National CineMedia, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
National CineMedia, Inc. operates the largest U.S. cinema advertising network through National CineMedia, LLC. The filing covers the three and nine months ended September 24, 2020, compared with the periods ended September 26, 2019.
Results were severely affected by COVID-19. Nearly all network theaters closed in mid-March 2020 and remained closed until late August. In-theater advertising resumed on September 4, 2020, but only approximately two-thirds of theaters were open as of September 24. By October 30, approximately 53% of the network was open after Regal re-closed its U.S. theaters.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $6.0 million | $110.5 million | $74.7 million | $297.6 million |
| Operating income/(loss) | $(21.3) million | $40.0 million | $(40.2) million | $88.6 million |
| Net income/(loss) attributable to NCM, Inc. | $(12.7) million | $9.2 million | $(30.2) million | $17.0 million |
| Basic and diluted EPS | $(0.16) | $0.12 | $(0.39) | $0.22 |
| Adjusted OIBDA | $(11.2) million | $51.7 million | $(9.5) million | $124.0 million |
| Adjusted OIBDA margin | (186.7%) | 46.8% | (12.7%) | 41.7% |
| Theater attendance | 5.2 million | 163.4 million | 125.8 million | 497.4 million |
Q3 revenue declined 94.6%, while year-to-date revenue declined 74.9%. National and regional advertising revenue fell 95.9% in Q3 and 75.9% year to date; local advertising revenue fell 86.3% in Q3 and 70.4% year to date. Revenue per attendee increased in Q3, but the improvement was more than offset by the collapse in attendance.
Total operating expenses decreased 61.3% in Q3 and 45.0% year to date, reflecting lower theater access fees, affiliate expenses, compensation, marketing, and other cost reductions. The company recorded a $1.7 million long-lived asset impairment in the first nine months.
Operating cash flow was $85.9 million for the first nine months, compared with $113.6 million in the prior-year period. Cash flow benefited substantially from collecting receivables, including a $163.3 million reduction in receivables. Investing cash flow was $15.5 million provided, and financing cash flow was $60.4 million provided.
Cash and cash equivalents were $217.7 million at September 24, 2020, compared with $55.9 million at December 26, 2019. Including marketable securities, total cash and securities were $220.7 million, of which $157.4 million was held at NCM LLC and was not available for NCM, Inc. dividends, taxes, or tax receivable payments.
Debt, Liquidity, and Capital Structure
- Total borrowings were $1.0616 billion, including $167.0 million outstanding under the revolving credit facility, $264.6 million of term loans, $230.0 million of 2026 senior unsecured notes, and $400.0 million of 2028 senior secured notes.
- Net borrowings were $1.0532 billion after debt issuance costs. Long-term debt carried on the balance sheet was $1.0505 billion.
- Only $4.4 million remained available under the $175.0 million revolving credit facility, net of borrowings and letters of credit.
- Total liquidity, defined as cash, cash equivalents, marketable securities, and revolver availability, was $225.1 million.
- Approximately 59% of borrowings carried fixed interest rates; a 100-basis-point change in variable rates would affect annual cash interest expense by approximately $4.3 million.
- The company’s consolidated net senior secured leverage ratio was 7.93 times and its consolidated net total leverage ratio was 10.43 times, exceeding ordinary covenant thresholds of 4.50 times and 6.25 times, respectively.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused an unprecedented reduction in theater attendance, advertising inventory, and revenue. Q3 attendance decreased 96.8% and year-to-date attendance decreased 74.7%.
- The company reduced or suspended non-essential spending, furloughed employees, implemented salary reductions, deferred capital expenditures, suspended the 401(k) match, and reduced its quarterly dividend from $0.19 to $0.07 per share.
- The company drew $110.0 million on its revolver in March 2020. Revolver borrowings increased from $39.0 million at year-end 2019 to $167.0 million at September 24, 2020.
- Cash dividends paid decreased to $26.5 million from $40.4 million in the prior-year period, while distributions to founding members decreased to $36.8 million from $49.4 million.
- There were no third-quarter mandatory distributions to NCM LLC members because available cash distributions were calculated as negative $24.3 million. Negative amounts were expected to be netted against future distributions, subject to covenant compliance and sufficient future cash generation.
- Equity attributable to NCM, Inc. declined to a deficit of $433.2 million from a deficit of $379.5 million at December 26, 2019. Total consolidated equity was a deficit of $210.4 million.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management expects results to remain highly variable and below historical levels until theaters reopen, major motion pictures are released, and patrons return. Management stated that it could not reliably determine the duration or ultimate financial impact of COVID-19.
The financial statements disclose substantial doubt about the company’s ability to continue as a going concern. Management believes existing liquidity and forecasted cash flows can fund obligations for the following year, but expects it may fail certain financial covenants. If waivers or amendments are not obtained, lenders could accelerate the debt, potentially triggering cross-defaults under the senior notes; the company states it could not repay all outstanding debt using current liquidity.
An April 2020 credit agreement amendment automatically waived specified leverage covenant noncompliance through the quarter ending July 1, 2021, subject to minimum liquidity of $55.0 million and restrictions on member distributions. Management was pursuing an additional amendment extending covenant relief through at least one year after issuance of the financial statements, but stated that approval was not assured.
Key risks include additional theater closures, reduced capacity and attendance, delayed or bypassed theatrical film releases, weakened advertising demand, advertiser and small-business credit losses, bankruptcy or restructuring of founding members or affiliates, impairment of intangible assets, increased leverage, and inability to access financing or obtain covenant relief.
The company identified COVID-19-related triggering events for intangible asset impairment testing but recorded no impairment charge for those assets in Q3 or the first nine months. The company also adopted the expected credit loss standard in the first quarter, recording a $3.2 million cumulative-effect reduction to retained earnings.
On October 30, 2020, the company declared a $0.07-per-share dividend, approximately $5.5 million, payable December 1, 2020.
Most Important Facts for Investors to Verify
- Whether the company obtained the additional credit facility amendment before the 2020 annual audit and whether covenant relief remains effective.
- Current theater openings, attendance trends, movie release schedules, and the pace of advertising revenue recovery.
- Available cash at NCM LLC versus cash held at NCM, Inc., and whether the $55.0 million minimum liquidity requirement remains satisfied.
- Revolver utilization, refinancing requirements, interest expense, and the risk of debt acceleration or cross-default.
- Whether future positive cash distributions from NCM LLC will be sufficient to fund NCM, Inc. dividends, taxes, and tax receivable agreement payments.
- Potential impairment of the $634.4 million net intangible asset balance and collectibility of advertising receivables.
- Whether dividend payments continue at $0.07 per share or are suspended in response to liquidity, covenant, or operating conditions.