National CineMedia(NCMI) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Financial Statements This section presents National CineMedia, Inc.'s unaudited condensed consolidated financial statements and comprehensive explanatory notes Unaudited Condensed Consolidated Balance Sheets | ASSETS (in millions) | June 25, 2020 | December 26, 2019 | | :------------------- | :------------ | :---------------- | | Cash and cash equivalents | $245.4 | $55.9 | | Receivables, net | $26.7 | $170.8 | | Total current assets | $277.7 | $254.3 | | Intangible assets, net | $640.5 | $643.7 | | Total assets | $1,147.9 | $1,130.0 | | LIABILITIES AND EQUITY/(DEFICIT) (in millions) | June 25, 2020 | December 26, 2019 | | :--------------------------------- | :------------ | :---------------- | | Total current liabilities | $63.2 | $119.5 | | Long-term debt, net | $1,050.9 | $923.9 | | Total liabilities | $1,322.9 | $1,251.2 | | Total equity/(deficit) | $(175.0) | $(121.2) | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income | (In millions, except share and per share data) | Three Months Ended June 25, 2020 | Three Months Ended June 27, 2019 | Six Months Ended June 25, 2020 | Six Months Ended June 27, 2019 | | :--------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | REVENUE | $4.0 | $110.2 | $68.7 | $187.1 | | OPERATING (LOSS) INCOME | $(23.8) | $37.7 | $(18.9) | $48.6 | | CONSOLIDATED NET (LOSS) INCOME | $(33.4) | $21.0 | $(41.6) | $18.4 | | NET (LOSS) INCOME ATTRIBUTABLE TO NCM, INC. | $(13.8) | $8.9 | $(17.5) | $7.8 | | NET (LOSS) INCOME PER NCM, INC. COMMON SHARE: | | | | | | Basic | $(0.18) | $0.11 | $(0.22) | $0.10 | | Diluted | $(0.18) | $0.11 | $(0.22) | $0.10 | Unaudited Condensed Consolidated Statements of Cash Flows | CASH FLOWS (in millions) | Six Months Ended June 25, 2020 | Six Months Ended June 27, 2019 | | :----------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $107.4 | $59.3 | | Net cash provided by investing activities | $15.5 | $10.6 | | Net cash provided by (used in) financing activities | $66.6 | $(68.5) | | CHANGE IN CASH AND CASH EQUIVALENTS | $189.5 | $1.4 | | Cash and cash equivalents at end of period | $245.4 | $42.8 | Unaudited Condensed Consolidated Financial Statements of Equity/(Deficit) | EQUITY/(DEFICIT) (in millions) | Balance—June 25, 2020 | Balance—June 27, 2019 | Balance—December 26, 2019 | | :----------------------------- | :-------------------- | :-------------------- | :------------------------ | | Total NCM, Inc. stockholders' equity/(deficit) | $(415.7) | $(379.5) | $(171.1) | | Noncontrolling interests | $240.7 | $273.2 | $258.3 | | Total equity/(deficit) | $(175.0) | $(110.5) | $(121.2) | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. The Company NCM, Inc. operates the largest U.S. cinema advertising network, severely impacted by COVID-19 theater closures, and adopted new credit loss accounting standards - NCM, Inc. operates the largest cinema advertising network in the U.S. through NCM LLC, which is owned by NCM, Inc. (48.0%), Regal (26.0%), Cinemark (25.1%), and AMC (0.9%)[27][30] - Temporary theater closures due to the COVID-19 Pandemic resulted in no in-theater revenue for the three months ended June 25, 2020[28] - The 2019 ESA Amendments extended contracts with Cinemark and Regal by four years, leading to a weighted average remaining term of approximately 19.3 years with founding members and 16.8 years overall (based on 2019 attendance) as of June 25, 2020[29] - Adoption of ASU 2016-13 on December 27, 2019, resulted in a $3.2 million cumulative-effect adjustment to retained earnings related to the allowance for credit losses[45] Note 2. Revenue from Contracts with Customers and Accounts Receivable Revenue, primarily from on-screen and lobby advertising, was severely impacted by COVID-19 theater closures, leading to a substantial Q2 2020 decrease and increased allowance for doubtful accounts - Revenue sources include on-screen and lobby network (LEN) advertising, lobby promotions, and advertising on websites and mobile applications (Cinema Accelerator, Noovie ARcade, Name That Movie, Noovie Shuffle, Fantasy Movie