National CineMedia, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is a holding company that consolidates National CineMedia, LLC, the largest U.S. cinema advertising network. Revenue is generated primarily from national, regional and local advertising in the Noovie cinema pre-show, theater lobby screens and promotions, digital properties and complementary out-of-home venues.
The filing covers the three months ended March 31, 2022, compared with the three months ended April 1, 2021. All theaters in the network were open during Q1 2022, while approximately 40% of the network remained closed during Q1 2021 because of COVID-19. The company had 20,605 screens and 76.0 million network attendees in Q1 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $35.9 million | $5.4 million | +564.8% |
| Operating loss | $22.5 million | $28.3 million | Improved by $5.8 million |
| Net loss attributable to NCM, Inc. | $25.2 million | $19.4 million | Worsened by $5.8 million |
| Basic and diluted loss per share | $0.31 loss | $0.25 loss | Worsened |
| Adjusted OIBDA | $(6.8) million | $(16.2) million | Improved by $9.4 million |
| Adjusted OIBDA margin | (18.9%) | (300.0%) | Improved |
| Net cash used in operating activities | $(23.6) million | $(25.0) million | Improved by $1.4 million |
Revenue growth reflected higher attendance and a fully open theater network. National advertising revenue was $26.3 million, local and regional advertising revenue was $6.1 million, and founding-member beverage advertising revenue was $3.5 million. Total attendance increased 450.7% to 76.0 million.
Total operating expenses were $58.4 million, including $17.9 million of theater access fees and revenue share, $10.2 million of selling and marketing costs, $9.7 million of administrative and other costs, $6.1 million of amortization and a $5.8 million impairment of long-lived assets, primarily internally developed software. Interest expense was $17.2 million, and the company recorded a $6.4 million loss from remeasurement of its tax receivable agreement payable. The effective tax rate was 0% because the company maintained a full valuation allowance on deferred tax assets.
Cash and cash equivalents were $113.8 million at March 31, 2022, compared with $101.2 million at December 30, 2021. Cash, cash equivalents and marketable securities totaled $115.1 million, and total liquidity, including available capacity under the 2018 revolving credit facility, was $121.9 million. However, $76.2 million of cash was held at NCM LLC and was not available for NCM, Inc. dividends, tax payments or tax receivable agreement obligations.
Total borrowings were $1.156 billion gross, or $1.147 billion net of debt issuance costs and discounts. Debt increased primarily because of a new $50.0 million revolving facility funded in January 2022. The 2018 revolving facility had $6.8 million of availability; the new $50.0 million facility was fully drawn and had no availability. Approximately 54% of borrowings carried fixed rates and 46% carried variable rates.
Material changes versus the prior comparable period
- Revenue increased $30.5 million as the theater network reopened and attendance recovered.
- Operating loss narrowed despite higher expenses, but net loss attributable to NCM, Inc. increased because of higher interest expense and the tax receivable agreement remeasurement loss.
- Theater access fees and revenue share increased $14.8 million to $17.9 million as active screens and attendance increased.
- Interest expense increased $2.5 million to $17.2 million, primarily following the January 2022 incremental revolving facility.
- The company recorded a $5.8 million long-lived-asset impairment and $0.4 million of sales-force reorganization costs; neither item was recorded in Q1 2021.
- Operating cash use improved modestly, but the company continued to generate negative operating cash flow and remained dependent on liquidity management and debt financing.
- NCM LLC issued 6.48 million common membership units to founding members for theater additions and recorded a $10.4 million intangible-asset increase.
- No Q1 2022 available-cash distribution was made to NCM, Inc. or the founding members because the calculated distribution was negative and prior negative amounts will be netted against future positive distributions.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management stated that the 2022 movie slate remained strong, including delayed major releases and theatrical-only releases, but advertising revenue continued to lag the recovery in theater attendance.
COVID-19 variants could lead to renewed restrictions, reduced attendance, delayed film releases or changes in consumer behavior. Management stated that the future impact of the pandemic could not be fully determined. Advertising revenue remains sensitive to attendance, advertiser demand, pricing and inventory utilization.
Under the January 2022 credit agreement amendment, leverage covenants were suspended through the quarter ending December 29, 2022, with specified leverage thresholds beginning in 2023. The company was in compliance with the applicable requirements at March 31, 2022. The amendment restricts available-cash distributions until after delivery of a compliance certificate for the quarter ending on or about December 28, 2023, subject to specified conditions.
Minimum liquidity under the amended credit arrangements was $55.0 million, consisting of unrestricted cash and revolving-facility availability. Management stated that existing liquidity and forecast cash flows should fund operating obligations, scheduled interest and debt service for at least one year after issuance of the financial statements.
The company had potential future payments of up to $121.5 million under minimum revenue guarantees in network affiliate agreements. It also had $22.2 million payable under the tax receivable agreement, including $11.9 million payable to related parties. Management did not expect to make a tax receivable agreement payment in 2022 for the 2021 tax year.
Interest-rate exposure is material: a 100-basis-point change in rates would affect annual cash interest expense by approximately $5.3 million based on outstanding variable-rate debt at March 31, 2022. The company declared a subsequent $0.03-per-share dividend, approximately $2.4 million, payable June 7, 2022.
Most important facts for investors to verify
- Whether advertising revenue and pricing continue to recover in line with theater attendance.
- The company’s ability to generate positive operating cash flow before significant debt maturities in 2023–2028.
- Compliance with revised leverage and liquidity covenants after the covenant suspension expires.
- Availability of cash at NCM, Inc. for dividends, tax obligations and tax receivable agreement payments, given that much of the cash is held at NCM LLC.
- Future interest expense and refinancing risk from the $1.156 billion gross debt balance, including the fully drawn $50.0 million high-cost revolving facility.
- Potential additional impairment charges if theater attendance, advertising demand or the financial condition of founding members and affiliates deteriorates.
- The effect of affiliate minimum revenue guarantees, founding-member theater access fees and revenue-sharing obligations as attendance recovers.
- The terms and restrictions governing future dividends and the ability to offset negative available cash distributions against future positive distributions.