National CineMedia, Inc. (NCMI) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Overview
We are America’s Movie Network. As the largest cinema advertising network in North America, we are a media company dedicated to uniting brands with young, diverse audiences through the power of movies and pop culture. We currently derive revenue principally from the sale of advertising to national, regional and local businesses in The Noovie® Show, our cinema advertising and entertainment show seen on movie screens across the U.S.
We present multiple formats of The Noovie® Show depending on the theater circuit in which it runs, which may include Post-Showtime advertising inventory after the advertised showtime. As of December 28, 2023, theaters presenting The Noovie Show format with Post-Showtime Inventory made up approximately 65.4% of our network. All other NCM network theater circuits, which make up the remaining 34.6% of our network, present The Noovie Show, without Post-Showtime advertising inventory. The movie trailers presented by the theater circuits that run before the feature film are not part of The Noovie Show.
We also sell advertising on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, we sell digital online and mobile advertising through our Audience Accelerator, across our suite of Noovie digital properties and a variety of complementary out of home venues in order to reach entertainment audiences beyond the theater. As of December 28, 2023, approximately 7.3 million moviegoers have downloaded our mobile apps. These downloads and the acquisition of second- and third-party data sets have resulted in unique data records of approximately 703.3 million as of December 28, 2023. We have long-term ESAs (approximately 12.2 weighted average years) with the ESA Parties and multi-year agreements with network affiliates, which expire at various dates between March 24, 2024 and July 13, 2033. The weighted average remaining term of the ESAs and the network affiliate agreements is 11.9 years as of December 28, 2023. The ESAs and network affiliate agreements grant NCM LLC exclusive rights in their theaters to sell advertising, subject to limited exceptions. The Noovie Show and our LEN programming are distributed predominantly via satellite through our proprietary DCN.
Management focuses on several measurements that we believe provide us with the necessary ratios and key performance indicators to manage our business, determine how we are performing versus our internal goals and targets, and against the performance of our competitors and other benchmarks in the marketplace in which we operate. We focus on many operating metrics including changes in revenue, Adjusted OIBDA and Adjusted OIBDA margin, as some of our primary measurement metrics. In addition, we monitor our monthly advertising performance measurements, including advertising inventory utilization, advertising pricing (CPM), local advertising rate per theater per week, advertising revenue per attendee, as well as significant operating expenses and related trends. We also monitor free cash flow, cash balances, the fixed charge coverage ratio and revolving credit facility availability to ensure financial debt covenant compliance and that there is adequate cash availability to fund our working capital needs, debt obligations and any future dividends declared by our Board of Directors.
Recent Developments
Bankruptcy Filing, Deconsolidation and Reconsolidation of NCM LLC—On April 11, 2023 NCM LLC filed a voluntary petition for reorganization with a prearranged Chapter 11 plan under Chapter 11 of Title 11 of the United States Code in the Bankruptcy Code in the Bankruptcy Court. During the Chapter 11 Case, the Company was deemed to no longer control NCM LLC for accounting purposes and NCM LLC was deconsolidated from the Company’s financial statements prospectively as of April 11, 2023. We continued to operate as the manager of the debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code throughout the Chapter 11 Case.
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On June 27, 2023, the Bankruptcy Court entered the Confirmation Order approving the Disclosure Statement on a final basis and confirming the Company’s Plan. Following confirmation of the Plan on August 7, 2023, all the conditions to effectiveness of the Plan were satisfied or waived, the Restructuring Transactions were substantially consummated and NCM LLC emerged from bankruptcy. Among other things, on the Effective Date, in accordance with the Plan, all common units under the NCM LLC Operating Agreement were canceled and extinguished, NCM, Inc. received NCM LLC common units and transferred the NCM Capital Contribution of approximately $15.5 million to NCM LLC, NCM LLC assumed certain unexpired Executory Contracts and Unexpired Leases, including AMC’s and Cinemark’s ESAs, NCM LLC transferred $8.8 million of cash to a professional fees escrow account and $15.0 million to an unsecured creditor settlements escrow account for the General Unsecured Claim Pool. NCM LLC commenced distributions to creditors, including the issuance of shares of NCM, Inc. common stock to holders of Secured Debt Claims and NCM LLC entered into an Exit Facility to support operations upon emergence. As a result of the Plan, all historical debt of NCM LLC was discharged and NCM LLC recorded a gain on bankruptcy of $916.4 million for the year ended December 28, 2023.
Additionally, upon emergence from bankruptcy, NCM, Inc., regained control and retained 100.0% ownership of NCM LLC, after taking into account elections by the holders of Secured Debt Claims to receive NCM, Inc. common stock in lieu of NCM LLC common units and was therefore reconsolidated into the Company’s financial statements prospectively as of August 7, 2023 akin to an acquisition under ASC 805 – Business Combinations. In accordance with ASC 805 – Business Combinations, the assets and liabilities of NCM LLC were adjusted to their estimated fair value as of the Effective Date.
As of December 28, 2023, the Company had not completed all agreed upon payments to the General Unsecured Claim Pool and held a total of $3.0 million within the escrow accounts and accruals, presented within ‘Restricted cash’ and ‘Accounts Payable’ on the unaudited Consolidated Balance Sheet as of December 28, 2023, respectively.
Regal Advertising Agreement—On September 7, 2022, Cineworld Group plc, the parent company of Regal, and certain of its subsidiaries, including Regal, Regal Cinemas, Inc., formerly a party to an ESA with NCM LLC, and Regal CineMedia Holdings, LLC, formerly a party to other agreements with NCM LLC and NCM, Inc., filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Southern District of Texas. On October 21, 2022, Regal filed a motion to reject the ESA without specifying an effective date for the rejection and indicated that Regal planned on negotiating with NCM LLC. NCM LLC also filed an adversary proceeding against Regal seeking declaratory relief and an injunction prohibiting Regal from breaching certain exclusivity, non-compete, non-negotiate and confidentiality provisions in the ESA by entering into a new agreement with a third-party or bringing any of the services performed by NCM LLC in-house. On February 1, 2023, Cineworld filed a motion for summary judgment on NCM LLC’s adversary proceeding with a hearing scheduled during the second quarter of 2023. On May 5, 2023, NCM LLC and Regal agreed to stay the ongoing litigation while the parties worked towards the terms of a new arrangement for NCM LLC to provide advertising services to Regal. In lieu of litigating Regal’s potential rejection of the ESA and NCM LLC’s adversary proceeding against Regal, the parties negotiated a Regal Advertising Agreement and Regal Termination Agreement. The Regal Advertising Agreement was effective on July 14, 2023 and provides that NCM LLC acquired the exclusive right to provide on-screen advertisements at Regal’s theaters for a term of ten years in exchange for payments based on the attendance at Regal’s theaters and the revenue generated by NCM LLC through advertising displayed in Regal’s theaters.
Pursuant to the Regal Advertising Agreement, NCM LLC has the right to display advertising in Regal’s theaters with a program of inventory that provides for (i) up to five minutes in length for exhibition on-screen immediately prior to showtime of a feature film or digital programming event, (ii) up to ten minutes immediately after the showtime of a feature film, extending the time available to NCM LLC by five minutes, and (iii) the Platinum Spot that may be exhibited on-screen prior to the last two trailers, which may be either thirty or sixty seconds in length, and subject to Regal’s approval, NCM LLC may display two thirty-second spots in the Platinum Spot and a Gold Spot, a thirty second spot displayed immediately prior to the fourth trailer preceding a feature film or digital programming event.
Pursuant to the Regal Termination Agreement, effective on July 14, 2023, Regal rejected and terminated the ESA. Additionally Regal and Regal’s affiliates’ waived all rights and interests as to the Tax Receivable Agreement, the Common Unit Adjustment Agreement, the Software License Agreement, the Director Designation Agreement, the Registration Rights Agreement and all the other joint venture agreements described in NCM LLC’s Company Operating Agreement, and Regal and Regal’s affiliates waived and released claims against other parties thereto. In connection with the Regal Advertising Agreement, NCM LLC and Regal also agreed to dismiss with prejudice the ongoing litigation between the parties related to NCM LLC’s request to enforce certain provisions of the ESA, including the exclusivity provision. Following the effective date of the Regal Termination Agreement of July 14, 2023, Regal is no longer an ESA Party or related party and is included within the network affiliate metrics.
