National CineMedia, Inc. — 2021 Q2 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. operates the largest U.S. cinema advertising network through National CineMedia, LLC, selling advertising in theaters, digital properties and complementary out-of-home venues. The unaudited report covers the quarter and six months ended July 1, 2021, compared primarily with the periods ended June 25, 2020.
COVID-19 continued to materially affect results. Approximately 97% of network theaters were open as of July 1, 2021, and second-quarter attendance was the highest since the pandemic began, but advertising demand remained well below historical levels. The company had 20,883 screens in its network, including 16,492 founding-member screens and 4,391 affiliate screens.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $14.0 million | $4.0 million | $19.4 million | $68.7 million |
| Operating loss | $(29.6) million | $(23.8) million | $(57.9) million | $(18.9) million |
| Net loss attributable to NCM, Inc. | $(22.7) million | $(13.8) million | $(42.1) million | $(17.5) million |
| Basic and diluted loss per share | $(0.28) | $(0.18) | $(0.53) | $(0.22) |
| Adjusted OIBDA | $(18.7) million | $(12.7) million | $(34.9) million | $1.7 million |
| Adjusted OIBDA margin | (133.6%) | (317.5%) | (179.9%) | 2.5% |
| Theater attendance | 49.1 million | 0.2 million | 62.9 million | 120.6 million |
Q2 revenue increased 250.0% year over year as theaters reopened, while six-month revenue declined 71.8% because much of the first quarter remained affected by closures and restrictions. Six-month total revenue per attendee declined 46.0% to $0.308.
- Q2 revenue mix: national and regional advertising $8.9 million, local advertising $3.0 million and founding-member beverage advertising $2.1 million.
- Operating expenses: $43.6 million in Q2, up 56.8% year over year; six-month expenses were $77.3 million, down 11.8%.
- Interest expense: $16.9 million in Q2 and $31.6 million for six months, up from $13.6 million and $27.2 million, respectively.
- Cash flow: six-month operating cash flow was $(61.6) million versus $107.4 million of cash provided in the prior-year period. Investing cash flow was $(2.9) million and financing cash flow was $31.6 million.
- Liquidity: cash, cash equivalents and marketable securities totaled $149.0 million, with total liquidity of $154.6 million including $5.6 million of revolver availability. Of the cash and securities, $98.2 million was held by NCM LLC and was not available for NCM, Inc. dividends, taxes or TRA payments.
- Debt: gross borrowings were $1,108.8 million, or $1,097.0 million net of debt issuance costs and discounts. Debt included $167.0 million outstanding under the revolver, $311.8 million of term loans and $630.0 million of senior notes.
- Balance sheet: total assets were $851.0 million and total liabilities were $1,200.0 million, resulting in total equity deficit of $(349.0) million.
Material Changes Versus the Prior Comparable Period
- Q2 national and regional advertising revenue rose 423.5%, local advertising revenue rose 30.4%, and beverage advertising revenue increased from zero to $2.1 million as theaters reopened.
- Despite the Q2 recovery, six-month revenue fell $49.3 million because attendance, impressions sold and theater availability were substantially lower during the first half of 2021. Six-month attendance declined 47.8%.
- The six-month operating loss increased to $57.9 million from $18.9 million, and the six-month net loss attributable to NCM, Inc. increased to $42.1 million from $17.5 million.
- The company issued a $50.0 million second tranche of term loans in March 2021, receiving net proceeds of approximately $43.0 million, and incurred higher interest rates under the amended credit agreement.
- AMC redeemed 1,390,567 NCM LLC membership units for NCM, Inc. common shares on March 23, 2021, reducing AMC’s NCM LLC ownership to 0% as of July 1, 2021.
- Quarterly dividends were reduced to $0.05 per share. The company declared an additional $0.05 per share dividend on August 9, 2021, payable September 6, 2021.
- No distributions were made to NCM LLC members for Q2 2021. Available cash distributions were calculated as negative $39.2 million for the quarter and negative $70.1 million for the six months, with amounts expected to be netted against future positive distributions subject to credit agreement conditions.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide numerical revenue, earnings or cash flow guidance. Management expects quarterly results to vary from historical seasonal trends because of COVID-19. Management is cautiously optimistic about the packed 2021 and 2022 movie slate and potential pent-up demand, but stated that recovery to historical attendance and advertising levels cannot be assured.
- COVID-19 risks: virus variants, renewed mask mandates, capacity restrictions, theater closures, delayed movie releases, lower attendance, advertiser hesitation and permanent changes in consumer behavior or theatrical release windows could adversely affect results.
- Liquidity and covenant relief: the credit agreement waives noncompliance with specified leverage covenants through the quarter ending June 30, 2022. Distribution restrictions apply until specified leverage and revolver-balance conditions are satisfied.
- Additional liquidity: the company approved the material terms of a proposed $20.0 million unsecured revolving loan from NCM, Inc. to NCM LLC, expected to be finalized in Q3 2021 and available from October 1, 2021 through March 31, 2022. The filing states that the definitive agreement had not yet been completed.
- Interest-rate exposure: approximately 43% of borrowings carried variable rates. A 100-basis-point rate change was estimated to affect annual cash interest expense by approximately $4.8 million.
- Tax and impairment items: the company maintained a full valuation allowance on deferred tax assets, resulting in no income tax benefit in 2021. No long-lived-asset impairment was recorded in 2021, compared with $1.7 million in the prior-year periods.
- Contingencies: network affiliate agreements contained minimum revenue guarantees with a maximum potential future payment amount of $107.6 million over remaining terms; $0.1 million was accrued at July 1, 2021. Ordinary-course legal claims were not expected to be material.
- Controls: management concluded that disclosure controls and procedures were effective as of July 1, 2021, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether theater attendance and advertiser commitments recover sufficiently to restore positive Adjusted OIBDA and operating cash flow.
- The final terms, availability and use of the proposed $20.0 million NCM, Inc. to NCM LLC revolving loan.
- Compliance with the amended credit agreement, including minimum liquidity, leverage covenants and restrictions on distributions.
- The timing and amount of future NCM LLC distributions after negative available cash is netted against future positive distributions.
- The sustainability of the $0.05 quarterly dividend given negative operating cash flow, debt service and limited revolver availability.
- Potential impairment of the $620.2 million net intangible asset balance if theater attendance, advertising revenue or affiliate liquidity do not recover as projected.