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 March 29, 2018
Commission file number: 001-33296
NATIONAL CINEMEDIA, INC.
(Exact name of registrant as specified in its charter)
|
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 ☒ 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 |
☐ |
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Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition method for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 May 3, 2018, 78,994,527 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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3 |
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Unaudited Condensed Consolidated Statements of Equity/(Deficit) |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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6 |
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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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35 |
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Item 4. |
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35 |
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Item 1. |
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36 |
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Item 1A. |
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36 |
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Item 2. |
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36 |
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Item 3. |
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36 |
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Item 4. |
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36 |
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Item 5. |
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36 |
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Item 6. |
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37 |
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38 |
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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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March 29, 2018 |
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December 28, 2017 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
46.0 |
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$ |
30.2 |
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Short-term marketable securities |
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22.0 |
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13.1 |
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Receivables, net of allowance of $5.7 and $6.0, respectively |
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115.0 |
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160.6 |
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Prepaid expenses |
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4.9 |
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4.2 |
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Income tax receivable |
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0.3 |
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0.2 |
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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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0.2 |
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0.1 |
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Total current assets |
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192.6 |
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212.6 |
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NON-CURRENT ASSETS: |
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Property and equipment, net of accumulated depreciation of $72.9 and $70.4, respectively |
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31.5 |
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30.7 |
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Intangible assets, net of accumulated amortization of $152.1 and $145.4, respectively |
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724.2 |
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717.2 |
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Deferred tax assets, net of valuation allowance of $89.1 and $98.1, respectively |
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186.5 |
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186.0 |
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Long-term notes receivable, net of current portion - founding members |
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4.1 |
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4.1 |
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Other investments |
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3.1 |
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3.5 |
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Long-term marketable securities |
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13.2 |
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16.2 |
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Debt issuance costs, net |
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1.1 |
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1.3 |
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Other assets |
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1.4 |
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1.5 |
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Total non-current assets |
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965.1 |
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960.5 |
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TOTAL ASSETS |
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$ |
1,157.7 |
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$ |
1,173.1 |
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LIABILITIES AND EQUITY/(DEFICIT) |
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CURRENT LIABILITIES: |
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Amounts due to founding members, net |
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$ |
10.8 |
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$ |
32.7 |
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Payable to founding members under tax receivable agreement |
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19.6 |
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19.6 |
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Accrued expenses |
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17.1 |
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19.9 |
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Accrued payroll and related expenses |
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8.8 |
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11.1 |
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Accounts payable |
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17.0 |
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19.3 |
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Deferred revenue |
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6.1 |
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7.1 |
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Total current liabilities |
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79.4 |
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109.7 |
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NON-CURRENT LIABILITIES: |
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Long-term debt, net of debt issuance costs of $8.2 and $8.7, respectively |