Revolving Credit Facility 2023—On August 7, 2023, NCM LLC entered into the Revolving Credit Facility 2023 with the lenders party thereto and CIT Northbridge Credit LLC as agent. The Revolving Credit Facility 2023 is an asset backed line facility where the capacity depends upon NCM LLC’s trade accounts receivable balance, as adjusted for aged balances and other considerations. The maximum capacity of the Revolving Credit Facility 2023 is $55.0 million. The proceeds of the
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Revolving Credit Facility 2023 may be used for, inter alia, working capital and capital expenditures. The Revolving Credit Facility 2023 will mature on August 7, 2026. The interest rate under the Revolving Credit Facility 2023 is a base rate or SOFR benchmark plus (i) 3.75% if less than 50% of revolving commitments are utilized or (ii) 4.50% if 50% or more of revolving commitments are utilized (utilizing the average revolver usage for the prior calendar month as a benchmark for this determination). The Revolving Credit Facility 2023 also contains a financial maintenance covenant requiring that the fixed charge coverage ratio ending on the last day of each fiscal month is at least 1.1 to 1.0 during a “Trigger Period.” A Trigger Period begins upon (i) an event of default or (ii) if availability is less than the greater of (a) $5.0 million and (b) 10% of aggregate revolving commitments. A Trigger Period ends only if (i) no event of default existed for the preceding 30 consecutive days and (ii) availability is greater than both (a) $5.0 million and (b) 10% of aggregate revolving commitments. Upon the effectiveness of the Revolving Credit Facility 2023, NCM LLC immediately drew $10.0 million from the facility, which represents the only amount currently outstanding under the Revolving Credit Facility 2023 as of December 28, 2023.
Reverse Stock Split—On August 3, 2023, the Company effected a one-for-ten (1:10) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by the Company’s stockholders on August 2, 2023. The reverse stock split reduced the number of outstanding shares of the Company’s common stock from 174,112,385 shares as of August 3, 2023, to 17,411,323 shares outstanding post-split. After the cancellation of Regal’s shares on August 7, 2023, there were 13,343,065 shares outstanding. The primary purpose of the reverse stock split was to comply with the Company’s obligations under the NCMI 9019 Settlement and so that the Plan could become effective, as well as, to increase the per share market price of the Company’s common stock in an effort to maintain compliance with applicable Nasdaq continued listing standards with respect to the closing price of the Company’s common stock.
Selected Historical and Operating Data
The following table sets forth our historical selected financial and operating data for the periods indicated. The selected financial and operating data should be read in conjunction with the other information contained in this document, including “Item 1. Business,” the audited historical Consolidated Financial Statements and the notes thereto included elsewhere in this document, and historical audited Consolidated Financial Statements, which have not been included in this document.
The results of operations data for the years ended December 28, 2023 and December 29, 2022 and the balance sheet data as of December 28, 2023 and December 29, 2022 are derived from the audited Consolidated Financial Statements of NCM, Inc. included elsewhere in this document. The results of operations data for the years ended December 30, 2021, December 31, 2020 and December 31, 2019 and the balance sheet data as of December 30, 2021, December 31, 2020 and December 31, 2019 are derived from the audited Consolidated Financial Statements of NCM, Inc. that are not included in this document.
| Results of Operations Data - Consolidated | Years Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions, except per share data) | Dec. 28, 2023 | Dec. 29, 2022 | Dec. 30, 2021 | Dec. 31, 2020 | Dec. 26, 2019 | |||||||||||||
| Revenue | $ | 165.2 | $ | 249.2 | $ | 114.6 | $ | 90.4 | $ | 444.8 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||||
| Advertising operating costs | 30.7 | 27.2 | 18.4 | 10.3 | 38.3 | |||||||||||||
| Network costs | 6.3 | 8.4 | 7.4 | 8.6 | 13.5 | |||||||||||||
| ESA theater access fees and revenue share | 43.1 | 82.3 | 51.1 | 24.6 | 82.7 | |||||||||||||
| Selling and marketing costs | 29.6 | 42.8 | 34.7 | 37.6 | 64.9 | |||||||||||||
| Administrative and other costs | 57.3 | 44.3 | 36.0 | 30.9 | 43.8 | |||||||||||||
| Impairment of long-lived assets | — | 5.8 | — | 1.7 | — | |||||||||||||
| Depreciation expense | 3.1 | 6.5 | 10.9 | 13.1 | 13.6 | |||||||||||||
| Amortization expense | 22.4 | 25.0 | 24.7 | 24.6 | 26.7 | |||||||||||||
| Total | 192.5 | 242.3 | 183.2 | 151.4 | 283.5 | |||||||||||||
| OPERATING (LOSS) INCOME | (27.3) | 6.9 | (68.6) | (61.0) | 161.3 | |||||||||||||
| NON-OPERATING (INCOME) EXPENSE | (724.0) | 73.1 | 49.8 | (96.9) | 62.2 | |||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 696.7 | (66.2) | (118.4) | 35.9 | 99.1 | |||||||||||||
| Provision for income taxes | — | — | — | 162.2 | 12.4 | |||||||||||||
| CONSOLIDATED NET INCOME (LOSS) | 696.7 | (66.2) | (118.4) | (126.3) | 86.7 | |||||||||||||
| Less: Net (loss) income attributable to noncontrolling interests | (8.5) | (37.5) | (69.7) | (60.9) | 50.6 | |||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO NCM, Inc. | $ | 705.2 | $ | (28.7) | $ | (48.7) | $ | (65.4) | $ | 36.1 |
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| EARNINGS (LOSS) PER NCM, INC. COMMON SHARE: | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Basic | $ | 14.73 | $ | (3.50) | $ | (0.61) | $ | (0.84) | $ | 0.47 | ||||||||
| Diluted | $ | 14.34 | $ | (3.50) | $ | (0.61) | $ | (0.84) | $ | 0.46 |
Summary Operating Data
Our Operating Data—Within the financial results outlined below, all activity during the Chapter 11 Case from April 11, 2023 to August 7, 2023 when NCM LLC was deconsolidated from NCM, Inc. represents activity and balances for NCM, Inc. standalone. All activity and balances prior to the deconsolidation of NCM LLC on April 11, 2023 and after the reconsolidation of NCM LLC on August 7, 2023 represent NCM, Inc. consolidated, inclusive of NCM LLC. The operating results for NCM LLC, which management believes better represent the Company’s historical consolidated performance, are presented separately subsequent to the operating data for NCM, Inc., which is presented below (dollars in millions, except share and margin data):
| Years Ended | % Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | Dec. 28, 2023 | Dec. 29, 2022 | 2023 to 2022 | |||||||
| Revenue | $ | 165.2 | $ | 249.2 | (33.7) | % | ||||
| Operating expenses: | ||||||||||
| Advertising operating costs | 30.7 | 27.2 | 12.9 | % | ||||||
| Network costs | 6.3 | 8.4 | (25.0) | % | ||||||
| ESA theater access fees and revenue share | 43.1 | 82.3 | (47.6) | % | ||||||
| Selling and marketing costs | 29.6 | 42.8 | (30.8) | % | ||||||
| Administrative and other costs | 57.3 | 44.3 | 29.3 | % | ||||||
| Impairment of long-lived assets | — | 5.8 | (100.0) | % | ||||||
| Depreciation expense | 3.1 | 6.5 | (52.3) | % | ||||||
| Amortization expense | 22.4 | 25.0 | (10.4) | % | ||||||
| Total operating expenses | 192.5 | 242.3 | (20.6) | % | ||||||
| Operating (loss) income | (27.3) | 6.9 | (495.7) | % | ||||||
| Non-operating (income) expense | (724.0) | 73.1 | (1090.4) | % | ||||||
| Income tax expense | — | — | — | % | ||||||
| Net loss attributable to noncontrolling interests | (8.5) | (37.5) | (77.3) | % | ||||||
| Net income (loss) attributable to NCM, Inc. | $ | 705.2 | $ | (28.7) | (2557.1) | % | ||||
| Net income (loss) per NCM, Inc. basic share | $ | 14.73 | $ | (3.50) | (520.9) | % | ||||
| Net income (loss) per NCM, Inc. diluted share | $ | 14.34 | $ | (3.50) | (509.7) | % |
Our Network—The net screens lost from our network by the ESA Parties and network affiliates during 2023 were as follows.
| Number of screens | |||||||
|---|---|---|---|---|---|---|---|
| ESA Parties | Network Affiliates | Total | |||||
| Balance as of December 29, 2022 | 16,062 | 4,033 | 20,095 | ||||
| Lost affiliates, net of new affiliates (1) | — | (154) | (154) | ||||
| Closures, net of openings (2) | (675) | 29 | (646) | ||||
| Affiliates rejected in NCM LLC’s Chapter 11 Case (3) | — | (892) | (892) | ||||
| Regal theaters (4) | (5,814) | 5,814 | — | ||||
| Balance as of December 28, 2023 | 9,573 | 8,830 | 18,403 |
(1)Represents the loss of three of our affiliates, partially offset by the gain of three affiliates during 2023 resulting in a net reduction of 154 affiliate screens to our network as of December 28, 2023.
