National CineMedia(NCMI) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Unaudited Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of income and comprehensive income, cash flows, and equity/(deficit), along with detailed notes explaining the company's business, accounting policies, revenue recognition, loss per share, intangible assets, related party transactions, borrowings, income taxes, commitments, contingencies, fair value measurements, and a subsequent event Unaudited Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (in millions) | December 30, 2021 (in millions) | | :----- | :--------------------------- | :------------------------------ | | Total Assets | $821.6 | $817.4 | | Total Liabilities | $1,243.0 | $1,200.9 | | Total Equity/(Deficit) | $(421.4) | $(383.5) | | Cash and cash equivalents | $113.8 | $101.2 | | Receivables, net | $43.0 | $53.0 | | Long-term debt, net | $1,143.3 | $1,094.3 | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended April 1, 2021 (in millions) | Change (YoY) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :----------- | | Revenue | $35.9 | $5.4 | +$30.5 | | Operating Loss | $(22.5) | $(28.3) | +$5.8 | | Non-Operating Expenses | $23.5 | $13.7 | +$9.8 | | Consolidated Net Loss | $(46.0) | $(42.0) | $(4.0) | | Net Loss Attributable to NCM, Inc. | $(25.2) | $(19.4) | $(5.8) | | Basic EPS | $(0.31) | $(0.25) | $(0.06) | | Diluted EPS | $(0.31) | $(0.25) | $(0.06) | Unaudited Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended April 1, 2021 (in millions) | | :----- | :---------------------------------------------- | :--------------------------------------------- | | Net cash used in operating activities | $(23.6) | $(25.0) | | Net cash used in investing activities | $(0.7) | $(2.0) | | Net cash provided by financing activities | $36.9 | $37.4 | | Change in cash and cash equivalents | $12.6 | $10.4 | | Cash and cash equivalents at end of period | $113.8 | $190.7 | - Cash paid for interest increased to $15.6 million in Q1 2022 from $10.9 million in Q1 2021[20] Unaudited Condensed Consolidated Statements of Equity/(Deficit) | Metric | December 30, 2021 (in millions) | March 31, 2022 (in millions) | | :----- | :------------------------------ | :--------------------------- | | Total Equity/(Deficit) | $(383.5) | $(421.4) | | NCM, Inc. Stockholders' Equity/(Deficit) | $(526.7) | $(552.1) | | Noncontrolling interests | $143.2 | $130.7 | - Cash dividends declared were $4.2 million for the three months ended March 31, 2022, and $4.5 million for the three months ended April 1, 2021[23] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. THE COMPANY - NCM operates the largest cinema advertising network in the U.S., selling advertising under long-term exhibitor service agreements (ESAs) with founding members (AMC, Regal, Cinemark) and third-party network affiliates[26] - The COVID-19 pandemic significantly impacted the business, with in-theater advertising revenue remaining below historical levels in Q1 2022 despite resumed major motion picture releases and increased attendance since Q3 2021[27] - Weighted average remaining term of ESAs with founding members is approximately 17.5 years, and with network affiliates is 15.2 years as of March 31, 2022[28] - NCM, Inc. owned 47.4% of NCM LLC common membership units as of March 31, 2022, with founding members Regal (23.7%), Cinemark (25.4%), and AMC (3.5%) holding the remainder[29] Note 2. REVENUE FROM CONTRACTS WITH CUSTOMERS AND ACCOUNTS RECEIVABLE - Revenue is derived from advertising in the Noovie® pre-show, Lobby Entertainment Network (LEN), lobby promotions, and online/mobile advertising platforms[45] - The company defers revenue associated with "make-good" provisions until advertising airs or the make-good period expires[46] | Revenue Category | Three Months Ended March 31, 2022 (in millions) | Three Months Ended April 1, 2021 (in millions) | | :--------------- | :---------------------------------------------- | :--------------------------------------------- | | National advertising revenue | $26.3 | $3.2 | | Local and regional advertising revenue | $6.1 | $1.7 | | Founding member advertising revenue from beverage concessionaire agreements | $3.5 | $0.5 | | Total revenue | $35.9 | $5.4 | - Revenue recognized in Q1 2022 from the Deferred Revenue balance as of December 30, 2021, was $4.5 million[50] Note 3. LOSS PER SHARE | Metric | Three Months Ended March 31, 2022 | Three Months Ended April 1, 2021 | | :----- | :-------------------------------- | :------------------------------- | | Net loss attributable to NCM, Inc. (in millions) | $(25.2) | $(19.4) | | Basic Loss per NCM, Inc. share | $(0.31) | $(0.25) | | Diluted Loss per NCM, Inc. share | $(0.31) | $(0.25) | | Basic Weighted Average Shares Outstanding | 81,040,652 | 78,481,355 | | Diluted Weighted Average Shares