National CineMedia, Inc.
National CineMedia, Inc. (Form: 10-Q, Received: 08/09/2016 06:12:59)

 

 

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 June 30, 2016

Commission file number: 001-33296

 

NATIONAL CINEMEDIA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5665602

(State or Other Jurisdiction of

Incorporation or Organization)

 

(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   x     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x

As of August 3, 2016, 62,378,026 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 Comprehensive Income

 

3

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

4

 

Unaudited Condensed Consolidated Statements of Equity/(Deficit)

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

35

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

36

Item 1A.

Risk Factors

 

36

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

 

38

 

 

 


PART I

Item 1. Financial Statements

NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

June 30, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17.4

 

 

$

31.7

 

Short-term marketable securities

 

 

18.5

 

 

 

13.2

 

Receivables, net of allowance of $6.1 and $5.6, respectively

 

 

126.3

 

 

 

148.9

 

Prepaid expenses

 

 

4.0

 

 

 

2.8

 

Income tax receivable

 

 

2.7

 

 

 

2.5

 

Current portion of notes receivable - founding members

 

 

4.2

 

 

 

4.2

 

Other current assets

 

 

0.6

 

 

 

0.3

 

Total current assets

 

 

173.7

 

 

 

203.6

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $62.8 and $64.1,

   respectively

 

 

27.6

 

 

 

25.1

 

Intangible assets, net of accumulated amortization of $105.2 and $91.9, respectively

 

 

574.8

 

 

 

566.7

 

Deferred tax assets

 

 

219.1

 

 

 

217.1

 

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

 

 

12.5

 

 

 

12.5

 

Other investments

 

 

6.8

 

 

 

5.4

 

Long-term marketable securities

 

 

28.5

 

 

 

40.5

 

Debt issuance costs, net

 

 

2.2

 

 

 

2.3

 

Other assets

 

 

0.5

 

 

 

0.5

 

Total non-current assets

 

 

872.0

 

 

 

870.1

 

TOTAL ASSETS

 

$

1,045.7

 

 

$

1,073.7

 

LIABILITIES AND EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Amounts due to founding members

 

$

12.4

 

 

$

35.5

 

Payable to founding members under tax receivable agreement

 

 

13.7

 

 

 

26.2

 

Accrued expenses

 

 

20.2

 

 

 

19.8

 

Accrued payroll and related expenses

 

 

9.9

 

 

 

18.1

 

Accounts payable

 

 

11.7

 

 

 

14.9

 

Deferred revenue

 

 

14.3

 

 

 

10.2

 

Total current liabilities

 

 

82.2

 

 

 

124.7

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt, net of debt issuance costs of $9.6 and $10.6, respectively

 

 

932.4

 

 

 

925.4

 

Deferred tax liability

 

 

48.9

 

 

 

50.1

 

Income tax payable

 

 

5.0

 

 

 

4.9

 

Payable to founding members under tax receivable agreement

 

 

143.6

 

 

 

140.3

 

Total non-current liabilities

 

 

1,129.9

 

 

 

1,120.7

 

Total liabilities

 

 

1,212.1

 

 

 

1,245.4

 

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, 59,836,399 and

   59,239,154 issued and outstanding, respectively

 

 

0.6

 

 

 

0.6

 

Additional paid in capital/(deficit)

 

 

(213.1

)

 

 

(221.5

)

Retained earnings (distributions in excess of earnings)

 

 

(210.3

)

 

 

(186.1

)

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

 

 

(422.8

)

 

 

(407.0

)

Noncontrolling interests

 

 

256.4

 

 

 

235.3

 

Total equity/(deficit)

 

 

(166.4

)

 

 

(171.7

)

TOTAL LIABILITIES AND EQUITY/DEFICIT

 

$

1,045.7

 

 

$

1,073.7

 

 

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

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

July 2, 2015

 

 

June 30, 2016

 

 

July 2, 2015

 