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(2)Represents the closure of 646 screens, net of new screens added, across our ESA Parties and network affiliates, including 645 screens closed by Regal prior to the Regal Advertising Agreement.
(3)Represents the loss of theaters related to affiliate agreements that were rejected by NCM LLC during the Chapter 11 Case.
(4)Represents the prospective reclassification of Regal’s theaters upon Regal’s rejection of its ESA and the commencement of the Regal Advertising Agreement on July 14, 2023, whereby Regal is now included within the Network Affiliates reporting.
Our ESA Party and network affiliate agreements allow us to sell cinema advertising across the largest network of digitally equipped theaters in the U.S. We believe that our market coverage strengthens our selling proposition and competitive positioning against other national, regional and local video advertising platforms, including television, online and mobile video platforms and other out of home video advertising platforms by allowing advertisers the broad reach and national scale that they need to effectively reach their target audiences.
Basis of Presentation
Prior to the completion of our IPO, NCM LLC was wholly-owned by its ESA Parties. In connection with the offering, NCM, Inc. purchased newly issued common membership units from NCM LLC and common membership units from NCM LLC’s ESA Parties and became a member of and the sole manager of NCM LLC. We entered into several agreements to effect the reorganization and the financing transaction and certain amendments were made to the existing ESAs to govern the relationships among NCM LLC and NCM LLC’s ESA Parties after the completion of these transactions.
The results of operations data discussed herein were derived from the audited Consolidated Financial Statements and accounting records of NCM, Inc. and should be read in conjunction with the notes thereto.
We have a 52-week or 53-week fiscal year ending on the first Thursday after December 25. Fiscal year 2023 contained 52 weeks and fiscal year 2022 contained 52 weeks. Our 2024 fiscal year will also contain 52 weeks. Throughout this document, we refer to our fiscal years as set forth below:
| Reference in | ||
|---|---|---|
| Fiscal Year Ended | this Document | |
| December 28, 2023 | 2023 | |
| December 29, 2022 | 2022 |
Results of Operations
Fiscal Years 2023 and 2022
Revenue. Total revenue decreased $84.0 million, or 33.7%, from $249.2 million for 2022 to $165.2 million for 2023. The following is a summary of revenue by category (in millions):
| Fiscal Year | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2022 to 2023 | 2022 to 2023 | |||||||||||
| Advertising revenue | $ | 155.1 | $ | 249.2 | $ | (94.1) | (37.8) | % | ||||||
| Management fee reimbursement | 10.1 | — | 10.1 | 100.0 | % | |||||||||
| Total revenue | $ | 165.2 | $ | 249.2 | $ | (84.0) | (33.7) | % |
Advertising revenue. Advertising revenue decreased by $94.1 million, or 37.8%, from $249.2 million in 2022 to $155.1 million in 2023. This decrease was primarily due to the deconsolidation of NCM LLC for the period of April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case. The $155.1 million of revenue for 2023 represents the activity of NCM LLC for the year prior to deconsolidation on April 11, 2023 and after the reconsolidation of NCM LLC August 7, 2023.
Management fee reimbursement. Management fee reimbursement increased by $10.1 million, or 100.0%, from $0.0 million in 2022 to $10.1 million in 2023. This increase was primarily due to the deconsolidation of NCM LLC on April 11, 2023 and represents the revenue recognized by NCM, Inc. for managing NCM LLC for the portion of 2023 when NCM LLC was deconsolidated from NCM, Inc. Management fee reimbursement is eliminated during periods of consolidation. This amount is equal to the expenses incurred by NCM, Inc. that were paid by NCM LLC.
Operating expenses. Total operating expenses decreased $49.8 million, or 20.6%, from $242.3 million for 2022 to $192.5 million for 2023. The following table shows the changes in operating expense for 2022 and 2023 (in millions):
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| Fiscal Year | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2022 to 2023 | 2022 to 2023 | |||||||||||
| Advertising operating costs | $ | 30.7 | $ | 27.2 | $ | 3.5 | 12.9 | % | ||||||
| Network costs | 6.3 | 8.4 | (2.1) | (25.0) | % | |||||||||
| ESA theater access fees and revenue share | 43.1 | 82.3 | (39.2) | (47.6) | % | |||||||||
| Selling and marketing costs | 29.6 | 42.8 | (13.2) | (30.8) | % | |||||||||
| Administrative and other costs | 57.3 | 44.3 | 13.0 | 29.3 | % | |||||||||
| Impairment of long-lived assets | — | 5.8 | (5.8) | 100.0 | % | |||||||||
| Depreciation expense | 3.1 | 6.5 | (3.4) | (52.3) | % | |||||||||
| Amortization expense | 22.4 | 25.0 | (2.6) | (10.4) | % | |||||||||
| Total operating expenses | $ | 192.5 | $ | 242.3 | $ | (49.8) | (20.6) | % |
Advertising operating costs. Advertising operating costs increased $3.5 million, or 12.9%, from $27.2 million in 2022 to $30.7 million in 2023. The increase was primarily due to an increase in advertising affiliate and partner expense for 2023, compared to 2022, primarily related to the Regal Advertising Agreement which commenced on July 14, 2023. When operating under the Regal ESA, the fees owed to Regal were previously presented within “ESA theater access fees and revenue share”. The increase was partially offset by the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case, with the $30.7 million of expense for the year 2023 representing the activity of NCM LLC prior to deconsolidation on April 11, 2023 and after the reconsolidation of NCM LLC on August 7, 2023.
Network costs. Network costs decreased $2.1 million, or 25.0%, from $8.4 million in 2022 to $6.3 million in 2023. The decrease was due to the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case, with the $6.3 million of expense for the year 2023 representing the activity of NCM LLC prior to deconsolidation on April 11, 2023 and after the reconsolidation of NCM LLC on August 7, 2023.
ESA theater access fees and revenue share. Theater access fees and revenue share decreased $39.2 million, or 47.6%, from $82.3 million in 2022 to $43.1 million in 2023. The decrease was primarily due to the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case, with the $43.1 million of expense for the year 2023 representing the activity of NCM LLC prior to deconsolidation on April 11, 2023 and after the reconsolidation of NCM LLC on August 7, 2023. The decrease was also due to the exclusion of Regal theater access fees following Regal’s termination of the Regal ESA on July 14, 2023.
Selling and marketing costs. Selling and marketing costs decreased $13.2 million, or 30.8%, from $42.8 million in 2022 to $29.6 million in 2023. The decrease was due to the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case, with the $29.6 million of expense for the year 2023 representing the activity of NCM LLC prior to deconsolidation on April 11, 2023 and after the reconsolidation of NCM LLC on August 7, 2023.
Administrative and other costs. Administrative and other costs increased $13.0 million, or 29.3%, from $44.3 million in 2022 to $57.3 million in 2023. The increase is due to costs incurred by NCM LLC through the petition date and subsequent to the Effective Date related to the Chapter 11 Case, as well as, expenses incurred directly by NCM, Inc. related to NCM LLC’s Chapter 11 Case, an increase in NCM, Inc. personnel related costs primarily related to a retention program implemented to ensure continuity of the management team during the Chapter 11 Case and an allocation of NCM LLC expenses related to NCM LLC administrative services utilized by NCM, Inc. during the deconsolidated period. These increases were partially offset by the deconsolidation of NCM LLC and exclusion of administrative and other costs incurred from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case.
Depreciation expense. Depreciation expense decreased $3.4 million, or 52.3%, from $6.5 million in 2022 to $3.1 million in 2023. This decrease was primarily due to a $1.9 million decrease in depreciation expense following the fair value adjustments to NCM LLC’s property and equipment upon reconsolidation on August 7, 2023. This decrease was also partially due to a reduction in depreciation expense caused by the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case.
