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 September 29, 2016
Commission file number: 001-33296
NATIONAL CINEMEDIA, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
20-5665602 |
|
(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 ☒ No ☐
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 ☒ No ☐
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 |
☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
(Do not check if a smaller reporting company) |
Smaller reporting company |
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2016, 62,401,177 shares of the registrant’s common stock (including unvested restricted shares), par value of $0.01 per share, were outstanding.
TABLE OF CONTENTS
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Page |
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Item 1. |
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1 |
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1 |
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2 |
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Unaudited Condensed Consolidated Statements of Comprehensive Income |
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3 |
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4 |
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Unaudited Condensed Consolidated Statements of Equity/(Deficit) |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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23 |
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Item 3. |
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37 |
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Item 4. |
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37 |
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Item 1. |
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38 |
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Item 1A. |
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38 |
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Item 2. |
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38 |
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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 5. |
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38 |
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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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September 29, 2016 |
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December 31, 2015 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
5.6 |
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$ |
31.7 |
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Short-term marketable securities |
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32.8 |
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13.2 |
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Receivables, net of allowance of $6.2 and $5.6, respectively |
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130.9 |
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148.9 |
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Prepaid expenses |
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3.3 |
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2.8 |
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Income tax receivable |
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2.5 |
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2.5 |
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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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0.7 |
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0.3 |
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Total current assets |
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180.0 |
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203.6 |
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NON-CURRENT ASSETS: |
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Property and equipment, net of accumulated depreciation of $64.5 and $64.1, respectively |
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28.1 |
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25.1 |
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Intangible assets, net of accumulated amortization of $112.0 and $91.9, respectively |
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567.7 |
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566.7 |
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Deferred tax assets |
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216.6 |
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217.1 |
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Long-term notes receivable, net of current portion - founding members |
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12.5 |
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12.5 |
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Other investments |
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6.8 |
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5.4 |
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Long-term marketable securities |
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15.6 |
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40.5 |
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Debt issuance costs, net |
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2.0 |
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2.3 |
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Other assets |
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0.5 |
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0.5 |
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Total non-current assets |
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849.8 |
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870.1 |
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TOTAL ASSETS |
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$ |
1,029.8 |
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$ |
1,073.7 |
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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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$ |
27.9 |
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$ |
35.5 |
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Payable to founding members under tax receivable agreement |
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16.6 |
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26.2 |
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Accrued expenses |
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19.5 |
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19.8 |
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Accrued payroll and related expenses |
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11.1 |
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18.1 |
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Accounts payable |
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14.1 |
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14.9 |
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Deferred revenue |
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15.4 |
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10.2 |
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Total current liabilities |
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104.6 |
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124.7 |
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NON-CURRENT LIABILITIES: |
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Long-term debt, net of debt issuance costs of $11.1 and $10.6, respectively |
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911.9 |
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925.4 |
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Deferred tax liability |
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48.3 |
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50.1 |
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Income tax payable |
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2.0 |
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4.9 |
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Payable to founding members under tax receivable agreement |
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144.3 |
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140.3 |
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Total non-current liabilities |
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1,106.5 |
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1,120.7 |
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Total liabilities |
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1,211.1 |
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1,245.4 |
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COMMITMENTS AND CONTINGENCIES (NOTE 7) |
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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, $0.01 par value; 175,000,000 shares authorized, 59,853,806 and 59,239,154 issued and outstanding, respectively |
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0.6 |
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0.6 |
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Additional paid in capital/(deficit) |
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(211.5 |
) |
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(221.5 |
) |
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Retained earnings (distributions in excess of earnings) |
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(216.4 |
) |
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(186.1 |
) |
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Total NCM, Inc. stockholders’ equity/(deficit) |
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(427.3 |
) |
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(407.0 |
) |
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Noncontrolling interests |
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246.0 |
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235.3 |
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Total equity/(deficit) |
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(181.3 |
) |
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(171.7 |
) |
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TOTAL LIABILITIES AND EQUITY/DEFICIT |
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$ |
1,029.8 |
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$ |
1,073.7 |
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See accompanying notes to Condensed Consolidated Financial Statements.
