ncmi-10q_20170928.htm

 

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 28, 2017

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)

 

(I.R.S. Employer

Identification No.)

 

9110 East Nichols Avenue, Suite 200

Centennial, Colorado

 

80112-3405

(Address of Principal Executive Offices)

 

(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.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

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 November 2, 2017, 78,501,468 shares of the registrant’s common stock (including unvested restricted shares), par value of $0.01 per share, were outstanding.

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I

 

 

 

 

 

 

Item 1.

Financial Statements

 

1

 

Unaudited Condensed Consolidated Balance Sheets

 

1

 

Unaudited Condensed Consolidated Statements of Income

 

2

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

3

 

Unaudited Condensed Consolidated Statements of Equity/(Deficit)

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

34

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

35

Item 1A.

Risk Factors

 

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

Defaults Upon Senior Securities

 

36

Item 4.

Mine Safety Disclosures

 

36

Item 5.

Other Information

 

36

Item 6.

Exhibits

 

36

 

 

 

 

Signatures

 

37

 

 

 


PART I

Item 1. Financial Statements

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

September 28,

2017

 

 

December 29,

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30.4

 

 

$

23.0

 

Short-term marketable securities

 

 

3.7

 

 

 

26.1

 

Receivables, net of allowance of $6.0 and $6.3, respectively

 

 

118.4

 

 

 

160.5

 

Prepaid expenses

 

 

4.1

 

 

 

3.1

 

Income tax receivable

 

 

0.4

 

 

 

2.4

 

Current portion of notes receivable - founding members

 

 

4.2

 

 

 

5.6

 

Other current assets

 

 

0.5

 

 

 

0.4

 

Total current assets

 

 

161.7

 

 

 

221.1

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $69.3 and $64.1,

   respectively

 

 

29.2

 

 

 

29.6

 

Intangible assets, net of accumulated amortization of $138.8 and $118.9, respectively

 

 

732.6

 

 

 

560.5

 

Deferred tax assets

 

 

199.0

 

 

 

209.1

 

Long-term notes receivable, net of current portion - founding members

 

 

8.3

 

 

 

8.3

 

Other investments

 

 

3.6

 

 

 

6.6

 

Long-term marketable securities

 

 

15.8

 

 

 

19.6

 

Debt issuance costs, net

 

 

1.4

 

 

 

1.9

 

Other assets

 

 

1.8

 

 

 

0.7

 

Total non-current assets

 

 

991.7

 

 

 

836.3

 

TOTAL ASSETS

 

$

1,153.4

 

 

$

1,057.4

 

LIABILITIES AND EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Amounts due to founding members

 

$

24.0

 

 

$

42.7

 

Payable to founding members under tax receivable agreement

 

 

15.9

 

 

 

18.4

 

Accrued expenses

 

 

22.4

 

 

 

19.6

 

Accrued payroll and related expenses

 

 

9.7

 

 

 

12.2

 

Accounts payable

 

 

14.0

 

 

 

17.4

 

Deferred revenue

 

 

5.7

 

 

 

10.3

 

Total current liabilities

 

 

91.7

 

 

 

120.6

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt, net of debt issuance costs of $9.2 and $10.7, respectively

 

 

910.8

 

 

 

924.3

 

Deferred tax liability

 

 

68.2

 

 

 

48.3

 

Income tax payable

 

 

0.4

 

 

 

2.0

 

Payable to founding members under tax receivable agreement

 

 

144.2

 

 

 

143.4

 

Total non-current liabilities

 

 

1,123.6

 

 

 

1,118.0

 

Total liabilities

 

 

1,215.3

 

 

 

1,238.6

 

COMMITMENTS AND CONTINGENCIES (NOTE 7)

 

 

 

 

 

 

 

 

EQUITY/(DEFICIT):

 

 

 

 

 

 

 

 

NCM, Inc. Stockholders’ Equity/(Deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and

   outstanding, respectively

 

 

 

 

 

 

Common stock, $0.01 par value; 175,000,000 shares authorized, 75,230,298 and

   59,874,412 issued and outstanding, respectively

 

 

0.8

 

 