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944.8 |
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923.3 |
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Deferred tax liability |
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0.1 |
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— |
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Income tax payable |
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0.2 |
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0.3 |
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Payable to founding members under tax receivable agreement |
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214.3 |
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212.6 |
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Other liabilities |
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3.3 |
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2.0 |
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Total non-current liabilities |
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1,162.7 |
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1,138.2 |
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Total liabilities |
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1,242.1 |
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1,247.9 |
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COMMITMENTS AND CONTINGENCIES (NOTE 8) |
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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, $0.01 par value; 175,000,000 shares authorized, 76,904,155 and 76,242,222 issued and outstanding, respectively |
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0.8 |
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0.8 |
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Additional paid in capital/(deficit) |
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(229.3 |
) |
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(233.1 |
) |
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Retained earnings (distributions in excess of earnings) |
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(145.6 |
) |
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(130.2 |
) |
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Total NCM, Inc. stockholders’ equity/(deficit) |
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(374.1 |
) |
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(362.5 |
) |
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Noncontrolling interests |
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289.7 |
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287.7 |
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Total equity/(deficit) |
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(84.4 |
) |
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(74.8 |
) |
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TOTAL LIABILITIES AND EQUITY/(DEFICIT) |
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$ |
1,157.7 |
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$ |
1,173.1 |
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See accompanying notes to the unaudited 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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March 29, 2018 |
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March 30, 2017 |
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REVENUE (including revenue from founding members of $8.0 and $8.4, respectively) |
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$ |
80.2 |
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$ |
71.9 |
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OPERATING EXPENSES: |
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Advertising operating costs |
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7.0 |
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5.0 |
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Network costs |
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3.5 |
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4.2 |
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Theater access fees—founding members |
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20.6 |
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20.6 |
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Selling and marketing costs |
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16.0 |
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18.1 |
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Administrative and other costs |
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12.6 |
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9.3 |
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Depreciation and amortization |
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9.5 |
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9.6 |
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Total |
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69.2 |
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66.8 |
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OPERATING INCOME |
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11.0 |
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5.1 |
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NON-OPERATING EXPENSES: |
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Interest on borrowings |
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13.8 |
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13.2 |
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Interest income |
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(0.2 |
) |
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(0.4 |
) |
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Gain on re-measurement of the payable to founding members under the tax receivable agreement |
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(0.1 |
) |
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— |
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Other non-operating income |
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— |
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(0.1 |
) |
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Total |
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13.5 |
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12.7 |
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LOSS BEFORE INCOME TAXES |
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(2.5 |
) |
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(7.6 |
) |
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Income tax expense (benefit) |
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1.0 |
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(1.8 |
) |
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CONSOLIDATED NET LOSS |
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(3.5 |
) |
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(5.8 |
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Less: Net loss attributable to noncontrolling interests |
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(1.6 |
) |
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(4.5 |
) |
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NET LOSS ATTRIBUTABLE TO NCM, INC. |
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$ |
(1.9 |
) |
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$ |
(1.3 |
) |
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NET LOSS PER NCM, INC. COMMON SHARE: |
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Basic |
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$ |
(0.03 |
) |
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$ |