Outstanding | 81,040,652 | 78,481,355 | - 86,233,848 and 84,427,289 weighted average exchangeable NCM LLC common units for Q1 2022 and Q1 2021, respectively, were excluded from diluted EPS as they were anti-dilutive[54] Note 4. INTANGIBLE ASSETS - Intangible assets consist of contractual rights to provide services in founding members' and network affiliates' theaters, amortized over their useful lives[55] - In Q1 2022, NCM LLC issued 6,483,893 common membership units and reduced 2,342,997 units, resulting in a net $10.4 million increase to intangible assets[57][59] - A reduction of $0.2 million to net intangible assets was recorded in Q1 2022 related to other encumbered theater payments[61] Note 5. RELATED PARTY TRANSACTIONS - AMC's ownership in NCM LLC was 3.5% as of March 31, 2022, and it is no longer considered a related party for certain accounting purposes but remains a party to key agreements[62] | Metric (in millions) | Three Months Ended March 31, 2022 | Three Months Ended April 1, 2021 | | :------------------- | :-------------------------------- | :------------------------------- | | Beverage concessionaire revenue (related parties) | $2.8 | $0.4 | | Theater access fee and revenue share to founding members (related parties) | $12.8 | $1.3 | - Mandatory distributions of available cash by NCM LLC to its members were calculated as negative $26.3 million for Q1 2022, meaning no payment will be made, and negative amounts will be netted against future positive distributions[70] - Amounts due to related party founding members, net, were $8.4 million as of March 31, 2022, primarily for theater access fees and revenue share[71] Note 6. BORROWINGS | Borrowing Type | March 31, 2022 (in millions) | December 30, 2021 (in millions) | Maturity Date | Interest Rate (March 31, 2022) | | :------------- | :--------------------------- | :------------------------------ | :------------ | :----------------------------- | | Revolving credit facility 2018 | $167.0 | $167.0 | June 20, 2023 | 4.50% (weighted-average) | | Revolving credit facility 2022 | $50.0 | — | June 20, 2023 | 9.11% (weighted-average) | | Term loans - first tranche | $259.9 | $261.2 | June 20, 2025 | 5.00% | | Term loans - second tranche | $49.5 | $49.8 | December 20, 2024 | 9.00% | | Senior secured notes due 2028 | $400.0 | $400.0 | April 15, 2028 | 5.875% | | Senior unsecured notes due 2026 | $230.0 | $230.0 | August 15, 2026 | 5.750% | | Total borrowings | $1,156.4 | $1,108.0 | | | - NCM LLC entered into a Third Amendment to its Credit Agreement on January 5, 2022, suspending consolidated net total leverage and senior secured leverage financial covenants through December 29, 2022, and setting new ratios thereafter[78] - A new $50.0 million secured revolving credit facility was entered into on January 5, 2022, fully funded, with a cash interest rate of term SOFR plus 8.00% (1.00% floor) and maturity on June 20, 2023[85] Note 7. INCOME TAXES - Income tax expense was $0.0 million for both Q1 2022 and Q1 2021, resulting in a 0.0% effective tax rate[89] - The company maintains a full valuation allowance on its net deferred tax assets, indicating uncertainty about realizing their benefits[89] Note 8. COMMITMENTS AND CONTINGENCIES - No legal proceedings are expected to have a material adverse effect on operating results or financial condition[90] | Metric (in millions) | March 31, 2022 | | :------------------- | :------------- | | ROU assets (facilities) | $18.3 | | Short-term lease liabilities (facilities) | $2.2 | | Long-term lease liabilities (facilities) | $19.8 | | Weighted average remaining lease term (facilities) | 7.3 years | | Weighted average annual discount rate | 7.4% | - 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[94] - Maximum potential future payments for minimum revenue guarantees to network affiliates is $121.5 million over remaining terms[99] Note 9. FAIR VALUE MEASUREMENTS - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[102][103] | Borrowing Type | March 31, 2022 Carrying Value (in millions) | March 31, 2022 Fair Value (in millions) | December 30, 2021 Carrying Value (in millions) | December 30, 2021 Fair Value (in millions) | | :------------- | :------------------------------------------ | :-------------------------------------- | :--------------------------------------------- | :------------------------------------------- | | Term loans - first tranche | $259.9 | $233.9 | $261.2 | $236.4 | | Term loans - second tranche | $49.5 | $46.8 | $49.8 | $48.1 | | Notes due 2026 | $230.0 | $165.6 | $230.0 | $179.4 | | Notes due 2028 | $400.0 | $349.0 | $400.0 | $357.0 | | Asset Type (in millions) | March 31, 2022 Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------- | :------------------------ | :------ | :------ | :------ | | Cash equivalents | $33.1 | $33.1 | — | — | | Short-term