UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2015
Commission file number: 001-33296
NATIONAL CINEMEDIA, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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20-5665602 |
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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9110 East Nichols Avenue, Suite 200 Centennial, Colorado |
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80112-3405 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (303) 792-3600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
x |
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Accelerated filer |
o |
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Non-accelerated filer |
o |
(Do not check if a smaller reporting company) |
Smaller reporting company |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 3, 2015, 61,496,385 shares of the registrant’s common stock (including unvested restricted shares), par value of $0.01 per share, were outstanding.
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Page |
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Item 1. |
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3 |
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3 |
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4 |
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Unaudited Condensed Consolidated Statements of Comprehensive Income |
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5 |
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6 |
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Unaudited Condensed Consolidated Statements of Equity/(Deficit) |
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8 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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9 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 |
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Item 3. |
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38 |
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Item 4. |
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38 |
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Item 1. |
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38 |
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Item 1A. |
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39 |
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Item 2. |
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39 |
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Item 3. |
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39 |
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Item 4. |
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39 |
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Item 5. |
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39 |
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Item 6. |
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39 |
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40 |
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NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
(UNAUDITED)
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October 1, 2015 |
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January 1, 2015 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
22.7 |
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$ |
13.4 |
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Short-term marketable securities |
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13.5 |
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21.7 |
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Receivables, net of allowance of $5.1 and $4.3, respectively |
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124.0 |
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116.5 |
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Prepaid expenses |
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3.1 |
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3.6 |
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Deferred tax assets |
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3.9 |
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6.9 |
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Income tax receivable |
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5.8 |
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6.1 |
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Current portion of notes receivable - founding members |
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4.2 |
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4.2 |
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Other current assets |
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1.0 |
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— |
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Total current assets |
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178.2 |
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172.4 |
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NON-CURRENT ASSETS: |
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Property and equipment, net of accumulated depreciation of $71.1 and $72.9, respectively |
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22.9 |
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22.4 |
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Intangible assets, net of accumulated amortization of $86.0 and $69.3, respectively |
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503.4 |
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488.6 |
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Deferred tax assets |
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222.4 |
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227.3 |
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Debt issuance costs, net of accumulated amortization of $19.7 and $17.8, respectively |
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13.6 |
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15.5 |
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Long-term notes receivable, net of current portion - founding members |
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16.6 |
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16.6 |
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Other investments |
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4.3 |
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2.5 |
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Long-term marketable securities |
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44.3 |
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45.5 |
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Other assets |
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0.5 |
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0.6 |
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Total non-current assets |
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828.0 |
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819.0 |
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TOTAL ASSETS |
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$ |
1,006.2 |
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$ |
991.4 |
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LIABILITIES AND EQUITY/(DEFICIT) |
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CURRENT LIABILITIES: |
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Amounts due to founding members |
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$ |
27.3 |
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$ |
34.9 |
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Payable to founding members under tax receivable agreement |
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28.0 |
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19.6 |
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Accrued expenses |
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22.1 |
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19.2 |
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Accrued payroll and related expenses |
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13.0 |
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10.7 |
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Accounts payable |
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13.1 |
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13.3 |
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Deferred revenue |
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8.7 |
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8.5 |
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Deferred tax liability |
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0.6 |
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1.0 |
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Total current liabilities |
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112.8 |
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107.2 |
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NON-CURRENT LIABILITIES: |
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Long-term debt |
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936.0 |
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892.0 |
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Deferred tax liability |
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50.0 |
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54.2 |
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Payable to founding members under tax receivable agreement |
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135.7 |
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146.7 |
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Total non-current liabilities |
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1,121.7 |
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1,092.9 |
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Total liabilities |
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1,234.5 |
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1,200.1 |
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COMMITMENTS AND CONTINGENCIES (NOTE 6) |
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EQUITY/(DEFICIT): |
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NCM, Inc. Stockholders’ Equity/(Deficit): |
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Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding, respectively |
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— |
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— |
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Common stock, $0.01 par value; 175,000,000 shares authorized, 59,018,867 and 58,750,926 issued and outstanding, respectively |
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0.6 |
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0.6 |
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Additional paid in capital/(deficit) |
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(244.9 |
) |
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(261.0 |
) |
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Retained earnings (distributions in excess of earnings) |
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(179.1 |
) |
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(147.4 |
) |
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Accumulated other comprehensive income/(loss) |
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— |
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(0.4 |
) |
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Total NCM, Inc. stockholders’ equity/(deficit) |
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(423.4 |
) |
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(408.2 |
) |
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Noncontrolling interests |
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195.1 |
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199.5 |
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Total equity/(deficit) |
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(228.3 |
) |
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(208.7 |
) |
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TOTAL LIABILITIES AND EQUITY/DEFICIT |
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$ |
1,006.2 |
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$ |
991.4 |
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See accompanying notes to Condensed Consolidated Financial Statements.