Amortization expense. Amortization expense decreased $2.6 million, or 10.4%, from $25.0 million in 2022, to $22.4 million in 2023. The decrease was primarily based on the increase in amortization expense associated with NCM LLC’s intangible assets based upon the fair value adjustments to NCM LLC’s intangible assets upon reconsolidation on
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August 7, 2023. This increase was partially offset by a reduction in amortization expense caused by the deconsolidation of NCM LLC from April 11, 2023 through August 7, 2023 during NCM LLC’s Chapter 11 Case.
Non-operating (income) expense. Total non-operating income increased $797.1 million, or 1090.4%, from non-operating expense of $73.1 million in 2022 to non-operating income of $724.0 million in 2023. The following table shows the changes in non-operating income for 2023 and 2022 (in millions):
| Fiscal Year | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2022 to 2023 | 2022 to 2023 | |||||||||||
| Interest on borrowings | $ | 27.9 | $ | 79.7 | $ | (51.8) | (65.0) | % | ||||||
| Loss (gain) on modification and retirement of debt, net | 0.4 | (5.9) | 6.3 | (106.8) | % | |||||||||
| Loss on re-measurement of the payable under the tax receivable agreement | 9.3 | 2.2 | 7.1 | 322.7 | % | |||||||||
| Gain on sale of asset | (0.3) | (2.2) | 1.9 | (86.4) | % | |||||||||
| Gain on deconsolidation of affiliate | (557.7) | — | (557.7) | 100.0 | % | |||||||||
| Gain on re-measurement of investment in NCM LLC | (35.5) | — | (35.5) | (86.4) | % | |||||||||
| Gain on reconsolidation of NCM LLC | (167.8) | — | (167.8) | 100.0 | % | |||||||||
| Other non-operating income | (0.3) | (0.7) | 0.4 | (57.1) | % | |||||||||
| Total non-operating (income) expense | $ | (724.0) | $ | 73.1 | $ | (797.1) | (1090.4) | % |
The increase in non-operating income was primarily due to a $557.7 million gain on deconsolidation of affiliate, a $167.8 million gain on reconsolidation of NCM LLC and a $35.5 million gain on remeasurement of NCM LLC recorded after NCM LLC emerged from bankruptcy and was reconsolidated on August 7, 2023, as well as a $51.8 million decrease in interest on borrowings primarily due to the discharge of historical debt that occurred upon NCM LLC’s emergence from bankruptcy and reconsolidation on August 7, 2023. This was partially offset by a $7.1 million increase in the loss on re-measurement of the payable under the tax receivable agreement primarily due to the net impact of the reconsolidation of NCM LLC and the Regal Termination Agreement and a $6.3 million decrease in loss on modification and retirement of debt, net due to limited activity within 2023 compared to 2022.
Results of Operations - NCM LLC
The following table presents operating data and Adjusted OIBDA (dollars in millions, except share and margin data) for the years ended December 28, 2023 and December 29, 2022 for NCM LLC:
| Years Ended | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | Dec. 28, 2023 | Dec. 29, 2022 | 2022 to 2023 | 2023 to 2022 | ||||||||||
| Revenue | $ | 259.8 | $ | 249.2 | $ | 10.6 | 4.3 | % | ||||||
| Operating expenses: | ||||||||||||||
| Advertising operating costs | 48.4 | 27.2 | 21.2 | 77.9 | % | |||||||||
| Network costs | 8.9 | 8.4 | 0.5 | 6.0 | % | |||||||||
| ESA theater access fees and revenue share | 72.7 | 82.3 | (9.6) | (11.7) | % | |||||||||
| Selling and marketing costs | 44.1 | 42.8 | 1.3 | 3.0 | % | |||||||||
| Administrative and other costs | 75.9 | 32.7 | 43.2 | 132.1 | % | |||||||||
| Loss on impairment of Regal ESA | 125.7 | — | 125.7 | 100.0 | % | |||||||||
| Impairment of long-lived assets | 8.9 | 5.8 | 3.1 | 53.4 | % | |||||||||
| Administrative fee—managing member | 21.7 | 11.0 | 10.7 | 97.3 | % | |||||||||
| Depreciation expense | 4.6 | 6.5 | (1.9) | (29.2) | % | |||||||||
| Amortization expense | 29.8 | 25.0 | 4.8 | 19.2 | % | |||||||||
| Total operating expenses | 440.7 | 241.7 | 199.0 | 82.3 | % | |||||||||
| Operating (loss) income | $ | (180.9) | $ | 6.9 | $ | (187.8) | (2721.7) | % | ||||||
| Adjusted OIBDA | $ | 52.7 | $ | 57.3 | $ | (4.6) | (8.0) | % | ||||||
| Adjusted OIBDA margin | 20.3 | % | 23.0 | % | (2.7) | % | (2.7) | % | ||||||
| Total theater attendance (in millions) (1) | 438.9 | 394.8 | 44.1 | 11.2 | % |
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(1)Represents the total attendance within NCM LLC’s advertising network, excluding screens and attendance associated with AMC Carmike theaters that are currently part of another cinema advertising network for each of the periods presented. Refer to Note 6 to the audited Consolidated Financial Statements included elsewhere in this document.
Revenue. Revenue increased $10.6 million, or 4.3%, from $249.2 million for the year ended 2022 to $259.8 million for the year ended 2023.
National advertising revenue increased by $2.9 million, or 1.5%, from $187.2 million in 2022 to $190.1 million in 2023. The increase in national advertising revenue was primarily due to an 8.7% increase in impressions sold and a 11.2% increase in network attendance in 2023, as compared to 2022.
Local and regional advertising revenue increased by $7.6 million, or 17.5%, from $43.5 million in 2022 to $51.1 million in 2023. The increase in local and regional advertising revenue was primarily due to an increase in contract activity and average size within the government, healthcare, travel and education service categories in 2023, as compared to 2022.
National advertising revenue from the ESA Parties’ beverage concessionaire agreements did not change from $18.6 million for 2022 to $18.6 million for 2023. While national advertising revenue from the ESA Parties’ beverage concessionaire agreements increased due to higher ESA Party theater attendance, the increase was fully offset by the discontinuation of beverage concessionaire revenue generated under the Regal ESA subsequent to its termination effective July 14, 2023.
Advertising operating costs. Advertising operating costs increased $21.2 million, or 77.9%, from $27.2 million in 2022 to $48.4 million in 2023. The increase was due primarily to a $20.4 million increase in advertising affiliate and partner expense, primarily related to the prospective reclassification of the fees associated with the Regal Advertising Agreement following its commencement on July 14, 2023. When operating under the Regal ESA, the fees owed to Regal were previously presented within “ESA theater access fees and revenue share”. This increase was also due to a $0.5 million increase in personnel related costs, primarily related to a retention program implemented to ensure continuity of the management team during the Chapter 11 Case, and a $0.3 million increase in partner revenue share expense in 2023, as compared to 2022.
Network costs. Network costs increased $0.5 million, or 6.0%, from $8.4 million in 2022 to $8.9 million in 2023. The increase was primarily related to a $0.4 million increase in personnel related costs primarily related to a retention program implemented to ensure continuity of the management team during the Chapter 11 Case.
ESA theater access fees and revenue share. Theater access fees and revenue share decreased $9.6 million, or 11.7%, from $82.3 million in 2022 to $72.7 million in 2023. This decrease was primarily due to a $14.7 million decrease caused by Regal’s termination of the Regal ESA on July 14, 2023 and the subsequent discontinuation of Regal’s theater access fees. This decrease was partially offset by a $4.5 million increase in the fees related to the number of active screens and ESA Party theater attendance following an increase in ESA Party screens and attendance, excluding Regal, in 2023, as compared to 2022, as well as a $1.0 million increase in fees due to contractual rate increases in 2023, as compared to 2022.
Selling and marketing costs. Selling and marketing costs increased $1.3 million, or 3.0%, from $42.8 million in 2022 to $44.1 million in 2023. This increase was primarily related to a $2.5 million increase in personnel related costs in 2023, as compared to 2022, driven by an increase in commissions to local and regional sales account directors consistent with the increase in local and regional revenue during 2023, as well as a $0.7 million increase in other selling related expenses in 2023, as compared to 2022 consistent with the increase in revenue. This increase was partially offset by a $1.3 million decrease due to a discontinuation of a sales partnership and a $0.8 million decrease in bad debt expense in 2023, as compared to 2022.
