Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Scripps Networks Interactive, Inc. | Financial_Report.xls |
EX-31.(A) - EX-31.(A) - Scripps Networks Interactive, Inc. | d903931dex31a.htm |
EX-32.(A) - EX-32.(A) - Scripps Networks Interactive, Inc. | d903931dex32a.htm |
EX-31.(B) - EX-31.(B) - Scripps Networks Interactive, Inc. | d903931dex31b.htm |
EX-10.34 - EX-10.34 - Scripps Networks Interactive, Inc. | d903931dex1034.htm |
EX-10.32.D - EX-10.32.D - Scripps Networks Interactive, Inc. | d903931dex1032d.htm |
EX-32.(B) - EX-32.(B) - Scripps Networks Interactive, Inc. | d903931dex32b.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-34004
SCRIPPS NETWORKS INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
Ohio | 61-1551890 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
9721 Sherrill Boulevard Knoxville, TN |
37932 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (865) 694-2700
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
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 and 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 ¨
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 ¨
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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. As of April 30, 2015 there were 94,120,270 of the Registrants Class A Common shares outstanding and 34,317,171 of the Registrants Common Voting shares outstanding.
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
PART I - FINANCIAL INFORMATION |
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Item 1. |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||||
Item 3. |
30 | |||||
Item 4. |
31 | |||||
Item 1. |
32 | |||||
Item 1A. |
32 | |||||
Item 2. |
32 | |||||
Item 3. |
33 | |||||
Item 4. |
33 | |||||
Item 5. |
33 | |||||
Item 6. |
33 | |||||
34 | ||||||
35 |
2
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of | ||||||||
(in thousands, except share and par value amounts) |
March 31, 2015 |
December 31, 2014 |
||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 154,785 | $ | 878,164 | ||||
Accounts receivable, net of allowances: 2015 - $10,591; 2014 - $7,889 |
630,322 | 629,775 | ||||||
Programs and program licenses |
490,391 | 477,575 | ||||||
Deferred income taxes |
55,994 | 41,831 | ||||||
Other current assets |
74,575 | 110,816 | ||||||
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|
|
|
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Total current assets |
1,406,067 | 2,138,161 | ||||||
Investments |
439,240 | 463,344 | ||||||
Property and equipment, net of accumulated depreciation: 2015 - $278,386; 2014 - $278,552 |
214,779 | 226,246 | ||||||
Goodwill |
572,047 | 573,119 | ||||||
Other intangible assets, net |
582,360 | 595,881 | ||||||
Programs and program licenses (less current portion) |
488,947 | 469,083 | ||||||
Deferred income taxes |
50,045 | 37,265 | ||||||
Other non-current assets |
182,139 | 164,533 | ||||||
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|
|
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Total Assets |
$ | 3,935,624 | $ | 4,667,632 | ||||
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|
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LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 20,075 | $ | 21,499 | ||||
Current portion of debt |
| 884,994 | ||||||
Program rights payable |
32,269 | 36,138 | ||||||
Customer deposits and unearned revenue |
56,146 | 47,929 | ||||||
Employee compensation and benefits |
40,847 | 73,185 | ||||||
Accrued marketing and advertising costs |
12,300 | 3,765 | ||||||
Other accrued liabilities |
165,618 | 90,444 | ||||||
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|
|
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Total current liabilities |
327,255 | 1,157,954 | ||||||
Debt (less current portion) |
1,844,622 | 1,494,411 | ||||||
Other liabilities (less current portion) |
239,693 | 234,429 | ||||||
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|
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Total liabilities |
2,411,570 | 2,886,794 | ||||||
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|
|
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Redeemable non-controlling interests |
98,268 | 96,251 | ||||||
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|
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Equity: |
||||||||
SNI shareholders equity: |
||||||||
Preferred stock, $0.01 par - authorized: 25,000,000 shares; none outstanding |
||||||||
Common stock, $0.01 par: |
||||||||
Class A - authorized: 240,000,000 shares; issued and outstanding: 2015 - 94,097,489 shares; 2014 - 97,789,910 shares |
941 | 978 | ||||||
Voting - authorized: 60,000,000 shares; issued and outstanding: 2015 - 34,317,171 shares; 2014 - 34,317,171 shares |
343 | 343 | ||||||
|
|
|
|
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Total |
1,284 | 1,321 | ||||||
Additional paid-in capital |
1,331,469 | 1,359,023 | ||||||
Retained (deficit) earnings |
(71,745 | ) | 79,994 | |||||
Accumulated other comprehensive loss |
(83,962 | ) | (57,891 | ) | ||||
|
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|
|
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Total SNI shareholders equity |
1,177,046 | 1,382,447 | ||||||
Non-controlling interest |
248,740 | 302,140 | ||||||
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|
|
|||||
Total equity |
1,425,786 | 1,684,587 | ||||||
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|
|
|
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Total Liabilities and Equity |
$ | 3,935,624 | $ | 4,667,632 | ||||
|
|
|
|
See notes to condensed consolidated financial statements.