1
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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September 29, 2016 |
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October 1, 2015 |
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September 29, 2016 |
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October 1, 2015 |
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REVENUE (including revenue from founding members of $7.6, $6.5, $22.1 and $23.2, respectively) |
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$ |
113.5 |
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$ |
111.7 |
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$ |
305.1 |
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$ |
310.1 |
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OPERATING EXPENSES: |
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Advertising operating costs |
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7.5 |
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7.8 |
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20.8 |
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21.9 |
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Network costs |
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4.1 |
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4.3 |
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12.9 |
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13.0 |
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Theatre access fees—founding members |
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19.2 |
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17.6 |
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56.8 |
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54.0 |
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Selling and marketing costs |
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16.8 |
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16.9 |
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54.5 |
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49.9 |
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Merger termination fee and related merger costs |
|
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— |
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— |
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— |
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34.3 |
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Administrative and other costs |
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8.6 |
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9.3 |
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32.9 |
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26.3 |
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Depreciation and amortization |
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8.9 |
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8.0 |
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26.5 |
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24.2 |
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Total |
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65.1 |
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63.9 |
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204.4 |
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223.6 |
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OPERATING INCOME |
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48.4 |
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47.8 |
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100.7 |
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86.5 |
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NON-OPERATING EXPENSES: |
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Interest on borrowings |
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14.3 |
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13.0 |
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41.2 |
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39.2 |
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Interest income |
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(0.3 |
) |
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(0.5 |
) |
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(1.3 |
) |
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(1.4 |
) |
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Accretion of interest on the discounted payable to founding members under tax receivable agreement |
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3.4 |
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3.5 |
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10.4 |
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10.6 |
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Amortization of terminated derivatives |
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— |
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— |
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— |
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1.6 |
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Loss on early retirement of debt |
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10.4 |
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— |
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10.4 |
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— |
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Other non-operating expense |
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— |
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0.1 |
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— |
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0.2 |
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Total |
|
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27.8 |
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16.1 |
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60.7 |
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50.2 |
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INCOME BEFORE INCOME TAXES |
|
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20.6 |
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31.7 |