REVENUE (including revenue from founding

   members of $7.2, $9.0, $14.5 and $16.7, respectively)

 

$

115.4

 

 

$

121.5

 

 

$

191.6

 

 

$

198.4

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising operating costs

 

 

8.3

 

 

 

8.3

 

 

 

13.3

 

 

 

14.1

 

Network costs

 

 

4.3

 

 

 

4.2

 

 

 

8.8

 

 

 

8.7

 

Theatre access fees—founding members

 

 

18.9

 

 

 

19.2

 

 

 

37.6

 

 

 

36.4

 

Selling and marketing costs

 

 

19.1

 

 

 

17.0

 

 

 

37.7

 

 

 

33.0

 

Merger termination fee and related merger costs

 

 

 

 

 

0.9

 

 

 

 

 

 

34.3

 

Administrative and other costs

 

 

9.4

 

 

 

8.3

 

 

 

24.3

 

 

 

17.0

 

Depreciation and amortization

 

 

8.9

 

 

 

8.2

 

 

 

17.6

 

 

 

16.2

 

Total

 

 

68.9

 

 

 

66.1

 

 

 

139.3

 

 

 

159.7

 

OPERATING INCOME

 

 

46.5

 

 

 

55.4

 

 

 

52.3

 

 

 

38.7

 

NON-OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on borrowings

 

 

13.5

 

 

 

13.1

 

 

 

26.9

 

 

 

26.2

 

Interest income

 

 

(0.4

)

 

 

(0.3

)

 

 

(1.0

)

 

 

(0.9

)

Accretion of interest on the discounted payable

   to founding members under tax receivable

   agreement

 

 

3.4

 

 

 

3.5

 

 

 

7.0

 

 

 

7.1

 

Amortization of terminated derivatives

 

 

 

 

 

 

 

 

 

 

 

1.6

 

Other non-operating expense

 

 

 

 

 

 

 

 

 

 

 

0.1

 

Total

 

 

16.5

 

 

 

16.3

 

 

 

32.9

 

 

 

34.1

 

INCOME BEFORE INCOME TAXES

 

 

30.0

 

 

 

39.1

 

 

 

19.4

 

 

 

4.6

 

Income tax expense

 

 

4.5

 

 

 

5.8

 

 

 

2.4

 

 

 

1.5

 

CONSOLIDATED NET INCOME

 

 

25.5

 

 

 

33.3

 

 

 

17.0

 

 

 

3.1

 

Less: Net income attributable to

   noncontrolling interests

 

 

18.7

 

 

 

23.2

 

 

 

14.5

 

 

 

2.0

 

NET INCOME ATTRIBUTABLE TO NCM, INC.

 

$

6.8

 

 

$

10.1

 

 

$

2.5

 

 

$

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER NCM, INC. COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.17

 

 

$

0.04

 

 

$

0.02

 

Diluted

 

$

0.11

 

 

$

0.17

 

 

$

0.04

 

 

$

0.02

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

59,831,675

 

 

 

58,974,581

 

 

 

59,721,270

 

 

 

58,931,628

 

Diluted

 

 

60,556,539

 

 

 

59,595,019

 

 

 

60,314,112

 

 

 

59,360,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.44

 

 

$

0.44

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

2


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

July 2, 2015

 

 

June 30, 2016

 

 

July 2, 2015

 

CONSOLIDATED NET INCOME, NET OF TAX OF $4.5,

    $5.8, $2.4 AND $1.5, RESPECTIVELY

 

$

25.5

 

 

$

33.3

 

 

$

17.0

 

 

$

3.1

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of terminated derivatives, net of tax of $0.0,

   $0.0, $0.0 and $0.3, respectively

 

 

 

 

 

 

 

 

 

 

 

1.3

 

CONSOLIDATED COMPREHENSIVE INCOME

 

 

25.5

 

 

 

33.3

 

 

 

17.0

 

 

 

4.4

 

Less: Comprehensive income attributable to noncontrolling

   interests

 

 

18.7

 

 

 

23.2

 

 

 

14.5

 

 

 

2.9

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO

   NCM, INC.