3
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended March 31, |
||||||||
(in thousands, except per share data) |
2015 | 2014 | ||||||
Operating Revenues: |
||||||||
Advertising |
$ | 435,268 | $ | 433,751 | ||||
Network affiliate fees, net |
209,008 | 200,871 | ||||||
Other |
13,974 | 9,127 | ||||||
|
|
|
|
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Total operating revenues |
658,250 | 643,749 | ||||||
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|
|
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Cost of services, excluding depreciation and amortization of intangible assets |
199,147 | 181,138 | ||||||
Selling, general and administrative |
202,187 | 191,877 | ||||||
Depreciation |
16,895 | 17,555 | ||||||
Amortization of intangible assets |
11,695 | 13,739 | ||||||
Losses (gains) on disposal of property and equipment |
2,516 | (152 | ) | |||||
|
|
|
|
|||||
Total operating expenses |
432,440 | 404,157 | ||||||
|
|
|
|
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Operating income |
225,810 | 239,592 | ||||||
Interest expense, net |
(12,967 | ) | (12,431 | ) | ||||
Equity in earnings of affiliates |
18,945 | 22,261 | ||||||
Miscellaneous, net |
5,531 | 273 | ||||||
|
|
|
|
|||||
Income from operations before income taxes |
237,319 | 249,695 | ||||||
Provision for income taxes |
(71,249 | ) | (76,906 | ) | ||||
|
|
|
|
|||||
Net income |
166,070 | 172,789 | ||||||
Less: net income attributable to non-controlling interests |
(42,227 | ) | (44,493 | ) | ||||
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|
|
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Net income attributable to SNI |
$ | 123,843 | $ | 128,296 | ||||
|
|
|
|
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Net income attributable to SNI common shareholders per share of common stock: |
||||||||
Net income attributable to SNI common shareholders per basic share of common stock |
$ | 0.94 | $ | 0.88 | ||||
Net income attributable to SNI common shareholders per diluted share of common stock |
$ | 0.94 | $ | 0.87 | ||||
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|
|
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Weighted average shares outstanding: |
||||||||
Weighted average basic shares outstanding |
131,259 | 146,322 | ||||||
Weighted average diluted shares outstanding |
131,942 | 147,440 | ||||||
|
|
|
|
See notes to condensed consolidated financial statements.
4
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Net income |
$ | 166,070 | $ | 172,789 | ||||
Other comprehensive income (loss), net of tax: |
||||||||
Foreign currency translation adjustments, net of tax: 2015 - $1,820; 2014 - $503 |
(27,220 | ) | 3,129 | |||||
Pension liability adjustments, net of tax: 2015 - ($508); 2014 - ($314) |
664 | 449 | ||||||
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Comprehensive income |
139,514 | 176,367 | ||||||
Less: comprehensive income attributable to non-controlling interests |
(41,742 | ) | (44,370 | ) | ||||
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|
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Comprehensive income attributable to SNI |
$ | 97,772 | $ | 131,997 | ||||
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See notes to condensed consolidated financial statements.
5
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 166,070 | $ | 172,789 | ||||
Depreciation and amortization of intangible assets |
28,590 | 31,294 | ||||||
Program amortization |
162,671 | 140,998 | ||||||
Equity in earnings of affiliates |
(18,945 | ) | (22,261 | ) | ||||
Program payments |
(200,552 | ) | (185,438 | ) | ||||
Dividends received from equity investments |
20,998 | 15,802 | ||||||
Deferred income taxes |
(25,631 | ) | (25,557 | ) | ||||
Stock-based compensation |
17,134 | 15,083 | ||||||
Changes in certain working capital accounts: |
||||||||
Accounts receivable, net |
(1,329 | ) | 27,514 | |||||
Other assets |
(7,834 | ) | (4,044 | ) | ||||
Accounts payable |
(1,093 | ) | 6,281 | |||||
Customer deposits and unearned revenue |
7,867 | (20,260 | ) | |||||
Accrued / refundable income taxes |
127,605 | 90,739 | ||||||
Other liabilities |
(14,962 | ) | (32,107 | ) | ||||
Other, net |
14,164 | 7,453 | ||||||
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Cash provided by operating activities |
274,753 | 218,286 | ||||||
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Cash Flows from Investing Activities: |
||||||||
Additions to property and equipment |
(9,399 | ) | (9,195 | ) | ||||
Collections on note receivable |
1,121 | 1,250 | ||||||
Purchases of long-term investments |
| (3,167 | ) | |||||
Foreign currency call option premium |
(16,000 | ) | | |||||
Other, net |
(22,635 | ) | 522 | |||||
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Cash used in investing activities |
(46,913 | ) | (10,590 | ) | ||||
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Cash Flows from Financing Activities: |
||||||||
Proceeds from debt |
475,000 | | ||||||
Payments on debt |
(1,010,000 | ) | | |||||
Dividends paid |
(29,716 | ) | (29,323 | ) | ||||
Dividends paid to non-controlling interests |
(94,906 | ) | (125,520 | ) | ||||
Repurchases of Class A Common stock |
(288,502 | ) | (250,062 | ) | ||||
Proceeds from stock options |
4,570 | 22,342 | ||||||
Other, net |
(6,284 | ) | (2,534 | ) | ||||
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Cash used in financing activities |
(949,838 | ) | (385,097 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
(1,381 | ) | 167 | |||||
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Decrease in cash and cash equivalents |
(723,379 | ) | (177,234 | ) | ||||
Cash and cash equivalents: |
||||||||
Beginning of year |
878,164 | 686,371 | ||||||
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End of period |
$ | 154,785 | $ | 509,137 | ||||
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Supplemental Cash Flow Disclosures |
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Interest paid, excluding amounts capitalized |
$ | 16,444 | $ | 15,359 | ||||
Income taxes refunded |
(35,817 | ) | (313 | ) | ||||
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|
See notes to condensed consolidated financial statements.
