National CineMedia, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 25, 2020, compared with June 27, 2019. National CineMedia operates a U.S. cinema advertising network through National CineMedia, LLC, with long-term exhibitor and network-affiliate agreements. Beginning in mid-March 2020, substantially all network theaters temporarily closed because of COVID-19. As of June 25, almost all theaters remained closed, preventing in-theater advertising.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $4.0 million | $110.2 million | $68.7 million | $187.1 million |
| Operating income (loss) | $(23.8) million | $37.7 million | $(18.9) million | $48.6 million |
| Net income (loss) attributable to NCM, Inc. | $(13.8) million | $8.9 million | $(17.5) million | $7.8 million |
| Diluted earnings (loss) per share | $(0.18) | $0.11 | $(0.22) | $0.10 |
| Adjusted OIBDA | $(12.7) million | $50.2 million | $1.7 million | $72.3 million |
| Adjusted OIBDA margin | (317.5%) | 45.6% | 2.5% | 38.6% |
| Operating cash flow | Not provided separately | Not provided separately | $107.4 million | $59.3 million |
Q2 revenue declined 96.4%, and year-to-date revenue declined 63.3%. Q2 national and regional advertising revenue fell 98.0% to $1.7 million, local advertising revenue fell 87.0% to $2.3 million, and founding-member beverage revenue fell to zero. Year-to-date theater attendance declined 63.9% to 120.6 million.
Cash and cash equivalents were $245.4 million at June 25, 2020, compared with $55.9 million at December 26, 2019. Including marketable securities, total cash, cash equivalents and marketable securities were $249.9 million. Of that amount, $168.1 million was held by NCM LLC and was not available for NCM, Inc. dividends, taxes or tax receivable agreement payments.
Total debt was $1.062 billion, including $167.0 million outstanding under the revolving credit facility, $265.3 million of term loans, $230.0 million of senior unsecured notes due 2026 and $400.0 million of senior secured notes due 2028. Debt, net of issuance costs, was $1.054 billion. Revolver availability was only $4.4 million after borrowings and letters of credit.
Total assets were $1.148 billion and total liabilities were $1.323 billion, resulting in consolidated equity/(deficit) of $(175.0) million. NCM, Inc. stockholders’ deficit was $(415.7) million.
Cash flow, liquidity and capital allocation
- Operating cash flow of $107.4 million primarily reflected collection of receivables outstanding before theater closures; receivables declined from $170.8 million at year-end to $26.7 million.
- Investing cash flow was $15.5 million, including $5.2 million of capital expenditures and net proceeds from marketable securities.
- Financing cash flow was $66.6 million, primarily reflecting net revolver borrowings of $128.0 million, partially offset by $21.0 million of dividends and $36.8 million of founding-member distributions.
- The company drew an additional $110.0 million on its revolver in March 2020 to support operations during the theater closures.
- The company reduced its quarterly dividend to $0.07 per share from $0.19 per share in the fourth quarter of 2019. A $0.07 per share dividend, approximately $5.5 million, was declared on August 3, 2020.
Material changes versus the prior comparable period
- COVID-19 closures eliminated virtually all in-theater advertising revenue in Q2. Remaining revenue was primarily associated with digital service offerings.
- Operating expenses declined 61.7% in Q2, but the reduction was insufficient to offset the revenue collapse. Theater access fees and founding-member revenue share expense fell from $21.6 million to zero in Q2.
- Management furloughed approximately 30% of employees, reduced remaining employee pay by up to 50%, suspended non-essential spending and hiring, deferred or terminated certain capital expenditures, and reduced board compensation.
- The company recorded a $1.7 million impairment charge for certain internally developed software. Management’s impairment analysis did not identify impairment of the principal theater-access intangible assets, although future impairment remains possible.
- The company adopted the current expected credit loss standard in the first quarter, recording a $3.2 million cumulative-effect adjustment to retained earnings and increasing expected credit-loss assumptions for local and regional customers.
- The April 30, 2020 credit agreement amendment provided an automatic waiver of specified leverage covenant noncompliance from the quarter ending June 25, 2020 through the quarter ending July 1, 2021, subject to liquidity and distribution restrictions.
Guidance, outlook, management commentary and risks
Management did not provide quantitative revenue or earnings guidance. It expects 2020 quarterly results to differ materially from historical seasonality and expects attendance to recover gradually because of capacity restrictions and uncertainty regarding consumer behavior.
Under the amended credit agreement, NCM LLC must maintain at least $55.0 million of unrestricted cash plus revolver availability through the quarter ending July 1, 2021. During the covenant holiday period, member distributions generally require trailing twelve-month Consolidated EBITDA of at least $277.0 million and revolver borrowings of no more than $39.0 million. No second-quarter 2020 distribution was made because available cash was negative by approximately $30.0 million; the amount is expected to be netted against a future distribution if permitted and sufficient cash is generated.
As of June 25, NCM LLC’s net senior secured leverage ratio was 4.58 times and total leverage was 6.01 times. The filing states that the company complied with the amended credit agreement, which automatically waived the applicable covenant noncompliance. Management believes available liquidity, collections and future operating cash flow after theater reopening should fund working capital, debt service and capital expenditures for at least the next twelve months, but this depends on the timing and extent of reopening and recovery.
Key risks include prolonged or repeated theater closures, reduced attendance, delayed or bypassed movie releases, lower advertising demand and CPMs, advertiser or theater-affiliate financial distress, receivable collection losses, potential impairment charges, high leverage, limited revolver availability, covenant and distribution restrictions, and the inability to service debt or fund obligations if cash flows remain depressed. A 100-basis-point change in variable interest rates would affect annual cash interest expense by approximately $4.3 million based on borrowings outstanding at quarter-end.
The company paid $12.8 million to founding members under the tax receivable agreement on July 15, 2020 and expected to pay an additional $1.4 million in the fourth quarter of 2020. Management stated that no material legal proceedings or material off-balance-sheet arrangements were identified.
Investor verification checklist
- Verify the pace and breadth of theater reopenings, attendance recovery, film-release schedules and the resulting return of in-theater advertising revenue.
- Reconcile NCM LLC cash availability with the $55.0 million minimum liquidity requirement and the $4.4 million revolver availability reported at quarter-end.
- Monitor debt balances, interest rates, leverage ratios, covenant waivers and restrictions on member distributions.
- Assess whether cash held at NCM LLC is sufficient for operating losses, debt service and capital expenditures while theaters remain underutilized.
- Evaluate potential impairment of theater-access intangible assets and collectibility of local and regional advertising receivables.
- Confirm future dividend and tax receivable agreement payments, including the effect of absent or delayed NCM LLC distributions.