 

$

6.8

 

 

$

10.1

 

 

$

2.5

 

 

$

1.5

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

3


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

July 2, 2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

17.0

 

 

 

3.1

 

Adjustments to reconcile consolidated net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Deferred income tax expense

 

 

2.1

 

 

 

1.0

 

Depreciation and amortization

 

 

17.6

 

 

 

16.2

 

Non-cash share-based compensation

 

 

10.3

 

 

 

5.9

 

Excess tax benefit from share-based compensation

 

 

 

 

 

(0.1

)

Accretion of interest on the discounted payable to founding members

   under tax receivable agreement

 

 

7.0

 

 

 

7.1

 

Impairment on investment

 

 

0.7

 

 

 

 

Amortization of terminated derivatives

 

 

 

 

 

1.6

 

Amortization of debt issuance costs

 

 

1.3

 

 

 

1.3

 

Other

 

 

(0.1

)

 

 

0.6

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

20.6

 

 

 

(12.0

)

Accounts payable and accrued expenses

 

 

(9.7

)

 

 

(1.8

)

Amounts due to founding members

 

 

0.3

 

 

 

1.0

 

Payment to founding members under tax receivable agreement

 

 

(23.5

)

 

 

(17.2

)

Deferred revenue

 

 

4.1

 

 

 

4.9

 

Income taxes and other

 

 

(1.8

)

 

 

(1.4

)

Net cash provided by operating activities

 

 

45.9

 

 

 

10.2

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6.6

)

 

 

(4.8

)

Purchases of marketable securities

 

 

(25.9

)

 

 

(40.8

)

Proceeds from sale and maturities of marketable securities

 

 

32.8

 

 

 

49.9

 

Purchases of intangible assets from network affiliates

 

 

(1.1

)

 

 

(0.9

)

Net cash (used in) provided by investing activities

 

 

(0.8

)

 

 

3.4

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of dividends

 

 

(28.2

)

 

 

(26.4

)

Proceeds from borrowings

 

 

93.0

 

 

 

113.0

 

Repayments of borrowings

 

 

(87.0

)

 

 

(70.0

)

Payment of debt issuance costs

 

 

(0.3

)

 

 

 

Founding member integration payments

 

 

1.0

 

 

 

1.1

 

Distributions to founding members

 

 

(33.5

)

 

 

(32.9

)

Excess tax benefit from share-based compensation

 

 

 

 

 

0.1

 

Proceeds from stock option exercises

 

 

0.3

 

 

 

1.1

 

Repurchase of stock for restricted stock tax withholding

 

 

(4.7

)

 

 

(1.2

)

Net cash used in financing activities

 

 

(59.4

)

 

 

(15.2

)

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(14.3

)

 

 

(1.6

)

Cash and cash equivalents at beginning of period

 

 

31.7

 

 

 

13.4

 

Cash and cash equivalents at end of period

 

$

17.4

 

 

$

11.8

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

4


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

(UNAUDITED)

 

 

Six Months Ended

 

 

June 30, 2016

 

 

July 2, 2015

 

Supplemental disclosure of non-cash financing and investing activity:

 

 

 

 

 

 

 

Purchase of an intangible asset with NCM LLC equity

$

21.1

 

 

$

31.4

 

Accrued distributions to founding members

$

8.8

 

 

$

25.1

 

(Decrease) increase in dividends not requiring cash in the period

$

(1.5

)

 

$

0.8

 

Increase in cost and equity method investments

$

2.0

 

 

$

1.7

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

25.5

 

 

$

24.8

 

Cash paid for income taxes, net of refunds

$

0.4

 

 

$

0.2

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

5


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)

(In millions, except share and per share data)

(UNAUDITED)

 

 

 

 