6
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
SNI Shareholders | Redeemable | |||||||||||||||||||||||||||
(in thousands, except share data) |
Common Stock |
Additional Paid-in Capital |
Retained (Deficit) Earnings |
Accumulated Other Comprehensive Income (Loss) |
Non-controlling Interest |
Total Equity |
Non-controlling Interests (Temporary Equity) |
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Balance as of December 31, 2013 |
$ | 1,462 | $ | 1,447,496 | $ | 662,574 | $ | (12,529 | ) | $ | 319,889 | $ | 2,418,892 | $ | 133,000 | |||||||||||||
Comprehensive income |
128,296 | 3,701 | 40,450 | 172,447 | 3,920 | |||||||||||||||||||||||
Dividends paid to non-controlling interest |
(120,270 | ) | (120,270 | ) | (5,250 | ) | ||||||||||||||||||||||
Dividends: declared and paid - $0.20 per share |
(29,323 | ) | (29,323 | ) | ||||||||||||||||||||||||
Repurchase of 3,106,925 Class A Common shares |
(31 | ) | (32,208 | ) | (217,823 | ) | (250,062 | ) | ||||||||||||||||||||
Stock-based compensation |
15,083 | 15,083 | ||||||||||||||||||||||||||
Exercise of employee stock options: 589,331 shares issued |
6 | 22,336 | 22,342 | |||||||||||||||||||||||||
Other stock-based compensation, net: 301,544 shares issued; 106,677 shares repurchased |
2 | (7,719 | ) | (7,717 | ) | |||||||||||||||||||||||
Tax benefits of compensation plans |
7,196 | 7,196 | ||||||||||||||||||||||||||
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Balance as of March 31, 2014 |
$ | 1,439 | $ | 1,452,184 | $ | 543,724 | $ | (8,828 | ) | $ | 240,069 | $ | 2,228,588 | $ | 131,670 | |||||||||||||
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Balance as of December 31, 2014 |
$ | 1,321 | $ | 1,359,023 | $ | 79,994 | $ | (57,891 | ) | $ | 302,140 | $ | 1,684,587 | $ | 96,251 | |||||||||||||
Comprehensive income (loss) |
123,843 | (26,071 | ) | 41,506 | 139,278 | 236 | ||||||||||||||||||||||
Dividends paid to non-controlling interests |
(94,906 | ) | (94,906 | ) | ||||||||||||||||||||||||
Addition to non-controlling interests |
700 | |||||||||||||||||||||||||||
Redeemable non-controlling interest fair value adjustment |
(1,081 | ) | (1,081 | ) | 1,081 | |||||||||||||||||||||||
Dividends: declared and paid - $0.23 per share |
(29,716 | ) | (29,716 | ) | ||||||||||||||||||||||||
Repurchase of 3,986,275 Class A Common shares |
(40 | ) | (43,677 | ) | (244,785 | ) | (288,502 | ) | ||||||||||||||||||||
Stock-based compensation |
17,134 | 17,134 | ||||||||||||||||||||||||||
Exercise of employee stock options: 100,012 shares issued |
1 | 4,569 | 4,570 | |||||||||||||||||||||||||
Other stock-based compensation, net: 299,572 shares issued; 105,730 shares repurchased |
2 | (6,853 | ) | (6,851 | ) | |||||||||||||||||||||||
Tax benefits of compensation plans |
1,273 | 1,273 | ||||||||||||||||||||||||||
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Balance as of March 31, 2015 |
$ | 1,284 | $ | 1,331,469 | $ | (71,745 | ) | $ | (83,962 | ) | $ | 248,740 | $ | 1,425,786 | $ | 98,268 | ||||||||||||
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See notes to condensed consolidated financial statements.
7
Table of Contents
SCRIPPS NETWORKS INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | Description of Business and Basis of Presentation |
Description of Business
Scripps Networks Interactive, Inc. (the Company) operates in the media industry and has interests in national television networks and internet-based media outlets. The Companys reportable segment is lifestyle media. The lifestyle media segment includes our six national television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Lifestyle Media also includes websites that are associated with the aforementioned television brands and other internet-based businesses serving home, food and travel related categories.
We also have established lifestyle media brands internationally. Our lifestyle-oriented channels are available in the United Kingdom (UK), other European markets, the Middle East and Africa (EMEA), Asia-Pacific (APAC) and Latin America.
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. These unaudited condensed consolidated financial statements and the related notes hereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations, comprehensive income, cash flows and shareholders equity include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results and outcomes may differ materially from managements estimates and assumptions.
Interim results are not necessarily indicative of the results that may be expected for any future interim periods or for a full year.
Reclassifications
Certain amounts in the operating activities section of our condensed consolidated 2014 statement of cash flows have been reclassified to conform with current year presentation. During 2015, amounts totaling $2.6 million previously reported within stock and deferred compensation plans have been reclassified to other, net. Amounts totaling $23.0 million previously reported within accrued employee compensation and benefits have been reclassified to other liabilities. Additionally, amounts totaling $20.3 million previously reported in other liabilities have been reclassified to customer deposits and unearned revenue. These reclassifications did not have an impact on the reported cash provided by operating activities in our condensed consolidated statements of cash flows for the three months ended March 31, 2014.
8
Table of Contents
2. | Shareholders Equity and Earnings per Share |
Basic earnings per share (EPS) is calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding, including participating securities outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential issuance of common shares. We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS.
The following table presents information about basic and diluted weighted average shares outstanding:
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Weighted average shares outstanding: |
||||||||
Basic |
131,259 | 146,322 | ||||||
Dilutive effect of equity awards |
683 | 1,118 | ||||||
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|
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Diluted weighted average shares outstanding |
131,942 | 147,440 | ||||||
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Anti-dilutive share awards |
337 | 313 | ||||||
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|
For 2015 and 2014, we had stock options that were anti-dilutive and accordingly were not included in the computation of diluted weighted average shares outstanding.