Administrative and other costs. Administrative and other costs increased $43.2 million, or 132.1%, from $32.7 million in 2022 to $75.9 million in 2023. This increase was primarily related to a $44.6 million increase in advisor and legal fees related to the Chapter 11 Case and Cineworld Proceeding. This was offset partially by a decrease of $0.5 million in recurring advisor fees, a $0.3 million decrease in annual licensing expenses and a $0.3 million decrease in lease costs related to leases modified and terminated in conjunction with the Chapter 11 Case in 2023, as compared to 2022.
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Administrative fee—managing member. Administrative fee—managing member increased $10.7 million, or 97.3%, from $11.0 million in 2022 to $21.7 million in 2023. This increase was primarily due to a $6.0 million increase in personnel related costs primarily related to a retention program implemented to ensure continuity of the management team during the Chapter 11 Case, a $3.3 million increase in advisor and legal fees related to the Chapter 11 Case and Cineworld Proceeding, $0.9 million increase in personnel related costs primarily due to retainers paid to the members of the special and restructuring committees of the Company’s Board of Directors during the Chapter 11 Case, as compared to 2022.
Loss on termination of Regal ESA. Loss on termination of Regal ESA costs increased $125.7 million, or 100.0%, from $0.0 million in 2022 to $125.7 million in 2023. This increase was primarily due to the $141.5 million disposal of the intangible asset related to the Regal ESA. This was partially offset by a $13.0 million gain on Regal’s surrender of ownership in the Company and the $2.9 million in payables forgiven in conjunction with emergence from bankruptcy in conjunction with the Chapter 11 Case.
Impairment of long-lived assets. Impairment of long-lived assets increased $3.1 million, or 53.4%, from $5.8 million in 2022 to $8.9 million in 2023. This increase was primarily due to the $8.9 million write-off of certain long-lived intangible assets in 2023, compared to 2022, with only $5.8 million of write-off of long-lived assets in 2022.
Depreciation expense. Depreciation expense decreased $1.9 million, or 29.2%, from $6.5 million in 2022 to $4.6 million in 2023. This was primarily due to a $1.9 million decrease in depreciation expense based upon the fair value adjustments to NCM LLC’s property and equipment upon reconsolidation with NCM, Inc. on August 7, 2023.
Amortization expense. Amortization expense increased $4.8 million, or 19.2%, from $25.0 million in 2022, to $29.8 million in 2023. The increase was primarily due to a $4.8 million increase in amortization expense of NCM LLC’s intangible assets following the fair value adjustments to NCM LLC’s intangible assets upon reconsolidation with NCM, Inc. on August 7, 2023.
Non-GAAP Financial Measures for NCM LLC
Adjusted OIBDA and Adjusted OIBDA margin are not financial measures calculated in accordance with GAAP in the United States.
Adjusted OIBDA represents operating income before depreciation and amortization expense adjusted to also exclude amortization of intangibles, non-cash share-based payment costs, executive transition costs, advisor fees related to abandoned financing transactions, impairment of long-lived assets, sales force reorganization costs, termination of the Regal ESA and advisor fees related to involvement in the Cineworld Proceeding and Chapter 11 Case. Our management use this non-GAAP financial measure to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes this is an important supplemental measure of operating performance because it eliminates items that have less bearing on its operating performance and highlights trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of this measure is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, amounts of amortization of intangibles, non-cash share-based compensation programs, executive transition costs, advisor fees related to abandoned financing transactions, impairment of long-lived assets, sales force reorganization costs, termination of the Regal ESA and advisor fees related to involvement in the Cineworld Proceeding and Chapter 11 Case, interest rates, debt levels or income tax rates.
Adjusted OIBDA margin is calculated by dividing Adjusted OIBDA by total revenue. Our management use this non-GAAP financial measure to evaluate operating performance, to forecast future results and as a basis for compensation. The Company believes this is an important supplemental measure of operating performance because it eliminates items that have less bearing on its operating performance and highlight trends in its core business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes the presentation of this measure is relevant and useful for investors because it enables them to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that may have different depreciation and amortization policies, amounts of amortization of intangibles, non-cash share-based compensation programs, executive transition costs, advisor fees related to abandoned financing transactions, impairment of long-lived assets, sales force reorganization costs, termination of the Regal ESA and advisor fees related to involvement in the Cineworld Proceeding and Chapter 11 Case, interest rates, debt levels or income tax rates.
A limitation of both of these measures, however, is that they exclude depreciation and amortization, which represent a proxy for the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in NCM LLC’s
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business. In addition, Adjusted OIBDA and Adjusted OIBDA margin have the limitation of not reflecting the effect of the Company’s depreciation, amortization of intangibles, non-cash share-based payment costs, executive transition costs, advisor fees related to abandoned financing transactions, impairments of long-lived assets, sales force reorganization costs, termination of the Regal ESA and advisor fees related to involvement in the Cineworld Proceeding or Chapter 11 Case. Adjusted OIBDA should not be regarded as an alternative to operating income, net income or as indicators of operating performance, nor should it be considered in isolation of, or as substitutes for financial measures prepared in accordance with GAAP. The Company believes that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA, and operating margin is the most directly comparable GAAP financial measure to Adjusted OIBDA margin. Because not all companies use identical calculations, these non-GAAP presentations may not be comparable to other similarly titled measures of other companies, or calculations in NCM LLC’s Revolving Credit Facility 2023.
The following table reconciles operating income to Adjusted OIBDA for NCM LLC for the periods presented (dollars in millions):
| Years Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 28, 2023 | Dec. 29, 2022 | Dec. 30, 2021 | Dec. 31, 2020 | Dec. 26, 2019 | ||||||||||||||
| Operating (loss) income | $ | (180.9) | $ | 6.9 | $ | (68.6) | $ | (61.0) | $ | 161.3 | ||||||||
| Depreciation expense | 4.6 | 6.5 | 10.9 | 13.1 | 13.6 | |||||||||||||
| Amortization expense | 29.8 | 25.0 | 24.7 | 24.6 | 26.7 | |||||||||||||
| Share-based compensation costs (1) | 5.5 | 7.1 | 8.1 | 2.2 | 5.5 | |||||||||||||
| Advisor fees related to abandoned financing transactions (2) | — | 0.5 | 0.1 | — | — | |||||||||||||
| Executive transition costs (3) | — | — | 0.1 | — | 0.4 | |||||||||||||
| Impairment of long-lived assets (4) | 8.9 | 5.8 | — | 1.7 | — | |||||||||||||
| Sales force reorganization costs (5) | — | 0.4 | — | — | — | |||||||||||||
| Loss on termination of Regal ESA, net (6) | 125.6 | — | — | — | — | |||||||||||||
| Advisor fees related to the Cineworld Proceeding (7) | 59.2 | 5.1 | — | — | — | |||||||||||||
| Adjusted OIBDA | $ | 52.7 | $ | 57.3 | $ | (24.7) | $ | (19.4) | $ | 207.5 | ||||||||
| Total revenue | $ | 259.8 | $ | 249.2 | $ | 114.6 | $ | 90.4 | $ | 444.8 | ||||||||
| Adjusted OIBDA margin | 20.3 | % | 23.0 | % | (21.6) | % | (21.5) | % | 46.7 | % |
(1)Share-based compensation costs are included in network operations, selling and marketing and administrative expense in the accompanying Consolidated Financial Statements.
(2)These fees relate to advisor and legal costs incurred for advice pertaining to an alternative debt transaction that was abandoned in the fourth quarter of 2021 and an alternative equity transaction that was abandoned in the fourth quarter of 2022.
(3)Executive transition costs represent costs associated with the search for the Company’s new CFO during the third quarter of 2021 and the search for the company’s CEO in 2019.
(4)The impairment of long-lived assets primarily relates to the write down of certain intangible assets related to a purchased affiliate and internally developed software and leasehold improvements no longer in use.
(5)Sales force reorganization costs represents redundancy costs associated with changes to the Company’s sales force implemented during the first quarter of 2022.
(6)The net impact of Regal’s termination of the ESA resulting from the disposal of the intangible asset partially offset by the surrender of Regal’s ownership in the Company and the forgiveness of prepetition claims.