(0.02 |
) |
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Diluted |
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$ |
(0.03 |
) |
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$ |
(0.02 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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76,640,414 |
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60,309,087 |
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Diluted |
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76,640,414 |
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60,309,087 |
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Dividends declared per common share |
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$ |
0.17 |
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$ |
0.22 |
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See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
2
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (UNAUDITED)
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Three Months Ended |
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March 29, 2018 |
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March 30, 2017 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Consolidated net loss |
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$ |
(3.5 |
) |
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(5.8 |
) |
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Adjustments to reconcile consolidated net loss to net cash provided by operating activities: |
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Deferred income tax expense |
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0.7 |
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(2.0 |
) |
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Depreciation and amortization |
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9.5 |
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9.6 |
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Non-cash share-based compensation |
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2.8 |
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2.7 |
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Impairment on investment |
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0.4 |
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1.4 |
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Amortization of debt issuance costs |
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0.7 |
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0.7 |
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Non-cash gain on re-measurement of the payable to founding members under the tax receivable agreement |
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(0.1 |
) |
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— |
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Other |
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— |
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(0.1 |
) |
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Changes in operating assets and liabilities: |
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Receivables, net |
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45.5 |
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67.9 |
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Accounts payable and accrued expenses |
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(5.8 |
) |
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(12.2 |
) |
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Amounts due to founding members, net |
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0.1 |
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(0.4 |
) |
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Deferred revenue |
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(1.0 |
) |
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(3.0 |
) |
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Income taxes and other |
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0.2 |
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(1.8 |
) |
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Net cash provided by operating activities |
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49.5 |
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57.0 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(3.5 |
) |
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(2.9 |
) |
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Purchases of marketable securities |
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(7.9 |
) |
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(17.0 |
) |
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Proceeds from sale and maturities of marketable securities |
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2.0 |
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12.0 |
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Purchases of intangible assets from network affiliates |
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— |
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(0.2 |
) |
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Proceeds from notes receivable - founding members |
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— |
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1.4 |
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Net cash used in investing activities |
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(9.4 |
) |
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(6.7 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payment of dividends |
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(15.0 |
) |
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(15.3 |
) |
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Proceeds from borrowings |
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58.0 |
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50.0 |
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Repayments of borrowings |
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(37.0 |
) |
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(35.0 |
) |
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Founding member integration and other encumbered theater payments |
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9.4 |
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1.0 |
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Distributions to founding members |
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(37.6 |
) |
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(39.9 |
) |
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Proceeds from stock option exercises |
|
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— |
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0.6 |
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Repurchase of stock for restricted stock tax withholding |
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(2.1 |
) |
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(4.5 |
) |
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Net cash used in financing activities |
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(24.3 |
) |
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(43.1 |
) |
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CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
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15.8 |
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7.2 |
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Cash, cash equivalents and restricted cash at beginning of period |
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30.2 |