9
Table of Contents
3. | Accounting Standards Updates |
In April 2015, the FASB issued new accounting guidance related to cloud computing fees, Customers Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on the accounting for fees paid in a cloud computing arrangement. Under the new standard, customers will apply the same criteria as vendors to determine whether such an arrangement contains a software license or is solely a service contract. The guidance is effective for us in the first quarter of 2016 and early adoption is permitted. We have elected to adopt this guidance effective for the second quarter of 2015 and it is not expected to have a material effect on our condensed consolidated financial statements.
In April 2015, the FASB updated accounting guidance related to interest, Imputation of Interest, which provides guidance on the presentation of debt issuance costs in financial statements. To simplify presentation of debt issuance costs, debt issuance costs related to a recognized debt liability are required to be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuances costs are not affected by the update. The update is effective for us in the first quarter of 2016 and requires retrospective application at the time of implementation. The adoption of the update is not expected to have a material effect on our condensed consolidated financial statements.
In May 2014, the FASB issued new accounting guidance on revenue recognition, Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the standard. The standard would be effective for us in the first quarter of 2017. In April 2015, the FASB issued an exposure draft that would delay the effective date of the standard one year to the first quarter of 2018. We are currently evaluating the new guidance to determine the impact it will have on our condensed consolidated financial statements and related disclosures and have not yet selected a transition approach to implement the standard.
4. | Acquisitions |
TVN On March 14, 2015 the Company, through a wholly-owned subsidiary, entered into a definitive agreement to purchase a controlling interest in TVN for cash consideration of 584 million Euros. Additionally, the Company will assume 840 million Euros in debt. TVN is one of the leading media companies in Poland, with a portfolio of free-to-air and pay TV lifestyle and entertainment channels, including TVN, TVN 7, TVN Style, TTV, TVN Turbo as well as Polands leading 24 hour news channel, TVN24, and business news channel TVN24 Biznes i Swiat. Also included within TVN is TVN Media, Polands leading advertising sales house.
The agreement is subject to regulatory approvals and will result in an initial ownership of 52.7% of TVN. Following completion of the acquisition, the Company will also launch a mandatory public tender offer for a minimum total ownership of 66%, as required under Polish law, to further increase its ownership interest.
The transaction is expected to be completed during the third quarter of 2015, subject to customary closing conditions, including regulatory approvals. We anticipate funding for the deal will be generated by accessing the public debt market and from borrowings against our Competitive Advance and Revolving Credit Facility (the Facility). To minimize the volatility in the TVN purchase price that may result from Euro to U.S. Dollar currency exchange rate changes, we entered into a foreign currency option contract during the first quarter that effectively sets the U.S. Dollar cash consideration for the transaction. We paid a $16 million premium to provide the Company a call option on 584 million Euros at a cost of $625 million. The foreign currency option contract will be settled on June 30, 2015. The gross notional value of the option contract totaled $628 million at March 31, 2015. The fair value change of $0.7 million at March 31, 2015 is included within miscellaneous, net in our condensed consolidated statements of operations.
During the first quarter of 2015, we incurred transaction related costs of $10.2 million associated with the pending acquisition of this controlling interest in TVN. These costs reduced net income attributable to SNI by $6.3 million.
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5. | Voluntary Early Retirement Program and Employee Termination Costs |
During the fourth quarter of 2014 we provided qualified employees with voluntary early retirement packages and notified employees of the elimination of certain positions within the Company. We also announced that the Company will be closing its Cincinnati, OH office location in late 2015 and will be relocating certain positions to our Knoxville, TN headquarters. Our first quarter 2015 operating results include $5.4 million for severance, retention, relocation, benefit costs and accelerated depreciation that were incurred as a result of these programs, and net income attributable to SNI was reduced by $3.3 million.
The following table summarizes the aforementioned activity:
(in thousands) |
||||
Liability as of December 31, 2014 |
$ | 14,072 | ||
Net accruals |
5,372 | |||
Payments |
(10,718 | ) | ||
Noncash (1) |
(473 | ) | ||
|
|
|||
Liability as of March 31, 2015 |
$ | 8,253 | ||
|
|
(1) | Amount represents the reclassification of accelerated depreciation included in current period charges. |
6. | Investments |
Investments consisted of the following:
As of | ||||||||
(in thousands) |
March 31, 2015 |
December 31, 2014 |
||||||
Equity-method investments |
$ | 407,508 | $ | 431,612 | ||||
Cost-method investments |
31,732 | 31,732 | ||||||
|
|
|
|
|||||
Total investments |
$ | 439,240 | $ | 463,344 | ||||
|
|
|
|
Investments accounted for using the equity method include the following:
As of | ||||||||
March 31, 2015 |
December 31, 2014 |
|||||||
UKTV |
50.00 | % | 50.00 | % | ||||
HGTV Canada |
33.00 | % | 33.00 | % | ||||
Food Canada |
29.00 | % | 29.00 | % | ||||
Fox-BRV Southern Sports Holdings |
7.25 | % | 7.25 | % | ||||
HGTV Magazine JV |
50.00 | % | 50.00 | % | ||||
Food Network Magazine JV |
50.00 | % | 50.00 | % |
UKTV receives financing through loans provided by us. These loans, totaling $111 million and $116 million at March 31, 2015 and December 31, 2014, respectively, and are reported within other non-current assets on our condensed consolidated balance sheets effectively act as a revolving facility for UKTV. As a result of this financing arrangement and the level of equity investment at risk, we have determined that UKTV is a variable interest entity (VIE). Our maximum exposure to losses due to the participation of the VIE is limited to the amount of loans outstanding. SNI and its partner in the venture share equally in the profits of the entity, have equal representation on UKTVs board of directors and share voting control in such matters as approving annual budgets, initiating financing arrangements and changing the scope of the business. However, our partner maintains control over certain operational aspects of the business related to programming content, scheduling and the editorial and creative development of UKTV. Additionally, certain key management personnel of UKTV are employees of our partner. Since we do not control these activities that are critical to UKTVs operating performance, we have determined that we are not the primary beneficiary of the entity and account for the investment under the equity method of accounting. The Companys investment in UKTV was $359 million and $377 million at March 31, 2015 and December 31, 2014, respectively.