3
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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October 1, 2015 |
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September 25, 2014 |
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October 1, 2015 |
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September 25, 2014 |
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REVENUE (including revenue from founding members of $6.5, $9.1, $23.2 and $28.4, respectively) |
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$ |
111.7 |
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$ |
100.8 |
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$ |
310.1 |
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$ |
270.9 |
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OPERATING EXPENSES: |
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Advertising operating costs |
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7.8 |
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6.5 |
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21.9 |
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18.1 |
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Network costs |
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4.3 |
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4.4 |
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13.0 |
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13.4 |
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Theatre access fees—founding members |
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17.6 |
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17.0 |
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54.0 |
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52.3 |
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Selling and marketing costs |
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16.9 |
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14.7 |
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49.9 |
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43.8 |
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Merger termination fee and related merger costs |
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- |
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2.0 |
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34.3 |
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3.7 |
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Administrative and other costs |
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9.3 |
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6.9 |
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26.3 |
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21.6 |
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Depreciation and amortization |
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8.0 |
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8.6 |
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24.2 |
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24.2 |
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Total |
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63.9 |
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60.1 |
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223.6 |
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177.1 |
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OPERATING INCOME |
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47.8 |
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40.7 |
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86.5 |
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93.8 |
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NON-OPERATING EXPENSES: |
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Interest on borrowings |
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13.0 |
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12.7 |
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39.2 |
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38.8 |
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Interest income |
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(0.5 |
) |
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(0.3 |
) |
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(1.4 |
) |
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(1.2 |
) |
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Accretion of interest on the discounted payable to founding members under tax receivable agreement |
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3.5 |
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3.5 |
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10.6 |
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10.8 |
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Amortization of terminated derivatives |
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- |
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2.6 |
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1.6 |
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7.6 |
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Other non-operating expense |
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0.1 |
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0.7 |
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0.2 |
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0.9 |
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Total |
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16.1 |
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19.2 |
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50.2 |
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56.9 |
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INCOME BEFORE INCOME TAXES |
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31.7 |
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21.5 |
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36.3 |
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36.9 |
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Income tax expense |
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4.8 |
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2.1 |
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6.3 |
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4.2 |
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CONSOLIDATED NET INCOME |
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26.9 |
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19.4 |
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30.0 |
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32.7 |
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Less: Net income attributable to noncontrolling interests |
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19.2 |
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14.6 |
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21.2 |
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27.4 |
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NET INCOME ATTRIBUTABLE TO NCM, INC. |
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$ |
7.7 |
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$ |
4.8 |
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$ |
8.8 |
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$ |
5.3 |
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NET INCOME PER NCM, INC. COMMON SHARE: |
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Basic |
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$ |
0.13 |
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$ |
0.08 |
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$ |
0.15 |
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$ |
0.09 |
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Diluted |
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$ |
0.13 |
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$ |
0.08 |
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$ |
0.15 |
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$ |
0.09 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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59,014,887 |
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58,744,395 |
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58,959,381 |
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58,695,073 |
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Diluted |
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59,625,214 |
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59,043,769 |
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59,452,580 |
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58,987,945 |
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Dividends declared per common share |
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$ |
0.22 |
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$ |
0.22 |
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$ |
0.66 |
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$ |
1.16 |
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See accompanying notes to Condensed Consolidated Financial Statements.