 

0.6

 

Additional paid in capital/(deficit)

 

 

(111.6

)

 

 

(207.7

)

Retained earnings (distributions in excess of earnings)

 

 

(250.5

)

 

 

(215.6

)

Total NCM, Inc. stockholders’ equity/(deficit)

 

 

(361.3

)

 

 

(422.7

)

Noncontrolling interests

 

 

299.4

 

 

 

241.5

 

Total equity/(deficit)

 

 

(61.9

)

 

 

(181.2

)

TOTAL LIABILITIES AND EQUITY/DEFICIT

 

$

1,153.4

 

 

$

1,057.4

 

 

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)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28,

2017

 

 

September 29,

2016

 

 

September 28,

2017

 

 

September 29,

2016

 

REVENUE (including revenue from founding members of

   $6.7, $7.6, $22.7 and $22.1, respectively)

 

$

116.4

 

 

$

113.5

 

 

$

285.4

 

 

$

305.1

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising operating costs

 

 

8.9

 

 

 

7.5

 

 

 

21.4

 

 

 

20.8

 

Network costs

 

 

3.7

 

 

 

4.1

 

 

 

11.9

 

 

 

12.9

 

Theater access fees—founding members

 

 

18.1

 

 

 

19.2

 

 

 

57.4

 

 

 

56.8

 

Selling and marketing costs

 

 

17.2

 

 

 

16.8

 

 

 

54.2

 

 

 

54.5

 

Administrative and other costs

 

 

8.8

 

 

 

8.6

 

 

 

28.6

 

 

 

32.9

 

Depreciation and amortization

 

 

9.4

 

 

 

8.9

 

 

 

28.2

 

 

 

26.5

 

Total

 

 

66.1

 

 

 

65.1

 

 

 

201.7

 

 

 

204.4

 

OPERATING INCOME

 

 

50.3

 

 

 

48.4

 

 

 

83.7

 

 

 

100.7

 

NON-OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on borrowings

 

 

13.1

 

 

14.3

 

 

 

39.4

 

 

 

41.2

 

Interest income

 

 

(0.2

)

 

 

(0.3

)

 

 

(1.0

)

 

 

(1.3

)

Accretion of interest on the discounted payable to

   founding members under tax receivable agreement

 

 

3.2

 

 

 

3.4

 

 

 

9.5

 

 

 

10.4

 

Loss on early retirement of debt

 

 

 

 

 

10.4

 

 

 

 

 

 

10.4

 

Other non-operating income

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

Total

 

 

16.1

 

 

 

27.8

 

 

 

47.8

 

 

 

60.7

 

INCOME BEFORE INCOME TAXES

 

 

34.2

 

 

 

20.6

 

 

 

35.9

 

 

 

40.0

 

Income tax expense (benefit)

 

 

2.3

 

 

 

(1.1

)

 

 

2.6

 

 

 

1.3

 

CONSOLIDATED NET INCOME

 

 

31.9

 

 

 

21.7

 

 

 

33.3

 

 

 

38.7

 

Less: Net income attributable to

   noncontrolling interests

 

 

22.5

 

 

 

13.5

 

 

 

27.4

 

 

 

28.0

 

NET INCOME ATTRIBUTABLE TO NCM, INC.

 

$

9.4

 

 

$

8.2

 

 

$

5.9

 

 

$

10.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER NCM, INC. COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

 

$

0.14

 

 

$

0.10

 

 

$

0.18

 

Diluted

 

$

0.15

 

 

$

0.13

 

 

$

0.10

 

 

$

0.18

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

63,993,273

 

 

 

59,846,496

 

 

 

61,637,445

 

 

 

59,763,012

 

Diluted

 

 

64,281,581

 

 

 

60,878,806

 

 

 

62,074,577

 

 

 

60,479,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.66

 

 

$

0.66

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

2


 

 

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) (UNAUDITED)

 

 

Nine Months Ended

 

 

 

September 28,

2017

 

 

September 29,

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

33.3

 

 

 

38.7

 

Adjustments to reconcile consolidated net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Deferred income tax expense

 

 

4.1

 