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A portion of the purchase price from our 50% investment in UKTV was attributed to amortizable intangible assets, which are included in the carrying value of our UKTV investment. Amortization recorded on these intangible assets reduces our equity in earnings recognized from the UKTV investment. Estimated amortization that will reduce the Companys equity in UKTVs earnings for each of the next five years is expected to be $12.3 million for the remainder of 2015 and $14.3 million in 2016, 2017, 2018 and 2019.
We regularly review our investments to determine if there have been any other-than-temporary declines in value. These reviews require management judgments that often include estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred. We evaluate, among other factors, the extent to which costs exceed fair value, the duration of the decline in fair value below carrying value and the current cash position, earnings and cash forecasts and near term prospects of the investee. No impairments were recognized on any of our investments in the first quarter of 2015 or 2014.
In the second quarter of 2015, the Company acquired a ten percent non-controlling interest in Refinery29, a web-based media site whose focus is female millennial audiences, for $30 million. The investment is expected to be accounted for under the cost method of accounting.
7. | Fair Value Measurement |
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified in one of three categories described below.
| Level 1 Quoted prices in active markets for identical assets or liabilities. |
| Level 2 Inputs, other than quoted market prices in active markets, that are observable either directly or indirectly. |
| Level 3 Unobservable inputs based on our own assumptions. |
The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2015:
(in thousands) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 27,009 | $ | 27,009 | ||||||||||||
Derivative asset |
16,718 | | $ | 16,718 | | |||||||||||
Investments |
22,791 | 22,791 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value |
$ | 66,518 | $ | 49,800 | $ | 16,718 | ||||||||||
Liabilities: |
||||||||||||||||
Derivative liability |
$ | 667 | | $ | 667 | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Temporary equity: |
||||||||||||||||
Redeemable non-controlling interests |
$ | 98,268 | | | $ | 98,268 | ||||||||||
|
|
|
|
|
|
|
|
The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2014:
(in thousands) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 738,090 | $ | 738,090 | | | ||||||||||
Derivative asset |
86 | | $ | 86 | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value |
$ | 738,176 | $ | 738,090 | $ | 86 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Temporary equity: |
||||||||||||||||
Redeemable non-controlling interest |
$ | 96,251 | | | $ | 96,251 | ||||||||||
|
|
|
|
|
|
|
|
Derivatives include freestanding foreign currency forward contracts which are marked to market at each reporting period. We classify our foreign currency forward contracts as Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
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We determine the fair value of the redeemable non-controlling interest using a combination of a discounted cash flow valuation model and a market approach that applies revenues and EBITDA estimates against the calculated multiples of comparable companies. Operating revenues and EBITDA are key assumptions utilized in both the discounted cash flow valuation model and the market approach. The selected discount rate of approximately 11% is also a key assumption in our discounted cash flow valuation model (Refer to Note 12Redeemable Non-controlling Interests and Non-controlling Interest for additional information).
The following table summarizes the activity for account balances whose fair value measurements are estimated utilizing level 3 inputs:
Redeemable Non-controlling Interests | ||||||||
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Beginning period balance |
$ | 96,251 | $ | 133,000 | ||||
Addition to non-controlling interest |
700 | | ||||||
Redeemable non-controlling interest fair value adjustment |
1,081 | | ||||||
Dividends paid to non-controlling interest |
| (5,250 | ) | |||||
Net income attributable to non-controlling interests |
236 | 3,920 | ||||||
|
|
|
|
|||||
End period balance |
$ | 98,268 | $ | 131,670 | ||||
|
|
|
|
The net income amounts reflected in the table above are reported within net income attributable to non-controlling interests in our condensed consolidated statements of operations.
Other Financial Instruments - The carrying values of our financial instruments do not materially differ from their estimated fair values as of March 31, 2015 and December 31, 2014 except for debt, which is disclosed in Note 9 - Debt.
