Business Context and Reporting Period
National CineMedia, Inc. filed this unaudited Form 10-Q for the quarter ended June 29, 2023, with comparative periods ended June 30, 2022. The company manages National CineMedia, LLC, a U.S. cinema advertising network operating under long-term exhibition-services agreements and network affiliate agreements.
On April 11, 2023, NCM LLC filed for Chapter 11 bankruptcy protection. NCM, Inc. concluded that it no longer controlled NCM LLC for accounting purposes and deconsolidated NCM LLC prospectively as of that date. Consequently, 2023 NCM, Inc. results include NCM LLC activity only through April 11, while post-petition results primarily reflect the standalone parent and management-fee activity.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $14.8 million | $67.1 million | $49.7 million | $103.0 million |
| Operating income/(loss) | $(4.9) million | $5.6 million | $(35.5) million | $(16.9) million |
| Net income/(loss) attributable to NCM, Inc. | $545.3 million | $(0.7) million | $499.8 million | $(25.9) million |
| Diluted EPS | $3.13 | $(0.01) | $2.83 | $(0.32) |
| Cash flow from operations | Not separately provided | Not separately provided | $4.5 million | $(40.4) million |
Q2 revenue declined 77.9% and six-month revenue declined 51.7%, primarily because NCM LLC was consolidated for only 12 days of the quarter and 103 days of the year-to-date period. Q2 included $7.7 million of management-fee reimbursement revenue. The reported net income was dominated by a noncash $557.7 million gain on deconsolidation of NCM LLC and is not representative of recurring operating performance.
NCM LLC, which management believes better reflects the underlying advertising business, reported Q2 revenue of $64.4 million, down 4.0% year over year. Q2 Adjusted OIBDA was $12.5 million versus $15.1 million, and Adjusted OIBDA margin was 19.4% versus 22.5%. For the six months, NCM LLC revenue was $99.3 million, Adjusted OIBDA was $1.6 million, and Adjusted OIBDA margin was 1.6% versus 10.9%.
Balance Sheet, Debt and Liquidity
- As of June 29, 2023, NCM, Inc. reported $15.5 million of cash and cash equivalents, $1.0 million of short-term marketable securities, and $7.7 million of long-term investments.
- Total assets were $43.4 million, compared with $792.4 million at December 29, 2022, largely because NCM LLC was deconsolidated.
- NCM, Inc. reported no debt on its balance sheet after deconsolidation. NCM LLC had approximately $1.23 billion of liabilities subject to compromise in bankruptcy, including approximately $1.145 billion of debt.
- NCM, Inc. reported total liabilities of $62.7 million and stockholders’ deficit of $19.3 million.
- Total NCM, Inc. liquidity, including cash, cash equivalents and marketable securities, was $16.4 million at June 29, 2023, compared with $69.9 million at December 29, 2022. NCM LLC’s revolving-credit availability was unavailable during the bankruptcy case.
- Six-month capital expenditures were $1.1 million for NCM, Inc.; NCM LLC reported $1.8 million of property and equipment purchases.
- No income tax expense was recorded for either six-month period; NCM, Inc. maintained a full valuation allowance on its deferred tax assets.
Material Changes Versus the Prior Comparable Period
- Revenue and most operating expenses fell sharply at NCM, Inc. because of the April 11 deconsolidation rather than a comparable full-period change in the underlying advertising business.
- NCM LLC’s Q2 revenue decreased 4.0%, with national advertising revenue down 12.7% and national advertising utilization down 18.7%. Local and regional advertising revenue increased 27.7%, and theater attendance increased 8.6% to 134.9 million.
- NCM LLC’s operating loss worsened to $2.2 million from operating income of $5.6 million. Administrative and other costs increased substantially because of Chapter 11, Cineworld/Regal-related legal fees and retention costs.
- Consolidated six-month operating cash flow improved to $4.5 million from $(40.4) million, primarily reflecting deconsolidation-related working-capital changes and receivable collections. Financing cash flow was $(52.0) million, including removal of $49.6 million of cash associated with the deconsolidated affiliate.
- The company suspended dividends in 2022. No second-quarter 2023 distribution was received from NCM LLC; available cash distributions for the first six months were calculated as negative $31.6 million and distributions were deferred during bankruptcy.
Guidance, Outlook, Risks and Unusual Items
- The Bankruptcy Court confirmed NCM LLC’s prearranged Plan on June 27, 2023. Effectiveness remained subject to conditions including exit financing and a reverse stock split. Management expected emergence within one month of the filing, but stated that timing and completion were uncertain.
- Under the Plan, existing NCM LLC debt and equity interests are expected to be cancelled, secured creditors are expected to receive substantially all reorganized NCM LLC common units subject to dilution, and general unsecured creditors are expected to receive a pro rata share of $15.0 million. NCM, Inc. expected to contribute approximately $15.0 million of cash and retain an estimated 13.8% interest in reorganized NCM LLC.
- AMC and Cinemark appealed the Confirmation Order and sought stays. The filing states that the outcome and timing of the bankruptcy restructuring remained uncertain.
- Regal’s ESA was terminated effective July 14, 2023, and replaced by a 10-year network affiliate advertising agreement. Regal agreed to support the Plan and surrender its company shares upon effectiveness. The termination is expected to result in disposal of Regal-related intangible assets.
- NCM LLC recorded $18.6 million of reorganization items in the six months, including $18.3 million of professional fees. The consolidated gain on deconsolidation was $557.7 million, while NCM LLC reported a six-month net loss of $78.6 million.
- Management stated that substantial doubt about NCM, Inc.’s ability to continue as a going concern no longer existed based on expected management-fee payments and existing cash, but acknowledged uncertainty regarding NCM LLC’s emergence and payments to NCM, Inc.
- Nasdaq granted continued listing subject to compliance by August 31, 2023. Failure to satisfy listing requirements could result in delisting, reduced liquidity and OTC trading. The company stated that the ultimate value of its common stock could not be assured.
Investor Verification Checklist
- Verify the effective date and final implementation of NCM LLC’s Chapter 11 Plan, including exit financing, reverse stock split and creditor recoveries.
- Assess the recurring economics of NCM LLC separately from NCM, Inc.’s reported results, particularly advertising utilization, national revenue and Adjusted OIBDA margin.
- Confirm the post-emergence ownership percentage and economic rights of NCM, Inc. in reorganized NCM LLC.
- Evaluate the impact of Regal’s replacement agreement and the write-off or disposal of Regal-related intangible assets.
- Monitor NCM, Inc.’s cash balance, management-fee receipts, deferred distributions, tax receivable obligations and funding requirement of approximately $15.0 million.
- Confirm Nasdaq compliance and the continued trading status of NCMI common stock.