 

 

3.8

 

Depreciation and amortization

 

 

28.2

 

 

 

26.5

 

Non-cash share-based compensation

 

 

8.3

 

 

 

13.7

 

Accretion of interest on the discounted payable to founding members

   under tax receivable agreement

 

 

9.5

 

 

 

10.4

 

Impairment on investment

 

 

3.1

 

 

 

0.7

 

Amortization of debt issuance costs

 

 

2.0

 

 

 

2.0

 

Redemption premium paid and write-off of debt issuance costs related to

   redemption of Senior Notes due 2021

 

 

 

 

 

10.4

 

Reversal of tax contingency reserve

 

 

(1.7

)

 

 

(2.9

)

Other

 

 

(0.2

)

 

 

(0.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

42.1

 

 

 

16.0

 

Accounts payable and accrued expenses

 

 

(1.7

)

 

 

(7.9

)

Amounts due to founding members

 

 

(0.4

)

 

 

(0.7

)

Payment to founding members under tax receivable agreement

 

 

(17.3

)

 

 

(23.5

)

Deferred revenue

 

 

(4.6

)

 

 

5.1

 

Income taxes and other

 

 

(0.7

)

 

 

(1.3

)

Net cash provided by operating activities

 

 

104.0

 

 

 

90.9

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7.7

)

 

 

(9.0

)

Acquisition of a business

 

 

(0.2

)

 

 

 

Purchases of marketable securities

 

 

(21.7

)

 

 

(45.0

)

Proceeds from sale and maturities of marketable securities

 

 

48.4

 

 

 

50.5

 

Purchases of intangible assets from network affiliates

 

 

(1.7

)

 

 

(1.6

)

Proceeds from notes receivable - founding members

 

 

1.4

 

 

 

 

Net cash provided by (used in) investing activities

 

 

18.5

 

 

 

(5.1

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of dividends

 

 

(42.1

)

 

 

(41.4

)

Proceeds from borrowings under the revolving credit facility

 

 

60.0

 

 

 

105.0

 

Repayments of borrowings under the revolving credit facility

 

 

(75.0

)

 

 

(168.0

)

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 and other encumbered theater payments

 

 

6.1

 

 

 

1.7

 

Distributions to founding members

 

 

(60.1

)

 

 

(42.2

)

Proceeds from stock option exercises

 

 

0.6

 

 

 

0.4

 

Repurchase of stock for restricted stock tax withholding

 

 

(4.6

)

 

 

(4.8

)

Net cash used in financing activities

 

 

(115.1

)

 

 

(111.9

)

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

7.4

 

 

 

(26.1

)

Cash and cash equivalents at beginning of period

 

 

23.0

 

 

 

31.7

 

Cash and cash equivalents at end of period

 

$

30.4

 

 

$

5.6

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

3


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

(UNAUDITED)

 

 

Nine Months Ended

 

 

September 28,

2017

 

 

September 29,

2016

 

Supplemental disclosure of non-cash financing and investing activity:

 

 

 

 

 

 

 

Purchase of an intangible asset with NCM LLC equity

$

201.8

 

 

$

21.1

 

Accrued distributions to founding members

$

27.2

 

 

$

25.3

 

Purchase of subsidiary equity with NCM, Inc. equity

$

77.8

 

 

$

 

Decrease in dividends not requiring cash in the period

$

(1.3

)

 

$

(0.4

)

Increase in cost and equity method investments

$

 

 

$

2.0

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

34.9

 

 

$

38.0

 

Cash paid for income taxes, net of refunds

$

1.5

 

 

$

0.5

 

 

See accompanying notes to 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)

 

 

 

 

 

 

 

NCM, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in

 

 

(Distribution

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Capital

 

 

in Excess of

 

 

Noncontrolling

 

 

 

Consolidated

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Earnings)

 

 

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—December 29, 2016

 

$

(181.2

)

 

 

59,874,412

 

 

$

0.6

 

 

$

(207.7

)

 

$

(215.6

)

 

$

241.5

 

Distributions to founding members

 

 

(47.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47.4

)

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

 

 

(32.2

)