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8. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets consisted of the following:
As of | ||||||||
(in thousands) |
March 31, 2015 |
December 31, 2014 |
||||||
Goodwill |
$ | 572,047 | $ | 573,119 | ||||
|
|
|
|
|||||
Other intangible assets: |
||||||||
Amortizable intangible assets: |
||||||||
Carrying amount: |
||||||||
Acquired network distribution rights |
584,639 | 586,687 | ||||||
Customer lists |
94,524 | 94,669 | ||||||
Copyrights and other trade names |
66,595 | 66,782 | ||||||
Acquired rights and other |
120,227 | 120,227 | ||||||
|
|
|
|
|||||
Total carrying amount |
865,985 | 868,365 | ||||||
|
|
|
|
|||||
Accumulated amortization: |
||||||||
Acquired network distribution rights |
(165,405 | ) | (157,847 | ) | ||||
Customer lists |
(72,896 | ) | (71,870 | ) | ||||
Copyrights and other trade names |
(20,923 | ) | (20,046 | ) | ||||
Acquired rights and other |
(24,401 | ) | (22,721 | ) | ||||
|
|
|
|
|||||
Total accumulated amortization |
(283,625 | ) | (272,484 | ) | ||||
|
|
|
|
|||||
Total other intangible assets, net |
582,360 | 595,881 | ||||||
|
|
|
|
|||||
Total goodwill and other intangible assets, net |
$ | 1,154,407 | $ | 1,169,000 | ||||
|
|
|
|
Amortization expense associated with intangible assets for each of the next five years is expected to be as follows:
(in thousands) |
Amortization | |||
Remainder of 2015 |
$ | 35,117 | ||
2016 |
45,685 | |||
2017 |
44,469 | |||
2018 |
44,215 | |||
2019 |
43,187 | |||
Later years |
369,687 | |||
|
|
Activity related to goodwill by business segment was as follows:
(in thousands) |
Lifestyle Media |
Corporate and other |
Total | |||||||||
Goodwill: |
||||||||||||
Balance as of December 31, 2014 |
$ | 510,484 | $ | 62,635 | $ | 573,119 | ||||||
Foreign currency translation adjustment |
| (1,072 | ) | (1,072 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance as of March 31, 2015 |
$ | 510,484 | $ | 61,563 | $ | 572,047 | ||||||
|
|
|
|
|
|
The carrying amount of goodwill in our lifestyle media segment includes accumulated impairments of $44.4 million at March 31, 2015 and December 31, 2014.
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9. | Debt |
Debt consisted of the following:
As of | ||||||||
(in thousands) |
March 31, 2015 |
December 31, 2014 |
||||||
Revolving credit facility |
$ | 350,000 | $ | | ||||
3.55% senior notes due in 2015 |
| 884,994 | ||||||
2.70% senior notes due in 2016 |
499,797 | 499,766 | ||||||
2.75% senior notes due in 2019 |
498,358 | 498,269 | ||||||
3.90% senior notes due in 2024 |
496,467 | 496,376 | ||||||
|
|
|
|
|||||
Total debt |
$ | 1,844,622 | $ | 2,379,405 | ||||
Current portion of debt |
| (884,994 | ) | |||||
|
|
|
|
|||||
Debt (less current portion) |
$ | 1,844,622 | $ | 1,494,411 | ||||
|
|
|
|
|||||
Fair value of debt* |
$ | 1,885,160 | $ | 2,409,995 | ||||
|
|
|
|
* | The fair value of the senior notes were estimated using level 2 inputs comprised of quoted prices in active markets, market indices and interest rate measurements for debt with similar remaining maturity. |
In November 2014, we completed the sale of $500 million aggregate principal amount of 2.75% Senior Notes due November 15, 2019 (the 2019 Notes) and $500 million aggregate principal amount of 3.90% Senior Notes due November 15, 2024 (the 2024 Notes). Interest is due on the 2019 Notes and 2024 Notes on May 15th and November 15th each year. Net proceeds from the issuance of these notes were utilized to pay off our $885 million 3.55% Senior Notes (the 2015 Notes) that matured on January 15, 2015.
The $885 million 2015 Notes were issued by a majority-owned subsidiary of SNI through a private placement. The 2015 Notes were guaranteed by the Company. Cox TMI, Inc. (Cox TMI), a wholly-owned subsidiary of Cox Communications, Inc. and 35% owner in the Travel Channel had agreed to indemnify us for payments made in respect of the Companys guarantee. In conjunction with the Company lending $885 million to its majority-owned subsidiary to satisfy the repayment of the 2015 Notes, Cox TMI has guaranteed the promissory note between the Company and the majority-owned subsidiary.
Our $500 million of aggregate principal amount Senior Notes mature on December 15, 2016 (the 2016 Notes) and bear interest at 2.70%. Interest is paid on the 2016 Notes on June 15th and December 15th of each year.
On March 31, 2014, we entered into the Facility that is five years and permits $650 million in aggregate borrowings and expires in March 2019. The Facility replaced our Competitive Advance and Revolving Credit Facility that collectively permitted aggregate borrowings up to $550 million and was due to expire on June 30, 2014. The Facility bears interest based on the Companys credit ratings, with drawn amounts bearing interest at LIBOR plus 100 basis points and 12.5 basis points on the aggregate Facility commitment as of March 31, 2015. The Company had outstanding borrowings of $350 million under the Facility on March 31, 2015 with a weighted-average interest rate of 1.06%. There were no outstanding borrowings under the Facility at December 31, 2014.
The Facility and all of our Senior Notes include certain affirmative and negative covenants, including the incurrence of additional indebtedness and maintenance of a maximum leverage ratio. The Company was in compliance with all covenants at March 31, 2015 and December 31, 2014.
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10. | Other Liabilities |
The following table outlines other liabilities:
As of | ||||||||
(in thousands) |
March 31, 2015 |
December 31, 2014 |
||||||
Pension and post employment benefits |
$ | 84,009 | $ | 81,012 | ||||
Deferred compensation |
44,458 | 41,096 | ||||||
Uncertain tax positions |
73,262 | 69,898 | ||||||
Other |
37,964 | 42,423 | ||||||
|
|
|
|
|||||
Other liabilities (less current portion) |
$ | 239,693 | $ | 234,429 | ||||
|
|
|
|
The other caption in the table above includes $21.9 million and $21.8 million related to obligations recognized for the purchase of intangible assets at March 31, 2015 and December 31, 2014, respectively. The other caption also includes the Real Gravity contingent consideration liability that totaled $6.0 million and $10.3 million at March 31, 2015 and December 31, 2014, respectively.