marketable securities | $0.3 | — | $0.3 | — | | Long-term marketable securities | $1.0 | — | $1.0 | — | | Total assets | $34.4 | $33.1 | $1.3 | — | Note 10. SUBSEQUENT EVENT - A cash dividend of $0.03 per share (approx. $2.4 million) was declared on May 9, 2022, payable June 7, 2022[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the first quarter of 2022 compared to 2021, covering business overview, recent developments, revenue and expense analysis, known trends, liquidity, capital resources, and critical accounting policies Overview - NCM is America's Movie Network, the largest cinema advertising network in the U.S., deriving revenue from advertising in its Noovie® pre-show, LEN, and digital properties[117][119] - As of March 31, 2022, approximately 57% of the network presents the new Noovie pre-show format with Post-Showtime advertising inventory, while the remaining 43% presents the Classic Noovie pre-show[118] - The company monitors key operating metrics including revenue, Adjusted OIBDA, advertising inventory utilization, national/regional advertising pricing (CPM), local advertising rate per theater per week, and advertising revenue per attendee[120] Recent Developments - In-theater advertising revenue for Q1 2022 remained below historical levels due to a lag between attendee recovery and advertiser return, despite all network theaters being open since Q3 2021[123] - The company significantly reduced payroll-related costs through temporary measures and a 45% headcount reduction as of March 31, 2022, compared to pre-pandemic levels[124] - On January 5, 2022, NCM LLC entered into a Third Amendment to its Credit Agreement, suspending certain financial covenants through December 29, 2022, and establishing new leverage ratios for subsequent quarters[125] - A new $50.0 million secured revolving credit facility was funded on January 5, 2022, with a maturity date of June 20, 2023[126] Summary Historical and Operating Data | Metric | Q1 2022 (in millions) | Q1 2021 (in millions) | % Change (YoY) | | :----- | :-------------------- | :-------------------- | :------------- | | Revenue | $35.9 | $5.4 | 564.8% | | Operating loss | $(22.5) | $(28.3) | (20.5)% | | Net loss attributable to NCM, Inc. | $(25.2) | $(19.4) | 29.9% | | Adjusted OIBDA | $(6.8) | $(16.2) | (58.0)% | | Adjusted OIBDA margin | (18.9)% | (300.0)% | 281.1% | | Total theater attendance | 76.0 | 13.8 | 450.7% | - Adjusted OIBDA is a non-GAAP measure used by management to evaluate operating performance, excluding depreciation, amortization of intangibles, non-cash share-based compensation, impairment of long-lived assets, and sales force reorganization costs[129] | Network Screens | December 30, 2021 | March 31, 2022 | Change | | :-------------- | :---------------- | :------------- | :----- | | Founding Members | 16,436 | 16,361 | (75) | | Network Affiliates | 4,304 | 4,244 | (60) | | Total | 20,740 | 20,605 | (135) | Results of Operations First Quarter of 2022 and First Quarter of 2021 - Total revenue increased by 564.8% to $35.9 million in Q1 2022, compared to $5.4 million in Q1 2021[134] | Revenue Category | Q1 2022 (in millions) | Q1 2021 (in millions) | $ Change (YoY) | % Change (YoY) | | :--------------- | :-------------------- | :-------------------- | :------------- | :------------- | | National advertising revenue | $26.3 | $3.2 | $23.1 | 721.9% | | Local and regional advertising revenue | $6.1 | $1.7 | $4.4 | 258.8% | | Founding member beverage revenue | $3.5 | $0.5 | $3.0 | 600.0% | | Total revenue | $35.9 | $5.4 | $30.5 | 564.8% | | Revenue per Attendee | Q1 2022 | Q1 2021 | % Change (YoY) | | :------------------- | :------ | :------ | :------------- | | National advertising revenue per attendee | $0.346 | $0.232 | 49.1% | | Local and regional advertising revenue per attendee | $0.080 | $0.123 | (35.0)% | | Total revenue per attendee | $0.472 | $0.391 | 20.7% | | Total theater attendance (in millions) | 76.0 | 13.8 | 450.7% | - Total operating expenses increased by $24.7 million (73.3%) to $58.4 million in Q1 2022, primarily due to higher advertising affiliate expense, increased theater access fees, and personnel costs[139][140][142] - Non-operating expenses increased by $9.8 million (71.5%) to $23.5 million, mainly due to a $7.9 million increase in loss on re-measurement of the TRA payable and a $2.5 million increase in interest on borrowings[147] - Net loss attributable to NCM, Inc. increased by $5.8 million to $(25.2) million in Q1 2022, driven by higher non-operating expenses, partially offset by a decrease in operating loss[148] Known Trends and Uncertainties - The COVID-19 pandemic's impact on future periods remains uncertain, with attendance-based fees reduced when attendance is lower than historical levels[149][150] - Beverage revenue pricing for founding members is