 

 

 

 

 

 

 

 

16.2

 

 

 

 

 

 

(48.4

)

Issuance of shares

 

 

77.8

 

 

 

14,600,000

 

 

 

0.2

 

 

 

77.6

 

 

 

 

 

 

 

NCM, Inc. investment in NCM LLC

 

 

(77.8

)

 

 

 

 

 

 

 

 

(77.8

)

 

 

 

 

 

 

Comprehensive income, net of tax

 

 

33.3

 

 

 

 

 

 

 

 

 

 

 

 

5.9

 

 

 

27.4

 

Share-based compensation issued

 

 

(4.0

)

 

 

755,886

 

 

 

 

 

 

(4.0

)

 

 

 

 

 

 

Share-based compensation

   expense/capitalized

 

 

8.6

 

 

 

 

 

 

 

 

 

5.3

 

 

 

 

 

 

3.3

 

Cash dividends declared $0.66 per share

 

 

(40.8

)

 

 

 

 

 

 

 

 

 

 

 

(40.8

)

 

 

 

Balance—September 28, 2017

 

$

(61.9

)

 

 

75,230,298

 

 

$

0.8

 

 

$

(111.6

)

 

$

(250.5

)

 

$

299.4

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

5


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.  THE COMPANY

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 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 September 28, 2017) 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 September 28, 2017, NCM LLC had 154,069,410 common membership units outstanding, of which 75,230,298 (48.8%) were owned by NCM, Inc., 27,871,862 (18.1%) were owned by Cinemark, 27,574,620 (17.9%) were owned by Regal and 23,392,630 (15.2%) 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 29, 2016 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 29, 2016.

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.

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 29, 2016 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.

 

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 September 28, 2017 and December 29, 2016, 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 28, 2017 and September 29, 2016, 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 2016 and 2017, 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 and nine months ended September 28, 2017 and September 29, 2016, 20,204, 15,492, 1,028,322 and 909,322 shares of restricted stock and restricted stock units vested, respectively.  During the three and nine months ended September 28, 2017 and three and nine months ended September 29, 2016, 0, 7,078, 58,450 and 30,528 stock options were exercised at a weighted average exercise price of $0, $12.86, $11.04 and $12.98 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 28,

2017

 

 

September 29,

2016

 

Net income attributable to NCM, Inc.

 

$

5.9

 

 

$

10.7

 

NCM LLC equity issued for purchase of intangible asset

 

 

78.8

 

 

 

9.2

 

Income tax and other impacts of subsidiary ownership

   changes (1)

 

 

16.2

 

 

 

(4.2

)

Change from net income attributable to NCM, Inc. and

   transfers from noncontrolling interests

 

$

100.9

 

 

$

15.7

 

 

 

(1)

Subsequent to the issuance of the December 29, 2016 financial statements, an error was identified to the recording of related party balances between the Company and NCM LLC. As of September 28, 2017, the Company recorded an increase of approximately $3.6 million to its additional paid in capital balance and recorded an equivalent reduction to its noncontrolling interests equity balance related to the correction of out of period errors.

Recently Adopted Accounting Pronouncements

In the first quarter of 2017, the Company adopted Accounting Standards Update 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”) on a prospective basis. ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The adoption of ASU 2016-07 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.

In the first quarter of 2017, the Company adopted Accounting Standards Update 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control (“ASU 2016-17”) on a retrospective basis to all periods since its adoption of Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”) in the first quarter of 2016. ASU 2016-17 changes the evaluation of whether a

 

7


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The adoption of ASU 2016-17 did not have a material impact on the Condensed Consolidated Financial Statements or notes thereto.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB revised the effective date for this standard to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning after December 15, 2016, for public entities. ASU 2014-09 allows for either a full retrospective or a modified retrospective transition method. The Company expects to adopt this guidance using the modified retrospective transition method during the first quarter of 2018. The Company expects to identify the same performance obligations under ASU 2014-09 as compared with deliverables and separate units of account previously identified. ASU 2014-09 will impact the accounting for barter transactions where the Company exchanges advertising time for products and services used principally for selling and marketing activities. The Company currently recognizes 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. Under the new guidance, the Company expects to 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 Company has evaluated ASU 2014-09 and does not expect the effect of adopting this guidance to be material to the unaudited Condensed Consolidated Financial Statements, however, the Company does expect additional disclosures in its notes to the unaudited Condensed Consolidated Financial Statements. The Company intends to design and implement changes to certain processes and internal controls related to its adoption of ASU 2014-09.  

