National CineMedia, Inc. — Form 10-Q Summary
Reporting period: Quarterly period ended September 28, 2023. The request metadata identifies “2022 Q3,” but the filing is for the third quarter of 2023, compared primarily with September 29, 2022.
Business Context and Reporting Period
National CineMedia operates a U.S. cinema advertising network through on-screen Noovie programming, theater-lobby screens and promotions, digital products, and complementary out-of-home venues. The company operates through National CineMedia, LLC, which has long-term exhibitor service agreements with AMC and Cinemark and network affiliate agreements, including a new agreement with Regal.
NCM LLC filed for Chapter 11 on April 11, 2023, was deconsolidated from NCM, Inc. during the bankruptcy case, and emerged and was reconsolidated on August 7, 2023. Consequently, reported consolidated results are not directly comparable with prior periods because the 2023 periods contain partial standalone NCM, Inc. activity and partial NCM LLC activity.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $24.7 million | $54.5 million | $74.4 million | $157.5 million |
| Operating loss | $(12.3) million | $(4.2) million | $(47.7) million | $(21.2) million |
| Net income (loss) attributable to NCM, Inc. | $181.8 million | $(8.9) million | $681.5 million | $(34.8) million |
| Diluted EPS | $2.89 | $(1.09) | $20.72 | $(4.28) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(22.3) million | $(36.7) million |
Consolidated operating margin was approximately (49.8%) in Q3 2023 and (64.1%) for the first nine months, based on reported revenue. The reported net income was substantially driven by non-recurring bankruptcy-related and reconsolidation gains rather than operating performance.
- Q3 consolidated revenue declined 54.7%, while nine-month revenue declined 52.8%, primarily because NCM LLC was deconsolidated from April 11 through August 7.
- Reported nine-month operating expenses were $122.1 million, down from $178.7 million, but administrative and other costs increased to $40.6 million from $30.2 million because of restructuring, legal, advisory and retention costs.
- NCM LLC pro forma operating data, which provides a more comparable view of the underlying business, showed Q3 revenue of $69.6 million, up 27.7%, and Adjusted OIBDA of $11.3 million, with a 16.2% margin versus 12.8% in the prior-year quarter.
- For the first nine months, NCM LLC pro forma revenue increased 7.2% to $168.9 million, but Adjusted OIBDA declined 15.1% to $12.9 million and the margin declined to 7.6% from 9.7%.
- NCM LLC pro forma Q3 theater attendance increased 23.5% to 131.7 million; nine-month attendance increased 16.2% to 356.6 million. Lower CPMs partially offset higher attendance and impressions sold.
Cash, Debt and Liquidity
| Balance-sheet item | September 28, 2023 | December 29, 2022 |
|---|---|---|
| Cash and cash equivalents | $17.2 million | $61.7 million |
| Restricted cash | $5.8 million | $2.1 million |
| Total cash, cash equivalents and restricted cash | $23.0 million | $63.8 million |
| Total debt, net | $10.0 million | $1,121.1 million |
| Reported total liquidity | $67.4 million | $69.9 million |
Historical NCM LLC debt was discharged upon emergence from bankruptcy. The company entered into a new asset-backed revolving facility with $55.0 million of maximum commitments, drew $10.0 million, and had $44.4 million of availability, net of outstanding borrowings and letters of credit, at September 28, 2023. The facility matures August 7, 2026, bears interest at a base rate or SOFR plus 3.75% to 4.50%, and had a weighted-average rate of 9.20% at quarter-end. The company stated that it was in compliance with its financial covenants.
Cash used in operating activities improved to $22.3 million from $36.7 million for the comparable nine-month period. Investing cash flow was $33.6 million, helped by $49.5 million of cash reconsolidated with NCM LLC, while financing cash flow was $(52.1) million. The company reported negative available cash distributions of approximately $57.9 million for the first nine months and expects no available cash distributions for the first three quarters of 2023.
Material Changes Versus the Prior Comparable Period
- Bankruptcy and reconsolidation: NCM LLC’s Chapter 11 filing caused deconsolidation and subsequently reconsolidation as a business combination. This produced a $557.7 million gain on deconsolidation, a $35.5 million gain on remeasurement of the investment, and a $168.0 million gain on reconsolidation.
- Debt reduction: Net debt fell from $1.12 billion at year-end 2022 to $10.0 million at September 28, 2023, primarily because historical debt was discharged through the Chapter 11 process.
- Regal relationship: Regal terminated its ESA effective July 14, 2023, while entering into a 10-year network affiliate advertising agreement. The termination resulted in a $125.6 million net loss, including disposal of the Regal ESA intangible asset, partly offset by Regal’s share surrender and forgiven payables.
- Cost structure: NCM LLC pro forma Q3 advertising operating costs increased 211.1%, primarily because payments under the Regal Advertising Agreement were classified as advertising affiliate and partner expense rather than ESA access fees. Chapter 11 and Cineworld-related advisory expenses also increased materially.
- Capital structure: The company completed a one-for-ten reverse stock split and issued approximately 83.4 million common shares to secured creditors upon emergence. Approximately 96.8 million common shares were outstanding at November 2, 2023.
- Tax and related-party balances: The company maintained a full valuation allowance on deferred tax assets and reported a 0.0% effective tax rate. Regal waived its rights under the tax receivable agreement, while the reconsolidation created additional tax basis and affected the TRA payable.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal financial guidance. Management expects future results to reflect the post-bankruptcy capital structure, the new Regal advertising arrangement, theater attendance, advertising demand and CPM trends. Management states that future results may not be comparable with historical results or bankruptcy-court projections.
- The company’s largest operational risks include post-bankruptcy relationship disruption, pending appeals by AMC and Cinemark, potential changes to ESA cooperation, theater attendance volatility, film release delays, advertising-market weakness and competition from digital, streaming and other media platforms.
- AMC and Cinemark appealed the bankruptcy Confirmation Order and Regal Order; the consolidated appeals remained pending in the U.S. District Court for the Southern District of Texas as of the filing.
- ESA parties represented approximately 51.9% of network screens and 58.2% of network attendance at September 28, 2023. Loss, renegotiation or non-renewal of an ESA could materially reduce revenue.
- The company has minimum revenue guarantees to network affiliates with a maximum potential future payment amount of $284.4 million over the remaining contract terms; $0.4 million was accrued at quarter-end.
- Liquidity is constrained by negative available cash distributions, restrictions under the new revolving facility, the holding-company structure and the fact that $21.1 million of cash was held at NCM LLC and unavailable for certain NCM, Inc. obligations.
- The company reported no material adverse impact from ordinary-course legal proceedings other than the disclosed bankruptcy-related matters and pending appeals. Disclosure controls were deemed effective as of September 28, 2023.
Important Facts for Investors to Verify
- Reconcile reported NCM, Inc. results with NCM LLC pro forma results because the 2023 periods are distorted by deconsolidation and reconsolidation.
- Assess the sustainability of NCM LLC’s underlying Adjusted OIBDA and margin after excluding bankruptcy, Regal termination and advisory costs.
- Monitor theater attendance, advertising impressions, CPMs and the financial impact of Regal’s new agreement.
- Confirm revolver availability, fixed-charge covenant compliance and the effect of negative available cash distributions on NCM, Inc.’s liquidity and dividends.
- Review the pending AMC and Cinemark appeals and any effect on the Plan, ESAs or relationships with the exhibitors.
- Evaluate dilution and potential selling pressure following the reverse split and issuance of approximately 83.4 million shares to secured creditors.
- Review the provisional fair values and useful lives assigned to $415.0 million of acquired intangible assets, which will drive future amortization and potential impairment charges.