based on the greater of previous year's CPM or unaffiliated third-party CPM for AMC, while Cinemark and Regal's beverage supplier pricing increases at a fixed rate of 2.0% annually[151] - Theater access fees to founding members are composed of fixed payments per patron (increasing 8% every five years, next in 2027) and per digital screen (increasing 5% annually)[152][153] - Cinemark and Regal receive a percentage of revenue from Platinum Spots, subject to a specified minimum average CPM if multiple advertisers run concurrently[154] Financial Condition and Liquidity - Liquidity is affected by seasonality, receivables collection, operating expenses, available cash payments to founding members, debt payments, income taxes, and dividends[155] - The company implemented cost-saving measures including reduced Board compensation, curtailed non-essential operating/capital expenditures, suspended 401K match, managed vendor costs, decreased quarterly dividend, and active cash management[157] | Metric (in millions) | March 31, 2022 | December 30, 2021 | April 1, 2021 | | :------------------- | :------------- | :---------------- | :------------ | | Cash, cash equivalents and marketable securities | $115.1 | $102.5 | $192.2 | | NCM LLC revolving credit facility availability | $6.8 | $6.8 | $5.6 | | Total liquidity | $121.9 | $109.3 | $197.8 | - As of March 31, 2022, NCM LLC held $76.2 million in cash, not available for NCM, Inc. dividends or TRA payments[162] - Management believes the company can meet operating and debt obligations for the next year based on current financial position and forecasted cash flows[159] Critical Accounting Policies - No significant changes to critical accounting policies as of March 31, 2022, from those disclosed in the annual report on Form 10-K for December 30, 2021[168] Recent Accounting Pronouncements - Adoption of recently issued accounting pronouncements is not expected to have a material impact on the unaudited Condensed Consolidated Financial Statements[169] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, affecting its variable-rate revolving credit facilities and term loans, with a 100-basis point fluctuation impacting annual cash interest expense by approximately $5.3 million - Primary market risk is interest rate risk, affecting variable-rate revolving credit facilities and term loans[170] - A 100-basis point fluctuation in market interest rates would increase/decrease annual cash interest expense by approximately $5.3 million on $217.0 million in revolving credit balances and $309.4 million in term loans outstanding as of March 31, 2022[170] - Historically low interest rates as of March 31, 2022, reduced interest rate risk, but an increase would raise this risk[171] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2022, concluding they were effective with no material changes to internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2022[173] - No material changes to internal control over financial reporting occurred during Q1 2022[176] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal proceedings in the ordinary course of business but does not anticipate any material adverse effect on its operating results or financial condition - No legal proceedings are expected to have a material adverse effect on operating results or financial condition[178] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the annual report on Form 10-K for the fiscal year ended December 30, 2021 - No material changes to risk factors from the annual report on Form 10-K filed March 3, 2022[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on shares delivered to the company from restricted stock upon vesting to cover employees' tax withholding obligations | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----- | :------------------------------- | :--------------------------- | | December 31, 2021 through January 27, 2022 | — | $— | | January 28, 2022 through February 24, 2022 | 18,773 | $3.17 | | February 25, 2022 through March 31, 2022 | 42,672 | $2.97 | Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities[182] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[183] Item 5. Other Information No other information was reported - None[184] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the Bylaws and Certificate of Incorporation, and amendments to the Credit Agreement and a new Revolving Credit Agreement - Key exhibits include amendments to Bylaws and Certificate of Incorporation (May 4, 2022), Amendment No. 3 to the Credit Agreement (January 5, 2022), and a new Revolving Credit Agreement (January 5, 2022)[186] Signatures The report was signed by Thomas F. Lesinski, Chief Executive Officer, and Ronnie Y. Ng, Chief Financial Officer, on May 9, 2022 - Report signed by CEO Thomas F. Lesinski and CFO Ronnie Y. Ng on May 9, 2022[192]