4
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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October 1, 2015 |
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September 25, 2014 |
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October 1, 2015 |
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September 25, 2014 |
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CONSOLIDATED NET INCOME, NET OF TAX OF $4.8, $2.1, 6.3 AND $4.2, RESPECTIVELY |
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$ |
26.9 |
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$ |
19.4 |
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$ |
30.0 |
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$ |
32.7 |
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OTHER COMPREHENSIVE INCOME, NET OF TAX: |
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Amortization of terminated derivatives, net of tax of $0.0, $0.5, $0.3 and $1.4, respectively |
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— |
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2.1 |
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1.3 |
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6.2 |
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CONSOLIDATED COMPREHENSIVE INCOME |
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26.9 |
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21.5 |
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31.3 |
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38.9 |
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Less: Comprehensive income attributable to noncontrolling interests |
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19.2 |
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16.0 |
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22.1 |
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31.5 |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO NCM, INC. |
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$ |
7.7 |
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$ |
5.5 |
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$ |
9.2 |
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$ |
7.4 |
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See accompanying notes to Condensed Consolidated Financial Statements.
5
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(UNAUDITED)
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Nine Months Ended |
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October 1, 2015 |
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September 25, 2014 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Consolidated net income |
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$ |
30.0 |
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$ |
32.7 |
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Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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Deferred income tax expense |
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5.7 |
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12.2 |
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Depreciation and amortization |
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24.2 |
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24.2 |
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Non-cash share-based compensation |
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9.7 |
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5.1 |
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Excess tax benefit from share-based compensation |
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(0.1 |
) |
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0.2 |
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Accretion of interest on the discounted payable to founding members under tax receivable agreement |
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10.6 |
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10.8 |
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Amortization of terminated derivatives |
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1.6 |
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7.6 |
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Amortization of debt issuance costs |
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1.9 |
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2.1 |
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Other |
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0.7 |
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— |
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Changes in operating assets and liabilities: |
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Receivables, net |
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(9.2 |
) |
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23.2 |
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Accounts payable and accrued expenses |
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3.9 |
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(6.1 |
) |
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Amounts due to founding members |
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0.5 |
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2.6 |
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Payment to founding members under tax receivable agreement |
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(17.2 |
) |
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(25.1 |
) |
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Deferred revenue |
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0.2 |
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1.6 |
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Income taxes and other |
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(0.6 |
) |
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(4.2 |
) |
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Net cash provided by operating activities |
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61.9 |
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86.9 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(8.0 |
) |
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(6.9 |
) |
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Purchases of marketable securities |
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(57.6 |
) |
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(99.1 |
) |
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Proceeds from sale and maturities of marketable securities |
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66.5 |
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110.7 |
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Purchases of intangible assets from network affiliates |
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(2.0 |
) |
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(3.0 |
) |
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Net cash (used in) provided by investing activities |
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(1.1 |
) |
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1.7 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payment of dividends |
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(39.4 |
) |
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(68.1 |
) |
|
Proceeds from borrowings |
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166.0 |
|
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92.0 |
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Repayments of borrowings |
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(122.0 |
) |
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|
(87.0 |
) |
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Payment of debt issuance costs |
|
|
— |
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|
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(0.7 |
) |
|
Founding member integration payments |
|
|
1.9 |
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|
1.5 |
|
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Distributions to founding members |
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(58.0 |
) |
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|
(55.7 |
) |
|
Excess tax benefit from share-based compensation |
|
|
0.1 |
|
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(0.2 |
) |
|
Proceeds from stock option exercises |
|
|
1.2 |
|
|
|
0.8 |
|
|
Repurchase of stock for restricted stock tax withholding |
|
|
(1.3 |
) |
|
|
(1.3 |
) |
|
Net cash used in financing activities |
|
|
(51.5 |
) |
|
|
(118.7 |
) |
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
9.3 |
|
|
|
(30.1 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
13.4 |
|
|
|
54.7 |
|
|
Cash and cash equivalents at end of period |
|
$ |
22.7 |
|
|
$ |
24.6 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
(UNAUDITED)
|
|
|
Nine Months Ended |
|
|||||
|
|
|
October 1, 2015 |
|
|
September 25, 2014 |
|
||
|
Supplemental disclosure of non-cash financing and investing activity: |
|
|
|
|
|
|
|
|
|
Purchase of an intangible asset with NCM LLC equity |
|
$ |
31.4 |
|
|
$ |
16.4 |
|
|
Accrued distributions to founding members |
|
$ |
24.7 |
|
|
$ |
21.8 |
|
|
Increase (decrease) in dividends not requiring cash in the period |
|
$ |
1.1 |
|
|
$ |
(0.5 |
) |
|
Write-off of property and equipment included in accrued expenses |
|
$ |
(0.3 |
) |
|
$ |
(0.4 |
) |
|
Increase in cost and equity method investments |
|
$ |
1.7 |
|
|
$ |
— |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
35.2 |
|
|
$ |
34.6 |
|
|
Payments (refunds) for income taxes, net |
|
$ |
0.2 |
|
|
$ |
(6.4 |
) |
See accompanying notes to Condensed Consolidated Financial Statements.