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23.3 |
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Cash, cash equivalents and restricted cash at end of period |
|
$ |
46.0 |
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$ |
30.5 |
|
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
3
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
(UNAUDITED)
|
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Three Months Ended |
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March 29, 2018 |
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March 30, 2017 |
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Supplemental disclosure of non-cash financing and investing activity: |
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Purchase of an intangible asset with NCM LLC equity |
$ |
15.9 |
|
|
$ |
201.8 |
|
|
Accrued distributions to founding members |
$ |
8.4 |
|
|
$ |
5.0 |
|
|
Accrued integration and other encumbered theater payments due from founding members |
$ |
1.9 |
|
|
$ |
— |
|
|
Increase in dividends not requiring cash in the period |
$ |
0.2 |
|
|
$ |
0.1 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
$ |
11.6 |
|
|
$ |
9.8 |
|
|
Cash paid for income taxes, net of refunds |
$ |
0.1 |
|
|
$ |
0.3 |
|
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
4
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)
(In millions, except share and per share data)
(UNAUDITED)
|
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NCM, Inc. |
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Retained |
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Additional |
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Earnings |
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||
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Paid in |
|
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(Distribution |
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||
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Common Stock |
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Capital |
|
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in Excess of |
|
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Noncontrolling |
|
||||||||
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Consolidated |
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Shares |
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Amount |
|
|
(Deficit) |
|
|
Earnings) |
|
|
Interest |
|
||||||
|
Balance—December 29, 2016 |
|
$ |
(232.2 |
) |
|
|
59,874,412 |
|
|
$ |
0.6 |
|
|
$ |
(343.6 |
) |
|
$ |
(130.7 |
) |
|
$ |
241.5 |
|
|
Distributions to founding members |
|
|
(5.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.0 |
) |
|
NCM LLC equity issued for purchase of intangible asset |
|
|
201.8 |
|
|
|
— |
|
|
|
— |
|
|
|
78.8 |
|
|
|
— |
|
|
|
123.0 |
|
|
Income tax and other impacts of NCM LLC ownership changes |
|
|
(35.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(53.5 |
) |
|
|
— |
|
|
|
18.0 |
|
|
Comprehensive loss, net of tax |
|
|
(5.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.3 |
) |
|
|
(4.5 |
) |
|
Share-based compensation issued |
|
|
(3.9 |
) |
|
|
720,989 |
|
|
|
— |
|
|
|
(3.9 |
) |
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense/capitalized |
|
|
2.8 |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
— |
|
|
|
1.3 |
|
|
Cash dividends declared $0.22 per share |
|
|
(13.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13.4 |
) |
|
|
— |
|
|
Balance—March 30, 2017 |
|
$ |
(91.2 |
) |
|
|
60,595,401 |
|
|
$ |
0.6 |
|
|
$ |
(320.7 |
) |
|
$ |
(145.4 |
) |
|
$ |
374.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 28, 2017 |
|
$ |
(74.8 |
) |
|
|
76,242,222 |
|
|
$ |
0.8 |
|
|
$ |
(233.1 |
) |
|
$ |
(130.2 |
) |
|
$ |
287.7 |
|
|
Cumulative-effect adjustment for adoption of ASU 2014-09 |
|
|
(0.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
|
Distributions to founding members |
|
|
(8.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8.4 |
) |
|
NCM LLC equity issued for purchase of intangible asset |
|
|
15.9 |
|
|
|
— |
|
|
|
— |
|
|
|
7.7 |
|
|
|
— |
|
|
|
8.2 |
|
|
Income tax and other impacts of NCM LLC ownership changes |
|
|
(0.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3.7 |
) |
|
|
— |
|
|
|
2.9 |
|
|
Comprehensive loss, net of tax |
|
|
(3.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.9 |
) |
|
|
(1.6 |
) |
|
Share-based compensation issued |
|
|
(2.1 |
) |
|
|
661,933 |
|
|
|
— |
|
|
|
(2.1 |
) |
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense/capitalized |
|
|
2.8 |
|
|
|
— |
|
|
|
— |
|
|
|
1.9 |
|
|
|
— |
|
|
|
0.9 |
|
|
Cash dividends declared $0.17 per share |
|
|
(13.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13.3 |
) |
|
|
— |
|
|
Balance—March 29, 2018 |
|
$ |
(84.4 |
) |
|
|
76,904,155 |
|
|
$ |
0.8 |
|
|
$ |
(229.3 |
) |
|
$ |
(145.6 |
) |
|
$ |
289.7 |
|
See accompanying notes to the unaudited Condensed Consolidated Financial Statements.
5
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., wholly owned subsidiaries of AMC Entertainment, Inc. (“AMC”), Regal Cinemas, Inc. and Regal CineMedia Holdings, LLC, wholly owned subsidiaries of Cineworld Group plc and 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, Cinemark and their affiliates are referred to in this document as “founding members”. NCM LLC operates the largest digital in-theater network in North America, allowing NCM LLC to sell advertising under long-term exhibitor services agreements (“ESAs”) with the founding members (approximately 19 years remaining as of March 29, 2018) and certain third-party theater circuits, referred to in this document as “network affiliates” under long-term network affiliate agreements, which have terms from one to twenty years.
As of March 29, 2018, NCM LLC had 157,564,977 common membership units outstanding, of which 76,904,155 (48.8%) were owned by NCM, Inc., 30,403,438 (19.3%) were owned by Regal, 28,779,904 (18.3%) were owned by Cinemark and 21,477,480 (13.6%) 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.
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 28, 2017 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 28, 2017.
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 5—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.
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 28, 2017 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.
Revenue Recognition—The Company derives revenue principally from the advertising business, which includes on-screen and lobby network (LEN) advertising and lobby promotions and advertising on entertainment websites and mobile applications owned by NCM LLC and other companies. Revenue is recognized over time as the customer receives the benefits provided by NCM LLC’s advertising services and the Company has the right to payment for performance to date. The Company considers the terms of each arrangement to determine the appropriate accounting treatment as more fully discussed in Note 2 - Revenue from Contracts with Customers.
6
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 29, 2018 and December 28, 2017, 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 months ended March 29, 2018 and March 30, 2017, the Company had 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 2017 and 2018, 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 March 29, 2018 and March 30, 2017, 956,239 and 978,359 shares of restricted stock and restricted stock units vested, respectively. During the three months ended March 29, 2018, no stock options were exercised. During the three months ended March 30, 2017, 58,450 stock options were exercised at a weighted average exercise price of $11.04 per share.
