National CineMedia, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2022; comparative periods ended September 30, 2021. The company operates a U.S. cinema advertising network through NCM LLC, primarily under long-term exhibitor service agreements with Regal, Cinemark and AMC, plus network affiliate agreements.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $54.5 million | $31.7 million | $157.5 million | $51.1 million |
| Operating loss | $(4.2) million | $(18.7) million | $(21.2) million | $(76.6) million |
| Net loss attributable to NCM, Inc. | $(8.9) million | $(15.2) million | $(34.8) million | $(57.3) million |
| Loss per diluted share | $(0.11) | $(0.19) | $(0.43) | $(0.72) |
| Adjusted OIBDA | $7.0 million | $(8.2) million | $15.2 million | $(43.1) million |
| Adjusted OIBDA margin | 12.8% | (25.9%) | 9.7% | (84.3%) |
| Theater attendance | 106.6 million | 75.7 million | 306.8 million | 138.6 million |
Revenue increased 71.9% in the quarter and 208.2% year to date, primarily from higher theater attendance, advertising utilization and pricing as the movie slate recovered from COVID-19 disruptions. National advertising revenue increased 75.7% in Q3 and 240.2% year to date. Total revenue per attendee rose 22.0% in Q3 and 39.0% year to date.
Operating expenses increased 16.5% in Q3 and 39.9% year to date, including higher theater access fees, advertising affiliate costs, selling and marketing costs, and a $5.8 million year-to-date impairment of internally developed software. Interest expense increased to $19.8 million in Q3 and $57.3 million year to date due to additional borrowings and higher variable interest rates.
Net cash used in operating activities improved to $36.7 million for the first nine months, compared with $92.5 million in the prior-year period. Investing cash flow used $2.0 million, while financing activities provided $11.0 million, including $50.0 million of new revolving borrowings. Cash and cash equivalents declined to $73.5 million from $101.2 million at December 30, 2021.
At September 29, 2022, total borrowings were $1.13 billion, or $1.12 billion net of issuance costs and discounts. Current debt was $220.2 million, including $217.0 million outstanding under two revolving facilities maturing June 20, 2023. Total reported liquidity, including cash, marketable securities and available revolving capacity, was $81.6 million; NCM LLC separately reported $60.9 million of cash and $6.8 million of available capacity.
Material changes versus the prior comparable period
- Revenue and attendance substantially recovered from COVID-19-affected 2021 levels, but management stated that attendance remained below historical levels and was inconsistent because of movie release timing.
- Adjusted OIBDA turned positive, improving by $15.2 million in Q3 and $58.3 million year to date.
- Interest expense rose $3.2 million in Q3 and $9.1 million year to date, reflecting the January 2022 revolving facility and rising rates.
- NCM, Inc. purchased $25.8 million principal amount of the 2028 senior secured notes, recording a $6.0 million gain on debt extinguishment.
- The network declined to 20,201 screens from 20,740 at year-end 2021, including the loss of 288 affiliate screens and net closure of 251 screens.
- No third-quarter 2022 available-cash distribution was made to NCM LLC members; calculated available cash distributions were negative due to recovery-related results and debt agreement restrictions.
- Common membership units held by founding members represented approximately 52.5% of NCM LLC on an as-converted basis and are exchangeable into NCM, Inc. common stock.
Outlook, risks and unusual items
Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. NCM LLC lacks sufficient liquidity to repay the $217.0 million revolving balance at its June 20, 2023 maturity and expects not to meet certain financial covenants for the period ending March 30, 2023. Potential remedies include extending facility maturities, extending covenant waivers or obtaining additional financing, but management stated that these plans are not probable and cannot alleviate the substantial doubt.
Debt and liquidity risk: Failure to refinance, repay or remain compliant could trigger defaults and acceleration of the term loans and senior notes. Approximately 47% of borrowings were variable-rate at quarter-end; a 100-basis-point rate change was estimated to affect annual cash interest expense by approximately $5.3 million.
Regal/Cineworld bankruptcy: Cineworld and subsidiaries including Regal filed for Chapter 11 protection. Regal subsequently moved to reject its exhibitor service agreement and indicated it intended to negotiate with NCM. NCM filed litigation seeking to preserve exclusivity and related contractual rights. Rejection, renegotiation or theater closures could materially reduce advertising inventory, revenue and the value of related intangible assets. No impairment was recorded for the Regal-related intangible asset in the reported periods, but future impairment remains possible.
Subsequent liquidity actions: NCM LLC delayed an $11.8 million interest payment due October 17, 2022 and entered a 30-day grace period; the payment was made on November 4, 2022 before the grace period expired. On November 3, 2022, NCM, Inc. purchased rights to approximately $4.9 million of NCM LLC accounts receivable for cash at book value.
COVID-19 effects, macroeconomic conditions, movie release schedules, advertiser recovery, theater attendance, founding-member financial condition and long-term related-party agreements remain significant operating risks. The filing states that ordinary-course legal claims are not expected to have a material adverse effect, apart from the disclosed Regal/Cineworld matter.
Investor verification points
- Confirm progress and final terms of refinancing or restructuring the revolving facilities before the June 20, 2023 maturity.
- Monitor covenant compliance, minimum liquidity requirements and any additional payment delays or defaults.
- Track the outcome of Regal’s ESA rejection motion, NCM’s litigation and any resulting theater closures or renegotiated economics.
- Assess whether attendance, advertising utilization and pricing can return to historical levels without proportionate increases in theater access and revenue-share costs.
- Reconcile cash availability at NCM LLC versus NCM, Inc., including restrictions on distributions and obligations under the tax receivable agreement.
- Evaluate the potential for future impairment of Regal-related and other long-lived intangible assets.
- Review the company’s ability to sustain dividends given negative available cash distributions, continuing net losses and debt constraints.