 

 

 

NCM, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in

 

 

(Distribution

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Capital

 

 

in Excess of

 

 

Comprehensive

 

 

Noncontrolling

 

 

 

Consolidated

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Earnings)

 

 

Loss

 

 

Interest

 

Balance—December 31, 2015

 

$

(171.7

)

 

 

59,239,154

 

 

$

0.6

 

 

$

(221.5

)

 

$

(186.1

)

 

$

 

 

$

235.3

 

Distributions to founding members

 

 

(9.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.9

)

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

 

 

(2.3

)

 

 

 

 

 

 

 

 

(3.7

)

 

 

 

 

 

 

 

 

1.4

 

Comprehensive income, net of tax

 

 

17.0

 

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

 

 

 

 

14.5

 

Share-based compensation issued

 

 

(4.4

)

 

 

597,245

 

 

 

 

 

 

(4.4

)

 

 

 

 

 

 

 

 

 

Share-based compensation

   expense/capitalized

 

 

10.5

 

 

 

 

 

 

 

 

 

7.3

 

 

 

 

 

 

 

 

 

3.2

 

Cash dividends declared $0.44 per

   share

 

 

(26.7

)

 

 

 

 

 

 

 

 

 

 

 

(26.7

)

 

 

 

 

 

 

Balance—June 30, 2016

 

$

(166.4

)

 

 

59,836,399

 

 

$

0.6

 

 

$

(213.1

)

 

$

(210.3

)

 

$

 

 

$

256.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—January 1, 2015

 

$

(208.7

)

 

 

58,750,926

 

 

$

0.6

 

 

$

(261.0

)

 

$

(147.4

)

 

$

(0.4

)

 

$

199.5

 

Distributions to founding members

 

 

(25.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25.1

)

NCM LLC equity returned for purchase

   of intangible asset

 

 

31.4

 

 

 

 

 

 

 

 

 

14.1

 

 

 

 

 

 

 

 

 

17.3

 

Income tax and other impacts of NCM

   LLC ownership changes

 

 

(2.4

)

 

 

 

 

 

 

 

 

(5.4

)

 

 

 

 

 

 

 

 

3.0

 

Comprehensive income, net of tax

 

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.4

 

 

 

2.9

 

Share-based compensation issued

 

 

1.1

 

 

 

261,112

 

 

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

Share-based compensation

   expense/capitalized

 

 

4.9

 

 

 

 

 

 

 

 

 

3.0

 

 

 

 

 

 

 

 

 

1.9

 

Cash dividends declared $0.44 per

   share

 

 

(27.2

)

 

 

 

 

 

 

 

 

 

 

 

(27.2

)

 

 

 

 

 

 

Balance—July 2, 2015

 

$

(221.6

)

 

 

59,012,038

 

 

$

0.6

 

 

$

(248.2

)

 

$

(173.5

)

 

$

 

 

$

199.5

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

6


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. (“AMC”), wholly owned subsidiaries of AMC Entertainment, Inc., Regal Cinemas, Inc. and Regal CineMedia Holdings, LLC, wholly owned subsidiaries of Regal Entertainment Group (“Regal”) and Cinemark Media, Inc. and Cinemark USA, Inc., wholly owned subsidiaries of Cinemark Holdings, Inc. (“Cinemark”).  The terms “NCM”, “the Company” or “we” shall, unless the context otherwise requires, be deemed to include the consolidated entity.  AMC, Regal and Cinemark and their affiliates are referred to in this document as “founding members”.  NCM LLC operates the largest digital in-theatre network in North America, allowing NCM LLC to sell advertising (the “Services”) under long-term exhibitor services agreements (“ESAs”) with the founding members (approximately 21 years remaining as of June 30, 2016) and certain third-party theatre circuits (known as “network affiliates”) under long-term network affiliate agreements, which have terms from three to twenty years.