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40.0 |
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36.3 |
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Income tax (benefit) expense |
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(1.1 |
) |
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4.8 |
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1.3 |
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6.3 |
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CONSOLIDATED NET INCOME |
|
|
21.7 |
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26.9 |
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|
38.7 |
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30.0 |
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Less: Net income attributable to noncontrolling interests |
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|
13.5 |
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19.2 |
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28.0 |
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21.2 |
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NET INCOME ATTRIBUTABLE TO NCM, INC. |
|
$ |
8.2 |
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$ |
7.7 |
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$ |
10.7 |
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$ |
8.8 |
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NET INCOME PER NCM, INC. COMMON SHARE: |
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Basic |
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$ |
0.14 |
|
|
$ |
0.13 |
|
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$ |
0.18 |
|
|
$ |
0.15 |
|
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Diluted |
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.18 |
|
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$ |
0.15 |
|
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic |
|
|
59,846,496 |
|
|
|
59,014,887 |
|
|
|
59,763,012 |
|
|
|
58,959,381 |
|
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Diluted |
|
|
60,878,806 |
|
|
|
59,625,214 |
|
|
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60,479,977 |
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59,452,580 |
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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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$ |
0.66 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
2
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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September 29, 2016 |
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October 1, 2015 |
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September 29, 2016 |
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October 1, 2015 |
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CONSOLIDATED NET INCOME, NET OF TAX OF ($1.1), $4.8, $1.3 AND $6.3, RESPECTIVELY |
|
$ |
21.7 |
|
|
$ |
26.9 |
|
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$ |
38.7 |
|
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$ |
30.0 |
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OTHER COMPREHENSIVE INCOME, NET OF TAX: |
|
|
|
|
|
|
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|
|
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Amortization of terminated derivatives, net of tax of $0.0, $0.0, $0.0 and $0.3, respectively |
|
|
— |
|
|
|
— |
|
|
|
— |
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1.3 |
|
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CONSOLIDATED COMPREHENSIVE INCOME |
|
|
21.7 |
|
|
|
26.9 |
|
|
|
38.7 |
|
|
|
31.3 |
|
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Less: Comprehensive income attributable to noncontrolling interests |
|
|
13.5 |
|
|
|
19.2 |
|
|
|
28.0 |
|
|
|
22.1 |
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO NCM, INC. |
|
$ |
8.2 |
|
|
$ |
7.7 |
|
|
$ |
10.7 |
|
|
$ |
9.2 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
3
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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|||||
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September 29, 2016 |
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October 1, 2015 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
|
|
|
|
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Consolidated net income |
|
$ |
38.7 |
|
|
|
30.0 |
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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|
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|
|
|
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Deferred income tax expense |
|
|
3.8 |
|
|
|
5.7 |
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Depreciation and amortization |
|
|
26.5 |
|
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|
24.2 |
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Non-cash share-based compensation |
|
|
13.7 |
|
|
|
9.7 |
|
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Excess tax benefit from share-based compensation |
|
|
— |
|
|
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(0.1 |
) |
|
Accretion of interest on the discounted payable to founding members under tax receivable agreement |
|
|
10.4 |
|
|
|
10.6 |
|
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Impairment on investment |
|
|
0.7 |
|
|
|
— |
|
|
Amortization of terminated derivatives |
|
|
— |
|
|
|
1.6 |
|
|
Amortization of debt issuance costs |
|
|
2.0 |
|
|
|
1.9 |
|
|
Redemption premium paid and write-off of debt issuance costs related to redemption of Senior Notes due 2021 |
|
|
10.4 |
|
|
|
— |
|
|
Reversal of income tax contingency reserve |
|
|
(2.9 |
) |
|
|
— |
|
|
Other |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Receivables, net |
|
|
16.0 |
|
|
|
(9.2 |
) |
|
Accounts payable and accrued expenses |
|
|
(7.9 |
) |
|
|
3.9 |
|
|
Amounts due to founding members |
|
|
(0.7 |
) |
|
|
0.5 |
|
|
Payment to founding members under tax receivable agreement |
|
|
(23.5 |
) |
|
|
(17.2 |
) |
|
Deferred revenue |
|
|
5.1 |
|
|
|
0.2 |
|
|
Income taxes and other |
|
|
(1.3 |
) |
|
|
(0.6 |
) |
|
Net cash provided by operating activities |
|
|
90.9 |
|
|
|
61.9 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(9.0 |
) |
|
|
(8.0 |
) |
|
Purchases of marketable securities |