7
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)
(In millions, except share and per share data)
(UNAUDITED)
|
|
|
|
|
|
|
NCM, Inc. |
|
|
|
|
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Accumulated |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in |
|
|
(Distribution |
|
|
Other |
|
|
|
|
|
|||
|
|
|
|
|
|
|
Common Stock |
|
|
Capital |
|
|
in Excess of |
|
|
Comprehensive |
|
|
Noncontrolling |
|
|||||||||
|
|
|
Consolidated |
|
|
Shares |
|
|
Amount |
|
|
(Deficit) |
|
|
Earnings) |
|
|
Loss |
|
|
Interest |
|
|||||||
|
Balance—January 1, 2015 |
|
$ |
(208.7 |
) |
|
|
58,750,926 |
|
|
$ |
0.6 |
|
|
$ |
(261.0 |
) |
|
$ |
(147.4 |
) |
|
$ |
(0.4 |
) |
|
$ |
199.5 |
|
|
Distributions to founding members |
|
|
(49.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(49.8 |
) |
|
NCM LLC equity issued for purchase of intangible asset |
|
|
31.4 |
|
|
|
— |
|
|
|
— |
|
|
|
14.1 |
|
|
|
— |
|
|
|
— |
|
|
|
17.3 |
|
|
Income tax and other impacts of NCM LLC ownership changes |
|
|
(1.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4.6 |
) |
|
|
— |
|
|
|
— |
|
|
|
2.9 |
|
|
Comprehensive income, net of tax |
|
|
31.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8.8 |
|
|
|
0.4 |
|
|
|
22.1 |
|
|
Share-based compensation issued |
|
|
(0.1 |
) |
|
|
267,941 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense/capitalized |
|
|
9.9 |
|
|
|
— |
|
|
|
— |
|
|
|
6.8 |
|
|
|
— |
|
|
|
— |
|
|
|
3.1 |
|
|
Excess tax benefit from share-based compensation |
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cash dividends declared $0.66 per share |
|
|
(40.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40.5 |
) |
|
|
— |
|
|
|
— |
|
|
Balance—October 1, 2015 |
|
$ |
(228.3 |
) |
|
|
59,018,867 |
|
|
$ |
0.6 |
|
|
$ |
(244.9 |
) |
|
$ |
(179.1 |
) |
|
$ |
(0.0 |
) |
|
$ |
195.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 26, 2013 |
|
$ |
(146.1 |
) |
|
|
58,519,137 |
|
|
$ |
0.6 |
|
|
$ |
(271.7 |
) |
|
$ |
(80.0 |
) |
|
$ |
(3.2 |
) |
|
$ |
208.2 |
|
|
Distributions to founding members |
|
|
(46.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(46.5 |
) |
|
NCM LLC equity returned for purchase of intangible asset |
|
|
16.4 |
|
|
|
— |
|
|
|
— |
|
|
|
7.5 |
|
|
|
— |
|
|
|
— |
|
|
|
8.9 |
|
|
Income tax and other impacts of NCM LLC ownership changes |
|
|
(0.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
1.7 |
|
|
Comprehensive income, net of tax |
|
|
38.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.3 |
|
|
|
2.1 |
|
|
|
31.5 |
|
|
Share-based compensation issued |
|
|
(0.5 |
) |
|
|
227,851 |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense/capitalized |
|
|
5.2 |
|
|
|
— |
|
|
|
— |
|
|
|
3.5 |
|
|
|
— |
|
|
|
— |
|
|
|
1.7 |
|
|
Excess tax benefit from share-based compensation |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cash dividends declared $1.16 per share |
|
|
(67.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(67.5 |
) |
|
|
— |
|
|
|
— |
|
|
Balance—September 25, 2014 |
|
$ |
(200.2 |
) |
|
|
58,746,988 |
|
|
$ |
0.6 |
|
|
$ |
(263.0 |
) |
|
$ |
(142.2 |
) |
|
$ |
(1.1 |
) |
|
$ |
205.5 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Description of Business