As of June 30, 2016, NCM LLC had 137,156,732 common membership units outstanding, of which 59,836,399 (43.6%) were owned by NCM, Inc., 27,072,701 (19.8%) were owned by Regal, 26,384,644 (19.2%) were owned by Cinemark and 23,862,988 (17.4%) were owned by AMC. The membership units held by the founding members are exchangeable into NCM, Inc. common stock on a one-for-one basis.

On May 5, 2014, NCM, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) to merge with Screenvision, LLC (“Screenvision”).  On November 3, 2014, the Department of Justice filed a lawsuit seeking to enjoin the merger.  On March 16, 2015, the Company announced the termination of the Merger Agreement and the lawsuit was dismissed.  After the Merger Agreement was terminated, NCM LLC reimbursed NCM, Inc. for certain expenses pursuant to an indemnification agreement among NCM LLC, NCM, Inc. and the founding members.  On March 17, 2015, NCM LLC paid Screenvision an approximate $26.8 million termination payment on behalf of NCM, Inc. During the six months ended July 2, 2015, NCM LLC also either paid directly or reimbursed NCM, Inc. for the legal and other merger-related costs of approximately $15.0 million ($7.5 million incurred by NCM, Inc. during the year ended January 1, 2015 and approximately $7.5 million incurred by NCM LLC during the six months ended July 2, 2015). The Company and the founding members each bore a pro rata portion of the merger termination fee and the related merger expenses based on their aggregate ownership percentages in NCM LLC when the expenses were incurred.

Basis of Presentation

The Company has prepared the unaudited Condensed Consolidated Financial Statements and related notes of NCM, Inc. in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report.  The balance sheet as of December 31, 2015 is derived from the audited financial statements of NCM, Inc.  Therefore, the unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K filed for the fiscal year ended December 31, 2015.

In the opinion of management, all adjustments necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made.  The Company’s business is seasonal and for this and other reasons operating results for interim periods may not be indicative of the Company’s full year results or future performance. As a result of the various related party agreements discussed in Note 4— Related Party Transactions , the operating results as presented are not necessarily indicative of the results that might have occurred if all agreements were with non-related third parties.  The Company manages its business under one reportable segment of advertising.  In the Condensed Consolidated Statements of Comprehensive Income, comprehensive income attributable to noncontrolling interests for the three months ended July 2, 2015 was omitted in the Company’s previously filed Form 10-Q for the period ended July 2, 2015.  This prior period omission was corrected within this Form 10-Q.  There was no impact to the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, the Condensed Consolidated Statements of Cash Flows or any notes thereto.

 

7


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Estimates —The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that a ffect 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 th ose related to the reserve for uncollectible accounts receivable, share-based compensation and income taxes. Actual results could differ from those estimates.

Significant Accounting Policies

The Company’s annual financial statements included in its Form 10-K filed for the fiscal year ended December 31, 2015 contain a complete discussion of the Company’s significant accounting policies. Following is additional information related to the Company’s accounting policies.

Concentration of Credit Risk and Significant Customers — Bad debts are provided for using the allowance for doubtful accounts method based on historical experience and management’s evaluation of outstanding receivables at the end of the period. Receivables are written off when management determines amounts are uncollectible. Trade accounts receivable are uncollateralized and represent a large number of geographically dispersed debtors. The collectability risk with respect to national and regional advertising is reduced by transacting with founding members or large, national advertising agencies who have strong reputations in the advertising industry and clients with stable financial positions. The Company has smaller contracts with thousands of local clients that are not individually significant. As of June 30, 2016 and December 31, 2015, there were no advertising agency groups or individual customers through which the Company sources national advertising revenue representing more than 10% of the Company’s outstanding gross receivable balance.  During the three and six months ended June 30, 2016 and July 2, 2015, there were no customers that accounted for more than 10% of revenue.