(7)Advisor and legal fees and expenses incurred in connection with the Company’s involvement in the Cineworld Proceeding and Chapter 11 Case and related appeals during the year ended December 28, 2023, as well as retention related expenses and retainers to the members of the special and restructuring committees of the Company’s Board of Directors.
Known Trends and Uncertainties
Beverage Revenue—Under the ESAs, up to 90 seconds of The Noovie® Show program can be sold to the ESA Parties to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. In 2023 and 2022, Cinemark and Regal, prior to its termination of the ESA, purchased 60 seconds of on-screen advertising time and AMC purchased 30 seconds to satisfy their obligations under their beverage concessionaire agreements. The ESA Parties’ current
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long-term contracts with their beverage suppliers require the 30 or 60 seconds of beverage advertising, although such commitments could change in the future. Per the ESA with AMC, the time sold to the beverage supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of The Noovie Show in the ESA Parties’ theaters, limited to the highest advertising CPM being then-charged by NCM LLC. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers now increases at a fixed rate of 2.0% each year. As of July 14, 2023, the effective date of the Regal Advertising Agreement, the Company no longer receives ESA beverage revenue from Regal.
Theater Access Fees—In consideration for NCM LLC’s access to the ESA Parties’ theater attendees for on-screen advertising and use of lobbies and other space within the ESA Parties’ theaters for the LEN and lobby promotions, the ESA Parties receive a monthly theater access fee under the ESAs. The theater access fee is composed of a fixed payment per patron and a fixed payment per digital screen (connected to the DCN). The payment per theater patron increases by 8% every five years, with an increase occurring in the current year and the next increase occurring in 2027. Pursuant to the ESAs, the payment per digital screen increases annually by 5%. Pursuant to the 2019 ESA Amendments, Cinemark receives and Regal previously received an additional monthly theater access fee beginning November 1, 2019 in consideration for NCM LLC's access to certain on-screen advertising inventory after the advertised showtime of a feature film. These fees are also based upon a fixed payment per patron of $0.052 beginning on November 1, 2022 and (iv) increasing 8% every five years beginning November 1, 2027. As of July 14, 2023, Regal rejected and terminated the Regal ESA and the Regal Advertising Agreement became effective. The payments under the Regal Advertising Agreement are based on the attendance at Regal’s theaters and the revenue generated by the Company through advertising displayed in Regal’s theaters and recorded within “Advertising operating costs” in the Consolidated Statement of Operations.
Financial Condition and Liquidity
Liquidity and Capital Resources
Our cash balances can fluctuate due to the seasonality of our business and related timing of collections of accounts receivable balances and operating expenditure payments, as well as interest or principal payments on our Revolving Credit Facility 2023, income tax payments, TRA payments, available cash payments (as defined in the NCM LLC Operating Agreement) to Cinemark and AMC in the event the ESA Parties hold NCM LLC membership units and amount of dividends to NCM, Inc.’s common stockholders.
On August 7, 2023, NCM LLC entered into the Revolving Credit Facility 2023 with CIT Northbridge Credit LLC as agent. The Revolving Credit Facility 2023 is an asset backed line facility where the capacity depends upon NCM LLC’s trade accounts receivable balance, as adjusted for aged balances and other considerations. The maximum availability NCM LLC has access to under the revolver is $55.0 million. The proceeds of the Revolving Credit Facility 2023 may be used for, inter alia, working capital and capital expenditures. The Revolving Credit Facility 2023 will mature on August 7, 2026. The interest rate under the Revolving Credit Facility 2023 is a base rate or SOFR benchmark plus (i) 3.75% if less than 50% of revolving commitments are utilized or (ii) 4.50% if 50% or more of revolving commitments are utilized (utilizing the average revolver usage for the prior calendar month as a benchmark for this determination). The Revolving Credit Facility 2023 also contains a financial maintenance covenant requiring that the fixed charge coverage ratio ending on the last day of each fiscal month is at least 1.1 to 1.0 during a “Trigger Period.” A Trigger Period begins upon (i) an event of default or (ii) if availability is less than the greater of (a) $5.0 million and (b) 10% of aggregate revolving commitments. A Trigger Period ends only if (i) no event of default existed for the preceding 30 consecutive days and (ii) availability is greater than both (a) $5.0 million and (b) 10% of aggregate revolving commitments. Upon the effectiveness of the Revolving Credit Facility 2023, NCM LLC immediately drew $10.0 million from the facility, which represents the only amount currently outstanding under the Revolving Credit Facility 2023, as of December 28, 2023.
A summary of our financial liquidity is as follows (in millions):
| Years Ended | $ Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2023 | December 29, 2022 | 2022 to 2023 | ||||||||
| Cash, cash equivalents and marketable securities (1) | $ | 34.6 | $ | 62.7 | $ | (28.1) | ||||
| NCM LLC’s Revolving Credit Facility 2023 availability (2) | 44.4 | — | 44.4 | |||||||
| NCM LLC’s revolver credit facility availability (3) | — | 7.2 | (7.2) | |||||||
| Total liquidity | $ | 79.0 | $ | 69.9 | $ | 9.1 |
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(1)Included in cash and cash equivalents as of December 28, 2023 and December 29, 2022 there was $31.9 million and $59.4 million, respectively, of cash held by NCM LLC which is not available to satisfy NCM, Inc.'s dividend payments and other NCM, Inc. obligations.
(2)NCM LLC’s total capacity under the Revolving Credit Facility 2023, which is subject to fluctuations in the underlying assets, is $55.0 million as of December 28, 2023. As of December 28, 2023, the amount available under the NCM LLC Revolving Credit Facility 2023 in the table above is net of the amount outstanding under the Revolving Credit Facility 2023 of $10.0 million and the outstanding letters of credit of $0.6 million.
(3)The revolving credit facility portion of NCM LLC’s total borrowings that was available, subject to certain conditions, for general corporate purposes of NCM LLC in the ordinary course of business and for other transactions permitted under the previous senior secured credit facility, and a portion was available for letters of credit. NCM LLC’s total capacity under the previous revolving credit facility pursuant to the Credit Agreement, dated as of June 20, 2018 among NCM LLC as borrower, JPMorgan Chase Bank, N.A. in its capacity as administrative agent and the lenders party thereto (the “Credit Agreement 2018”) was $175.0 million as of December 29, 2022 and NCM LLC’s total capacity under the previous revolving credit facility pursuant to the revolving credit agreement, dated as of January 5, 2022, among NCM LLC as borrower, Wilmington Savings Fund Society, FSB in its capacity as administrative agent, and the lenders party thereto (the “Revolving Credit Agreement 2022”) was $50.0 million as of December 29, 2022. As of December 29, 2022, the amount available under the NCM LLC revolving credit facilities pursuant to the Credit Agreement 2018 and the Revolving Credit Agreement 2022 in the table above was net of the amount outstanding under the revolving credit facilities of $217.0 million and outstanding letters of credit of $0.8 million. These facilities were terminated on August 7, 2023 in conjunction with the Chapter 11 Case.
We have generated and used cash as follows (in millions):
| Years Ended | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Operating cash flow | $ | (6.7) | $ | (47.3) | ||
| Investing cash flow | $ | 32.6 | $ | (0.4) | ||
| Financing cash flow | $ | (52.1) | $ | 10.3 |
Cash Flows – Fiscal Years 2023 and 2022
Operating Activities. The $40.6 million decrease in cash used in operating activities for the year ended December 28, 2023, as compared to the year ended December 29, 2022, was primarily due to 1) a $76.3 million increase in account receivable collections primarily due to higher revenue of NCM LLC during the year ended December 28, 2023, as compared to the year ended December 29, 2022, 2) a $2.2 million increase in integration and other encumbered theaters payments received in 2023 due to higher revenue in the fourth quarter of 2022, paid in the first quarter of 2023, as compared to the fourth quarter of 2021 and 3) a $0.4 million decrease in the change of other assets due primarily to the change in NCM LLC’s account balances between deconsolidation on April 11, 2023 and reconsolidation on August 7, 2023. The increases in cash provided by operating activities were partially offset by 1) a $16.9 million increase in payments of accounts payable and accrued expenses primarily due to NCM LLC’s emergence from bankruptcy in 2023, as well as, the change in NCM LLC’s account balances between deconsolidation on April 11, 2023 and reconsolidation on August 7, 2023, 2) an $11.0 million decrease in prepaid expenses primarily due to NCM LLC’s emergence from bankruptcy in 2023, 3) a $5.2 million increase in amounts paid to the ESA Parties, net due to NCM LLC’s emergence from bankruptcy and the prospective reclassification of the Regal related payments during 2023 and 4) a $3.7 million increase in net loss adjusted for non-cash items during the year ended December 28, 2023, as compared to the year ended December 29, 2022.
