National CineMedia, Inc. 2021 Q3 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is the holding company for National CineMedia, LLC, which operates a U.S. cinema advertising network through long-term exhibitor service agreements and network affiliate agreements. The filing covers the three and nine months ended September 30, 2021, compared with the three and nine months ended September 24, 2020. All network theaters were open during the third quarter, but advertising revenue remained below historical levels because of reduced attendance, movie-release disruptions, COVID-19 variants and the Company’s inability to participate in the 2021 advertising upfront market during the prior theater closures.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Revenue | $31.7 million | $6.0 million | $51.1 million | $74.7 million |
| Operating loss | $(18.7) million | $(21.3) million | $(76.6) million | $(40.2) million |
| Net loss attributable to NCM, Inc. | $(15.2) million | $(12.7) million | $(57.3) million | $(30.2) million |
| Loss per diluted share | $(0.19) | $(0.16) | $(0.72) | $(0.39) |
| Adjusted OIBDA | $(8.2) million | $(11.2) million | $(43.1) million | $(9.5) million |
| Adjusted OIBDA margin | (25.9%) | (186.7%) | (84.3%) | (12.7%) |
| Net cash used in operating activities | Not separately presented | $(92.5) million | $85.9 million provided |
Q3 revenue increased 428.3% year over year as theaters reopened and attendance improved. Year-to-date revenue decreased 31.6%, reflecting the inclusion of a pre-pandemic quarter in the 2020 comparison period. Q3 theater attendance was 75.7 million, versus 5.2 million in the comparable 2020 quarter; year-to-date attendance increased 10.2% to 138.6 million. However, year-to-date revenue per attendee declined 37.9% to $0.369.
Q3 total operating expenses were $50.4 million, up 84.6%, primarily due to higher advertising affiliate costs, theater access fees, revenue share, personnel costs and administrative expenses as operations resumed. Interest expense was $16.6 million in Q3 and $48.2 million year to date. The nine-month effective tax rate was 0.0% because the Company maintained a full valuation allowance against its deferred tax assets.
Balance sheet, debt and liquidity
| Item | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $110.1 million | $180.3 million |
| Cash, cash equivalents and marketable securities | $111.3 million | $181.8 million |
| Total borrowings, before debt issuance costs | $1,108.0 million | $1,060.3 million |
| Net debt carrying value | $1,096.8 million | $1,052.3 million |
| Revolving credit availability | $6.8 million | $4.4 million |
| Total liquidity | $118.1 million | $186.2 million |
| Stockholders’ equity/(deficit) | $(532.5) million | $(473.1) million |
Total debt included $167.0 million outstanding on the revolving facility, $311.0 million of term loans, $400.0 million of senior secured notes due 2028 and $230.0 million of senior unsecured notes due 2026. Approximately 57% of borrowings carried fixed rates and 43% carried variable rates. A 100-basis-point change in applicable market rates would affect annual cash interest expense by approximately $4.8 million.
Management stated that NCM LLC was in compliance with the amended credit agreement as of September 30, 2021, including the $55.0 million minimum liquidity requirement, because financial covenant noncompliance was automatically waived through the quarter ending June 30, 2022. Nevertheless, the Company does not expect to meet its financial covenants within one year after issuance of the financial statements. The filing therefore identifies substantial doubt about the Company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Q3 revenue recovered sharply from the theater shutdown period, but year-to-date revenue remained below 2020 because the prior-year comparison included a pre-pandemic quarter.
- National and regional advertising revenue increased 554.3% in Q3 but declined 35.5% year to date. National advertising utilization was 79.3% in Q3 and 60.0% year to date, compared with 71.0% and 103.6%, respectively, in the comparable periods.
- Year-to-date operating loss nearly doubled to $76.6 million, while year-to-date Adjusted OIBDA declined to $(43.1) million.
- Operating cash flow changed from $85.9 million provided in the prior-year period to $92.5 million used, primarily due to lower collections, higher net loss and reduced integration payments.
- Debt increased by $47.7 million after the issuance of a $50.0 million second tranche of term loans, which generated $43.0 million of net proceeds.
- Interest expense increased due to higher debt and increased credit facility margins following the March 2021 credit agreement amendment.
- The Company reduced its quarterly dividend to $0.05 per share and declared an additional $0.05-per-share dividend for payment in December 2021.
- AMC redeemed its remaining NCM LLC units in March 2021 and held 0.0% of NCM LLC as of September 30, 2021; Regal owned 25.8%, Cinemark owned 25.9% and NCM, Inc. owned 48.3%.
Outlook, risks, contingencies and unusual items
Management expects the movie slate for the remainder of 2021 and into 2022 to remain strong, supported by delayed major releases and theatrical-only releases. Management remains optimistic that attendance will continue to recover, but provides no assurance that attendance will return to historical levels.
The principal risk is the Company’s projected failure to satisfy financial covenants after the waiver period. If a waiver extension, amendment or additional financing is not obtained, lenders could accelerate the senior secured debt, potentially causing a cross-default under the senior notes. The Company states that current liquidity would not be sufficient to repay all outstanding debt. Management is pursuing an extension of the covenant waiver and additional financing, including potential financing from third-party lenders or NCM, Inc.; success is not assured.
COVID-19 remains a material uncertainty. New variants, renewed mask mandates, capacity restrictions, theater closures, lower attendance, changes in consumer behavior, increased streaming adoption and changes to theatrical release windows could adversely affect revenue, cash flow and liquidity.
NCM LLC generated negative available cash distributions of approximately $23.2 million in Q3 and $93.3 million year to date. No Q3 distribution was paid, and no distribution is expected for Q4 2021. Negative amounts are expected to be netted against future positive distributions, subject to credit agreement requirements.
The Company had potential future payments of up to $105.4 million under network affiliate minimum revenue guarantees over the remaining agreement terms, although amounts generally depend on attendance or affiliate revenue levels. The Company also recorded $0.2 million of accrued affiliate minimum guarantee obligations at September 30, 2021.
Important facts for investors to verify
- Whether management completes an extension of the covenant waiver, credit agreement amendment or additional financing before a potential default.
- Whether theater attendance, advertising utilization and revenue per attendee recover sufficiently to restore positive Adjusted OIBDA and operating cash flow.
- The timing and conditions under which NCM LLC may resume distributions to NCM, Inc. and whether dividend payments remain sustainable.
- Available liquidity after accounting for cash held at NCM LLC, debt service, interest expense, tax receivable agreement payments and working-capital needs.
- Potential acceleration or cross-default consequences if financial covenants are not met.
- Whether COVID-19 variants, public-health restrictions, streaming behavior or movie-release changes further affect theater attendance.
- The recoverability of the Company’s $613.9 million of net intangible assets and the continued validity of assumptions supporting no impairment charge.