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):
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 29, 2018 |
|
|
March 30, 2017 |
|
||
|
Net loss attributable to NCM, Inc. |
|
$ |
(1.9 |
) |
|
$ |
(1.3 |
) |
|
NCM LLC equity issued for purchase of intangible asset |
|
|
7.7 |
|
|
|
78.8 |
|
|
Income tax and other impacts of subsidiary ownership changes |
|
|
(3.7 |
) |
|
|
(53.5 |
) |
|
Change from net loss attributable to NCM, Inc. and transfers from noncontrolling interests |
|
$ |
2.1 |
|
|
$ |
24.0 |
|
Recently Adopted Accounting Pronouncements
During the first quarter of 2018, the Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) using the modified retrospective transition method. The Company identified the same performance obligations under ASU 2014-09 as compared with deliverables and separate units of account previously identified. ASU 2014-09 impacted the accounting for barter transactions where the Company exchanges advertising time for products and services used principally for selling and marketing activities. The Company historically recognized revenue for these transactions at the estimated fair value of the advertising exchanged based on the fair value received for similar advertising from cash paying customers. In accordance with the new guidance, the Company will recognize revenue for these transactions based upon the fair value of the products and services received, rather than the value of the advertising provided. The modified retrospective transition method allows entities to apply the new revenue standard prospectively and record a cumulative-effect adjustment to the opening balance of retained earnings in the period the new revenue standard is first applied. Upon the adoption of ASU 2014-09 on December 29, 2017, the Company recorded an $0.2 million cumulative-effect adjustment related to the change in accounting for barter transactions on contracts that are not completed as of December 29, 2017 in the unaudited Consolidated Balance Sheet. The Company’s adoption of ASU 2014-09 did not have a material impact on the unaudited Condensed Consolidated Financial Statements. The Company has incorporated additional disclosures in Note 2 – Revenue from Contracts with Customers to the unaudited Condensed Consolidated Financial Statements to comply with ASU 2014-09.
7
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in earnings (rather than reported through other comprehensive income) and updates certain presentation and disclosure requirements. In February 2018, the FASB issued Accounting Standards Update 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”). These amendments clarify the guidance on certain topics referred to in ASU 2016-01. No changes to the methodology utilized to value the Company’s investments were necessary upon adoption of the ASU 2016-01. The Company has incorporated changes to disclosures in its notes to the unaudited Condensed Consolidated Financial Statements to comply with ASU 2016-01.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) on a retrospective basis. ASU 2016-15 provides guidance on certain cash receipts and cash payments presented and classified in the statement of cash flows. The adoption of ASU 2016-15 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.
During the first quarter of 2018, the Company adopted Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) on a retrospective basis. ASU 2016-18 requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. The Company has adjusted the Condensed Consolidated Statement of Cash Flow for the three months ended March 30, 2017 to include the restricted cash balance within the aforementioned captions. The adoption of ASU 2016-18 had no other impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements (“ASU 2016-13”), which requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted and is to be adopted on a modified retrospective basis. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
In March 2018, the FASB issued Accounting Standards Update 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (“ASU 2018-04”), which amends and supersedes variance paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The Company is currently evaluating the impact that adopting this guidance will have on the unaudited Condensed Consolidated Financial Statements or notes thereto.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its unaudited Condensed Consolidated Financial Statements or notes thereto.
8
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Change in Accounting Principle and Correction of an Error
During the first quarter of 2018, the Company changed its method of accounting for its payable to founding members under the tax receivable agreement (“TRA”), which requires the Company to pay 90% of the expected cash savings to NCM, Inc. from federal, state, and local jurisdictions upon realization of amortization and other deductions specified under the TRA. At inception of the TRA in 2007, the payable was recorded at the fair value by discounting the amounts expected to be payable to founding members under the TRA at the Company’s weighted average cost of capital. The Company then remeasured the present value of the payable to founding members under the TRA each subsequent reporting period.
As a result of the change in accounting principle, the payable is now stated at the undiscounted amount of all expected future payments under the agreement. The Company believes that the undiscounted presentation is preferable because it is consistent with the predominant accounting method used by other companies with such TRA agreements and is more consistent with the undiscounted approach used for the corresponding deferred tax assets that are subject to the TRA. Accordingly, the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Condensed Statements of Equity (Deficit) and Condensed Consolidated Statement of Cash Flows for the respective prior periods have been recast to reflect retrospective application of the change in accounting principle. Since this change in accounting principle dates back to the Company’s IPO, the Company has recorded the cumulative effect for the change in accounting principle to beginning retained earnings as of December 29, 2016.