In January 2016, the FASB issued 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. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies and should be adopted on a prospective 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 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.

 

8


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. A retrospective transition method should be used in the application of the amendments within ASU 2016-15. If retrospective application is considered impracticable, retrospective application may be used as of the earliest date practicable. The Company is currently evaluating the impact that adopting this guidance will have on the Condensed Consolidated Financial Statements or notes thereto.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which 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. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will have to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-18 to have a material impact 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.

2.  EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding.  Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of potentially dilutive common stock options, restricted stock and restricted stock units using the treasury stock method.  The components of basic and diluted earnings per NCM, Inc. share are as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 28,

2017

 

 

September 29,

2016

 

 

September 28,

2017

 

 

September 29,

2016

 

Net income attributable to NCM, Inc. (in millions)

$

9.4

 

 

$

8.2

 

 

$

5.9

 

 

$

10.7

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

63,993,273

 

 

 

59,846,496

 

 

 

61,637,445

 

 

 

59,763,012

 

Add: Dilutive effect of stock options and

   restricted stock

 

288,308

 

 

 

1,032,310

 

 

 

437,132

 

 

 

716,965

 

Diluted

 

64,281,581

 

 

 

60,878,806

 

 

 

62,074,577

 

 

 

60,479,977

 

Income per NCM, Inc. share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.15

 

 

$

0.14

 

 

$

0.10

 

 

$

0.18

 

Diluted

$

0.15

 

 

$

0.13

 

 

$

0.10

 

 

$

0.18

 


The effect of 90,069,881, 77,320,333, 87,769,713 and 76,920,803 weighted average exchangeable NCM LLC common units held by the founding members for the three and nine months ended September 28, 2017 and September 29, 2016, respectively, have been excluded from the calculation of diluted weighted average shares and earnings per NCM, Inc. share as they were antidilutive.  NCM LLC common units do not participate in dividends paid on NCM, Inc’s common stock.  In addition, there were 935,912, 11,801, 433,224 and 26,387 stock options and non-vested (restricted) shares for the three and nine months ended September 28, 2017 and September 29, 2016, respectively, excluded from the calculation as they were antidilutive.  The Company’s non-vested (restricted) shares do not meet the definition of a participating security as the dividends will not be paid if the shares do not vest.

 

9


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3.  INTANGIBLE ASSETS

Intangible assets consist of contractual rights to provide the Company’s services within the theaters of the founding members and network affiliates and are stated at cost, net of accumulated amortization.  The Company’s intangible assets with its founding members are recorded at the fair market value of NCM, Inc.’s publicly traded stock as of the date on which the common membership units were issued.  The NCM LLC common membership units are fully convertible into NCM, Inc.’s common stock. In addition, the Company records intangible assets for up-front fees paid to network affiliates upon commencement of a network affiliate agreement. The Company’s intangible assets have a finite useful life and the Company amortizes the assets over the remaining useful life corresponding with the ESAs or the term of the network affiliate agreement.  

Common Unit Adjustments—In accordance with NCM LLC’s Common Unit Adjustment Agreement with its founding members, on an annual basis NCM LLC determines the amount of common membership units to be issued to or returned by the founding members based on theater additions or dispositions during the previous year.  In addition, NCM LLC’s Common Unit Adjustment Agreement requires that a Common Unit Adjustment occur for a specific founding member if its acquisition or disposition of theaters, in a single transaction or cumulatively since the most recent Common Unit Adjustment, results in an attendance increase or decrease in excess of two percent of the annual total attendance at the prior adjustment date.  