11. | Foreign Exchange Risk Management |
In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, we may enter into derivative instruments, principally forward and option foreign currency contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities and probable commitments. All of our forward contracts are designated as freestanding derivatives and are designed to minimize foreign currency exposures between the U.S. Dollar and British Pound, while our option contract is designed to hedge the U.S. Dollar and Euro. We do not enter into currency exchange rate derivative instruments for speculative purposes.
The freestanding derivative forward contracts are used to offset our exposure to the change in value of specific foreign currency denominated assets and liabilities while our option contract is used to manage the foreign currency exposure from a forecasted transaction. These derivatives are not designated as hedges, and therefore, changes in the value of these contracts are recognized currently in earnings within miscellaneous, net in our condensed consolidated statements of operations. The cash flow settlements from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The option contract premium payment is reported as an investing activity. The gross notional amount of our derivative contracts outstanding were $747 million and $124 million at March 31, 2015 and December 31, 2014, respectively.
We recognized $6.3 million of gains during the first quarter of 2015 and $2.5 million of losses during the first quarter of 2014 from these forward and option contracts, which are reported within miscellaneous, net in the condensed consolidated statements of operations. The gains and losses from these forward contracts are offset by foreign exchange transaction losses of $5.4 million and gains of $2.4 million recognized in the first quarter of 2015 and 2014, respectively. Foreign exchange transaction gains and losses are recorded within miscellaneous, net in our condensed consolidated statements of operations.
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12. | Redeemable Non-controlling Interests and Non-controlling Interest |
Redeemable Non-controlling Interests
A non-controlling interest holds a 35% residual interest in the Travel Channel. The non-controlling owner of that interest has a put option requiring us to repurchase their interest, and we have a call option to acquire their outstanding interest. The non-controlling interest holder will receive appraised value for their interest at the time either option is exercised. The put option on the non-controlling interest in the Travel Channel became exercisable on August 18, 2014, and our call option becomes exercisable on December 15, 2015.
A non-controlling interest holds a 30% residual interest in Food Network Latin America (FNLA). The owner of the non-controlling interest has a put option requiring us to repurchase their interest, and we have a call option to acquire their outstanding interest. The put option on the non-controlling interest in the FNLA becomes exercisable in 2017, and our call option becomes exercisable in 2024 or upon the occurrence of other contractual call events.
Non-controlling Interest
The Food Network is operated and organized under the terms of a general partnership (the Partnership). SNI and a non-controlling owner hold interests in the Partnership. During the fourth quarter of 2014, the Partnership agreement was extended and specifies a dissolution date of December 31, 2016. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits the Company, as holder of approximately 80% of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued, it will be required to limit its activities to windup up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.
13. | Employee Benefit Plans |
The Company offers various postretirement benefits to its employees.
The components of benefit plan expense consisted of the following:
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Interest cost |
$ | 732 | $ | 856 | ||||
Expected return on plan assets, net of expenses |
(949 | ) | (1,150 | ) | ||||
Special termination benefits |
583 | | ||||||
Amortization of net loss |
568 | 244 | ||||||
|
|
|
|
|||||
Total for defined benefit plans |
934 | (50 | ) | |||||
Supplemental executive retirement plan (SERP) |
1,105 | 945 | ||||||
Defined contribution plans |
6,285 | 6,586 | ||||||
|
|
|
|
|||||
Total |
$ | 8,324 | $ | 7,481 | ||||
|
|
|
|
Amortization of actuarial losses for the nonqualified SERP totaled $0.6 million and $0.5 million in the first quarter of 2015 and 2014, respectively
We contributed $0.1 million and $0.2 million to fund current benefit payments for the SERP during the first quarter of 2015 and 2014, respectively. We anticipate contributing $4.6 million to fund the SERPs benefit payments during the remainder of 2015. The amount, if any, we anticipate contributing to fund our Pension Plan cannot be determined at this time.
The company remeasures both plan assets and obligations on at least an annual basis.
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Executive Deferred Compensation Plan
We have an unqualified executive deferred compensation plan (Deferred Compensation Plan) that is available to certain management level employees and directors of the Company. Under the Deferred Compensation Plan, participants may elect to defer receipt of a portion of their annual compensation. The Deferred Compensation Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits. We may use corporate owned life insurance contracts held in a rabbi trust to support the plan. We have invested $41.5 million within this rabbi trust since 2012 and purchased $19.2 million of corporate owned life insurance contracts with these assets. The cash surrender value of the company owned life insurance contracts totaled $21.2 million and $20.7 million at March 31, 2015 and December 31, 2014, respectively, and is included within other assets on our condensed consolidated balance sheets. Gains or losses related to the insurance contracts are included within miscellaneous, net in our condensed consolidated statements of operations. The unsecured obligation to pay the deferred compensation, adjusted to reflect the positive or negative performance of investment measurement options selected by each participant, totaled $46.1 million and $42.8 million at March 31, 2015 and December 31, 2014, respectively, and are included within other liabilities on our condensed consolidated balance sheets.
14. | Stock Based Compensation and Share Repurchase Program |
We have a Long-Term Incentive Plan (the LTI Plan) that provides for long-term equity incentive compensation for key employees and members of the Board of Directors (the Board). A variety of discretionary awards for employees and non-employee directors are authorized under the LTI Plan, including incentive or non-qualified stock options, stock appreciation rights, restricted or nonrestricted stock units and performance awards.