League)[37][52] Revenue Category (in millions) | Revenue Category (in millions) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :----------------------------- | :------ | :------ | :------- | :------- | | National and regional advertising revenue | $1.7 | $84.3 | $51.5 | $141.7 | | Local advertising revenue | $2.3 | $17.7 | $11.7 | $30.5 | | Founding member advertising revenue from beverage concessionaire agreements | $0.0 | $8.2 | $5.5 | $14.9 | | Total revenue | $4.0 | $110.2 | $68.7 | $187.1 | - The allowance for doubtful accounts for local and regional customers was increased as of June 25, 2020, due to the adverse impact of the COVID-19 Pandemic on certain small businesses[38] Allowance for Doubtful Accounts (in millions) | Allowance for Doubtful Accounts (in millions) | June 25, 2020 | | :-------------------------------------------- | :------------ | | Allowance for National Customer Receivables | $0.4 | | Allowance for Local/Regional Customer Receivables | $2.8 | Note 3. (Loss) Earnings Per Share The company reported a significant basic and diluted net loss per share for Q2 and YTD 2020, driven by the consolidated net loss attributable to NCM, Inc NET (LOSS) INCOME PER NCM, INC. COMMON SHARE | NET (LOSS) INCOME PER NCM, INC. COMMON SHARE | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :------------------------------------------- | :------ | :------ | :------- | :------- | | Basic | $(0.18) | $0.11 | $(0.22) | $0.10 |\ | Diluted | $(0.18) | $0.11 | $(0.22) | $0.10 |\ | Weighted average shares outstanding (Basic) | 77,995,951 | 77,343,093 | 77,879,959 | 77,261,435 | - The effect of 84.5 million weighted average exchangeable NCM LLC common units held by founding members was excluded from diluted EPS calculation for Q2 2020 as they were anti-dilutive[60] Note 4. Intangible Assets Intangible assets, mainly contractual rights, were not impaired as of June 25, 2020, despite COVID-19 impacts, and common unit adjustments created a $10.5 million net intangible asset in Q1 2020 - Intangible assets consist of contractual rights to provide services in founding members' and network affiliates' theaters, recorded at cost net of amortization[61] - No impairment charges were recorded for intangible assets for the three and six months ended June 25, 2020, despite COVID-19 impacts, as estimated future cash flows exceeded net book value[61][63] - In Q1 2020, NCM LLC issued 3,022,959 common membership units to founding members, resulting in a net intangible asset of $10.5 million[65] - Integration and other encumbered theater payments reduced net intangible assets by $1.4 million for the six months ended June 25, 2020, with no payments earned in Q2 2020 due to theater closures[67] Note 5. Related Party Transactions Material agreements with founding members were significantly impacted by theater closures, resulting in $0.0 million beverage concessionaire revenue and theater access fees in Q2 2020, and negative mandatory distributions - Key agreements with founding members include ESAs (exclusive advertising rights), Common Unit Adjustment Agreement (adjusts membership units based on theater changes), and Tax Receivable Agreement (TRA) (payments for tax savings)[71] Related Party Transactions (in millions) | Related Party Transactions (in millions) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :------------------------------------- | :------ | :------ | :------- | :------- | | Beverage concessionaire revenue | $0.0 | $6.5 | $4.3 | $11.8 | | Theater access fee and revenue share | $0.0 | $14.5 | $12.5 | $27.4 | | Purchase of movie tickets/concession products | $0.0 | $0.1 | $0.1 | $0.2 | - Mandatory distributions of available cash to members for Q2 2020 were calculated as negative $29.8 million due to theater closures, resulting in no payment for the quarter[78] Distributions to Members (in millions) | Distributions to Members (in millions) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :----------------------------------- | :------ | :------ | :------- | :------- | | Cinemark | $0.0 | $7.5 | $2.1 | $10.5 | | Regal | $0.0 | $7.9 | $2.2 | $11.0 | | NCM, Inc. | $0.0 | $14.6 | $4.1 | $20.4 | | Total | $0.0 | $30.0 | $8.4 | $41.9 | Note 6. Borrowings NCM LLC's total outstanding debt increased to $1,062.3 million due to a $110.0 million revolving credit facility draw, with the Credit Agreement amended to waive financial covenants, requiring $55.0 million in liquidity during the 'Covenant Holiday Period' Borrowings (in millions) | Borrowings (in millions) | June 25, 2020 | December 26, 2019 | Maturity Date | | :----------------------- | :------------ | :---------------- | :------------ | | Revolving credit facility | $167.0 | $39.0 | June 20, 2023 | | Term loans | $265.3 | $266.6 | June 20, 2025 | | Senior unsecured notes due 2026 | $230.0 | $230.0 | August 15, 2026 | | Senior secured notes due 2028 | $400.0 | $400.0 | April 15, 2028 | | Total borrowings | $1,062.3 | $935.6 | | - NCM LLC drew an additional $110.0 million on its revolving credit facility in March 2020 to fund operations during theater closures[86] - The Credit Agreement Amendment (April 30, 2020) waived financial covenants for Q2 2020 through Q2 2021, requiring NCM LLC to maintain at least $55.0 million in unrestricted cash and revolving credit availability[85] Financial Ratios (as of June 25, 2020) | Financial Ratios (as of June 25, 2020) | Value | Covenant/Restriction | | :------------------------------------- | :------ | :------------------- | | Consolidated net senior secured leverage ratio | 4.58x | 4.50x (covenant), 5.50x (dividend restriction) | | Consolidated net total leverage ratio | 6.01x | 6.25x (covenant) | Note 7. Income Taxes The company recorded an income tax benefit of $4.6 million for the six months ended June 25, 2020, compared to an expense in the prior year, driven by tax benefits on pretax book losses attributable to NCM Inc Income Tax (in millions) | Income Tax (in millions) | Six Months Ended June 25, 2020 | Six Months Ended June 27, 2019 | | :----------------------- | :----------------------------- | :----------------------------- | | Income tax (benefit) expense | $(4.6) | $1.7 | | Effective tax rate | 20.8% | 17.9% | - The increase in income tax benefit was primarily due to recording a tax benefit on pretax book losses attributable to NCM Inc. of $22.0 million for the six months ended June 25, 2020, compared to tax expense on pretax book income of $9.4 million in the prior year[92] Note 8. Commitments and Contingencies The company's operating lease agreements resulted in ROU assets of $21.4 million and lease liabilities of $25.4 million, with no theater access fees or Platinum Spot revenue share owed for Q2 2020 due to theater closures - The company has ROU assets of $21.4 million and short-term and long-term lease liabilities of $1.7 million and $23.7 million, respectively, for facility operating leases as of June 25, 2020[94] Total Lease Cost (in millions) | Total Lease Cost (in millions) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :----------------------------- | :------ | :------ | :------- | :------- | | Operating lease cost | $0.9 | $0.8 | $1.8 | $1.6 | | Short-term lease cost | $0.0 | $0.0 | $0.0 | $0.1 | | Variable lease cost | $0.2 | $0.2 | $0.3 | $0.3 | | Total lease cost | $1.1 | $1.0 | $2.1 | $2.0 | - ESAs and network affiliate agreements are treated as short-term leases (less than one month) under ASC 842, with amortization of related intangible assets recognized as lease expense[99] - No theater access fees or Platinum Spot revenue share were owed for Q2 2020 due to theater closures[103] - The maximum potential future payments for network affiliate minimum revenue guarantees is $71.2 million over remaining terms[104] Note 9. Fair Value Measurements The company measures assets and liabilities at fair value, categorizing inputs into Level 1, 2, or 3, with no impairments recorded, and the fair value of term loans and notes is lower than carrying values due to market conditions - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[105][106] Borrowings (in millions) | Borrowings (in millions) | Carrying Value (June 25, 2020) | Fair Value (June 25, 2020) | | :----------------------- | :----------------------------- | :------------------------- | | Term