National CineMedia, Inc. (“NCM, Inc.”) was incorporated in Delaware as a holding company with the sole purpose of becoming a member and sole manager of National CineMedia, LLC (“NCM LLC”), a limited liability company owned by NCM, Inc., American Multi-Cinema, Inc. and AMC ShowPlace Theatres, Inc. (“AMC”), wholly owned subsidiaries of AMC Entertainment, Inc., Regal Cinemas, Inc. and Regal CineMedia Holdings, LLC, wholly owned subsidiaries of Regal Entertainment Group (“Regal”) and Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc. (“Cinemark”). The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity. AMC, Regal and Cinemark and their affiliates are referred to in this document as “founding members”. The Company operates the largest digital in-theatre network in North America, allowing NCM LLC to sell advertising (the “Services”) under long-term exhibitor services agreements (“ESAs”) with the founding members (approximately 21 years remaining as of October 1, 2015) and certain third-party theatre circuits (known as “network affiliates”) under long-term network affiliate agreements, which have terms from three to twenty years.
As of October 1, 2015, NCM LLC had 130,723,361 common membership units outstanding, of which 59,018,867 (45.2%) were owned by NCM, Inc., 26,409,784 (20.2%) were owned by Regal, 25,631,046 (19.6%) were owned by Cinemark and 19,663,664 (15.0%) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one basis.
Recent Transactions
On May 5, 2014, NCM, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) to merge with Screenvision, LLC (“Screenvision”). On November 3, 2014, the Department of Justice filed a lawsuit seeking to enjoin the merger. On March 16, 2015, the Company announced the termination of the Merger Agreement and the lawsuit was dismissed. After the Merger Agreement was terminated, NCM LLC reimbursed NCM, Inc. for certain expenses pursuant to an indemnification agreement among NCM LLC, NCM, Inc. and the founding members. On March 17, 2015, NCM LLC paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc. This payment was $2 million lower than the reverse termination fee contemplated by the Merger Agreement. During the nine months ended October 1, 2015, NCM LLC also either paid directly or reimbursed NCM, Inc. for the legal and other merger-related costs of approximately $15.0 million ($7.5 million incurred by NCM, Inc. during the year ended January 1, 2015 and approximately $7.5 million incurred by NCM LLC during the nine months ended October 1, 2015). The Company and the founding members each bore a pro rata portion of the merger termination fee and the related merger expenses based on their aggregate ownership percentages in NCM LLC.
Basis of Presentation
The Company has prepared the unaudited Condensed Consolidated Financial Statements and related notes of NCM, Inc. in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. The balance sheet as of January 1, 2015 is derived from the audited financial statements of NCM, Inc. Therefore, the unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K filed for the fiscal year ended January 1, 2015.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made. The Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s full year results or future performance. As a result of the various related party agreements discussed in Note 4—Related Party Transactions, the operating results as presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties. The Company manages its business under one reportable segment: advertising.
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Estimates—The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the reserve for uncollectible accounts receivable, share-based compensation and income taxes. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended January 1, 2015 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.