Additionally, subsequent to the issuance of the Company’s Consolidated Financial Statements for the year ended December 29, 2016, the Company identified and corrected an immaterial non-cash error related to the accounting under ASC 740 for the Company’s payable to founding members under the TRA which was corrected within the Company’s Form 10-K for the period ending December 28, 2017. As a result of the error, the liability under the TRA (including the historical discount on such payable) and related accounts for the year ended December 29, 2016 were restated from the amount previously reported to reflect the additional amounts that will be payable under the TRA upon settlement of all expected future payments to the founding members. Further, the deferred tax liability recorded at the IPO related to the discounted TRA liability was reversed to reflect all applicable basis differences related to the TRA. The impact of the error on the Condensed Consolidated Statements of Income and the Condensed Consolidated Statement of Cash Flows for the three months ended March 30, 2017 is presented within the tables below and the impact of the error on the Condensed Consolidated Statement of Equity for the three months ended March 30, 2017 is stated below.
The Condensed Consolidated Financial Statements and corresponding footnotes for the three months ended March 30, 2017 have been restated from the amounts previously reported to reflect the correction of this error as shown within the tables below.
The following table presents the effect of the change in accounting principle to the December 29, 2016 beginning retained earnings balance and additional paid in capital (deficit) balance (in millions):
|
Beginning retained earnings, as of December 29, 2016 – as previously reported |
$ |
(248.3 |
) |
|
Cumulative effect for change in accounting principle |
|
117.6 |
|
|
Beginning retained earnings, as of December 29, 2016 – as adjusted |
$ |
(130.7 |
) |
|
Beginning additional paid in capital (deficit), as of December 29, 2016 – as previously reported |
$ |
(110.5 |
) |
|
Cumulative effect for change in accounting principle |
|
(233.1 |
) |
|
Beginning additional paid in capital (deficit), as of December 29, 2016 – as adjusted |
$ |
(343.6 |
) |
The following table presents the effects of the change in accounting principle to the Condensed Consolidated Balance Sheet (in millions):
9
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
As of December 28, 2017 |
|
||||||||||
|
|
As Reported |
|
|
Change in Accounting Principle |
|
|
As Adjusted |
|
|||
|
Long-term deferred tax assets, net of valuation allowance of $98.1 |
$ |
161.0 |
|
|
$ |
25.0 |
|
|
$ |
186.0 |
|
|
TOTAL ASSETS |
|
1,148.1 |
|
|
|
25.0 |
|
|
|
1,173.1 |
|
|
Long-term payable to founding members under tax receivable agreement |
|
114.0 |
|
|
|
98.6 |
|
|
|
212.6 |
|
|
Total liabilities |
|
1,149.3 |
|
|
|
98.6 |
|
|
|
1,247.9 |
|
|
Additional paid in capital (deficit) |
|
13.8 |
|
|
|
(246.9 |
) |
|
|
(233.1 |
) |
|
Retained earnings (distributions in excess of earnings) |
|
(303.5 |
) |
|
|
173.3 |
|
|
|
(130.2 |
) |
|
Total equity/(deficit) |
|
(1.2 |
) |
|
|
(73.6 |
) |
|
|
(74.8 |
) |
|
TOTAL LIABILITIES AND EQUITY/DEFICIT |
|
1,148.1 |
|
|
|
25.0 |
|
|
|
1,173.1 |
|
The following table presents the effects of the correction of the prior period error and change in accounting principle to the Condensed Consolidated Statement of Income (in millions, except for per share data):
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
March 30, 2017 |
|
|||||||||||||||||
|
|
As Reported |