 

Share-Based Compensation —The Company has issued stock options and restricted stock to certain employees and restricted stock units to its independent directors. The Company has not granted stock options since 2012.  In 2015 and 2016, the restricted stock grants for Company officers vest upon the achievement of Company performance measures and/or service conditions, while non-officer grants vest only upon the achievement of service conditions.  Compensation expense of restricted stock that vests upon the achievement of Company performance measures is based on management’s financial projections and the probability of achieving the projections, which require considerable judgment. A cumulative adjustment is recorded to share-based compensation expense in periods that management changes its estimate of the number of shares of restricted stock expected to vest. Ultimately, the Company adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. Dividends are accrued when declared on unvested restricted stock that is expected to vest and are only paid with respect to shares that actually vest.  During the three months ended June 30, 2016 and July 2, 2015 and the six months ended June 30, 2016 and July 2, 2015, 25,225, 16,146, 893,830 and 254,461 shares of restricted stock and restricted stock units vested, respectively. During the three months ended June 30, 2016 and July 2, 2015 and the six months ended June 30, 2016 and July 2, 2015, 516, 57,890, 23,450 and 90,405 stock options were exercised at a weighted average exercise price of $12.73, $12.15, $13.01 and $12.18 per share, respectively.

Consolidation —NCM, Inc. consolidates the accounts of NCM LLC under the provisions of ASC 810, Consolidation (“ASC 810”).  Under ASC 810, a managing member of a limited liability company (“LLC”) is presumed to control the LLC, unless the non-managing members have the right to dissolve the entity or remove the managing member without cause, or if the non-managing members have substantive participation rights.  The non-managing members of NCM LLC do not have dissolution rights or removal rights.  NCM, Inc. has evaluated the provisions of the NCM LLC membership agreement and has concluded that the various rights of the non-managing members are not substantive participation rights under ASC 810, as they do not limit NCM, Inc.’s ability to make decisions in the ordinary course of business.

 

8


NATIONAL CINEMEDIA, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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):

 

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

July 2, 2015

 

Net income attributable to NCM, Inc.

 

$

2.5

 

 

$

1.1

 

NCM LLC equity issued for purchase of intangible asset

 

 

9.2

 

 

 

14.1

 

Income tax and other impacts of subsidiary ownership

   changes

 

 

(3.7

)

 

 

(5.4

)

Change from net income attributable to NCM, Inc. and

   transfers from noncontrolling interests

 

$

8.0

 

 

$

9.8

 

Recently Adopted Accounting Pronouncements

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-01,  Income Statement Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”) on a prospective basis, which eliminates the concept of extraordinary items from GAAP.  Under ASU 2015-01, reporting entities will no longer be required to assess whether an underlying event or transaction is extraordinary, however, presentation and disclosure guidance for items that are unusual in nature or occur infrequently are retained, and are expanded to include items that are both unusual in nature and infrequently occurring. The adoption of ASU 2015-01 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”) on a prospective basis.  ASU 2015-02 amends current consolidation guidance by modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. The adoption of ASU 2015-02 did not have a material impact on the unaudited Condensed Consolidated Financial Statements or notes thereto.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-03,  Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) on a retrospective basis, which provides guidance for simplifying the presentation of debt issuance costs.  ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.  The Company also adopted Accounting Standards Update 2015-15,  Interest — Imputation of Interest (“ASU 2015-15”) on a retrospective basis,   which states the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company reclassified net deferred financing costs related to the Company’s Term Loans, Senior Secured Notes and Senior Unsecured Notes in the Condensed Consolidated Balance Sheets as a direct deduction from the carrying amount of those borrowings, while net deferred financing costs related to the Company’s Revolving Credit Facility remained an asset in the unaudited Condensed Consolidated Balance Sheets. Upon adoption of ASU 2015-03 and ASU 2015-15, net deferred financing costs of $10.6 million in the December 31, 2015 unaudited Condensed Consolidated Balance Sheet were reclassified from an asset to a reduction of the carrying value of long-term debt.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-05, Intangibles-Goodwill and Other