loans | $265.3 | $220.2 | | Notes due 2026 | $230.0 | $162.3 | | Notes due 2028 | $400.0 | $329.4 | Recurring Fair Value Measurements (in millions) | Recurring Fair Value Measurements (in millions) | June 25, 2020 (Fair Value) | Level 1 | Level 2 | Level 3 | | :---------------------------------------------- | :------------------------- | :------ | :------ | :------ | | Cash equivalents | $49.8 | $49.8 | — | — | | Short-term marketable securities | $1.5 | — | $1.5 | — | | Long-term marketable securities | $3.0 | — | $3.0 | — | | Total assets | $54.3 | $49.8 | $4.5 | — | Note 10. Subsequent Event On August 3, 2020, the company declared a cash dividend of $0.07 per share, totaling approximately $5.5 million, payable on August 31, 2020 - A cash dividend of $0.07 per share (approx. $5.5 million) was declared on August 3, 2020, payable on August 31, 2020[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations, highlighting the severe impact of the COVID-19 pandemic on revenue and operating results, and the implementation of cost-saving measures and credit agreement amendments Overview National CineMedia, Inc. operates the largest U.S. cinema advertising network, severely impacted by temporary COVID-19 theater closures, resulting in no in-theater revenue for Q2 2020 - NCM is America's largest cinema advertising network, deriving revenue from on-screen and lobby advertising in its 'Noovie' pre-show[122] - Temporary theater closures due to COVID-19 from mid-March 2020 resulted in no in-theater revenue for the three months ended June 25, 2020[122] - The network includes two Noovie pre-show formats: one with Post-Showtime Inventory (58% of network based on 2019 attendance) and the Classic Noovie pre-show (42% of network)[123] - The company also sells online and mobile advertising through Cinema Accelerator and Noovie digital properties, with over 146 million first- and second-party data sets as of June 25, 2020[124] Recent Developments (COVID-19) The COVID-19 pandemic led to widespread theater closures, severely impacting revenue, prompting significant cash preservation measures, a $110.0 million revolving credit facility draw, and an amended Credit Agreement waiving financial covenants with a $55.0 million liquidity requirement - Almost all theaters in NCM's network remained closed as of June 25, 2020, leading to no in-theater advertising revenue[127] - Cash preservation measures included furloughing 30% of staff, reducing pay by up to 50%, suspending non-essential operating expenditures, implementing a hiring freeze, suspending 401K match, terminating/deferring capital expenditures, and decreasing quarterly dividend to $0.07 per share[128] - NCM LLC drew an additional $110.0 million on its revolving credit facility in March 2020, increasing cash and marketable securities to $249.9 million ($168.1 million at NCM LLC) as of June 25, 2020[130] - The Credit Agreement Amendment (April 30, 2020) waived financial covenants for Q2 2020 through Q2 2021, requiring NCM LLC to maintain at least $55.0 million in unrestricted cash and revolving credit availability[131] - Benefits recognized under the CARES Act include deferral of $0.4 million in FICA payroll taxes in Q2 2020 and eligibility for the Employee Retention Payroll Tax Credit[133] Summary Historical and Operating Data The company's operating data for Q2 and YTD 2020 shows significant declines across all key metrics due to the COVID-19 pandemic, with revenue decreasing by 96.4% in Q2 2020 and total theater attendance plummeting by 99.9% Operating Data (in millions, except share and margin data) | Operating Data (in millions, except share and margin data) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | % Change Q2 2020 to Q2 2019 | % Change YTD 2020 to YTD 2019 | | :------------------------------------------------------- | :------ | :------ | :------- | :------- | :-------------------------- | :---------------------------- | | Revenue | $4.0 | $110.2 | $68.7 | $187.1 | (96.4)% | (63.3)% | | Total operating expenses | $27.8 | $72.5 | $87.6 | $138.5 | (61.7)% | (36.8)% | | Operating (loss) income | $(23.8) | $37.7 | $(18.9) | $48.6 | (163.1)% | (138.9)% | | Net (loss) income attributable to NCM, Inc. | $(13.8) | $8.9 | $(17.5) | $7.8 | (255.1)% | (324.4)% | | Net (loss) income per NCM, Inc. basic share | $(0.18) | $0.11 | $(0.22) | $0.10 | (263.6)% | (320.0)% | | Adjusted OIBDA | $(12.7) | $50.2 | $1.7 | $72.3 | (125.3)% | (97.6)% | | Total theater attendance (in millions) | 0.2 | 185.3 | 120.6 | 334.0 | (99.9)% | (63.9)% | Non-GAAP Financial Measures Adjusted OIBDA, a non-GAAP measure, was a loss of $(12.7) million for Q2 2020, a significant decline from the prior year, reflecting the severe impact of theater closures on operating performance - Adjusted OIBDA is a non-GAAP measure representing operating income before depreciation, amortization of intangibles for network theater screen leases, non-cash share-based compensation, impairment of long-lived assets, and CEO transition costs[138] Adjusted OIBDA Reconciliation (in millions) | Adjusted OIBDA Reconciliation (in millions) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :------------------------------------------ | :------ | :------ | :------- | :------- | | Operating (loss) income | $(23.8) | $37.7 | $(18.9) | $48.6 | | Depreciation expense | $3.2 | $3.3 | $6.4 | $6.6 | | Amortization of intangibles | $6.1 | $7.0 | $12.2 | $13.9 | | Share-based compensation costs | $0.1 | $2.1 | $0.3 | $2.9 | | Impairment of long-lived assets | $1.7 | $0.0 | $1.7 | $0.0 | | CEO transition costs | $0.0 | $0.1 | $0.0 | $0.3 | | Adjusted OIBDA | $(12.7) | $50.2 | $1.7 | $72.3 | | Total revenue | $4.0 | $110.2 | $68.7 | $187.1 | | Adjusted OIBDA margin | (317.5)%| 45.6% | 2.5% | 38.6% | Our Network As of June 25, 2020, the company's network comprised 21,008 screens, a slight decrease from December 26, 2019, due to net affiliate screen losses and closures, excluding temporary COVID-19 related closures Number of Screens | Number of Screens | Founding Members | Network Affiliates | Total | | :---------------- | :--------------- | :----------------- | :---- | | Balance as of December 26, 2019 | 16,880 | 4,328 | 21,208| | Lost affiliates, net of new affiliates | — | (175) | (175) | | Openings, net of closures | 73 | (98) | (25) | | Balance as of June 25, 2020 | 16,953 | 4,055 | 21,008| - Approximately 99% of the network's attendance is generated by theaters connected to the proprietary Digital Content Network (DCN), with 100% of the Noovie pre-show projected on digital projectors[124] Basis of Presentation The financial results for the three and six months ended June 25, 2020, and June 27, 2019, are derived from the unaudited Condensed Consolidated Financial Statements of NCM, Inc - Results are derived from unaudited Condensed Consolidated Financial Statements and accounting records of NCM, Inc[145] Results of Operations The results of operations were severely impacted by the COVID-19 pandemic, leading to significant revenue declines and operating losses for both Q2 and the six months ended June 25, 2020, despite cost-saving measures Second Quarter of 2020 and Second Quarter of 2019 For Q2 2020, total revenue plummeted by 96.4% to $4.0 million due to theater closures, resulting in an operating loss of $(23.8) million and a net loss of $(13.8) million, despite a 61.7% decrease in total operating expenses Revenue (in millions) | Revenue (in millions) | Q2 2020 | Q2 2019 | $ Change | % Change | | :-------------------- | :------ | :------ | :------- | :------- | | National and regional advertising revenue | $1.7 | $84.3 | $(82.6) | (98.0)% | | Local advertising revenue | $2.3 | $17.7 | $(15.4) | (87.0)% | | Founding member beverage revenue | $0.0 | $8.2 | $(8.2) | (100.0)% | | Total revenue | $4.0 | $110.2 | $(106.2) | (96.4)% | - The decrease in revenue was primarily due to the temporary closure of almost all theaters in response to the COVID-19 Pandemic, preventing in-theater advertising[148][149][150] Operating Expenses (in millions) | Operating Expenses (in millions) | Q2 2020 | Q2 2019 | $ Change | % Change | | :------------------------------- | :------ | :------ | :------- | :------- | | Advertising operating