|
|
(45.0 |
) |
|
|
(57.6 |
) |
|
Proceeds from sale and maturities of marketable securities |
|
|
50.5 |
|
|
|
66.5 |
|
|
Purchases of intangible assets from network affiliates |
|
|
(1.6 |
) |
|
|
(2.0 |
) |
|
Net cash used in investing activities |
|
|
(5.1 |
) |
|
|
(1.1 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(41.4 |
) |
|
|
(39.4 |
) |
|
Proceeds from borrowings under the revolving credit facility |
|
|
105.0 |
|
|
|
166.0 |
|
|
Repayments of borrowings under the revolving credit facility |
|
|
(168.0 |
) |
|
|
(122.0 |
) |
|
Proceeds from issuance of Senior Notes due 2026 |
|
|
250.0 |
|
|
|
— |
|
|
Redemption of Senior Notes due 2021 |
|
|
(207.9 |
) |
|
|
— |
|
|
Payment of debt issuance costs |
|
|
(4.7 |
) |
|
|
— |
|
|
Founding member integration payments |
|
|
1.7 |
|
|
|
1.9 |
|
|
Distributions to founding members |
|
|
(42.2 |
) |
|
|
(58.0 |
) |
|
Excess tax benefit from share-based compensation |
|
|
— |
|
|
|
0.1 |
|
|
Proceeds from stock option exercises |
|
|
0.4 |
|
|
|
1.2 |
|
|
Repurchase of stock for restricted stock tax withholding |
|
|
(4.8 |
) |
|
|
(1.3 |
) |
|
Net cash used in financing activities |
|
|
(111.9 |
) |
|
|
(51.5 |
) |
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(26.1 |
) |
|
|
9.3 |
|
|
Cash and cash equivalents at beginning of period |
|
|
31.7 |
|
|
|
13.4 |
|
|
Cash and cash equivalents at end of period |
|
$ |
5.6 |
|
|
$ |
22.7 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
4
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
(UNAUDITED)
|
|
Nine Months Ended |
|
|||||
|
|
September 29, 2016 |
|
|
October 1, 2015 |
|
||
|
Supplemental disclosure of non-cash financing and investing activity: |
|
|
|
|
|
|
|
|
Purchase of an intangible asset with NCM LLC equity |
$ |
21.1 |
|
|
$ |
31.4 |
|
|
Accrued distributions to founding members |
$ |
25.3 |
|
|
$ |
24.7 |
|
|
(Decrease) increase in dividends not requiring cash in the period |
$ |
(0.4 |
) |
|
$ |
1.1 |
|
|
Write-off of property and equipment included in accrued expenses |
$ |
— |
|
|
$ |
(0.3 |
) |
|
Increase in cost and equity method investments |
$ |
2.0 |
|
|
$ |
1.7 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
$ |
38.0 |
|
|
$ |
35.2 |
|
|
Cash paid for income taxes, net of refunds |
$ |
0.5 |
|
|
$ |
0.2 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
5
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—December 31, 2015 |
|
$ |
(171.7 |
) |
|
|
59,239,154 |
|
|
$ |
0.6 |
|
|
$ |
(221.5 |
) |
|
$ |
(186.1 |
) |
|
$ |
— |
|
|
$ |
235.3 |
|
|
Distributions to founding members |
|
|
(35.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35.2 |
) |
|
NCM LLC equity issued for purchase of intangible asset |
|
|
21.1 |
|
|
|
— |
|
|
|
— |
|
|
|
9.2 |
|
|
|
— |
|
|
|
— |
|
|
|
11.9 |
|
|
Income tax and other impacts of NCM LLC ownership changes |
|
|
(2.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
|
Comprehensive income, net of tax |
|
|
38.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.7 |
|
|
|
|
|
|
|
28.0 |
|
|
Share-based compensation issued |
|
|
(4.4 |
) |
|
|
614,652 |
|
|
|
— |
|
|
|
(4.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense/capitalized |
|
|
14.0 |
|
|
|
— |
|
|
|
— |
|
|
|
9.4 |
|
|
|
— |
|
|
|
— |
|
|
|
4.6 |
|
|
Cash dividends declared $0.66 per share |
|
|
(41.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41.0 |
) |
|
|
— |
|
|
|
— |
|
|
Balance—September 29, 2016 |
|
$ |
(181.3 |
) |
|
|
59,853,806 |
|
|
$ |
0.6 |
|
|
$ |
(211.5 |
) |
|
$ |
(216.4 |
) |
|
$ |
— |
|
|
$ |
246.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
$ |
— |
|
|
$ |
195.1 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
6
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”. NCM LLC 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 20 years remaining as of September 29, 2016) 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 September 29, 2016, NCM LLC had 137,174,139 common membership units outstanding, of which 59,853,806 (43.6%) were owned by NCM, Inc., 27,072,701 (19.8%) were owned by Regal, 26,384,644 (19.2%) were owned by Cinemark and 23,862,988 (17.4%) 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.
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. 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 when the expenses were incurred.
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 December 31, 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 December 31, 2015.
In the opinion of management, all 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 of advertising.
7
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 December 31, 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 transacting with founding members or large, national advertising agencies who 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 September 29, 2016 and December 31, 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 September 29, 2016 and October 1, 2015, there were no customers that accounted for more than 10% of revenue.
Share-Based Compensation—The Company has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors. The Company has not granted stock options since 2012. In 2015 and 2016, 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 September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, 15,492, 4,378, 909,322 and 258,839 shares of restricted stock and restricted stock units vested, respectively. During the three months ended September 29, 2016 and October 1, 2015 and the nine months ended September 29, 2016 and October 1, 2015, 7,078, 4,135, 30,528 and 94,540 stock options were exercised at a weighted average exercise price of $12.86, $12.06, $12.98 and $12.18 per share, respectively.
Consolidation—NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810, Consolidation (“ASC 810”). 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 |
|
|||||
|
|
|
September 29, 2016 |
|
|
October 1, 2015 |
|
||
|
Net income attributable to NCM, Inc. |
|
$ |
10.7 |
|
|
$ |
8.8 |
|
|
NCM LLC equity issued for purchase of intangible asset |
|
|
9.2 |
|
|
|
14.1 |
|
|
Income tax and other impacts of subsidiary ownership changes |
|
|
(4.2 |
) |
|
|
(4.6 |
) |
|
Change from net income attributable to NCM, Inc. and transfers from noncontrolling interests |
|
$ |
15.7 |
|
|
$ |
||