Investing Activities. The $33.0 million increase in cash provided by investing activities for the year ended December 28, 2023, as compared to the year ended December 29, 2022, was primarily due to a $49.5 million addition of cash, cash equivalents and restricted cash due to the reconsolidation of NCM LLC in the third quarter of 2023 and a $0.7 million increase in proceeds from sale and maturities of marketable securities. The increases in cash provided were partially offset by a $15.5 million contribution provided upon the reconsolidation of NCM LLC and a $1.9 million decrease in proceeds from the sale of assets in the year ended December 28, 2023, as compared to the year ended December 29, 2022.
Financing Activities. The $62.4 million increase in cash used by financing activities for the year ended December 28, 2023, as compared to the year ended December 29, 2022, was primarily due to the issuance of the $50.0 million Revolving Credit Facility 2022 in the first quarter of 2022 with no issuance in 2023, as well as, the $49.6 million removal of cash, cash equivalents and restricted cash due to the deconsolidation of NCM LLC in the second quarter of 2023. These increases in cash used were partially offset by a $19.8 million decrease in the purchases of NCM LLC’s 5.875% Senior Secured Notes due 2028
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as there were no purchases made in 2023, a $9.0 million decrease in dividend payments following the suspension of the dividend in the third quarter of 2022, a $5.8 million decrease in payments of debt issuance costs due to limited refinancing activity in the year ended December 28, 2023, as compared to the year ended December 29, 2022, and a $2.4 million decrease in repayment of the term loan facility due to the discharge of NCM LLC’s historical debt through its Chapter 11 Case during the year ended December 28, 2023.
Sources of Capital and Capital Requirements
NCM, Inc.’s primary source of liquidity and capital resources is the quarterly available cash distributions from NCM LLC as well as its existing cash balances and marketable securities, which as of December 28, 2023 were $37.6 million (including $34.9 million of cash and restricted cash held by NCM LLC). NCM LLC’s primary sources of liquidity and capital resources are its cash provided by operating activities, availability under its Revolving Credit Facility 2023 and cash on hand. NCM LLC drew down $10.0 million of its Revolving Credit Facility 2023 immediately upon emergence from bankruptcy on August 7, 2023. The $34.9 million of cash at NCM LLC will be used to fund operations. Cash at NCM, Inc. is used to fund income taxes, payments associated with the TRA and for future payment of dividends to NCM, Inc. stockholders.
Cash flows generated by NCM LLC’s distributions to NCM, Inc. and NCM LLC’s other members were deferred during the Chapter 11 Case. NCM LLC is required, pursuant to the terms of the NCM LLC Operating Agreement, to distribute its available cash, as defined in the NCM LLC Operating Agreement, quarterly to its members (only NCM, Inc. as of December 28, 2023). The other members are only able to receive available cash when they hold units. The available cash distribution to the members of NCM LLC for the three months ended December 28, 2023 was calculated as approximately $30.3 million, due entirely to NCM, Inc, as the sole holder of NCM LLC units as of December 28, 2023. The available cash distribution to the members of NCM LLC for the combined three months ended March 31, 2023, three months ended June 29, 2023 and three months ended September 28, 2023 was calculated as approximately negative $50.6 million, of which NCM, Inc.'s share is approximately negative $50.6 million. Further there was $20.6 million and $93.7 million of negative available cash generated during the years ended December 29, 2022 and December 30, 2021, respectively. Regal’s portion of the negative available cash generated was extinguished as part of the Termination Agreement. Pursuant to the NCM LLC Operating Agreement, there were no available cash distributions made for the first, second or third quarter of 2023. The available cash distribution related to the fourth quarter of 2023 is due to NCM, Inc. in the first quarter of 2024. NCM, Inc. has the option to defer payment at its discretion. Negative available cash distributions for the years of 2022 and 2021 are expected to be netted in accordance with the NCM LLC Operating Agreement against future positive available cash distributions.
NCM, Inc. expects to use its cash balances and cash received from future available cash distributions (as allowed for under the Revolving Credit Facility 2023) to fund payments associated with the TRA, stock repurchases and future dividends as declared by the Board of Directors. The Company does not expect to make a TRA payment in 2024 for the 2023 tax year and did not make a TRA payment in 2023 for the 2022 tax year. Distributions from NCM LLC and NCM, Inc. cash balances should be sufficient to fund payments associated with the TRA, income taxes and any stock buybacks or declared dividends for the foreseeable future at the discretion of the Board of Directors. At the discretion of the Board of Directors, it is the Company’s intention to distribute substantially all its free cash flow to stockholders through dividends. The declaration, payment, timing and amount of any future dividends payable will be at the sole discretion of the Board of Directors who will take into account general economic and advertising market business conditions, the Company’s financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant.
Capital Expenditures
Capital expenditures of NCM LLC include digital applications being developed primarily by our programmers and outside consultants, capitalized software development or upgrades for our Digital Content Software, audience targeting and data management systems, cinema advertising management system, equipment required for our Customer Experience Center and content production and post-production facilities, office leasehold improvements, desktop equipment for use by our employees, and in certain cases, the costs necessary to install equipment at or digitize all or a portion of a network affiliate’s theaters when they are added to our network. Capital expenditures in 2023 were $5.3 million (including $2.0 million associated with upgrades to our existing systems related to the continued upgrades of our cinema advertising management system; $1.5 million associated with digital product development; $1.3 million associated with certain implementation and prepaid costs associated with Cloud Computing arrangements and $0.3 million associated with network affiliate additions) compared to $4.2 million for the 2022 period (including $1.9 million associated with digital product development; $0.9 million associated with upgrades to our existing systems related to the continued upgrades of our cinema advertising management system; $0.4 million associated with network affiliate additions and $0.1 million associated with certain implementation and prepaid costs associated with Cloud Computing arrangements). The capital expenditures have typically been satisfied through cash flow from operations. All capital expenditures related to the DCN within the ESA Parties’ theaters have been made by the ESA Parties under the ESAs. We expect they will continue to be made by the ESA Parties in accordance with the ESAs.
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We expect to make approximately $6.0 million to $7.0 million of capital expenditures in fiscal 2024. We expect approximately $3.2 million of capital expenditures related to upgrades to our Digital Content Software distribution and content management software and our other internal management systems, including our cinema advertising management system, reporting systems, network equipment related to currently contracted network affiliate theaters, server and storage upgrades and software licensing, $ 1.5 million towards network affiliate additions, $1.5 million towards digital products and data sets and $0.2 million towards leasehold improvements. Our capital expenditures may increase as we add additional network affiliates. We expect that additional expenditures, if any, would be funded in part by additional cash flows associated with those new network affiliates.
Financings
On August 7, 2023, NCM LLC entered into the Revolving Credit Facility 2023 with CIT Northbridge Credit LLC as agent. The Revolving Credit Facility 2023 is an asset backed line facility where the capacity depends upon NCM LLC’s trade accounts receivable balance, as adjusted for aged balances and other considerations, and is secured by a lien on substantially all of assets of NCM LLC. The maximum availability NCM LLC has access to under the Revolving Credit Facility 2023 is $55.0 million. The proceeds of the Revolving Credit Facility 2023 may be used for, inter alia, working capital and capital expenditures. The Revolving Credit Facility 2023 will mature on August 7, 2026. The interest rate under the Revolving credit facility 2023 is a base rate or SOFR benchmark plus (i) 3.75% if less than 50% of revolving commitments are utilized or (ii) 4.50% if 50% or more of revolving commitments are utilized (utilizing the average revolver usage for the prior calendar month as a benchmark for this determination). The Revolving Credit Facility 2023 also contains a financial maintenance covenant requiring that the fixed charge coverage ratio ending on the last day of each fiscal month is at least 1.1 to 1.0 during a “Trigger Period.” A Trigger Period begins upon (i) an event of default or (ii) if availability is less than the greater of (a) $5.0 million and (b) 10% of aggregate revolving commitments. A Trigger Period ends only if (i) no event of default existed for the preceding thirty (30) consecutive days and (ii) availability is greater than both (a) $5.0 million and (b) 10% of aggregate revolving commitments. Upon the effectiveness of the Revolving Credit Facility 2023, NCM LLC immediately drew $10.0 million from the facility, which represents the only amount currently outstanding under the Revolving Credit Facility 2023, as of December 28, 2023. The Revolving Credit Facility 2023 also contains customary representations, warranties, covenants, events of default, terms and conditions, including limitations on liens, incurrence of debt, mergers and significant asset dispositions. As of December 28, 2023, NCM LLC’s maximum availability under the $55.0 million Revolving Credit Facility 2023 was $44.4 million, net of $10.0 million outstanding and net letters of credit of $0.6 million. The weighted-average interest rate on the Revolving Credit Facility 2023 as of December 28, 2023 was 9.20%. Upon execution of the Revolving Credit Facility 2023, NCM LLC recorded $2.4 million as debt issuance costs and received $9.1 million in proceeds.