costs | $1.1 | $9.9 | $(8.8) | (88.9)% | | Network costs | $1.6 | $3.4 | $(1.8) | (52.9)% | | Theater access fees and revenue share—founding members | $0.0 | $21.6 | $(21.6) | (100.0)% | | Selling and marketing costs | $6.7 | $16.2 | $(9.5) | (58.6)% | | Administrative and other costs | $7.4 | $11.1 | $(3.7) | (33.3)% | | Impairment of long-lived assets | $1.7 | $0.0 | $1.7 | 100.0% | | Depreciation expense | $3.2 | $3.3 | $(0.1) | (3.0)% | | Amortization of intangibles | $6.1 | $7.0 | $(0.9) | (12.9)% | | Total operating expenses | $27.8 | $72.5 | $(44.7) | (61.7)% | - Operating loss was $(23.8) million in Q2 2020, compared to income of $37.7 million in Q2 2019[15] - Net loss attributable to NCM, Inc. was $(13.8) million in Q2 2020, compared to net income of $8.9 million in Q2 2019[15] Six months ended June 25, 2020 and June 27, 2019 For the six months ended June 25, 2020, total revenue decreased by 63.3% to $68.7 million due to a 63.9% drop in attendance, resulting in an operating loss of $(18.9) million and a net loss of $(17.5) million attributable to NCM, Inc Revenue (in millions) | Revenue (in millions) | YTD 2020 | YTD 2019 | $ Change | % Change | | :-------------------- | :------- | :------- | :------- | :------- | | National and regional advertising revenue | $51.5 | $141.7 | $(90.2) | (63.7)% | | Local advertising revenue | $11.7 | $30.5 | $(18.8) | (61.6)% | | Founding member beverage revenue | $5.5 | $14.9 | $(9.4) | (63.1)% | | Total revenue | $68.7 | $187.1 | $(118.4) | (63.3)% | Revenue per Attendee | Revenue per Attendee | YTD 2020 | YTD 2019 | % Change | | :------------------- | :------- | :------- | :------- | | National and regional advertising revenue per attendee | $0.427 | $0.424 | 0.7% | | Local advertising revenue per attendee | $0.097 | $0.091 | 6.6% | | Total advertising revenue per attendee | $0.570 | $0.560 | 1.8% | | Total theater attendance (in millions) | 120.6 | 334.0 | (63.9)% | - National advertising CPMs decreased by 8.7% due to a shift to lower CPM deals and a change in client mix[166] Operating Expenses (in millions) | Operating Expenses (in millions) | YTD 2020 | YTD 2019 | $ Change | % Change | | :------------------------------- | :------- | :------- | :------- | :------- | | Advertising operating costs | $7.3 | $17.2 | $(9.9) | (57.6)% | | Network costs | $4.5 | $6.9 | $(2.4) | (34.8)% | | Theater access fees and revenue share—founding members | $17.7 | $40.7 | $(23.0) | (56.5)% | | Selling and marketing costs | $20.6 | $31.4 | $(10.8) | (34.4)% | | Administrative and other costs | $17.2 | $21.8 | $(4.6) | (21.1)% | | Impairment of long-lived assets | $1.7 | $0.0 | $1.7 | 100.0% | | Depreciation expense | $6.4 | $6.6 | $(0.2) | (3.0)% | | Amortization of intangibles | $12.2 | $13.9 | $(1.7) | (12.2)% | | Total operating expenses | $87.6 | $138.5 | $(50.9) | (36.8)% | - Operating loss was $(18.9) million for YTD 2020, compared to income of $48.6 million for YTD 2019[15] - Net loss attributable to NCM, Inc. was $(17.5) million for YTD 2020, compared to net income of $7.8 million for YTD 2019[15] Known Trends and Uncertainties The COVID-19 Pandemic remains the primary uncertainty, preventing in-theater advertising and impacting revenue, fees, and the Platinum Spot revenue share, while the CARES Act provides some tax benefits - The COVID-19 Pandemic prevents in-theater advertising, impacting revenue, theater access fees, network affiliate payments, and Platinum Spot revenue share[181] - The CARES Act provides benefits such as deferral of FICA payroll taxes and the Employee Retention Payroll Tax Credit[183][184] - Beverage revenue is expected to decrease due to theater closures and potentially lower attendance post-reopening. CPM for AMC's beverage revenue decreased by 0.3% in 2020, while Cinemark and Regal's increased by 2.0%[185] - Theater access fees are not owed when theaters are closed and will be reduced for partial operation. Patron-based fees increase by 8% every five years (next in FY2022), and digital screen fees increase annually by 5%[186] - Platinum Spot revenue share (25% of revenue to Cinemark and Regal) is also impacted