During the first quarter of 2017, NCM LLC issued 2,351,029 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2016 fiscal year.  Also during the first quarter of 2017, NCM, Inc. and NCM LLC entered into a binding Memorandum of Understanding (“MOU”) with AMC to effectuate aspects of a final judgment (the “Final Judgment”) entered into by the Department of Justice (the “DOJ”) in connection with AMC’s acquisition of Carmike Cinemas, Inc. (“Carmike”).  Pursuant to the MOU, the Company issued 18,425,423 NCM LLC common membership units to AMC in respect of the annual attendance at such Carmike theaters in accordance with the Common Unit Adjustment Agreement during the first quarter of 2017.  AMC’s acquisition of Carmike meets the criteria for a Common Unit Adjustment because it resulted in an extraordinary attendance increase of approximately 9.5%.  Further, the Final Judgment required AMC to transfer advertising rights to 17 theaters from NCM LLC to another advertising provider.  Pursuant to the MOU, AMC surrendered 4,657,673 NCM LLC common membership units in respect of such theaters.  The 4,657,673 NCM LLC common membership units were comprised of (i) 2,850,453 NCM LLC common membership units pursuant to the adjustment for divested theaters in the Common Unit Adjustment Agreement and (ii) an additional 1,807,220 NCM LLC common membership units valued at $25.0 million to compensate for NCM LLC’s lost operating income for these theaters during the 10-year term of the Final Judgment.  To facilitate the theater transfers, during the first quarter of 2017, AMC and Regal entered into an amendment of its ESA with NCM LLC and Cinemark entered into a waiver of certain rights under its ESA.  NCM LLC recorded a net intangible asset of $201.8 million during the first quarter of 2017 related to these transactions.  

During the first quarter of 2016, NCM LLC issued 1,416,515 common membership units to its founding members for the rights to exclusive access to the theater screens and attendees added, net of dispositions by the founding members to NCM LLC’s network during the 2015 fiscal year and NCM LLC recorded a net intangible asset of $21.1 million during the first quarter of 2016 as a result of the Common Unit Adjustment.

 

10


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Integration Payments and Other Encumbered Theater Payments—If an existing on-screen advertising agreement with an alternative provider is in place with respect to any acquired theaters, the founding members may elect to receive common membership units related to those encumbered theaters in connection with the Common Unit Adjustment.  If the founding members make this election, then they are required to make payments on a quarterly basis in arrears in accordance with certain run-out provisions pursuant to the ESAs (“integration payments”). Because the Carmike theaters are subject to an existing on-screen advertising agreement with an alternative provider, AMC will make integration payments to NCM LLC. The integration payments will continue until the earlier of (i) the date the theaters are transferred to NCM LLC’s network or (ii) the expiration of the ESA. Integration payments are calculated based upon the advertising cash flow that the Company would have generated if it had exclusive access to sell advertising in the theaters with pre-existing advertising agreements. The ESA additionally entitles NCM LLC to payments related to the founding members’ on-screen advertising commitments under their beverage concessionaire agreements for encumbered theaters. These payments are also accounted for as a reduction to the intangible asset. During the three and nine months ended September 28, 2017 and September 29, 2016, the Company recorded a reduction to net intangible assets of $6.9 million, $0.7 million, $11.6 million and $1.5 million, respectively, related to integration and other encumbered theater payments. These payments received from AMC related to their acquisitions of theaters from Carmike and Rave Cinemas and from Cinemark related to their acquisition of theaters from Rave Cinemas. During the three and nine months ended September 28, 2017 and September 29, 2016, AMC and Cinemark paid a total of $4.6 million, $0.7 million, $6.1 million and $1.7 million, respectively, in integration and other encumbered theater payments (as payments are made one quarter and one month in arrears, respectively). If common membership units are issued to a founding member for newly acquired theaters that are subject to an existing on-screen advertising agreement with an alternative provider, the amortization of the intangible asset commences after the existing agreement expires and NCM LLC can utilize the theaters for all of its services.

 

 

4.  RELATED PARTY TRANSACTIONS

Founding Member Transactions—In connection with NCM, Inc.’s initial public offering (“IPO”), the Company entered into several agreements to define and regulate the relationships among NCM, Inc., NCM LLC and the founding members. T