The Revolving Credit Facility 2023 contains a number of covenants and financial ratio requirements, with which NCM LLC was in compliance at December 28, 2023, including maintaining a fixed charge coverage ratio in excess of 1.1:1.00 on a monthly basis while maintaining availability in excess of either (i) $8.25 million or (ii) 15.0% of the aggregate revolver commitments (the “availability thresholds”). NCM LLC is permitted to make quarterly dividend payments and other payments based on the fixed charge coverage ratio and availability thresholds so long as no default or event of default has occurred and continues to occur. Dividend payments and other distributions are made if the fixed charge coverage ratio is in excess of 1.1:1.0 and availability, after the distribution, is in compliance with the availability thresholds.
There are no borrower distribution restrictions as long as NCM LLC’s fixed coverage ratio is 1.1:1.0, NCM LLC maintains availability under the availability thresholds and NCM LLC is in compliance with its debt covenants. If there are borrower distribution restrictions on the payments, NCM LLC may not declare or pay any dividends, or make any payments on account of NCM LLC or make any other distribution for obligations of NCM LLC. When these restrictions are effective, NCM LLC may still pay the services fee and reimbursable costs pursuant to terms of a management services agreement, between NCM, Inc. and NCM LLC, in exchange for NCM, Inc. providing specified management services to NCM LLC. NCM LLC can also make payments pursuant to the Common Unit Adjustment Agreement and Tax Receivable Agreement in the amount, and at the time necessary to satisfy the contractual obligations with respect to the actual cash tax benefits payable to NCM LLC’s founding members.
As of December 28, 2023, the NCM LLC’s fixed charge coverage ratio was 54.2:1.0 (versus the required ratio of 1.1:1.0) and had availability under the Revolving Credit Facility 2023 of $44.4 million (versus the applicable availability threshold of $8.25 million). As of December 28, 2023, NCM LLC was in compliance with the financial covenants of the Revolving Credit Facility 2023 described above.
As of December 28, 2023, the weighted average remaining maturity was 2.6 years. As of December 28, 2023, 100% of our borrowings bear interest at variable rates and as such, our net income and earnings per share could fluctuate with market interest rate fluctuations that could increase or decrease the interest paid on our borrowings.
Critical Accounting Estimates and Policies
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The significant accounting policies of the Company are described in Note 1 to the audited Consolidated Financial Statements included elsewhere in this document. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances and are evaluated on an ongoing basis. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Deconsolidation of NCM LLC
NCM LLC does not have a readily determinable fair value. Upon the deconsolidation of NCM LLC, the original cost of the investment was valued based upon NCM, Inc.'s ownership of the secured debt of NCM LLC and the estimation of the enterprise value of NCM LLC utilizing a combination of a market approach and income approach. The market approach relied upon a comparison with guideline public companies and entails selecting relevant financial information of the subject company and capitalizing those amounts using valuation multiples that are based on empirical market observation. The income approach relied upon an analysis of NCM LLC’s projected economic earnings discounted to present value. Significant assumptions utilized within these analyses include the weighted average cost of capital and NCM LLC’s forecasted cash flows. Due to the inherent uncertainty of determining the fair value of securities that do not have a readily available fair value, the determination of the fair value required significant judgment or estimation and changes in the estimates and assumptions used in the valuation models could materially affect the determination.
Reconsolidation of NCM LLC
The Company accounted for the reconsolidation of NCM LLC using the acquisition method of accounting. The acquisition method requires the Company to make significant estimates and assumptions, especially at the acquisition date as the Company allocates the estimated fair values of acquired tangible and intangible assets and the liabilities assumed. The Company also uses our best estimates to determine the useful lives of the tangible and definite-lived intangible assets, which impact the periods over which depreciation and amortization of those assets are recognized. These best estimates and assumptions are inherently uncertain as they pertain to forward looking views of the Company’s businesses, client behavior and market conditions. See Note 5—Reconsolidation of NCM LLC for further information on the valuation methods and the results of applying the acquisition method of accounting, including the estimated fair values of the assets acquired and liabilities assumed, and, where relevant, the estimated remaining useful lives.
Valuation of Intangible Assets
In accordance with ASC 360—Property, Plant and Equipment, we evaluate intangible assets and other long-lived assets for impairment whenever a triggering event occurs indicating that they may not be recoverable. Recoverability is assessed by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized equal to the difference between the carrying amount and the fair value of the asset group. We group assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. In order to develop future undiscounted net cash flows, we utilize estimates and assumptions based on historical data and consideration of future market conditions while incorporating management’s expectations as of the balance sheet date. Unforeseen events, changes in circumstances and market conditions and material differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in impairment charges.
Income Taxes
Nature of Estimates Required. We account for income taxes in accordance with ASC 740 – Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the audited Consolidated Financial Statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are to be established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company generated a three-year cumulative pre-tax book loss during 2021 driven by the impact of the COVID-19 Pandemic on the Company’s operations in 2020 and 2021. Given the associated weight assigned to this item as negative evidence within the Company’s analysis, the Company determined it is more-likely-than-not that the Company will not be able to realize certain of the Company’s deferred tax assets before they expire. Given the additional pre-tax book losses in 2022, the Company continues to have a valuation allowance in the amount of $146.0 million against the deferred tax asset as of December 28, 2023. As we do expect to generate pre-tax book income following the complete recovery from the lingering impacts of the COVID-19 Pandemic and Chapter 11 Case, we have recorded an impact from the Net Business Interest Expense Limitation IRC § 163(j) on our payable to ESA Parties under the TRA.
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In addition, due to the basis differences resulting from our IPO-related transactions (including the TRA with the ESA Parties) and subsequent adjustments pursuant to the Common Unit Adjustment Agreement, we are required to make cash payments under the TRA to the ESA Parties in amounts equal to 90% of our actual tax benefit realized from the tax amortization of the basis difference for certain deferred assets noted above. Following the increase in the valuation allowance as of December 31, 2020, the Company recorded a corresponding $151.9 million reduction to the “Payable to ESA Parties under the tax receivable agreement” equal to the portion of the payable related to 90% of the amortization of the expected benefits from the realization of the deferred tax assets deemed not more-likely-than-not to be realized as of December 31, 2020. Once the Company returns to a more normal operating level and emerges from a three-year cumulative pre-tax book loss position, part or all the valuation allowance is expected to reverse, resulting in an inverse impact to the payable to ESA Parties under the tax receivable agreement which would increase to reflect future payments to the ESA Parties at that time. The requirements of the TRA, as amended, are highly technical and complex and involve management’s judgment, including judgments to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements. Management performs thorough analysis of the estimate each quarter and upon new information or conditions will refine its estimate. If we were to fail to meet certain of the requirements of the TRA, we could be subject to additional payments to taxing authorities or to the ESA Parties. We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the audited Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
For fiscal 2023, our provision for income taxes was $0.0 million. Changes in management’s estimates and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences and judgments used to determine hypothetical tax outcomes exclusive of the IPO date transaction and agreements could impact the provision for income taxes and change the effective tax rate.
Recent Accounting Pronouncements
For a discussion of the recent accounting pronouncements relevant to our business operations, refer to the information provided under Note 1 to the audited Consolidated Financial Statements included elsewhere in this document.
Related-Party Transactions
For a discussion of the related-party transactions, refer to the information provided under Note 9 to the audited Consolidated Financial Statements included elsewhere in this document.