by theater utilization[187] Financial Condition and Liquidity The company's liquidity was significantly impacted by COVID-19, leading to a $110.0 million revolving credit facility draw and total liquidity of $254.3 million as of June 25, 2020, with management expecting sufficient liquidity for the next twelve months - The company's cash balances fluctuate due to seasonality, timing of receivables/payments, distributions, debt payments, and income taxes[188] - NCM LLC drew an additional $110.0 million on its revolving credit facility in March 2020 to fund operations during expected reduced cash flows[190] Financial Liquidity (in millions) | Financial Liquidity (in millions) | June 25, 2020 | December 26, 2019 | June 27, 2019 | | :-------------------------------- | :------------ | :---------------- | :------------ | | Cash, cash equivalents and marketable securities | $249.9 | $80.9 | $61.7 | | NCM LLC revolver availability | $4.4 | $132.4 | $143.2 | | Total liquidity | $254.3 | $213.3 | $204.9 | - NCM LLC must maintain a total balance of $55.0 million in unrestricted cash and revolving credit facility availability until July 1, 2021, as per the Credit Agreement Amendment[191][196] Cash Flows (in millions) | Cash Flows (in millions) | Six Months Ended June 25, 2020 | Six Months Ended June 27, 2019 | | :----------------------- | :----------------------------- | :----------------------------- | | Operating cash flow | $107.4 | $59.3 | | Investing cash flow | $15.5 | $10.6 | | Financing cash flow | $66.6 | $(68.5) | - Operating cash flow increased due to a $122.3 million larger decrease in accounts receivable and a $13.9 million decrease in TRA payments (due to postponement)[194] - Financing cash flow increased due to a $128.0 million increase in net proceeds from the revolving credit facility and a $6.2 million decrease in dividends paid[196] Critical Accounting Policies No significant changes to critical accounting policies occurred as of June 25, 2020, except for the allowance for doubtful accounts upon the adoption of ASC 326 in Q1 2020 - No significant changes to critical accounting policies, except for the allowance for doubtful accounts due to ASC 326 adoption in Q1 2020[200] Recent Accounting Pronouncements The company expects no material impact from recently issued accounting pronouncements on its unaudited Condensed Consolidated Financial Statements - No material impact expected from recently issued accounting pronouncements[201] Related Party Transactions Information regarding related party transactions is provided in Note 5 to the unaudited Condensed Consolidated Financial Statements - Details on related party transactions are in Note 5[202] Off-Balance Sheet Arrangements The company does not believe it has any material off-balance sheet arrangements that would significantly impact its financial condition or results of operations - No material off-balance sheet arrangements[203] Contractual and Other Obligations There were no material changes to the company's contractual obligations during the six months ended June 25, 2020 - No material changes to contractual obligations during the six months ended June 25, 2020[205] Seasonality The company's revenue and operating results are typically seasonal, with higher performance in Q2, Q3, and Q4, but 2020 results are expected to deviate significantly due to COVID-19 theater closures - Revenue and operating results are seasonal, typically higher in Q2, Q3, and Q4, driven by advertising client demand and theater attendance[206] - Q1 typically has less revenue due to lower advertising demand[206] - 2020 quarterly results are expected to vary from historical trends due to temporary theater closures from COVID-19[206] Quarterly Percentage of Total Revenue | Quarterly Percentage of Total Revenue | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | | :------------------------------------ | :------------ | :------------- | :------------ | :------------- | | FY 2017 | 16.9% | 22.8% | 27.3% | 33.0% | | FY 2018 | 18.2% | 25.8% | 24.9% | 31.1% | | FY 2019 | 17.3% | 24.8% | 24.8% | 33.1% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk on its variable-rate debt, with a 100-basis point fluctuation impacting annual cash interest expense by approximately $4.3 million, though government actions have reduced this risk - Primary market risk is interest rate risk on variable-rate revolving credit facility ($167.0 million outstanding) and term loan ($265.3 million outstanding)[209] - A 100-basis point fluctuation in market interest rates would change annual cash interest expense by approximately $4.3 million[209] - Government-lowered Federal Reserve interest rates due to COVID-19 have reduced the company's interest rate risk[210] Item 4. Controls and Procedures The company's disclosure controls and procedures were evaluated as effective as of June 25, 2020, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of June 25, 2020[212] - No material changes to internal control over financial reporting occurred during the quarter ended June 25, 2020[215] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to ordinary course legal actions but expects no material adverse effect on its financial condition or results of operations - No legal proceedings are expected to have a material adverse effect on financial condition or results of operations[217] Item 1A. Risk Factors The COVID-19 pandemic remains a significant risk, disrupting business, leading to theater closures, delayed film releases, and potential long-term changes in consumer behavior and advertising spending, exacerbating existing risks - The COVID-19 pandemic has disrupted and continues to disrupt the company's business, founding members, and network affiliates, leading to temporary theater closures and delayed film releases[219][220] - Significant impacts include decreased theater attendance, changes in advertisers' perception of cinema advertising, reduced advertising budgets, potential bankruptcy of partners, and increased risk related to employee matters and liquidity[222][223][224] - The company implemented cost-saving measures (furloughs, pay reductions, expenditure suspensions) and sought CARES Act benefits, but the extent and duration of the pandemic's adverse effects are unknown[221][222][225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During April-May 2020, the company purchased 6,688 shares of restricted stock from employees at an average price of $3.14 per share to cover tax withholding obligations upon vesting Period | Total Number of Shares Purchased | Average Price Paid Per Share | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------------------------- | :----------------------------- | :--------------------------- | | April 24, 2020 through May 21, 2020 | 6,688 | $3.14 | Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable Item 5. Other Information There is no other information to report under this item - None Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to employment agreements, the 2020 Omnibus Plan, the Credit Agreement, XBRL taxonomy documents, and certifications Exhibit | Description | Exhibit | Description | | :------ | :---------- | | 10.1 | Amendment No. 1 to the Employment Agreement (Scott Felenstein) | | 10.2 | National CineMedia, Inc. 2020 Omnibus Plan | | 10.3 | Amendment No. 1 to the Credit Agreement | | 10.4 | Amendment No. 1 to the Consulting Agreement (Katherine L. Scherping) | | 10.5 | Form of 2020 Stock Option Agreement | | 10.6 | Form of 2020 Restricted Stock Unit Agreement (Time Based) | | 10.7 | Form of 2020 Restricted Stock Unit Agreement (Director) | | 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer and Interim PFO | | 32.1 | Certification of Chief Executive Officer and Interim PFO Pursuant to 18 U.S.C. Section 1350 | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | 104 | Cover Page Interactive Data File | Signatures The report was signed on August 3, 2020, by Thomas F. Lesinski, Chief Executive Officer and Director (Principal Executive Officer and Interim Principal Financial Officer) of National CineMedia, Inc - Report signed by Thomas F. Lesinski, CEO and Director (Principal Executive Officer and Interim Principal Financial Officer) on August 3, 2020[237]