|
|
Correction of an Error |
|
|
As Corrected |
|
|
Change in Accounting Principle |
|
|
As Corrected and Adjusted |
|
|||||
|
Accretion of interest on the discounted payable to founding members under tax receivable agreement |
$ |
3.4 |
|
|
$ |
1.4 |
|
|
$ |
4.8 |
|
|
$ |
(4.8 |
) |
|
$ |
— |
|
|
Total non-operating expenses |
|
16.1 |
|
|
|
1.4 |
|
|
|
17.5 |
|
|
|
(4.8 |
) |
|
|
12.7 |
|
|
LOSS BEFORE INCOME TAXES |
|
(11.0 |
) |
|
|
(1.4 |
) |
|
|
(12.4 |
) |
|
|
4.8 |
|
|
|
(7.6 |
) |
|
Income tax benefit |
|
(1.5 |
) |
|
|
1.0 |
|
|
|
(0.5 |
) |
|
|
(1.3 |
) |
|
|
(1.8 |
) |
|
CONSOLIDATED NET LOSS |
|
(9.5 |
) |
|
|
(2.4 |
) |
|
|
(11.9 |
) |
|
|
6.1 |
|
|
|
(5.8 |
) |
|
NET LOSS ATTRIBUTABLE TO NCM, INC. |
$ |
(5.0 |
) |
|
$ |
(2.4 |
) |
|
$ |
(7.4 |
) |
|
$ |
6.1 |
|
|
$ |
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER NCM, INC. COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
(0.08 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.10 |
|
|
$ |
(0.02 |
) |
|
Diluted |
$ |
(0.08 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.10 |
|
|
$ |
(0.02 |
) |
The following table presents the effects of the correction of the prior period error and change in accounting principle to the Condensed Consolidated Statement of Cash Flow (in millions):
|
|
Three Months Ended |
|
|
|
|||||||||||||||||
|
|
March 30, 2017 |
|
|
|
|||||||||||||||||
|
|
As Reported |
|
|
Correction of an Error |
|
|
As Corrected |
|
|
Change in Accounting Principle |
|
|
As Corrected and Adjusted |
|
|
|
|||||
|
Consolidated net loss |
$ |
(9.5 |
) |
|
$ |
(2.4 |
) |
|
$ |
(11.9 |
) |
|
$ |
6.1 |
|
|
$ |
(5.8 |
) |
|
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
(1.7 |
) |
|
|
1.0 |
|
|
|
(0.7 |
) |
|
|
(1.3 |
) |
|
|
(2.0 |
) |
|
|
|
Accretion of interest on the discounted payable to founding members under tax receivable agreement |
|
3.4 |
|
|
|
1.4 |
|
|
|
4.8 |
|
|
|
(4.8 |
) |
|
|
— |
|
|
|
|
Net cash provided by operating activities |
|
57.0 |
|
|
|
— |
|
|
|
57.0 |
|
|
|
— |
|
|
|
57.0 |
|
|
|
The correction of the error resulted in an increase of $3.4 million within the activity and a decrease of $93.9 million in the ending balance of the additional paid in capital (deficit) balance for the quarter ended March 30, 2017.
The change in accounting principle resulted in a decrease of $13.6 million within the activity and an increase of $219.6 million in the ending balance of the additional paid in capital (deficit) balance for the quarter ended March 30, 2017. These adjustments were within the ‘Income tax and other impacts of NCM LLC ownership changes’ line of the Condensed Consolidated Statements of Equity included herein. The change in accounting principle resulted in an $2.1 million decrease in the net loss and a $0.03 decrease in net loss per share for the quarter ended March 29, 2018.
10
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
On December 29, 2017, the Company adopted ASU 2014-09. The following disclosures have been added in accordance with ASU 2014-09.
Revenue Recognition
The Company derives revenue principally from the sale of advertising to national, regional and local businesses in Noovie, the Company’s cinema advertising and entertainment pre-show. The Company also sells advertising through the Lobby Entertainment Network (“LEN”), a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. In addition, the Company sells online and mobile advertising through the Cinema Accelerator digital product. The Company also has a long-term agreement to exhibit the advertising of the founding members’ beverage suppliers.