Concentration of Credit Risk and Significant Customers—Bad debts are provided for using the allowance for doubtful accounts method based on historical experience and management’s evaluation of outstanding receivables at the end of the period. Receivables are written off when management determines amounts are uncollectible. Trade accounts receivable are uncollateralized and represent a large number of geographically dispersed debtors. The collectability risk with respect to national and regional advertising is reduced by the fact that the majority of accounts receivable are with large, national advertising agencies that have strong reputations in the advertising industry and clients with stable financial positions. The Company has smaller contracts with thousands of local clients that are not individually significant. As of October 1, 2015 and January 1, 2015, there were no advertising agency groups or individual customers through which the Company sources national advertising revenue representing more than 10% of the Company’s outstanding gross receivable balance. During the three and nine months ended October 1, 2015 and the three months ended September 25, 2014, there were no customers that accounted for more than 10% of revenue. During the nine months ended September 25, 2014, revenue related to advertisements of NCM LLC’s founding members’ beverage supplier accounted for 10.4% of total revenue.
Share-Based Compensation—The Company has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors. In 2015 and 2014, the Company did not grant stock options. In 2015 and 2014, the restricted stock grants for Company officers vest upon the achievement of Company performance measures and/or service conditions, while non-officer grants vest only upon the achievement of service conditions. Compensation expense of restricted stock that vests upon the achievement of Company performance measures is based on management’s financial projections and the probability of achieving the projections, which require considerable judgment. A cumulative adjustment is recorded to share-based compensation expense in periods that management changes its estimate of the number of shares of restricted stock expected to vest. Ultimately, the Company adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Dividends are accrued when declared on unvested restricted stock that is expected to vest and are only paid with respect to shares that actually vest. During the three months ended October 1, 2015 and September 25, 2014 and the nine months ended October 1, 2015 and September 25, 2014, 4,378, 1,930, 258,839 and 253,590 shares of restricted stock and restricted stock units vested, respectively. During the three months ended October 1, 2015 and September 25, 2014 and the nine months ended October 1, 2015 and September 25, 2014, 4,135, 3,605, 94,540 and 56,052 stock options were exercised at a weighted average exercise price of $12.06, $11.54, $12.18 and $13.58 per share, respectively.
In connection with the Company’s March 2014 special cash dividend of $0.50 per share and pursuant to the antidilution adjustment terms of the Company’s Equity Incentive Plan, the exercise price and the number of shares of common stock subject to options held by option holders were adjusted to prevent dilution and restore their economic value that existed immediately before the special dividend. The antidilution adjustments made with respect to such options resulted in a decrease in the range of exercise prices from $5.35 - $24.68 per share to $5.18 - $23.90 per share and an increase in the aggregate number of shares issuable upon exercise of such options by 98,589 shares, or 3.3%, of previously outstanding options. The number of shares authorized under the Equity Incentive Plan increased by an equivalent number of shares. There were no accounting consequences for the changes made to reduce the exercise prices and increase the number of underlying options as a result of the special cash dividend because the aggregate fair values of the awards immediately before and after the modifications were the same.
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidation—NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810, Consolidation (“ASC 810”). Under ASC 810, a managing member of a limited liability company (“LLC”) is presumed to control the LLC, unless the non-managing members have the right to dissolve the entity or remove the managing member without cause, or if the non-managing members have substantive participating rights. The non-managing members of NCM LLC do not have dissolution rights or removal rights. NCM, Inc. has evaluated the provisions of the NCM LLC membership agreement and has concluded that the various rights of the non-managing members are not substantive participation rights under ASC 810, as they do not limit NCM, Inc.’s ability to make decisions in the ordinary course of business.
The following table presents the changes in NCM, Inc.’s equity resulting from net income attributable to NCM, Inc. and transfers to or from noncontrolling interests (in millions):
|
|
|
Nine Months Ended |
|
|||||
|
|
|
October 1, 2015 |
|
|
September 25, 2014 |
|
||
|
Net income attributable to NCM, Inc. |
|
$ |
8.8 |
|
|
$ |
5.3 |
|
|
NCM LLC equity issued for purchase of intangible asset |
|
|
14.1 |
|
|
|
7.5 |
|
|
Income tax and other impacts of subsidiary ownership changes |
|
|
(4.6 |
) |
|
|
(2.0 |
) |
|
Change from net income attributable to NCM, Inc. and transfers from noncontrolling interests |
|
$ |
18.3 |
|
|
$ |
10.8 |
|