National advertising, including advertising under the beverage concessionaire and PSA agreements, is sold on a cost per thousand “CPM” basis. The Company recognizes national advertising over time as impressions (or theater attendees) are delivered. National advertising is also sold to content partners. The content partners provide the Company with original entertainment content segments, typically 90 seconds in length, that are entertaining, informative, or educational in nature in the Noovie pre-show and they make commitments to buy a portion of the Company’s advertising inventory at a specified CPM. The Company recognizes revenue for the content segments ratably over time as the content segments air. Local and regional advertising is sold on a per-screen, per-week basis and to a lesser extent on a CPM basis. The Company recognizes local on-screen advertising revenue over the period in which the advertising airs as dictated by the underlying sales contracts. When sold separately, LEN advertising and lobby promotions are sold based on length and breadth of the promotion. The Company recognizes revenue derived from lobby network and promotions over time when the advertising is displayed in theater lobbies. The Company sells online and mobile advertising on a CPM basis. The Company recognizes revenue from branded entertainment websites and mobile applications over time as the online or mobile impressions are served.
Customer contracts often include multiple advertising services to reach the movie goer at multiple points during a theater experience. The Company considers each of these advertising services to represent distinct performance obligations of the contract and allocates a portion of the transaction price to each service based upon the standalone selling price of the service, when available. When standalone selling prices are not available or not applicable given the nature of the customer, the Company allocates the transaction price based upon all information that is reasonably available and maximizes the use of observable inputs. Methods utilized include the adjusted market and expected cost-plus margin approaches.
The Company enters into barter transactions that exchange advertising program time for products and services used principally for selling and marketing activities. The Company records barter transactions at the estimated fair value of the products and services received. Revenues for advertising barter transactions are recognized when advertising is provided, and products and services received are charged to expense when used.
The Company makes contractual guarantees to deliver a specified number of impressions to view the customers’ advertising. If those contracted number of impressions are not delivered, the Company will run additional advertising to deliver the contracted impressions at a later date. The deferred portion of the revenue associated with undelivered impressions is referred to as a make-good provision. In rare cases, the Company will make a cash refund of the portion of the contract related to the undelivered impressions. Given the limited history of cash settlements of the make-good provision, the Company recognizes revenue on the guaranteed contracts as the impressions are delivered and no reserve for variable consideration is recorded. The Company defers the revenue associated with the make-good until the advertising airs to the theater attendance specified in the advertising contract. The make-good provision is recorded within accrued expenses in the Condensed Consolidated Balance Sheets. As of March 29, 2018 and December 28, 2017, the Company had a make-good provision of $1.9 million and $5.5 million, respectively.
The Company recognizes revenue as the performance obligation for the advertising services is satisfied. Invoices are generated following the processing of each revenue contract and payment is due from the customer within 30 days of the invoice date. Customers select to pay the invoice in full at the start of a contract or through equal monthly installments over the course of the contract. The Company records deferred revenue when cash payments are received, or invoices are issued, in advance of revenue being earned. Deferred revenue is classified as a current liability as it is expected to be earned within the next twelve months.
The Company has certain contracts with two-year terms that are noncancelable following a specified date within the contract period. The estimated revenue expected to be recognized in the future related to these contracted performance obligations that are unsatisfied (or partially unsatisfied) as of March 29, 2018, was $13.2 million, $5.5 million of which is
11
NATIONAL CINEMEDIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
expected to be recognized in 2018 and $7.7 million is expected to be recognized in 2019. Agreements with a duration less than one year are not included within this disclosure as the Company elected to use the practical expedient in ASC 606-10-50-14 for those contracts. In addition, other of the Company’s contracts longer than one year that are cancelable are not included within this disclosure.
Disaggregation of Revenue
The Company disaggregates revenue based upon the type of customer: national; local and regional; and beverage concessionaire. This method of disaggregation is in alignment with how revenue is reviewed by management and discussed with and historically disclosed to investors.
The following table summarizes revenue from contracts with customers for the three-month periods ended March 29, 2018 and March 30, 2017:
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|
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Three months ended |
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|||||
|
|
|
March 29, 2018 |
|
|
March 30, 2017 |
|
||
|
National advertising revenue |
|
$ |
54.8 |
|
|
$ |
44.4 |
|
|
Local and regional advertising revenue |
|
|
17.4 |
|
|
|
19.1 |
|