In the first quarter of 2015, the Company granted 0.4 million stock options and 0.2 million restricted share units (RSUs), including performance-based restricted share units (PBRSUs). The number of shares ultimately issued for the PBRSUs depends upon the specified performance conditions attained. Share based compensation costs totaled $17.1 million and $15.1 million for the first quarter of 2015 and 2014, respectively. The fair values for share options are estimated on the date of grant using a lattice-based binomial model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.
As of March 31, 2015, $3.8 million of total unrecognized stock-based compensation expense related to stock options is expected to be recognized over a weighted-average period of 2.1 years. In addition, $27.7 million of total unrecognized stock-based compensation cost related to RSUs, including PBRSUs, is expected to be recognized over a weighted-average period of 1.8 years.
Share Repurchase Program
We have a share repurchase program (repurchase program) authorized by the Board that permits us to acquire the Companys Class A Common shares. During the first quarter of 2015, we repurchased 4.0 million shares for approximately $289 million, including repurchasing 3.0 million shares for approximately $217 million from Scripps family members. During the first quarter of 2014, we repurchased 3.1 million shares for approximately $250 million.
As of March 31, 2015, $1.2 billion remains available for repurchase under the repurchase program. All shares repurchased under the repurchase program are constructively retired and returned to unissued shares. There is no expiration date for the repurchase program, and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the repurchase program.
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15. | Comprehensive Income |
Changes in the accumulated other comprehensive income or loss (AOCI) balance by component consisted of the following for the respective period of 2015:
Three months ended March 31, |
||||||||
(in thousands) |
Currency Translation Adjustments |
Pension Liability Adjustments |
||||||
AOCI beginning period balance |
$ | (25,122 | ) | $ | (32,769 | ) | ||
|
|
|
|
|||||
Other comprehensive loss before reclassifications |
(26,735 | ) | | |||||
Amounts reclassified from AOCI |
| 664 | ||||||
|
|
|
|
|||||
Net current period other comprehensive (loss) income |
(26,735 | ) | 664 | |||||
|
|
|
|
|||||
AOCI balance as of March 31, 2015 |
$ | (51,857 | ) | $ | (32,105 | ) | ||
|
|
|
|
Amounts reported in the table above are net of income tax.
Changes in the AOCI balance by component consisted of the following for the respective period of 2014:
Three months ended March 31, |
||||||||
(in thousands) |
Currency Translation Adjustments |
Pension Liability Adjustments |
||||||
AOCI beginning period balance |
$ | 12,449 | $ | (24,978 | ) | |||
|
|
|
|
|||||
Other comprehensive income before reclassifications |
3,252 | | ||||||
Amounts reclassified from AOCI |
| 449 | ||||||
|
|
|
|
|||||
Net current period other comprehensive income |
3,252 | 449 | ||||||
|
|
|
|
|||||
AOCI balance as of March 31, 2014 |
$ | 15,701 | $ | (24,529 | ) | |||
|
|
|
|
Amounts reported in the table above are net of income tax.
Amounts reclassified to net earnings for pension liability adjustments relate to the amortization of actuarial losses. These amounts are included within selling, general and administrative in our condensed consolidated statement of operations and totaled $1.2 million and $0.8 million, for the first quarter of 2015 and 2014, respectively (see Note 13 - Employee Benefit Plans for additional information).
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16. | Segment Information |
The Companys operating segments are determined based upon our management and internal reporting structure. We manage our operations through one reportable operating segment, lifestyle media.
Lifestyle media includes our six national television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Lifestyle media also includes websites that are associated with the aforementioned television brands and other internet-based businesses serving home, food and travel related categories. The Food Network and Cooking Channel are included in the Food Network Partnership, of which we own approximately 69%. We also own 65% of Travel Channel. Each of our networks is distributed by cable and satellite distributors and telecommunication service providers. Lifestyle media earns revenue primarily from the sale of advertising time and from affiliate fees paid by distributors of our content.
The results of businesses not separately identified as reportable segments are included within our corporate and other caption. Corporate and other includes the results of the lifestyle-oriented channels we operate in EMEA, APAC and Latin America, operating results from the international licensing of our national networks programming and other interactive and digital business initiatives that are not associated with our lifestyle media or international businesses.
In the fourth quarter of 2014, we made changes to our management reporting structure related to operating results from our uLive business. In conjunction with this change in our reporting structure, we now report the results of uLive within the lifestyle media reportable segment rather than within the corporate and other caption. For comparability purposes, prior year segment results have also been reclassified to reflect the impact of this management reporting change. This reclassification only affects our segment reporting, and does not change our consolidated operating revenues, operating income or net income.
Each of our businesses may provide advertising, programming or other services to one another. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits and other shared services, are allocated to our businesses. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the businesses.
Our chief operating decision maker evaluates the operating performance of our businesses and makes decisions about the allocation of resources to the businesses using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items included in net income determined in accordance with GAAP.
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Information regarding our segments is as follows:
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Segment operating revenues: |
||||||||
Lifestyle media |
$ | 634,185 | $ | 625,095 | ||||
Corporate and other |
24,065 | 18,737 | ||||||
Intersegment eliminations |
| (83 | ) | |||||
|
|
|
|
|||||
Total operating revenues |
$ | 658,250 | $ | 643,749 | ||||
|
|
|
|
|||||
Segment profit (loss): |
||||||||
Lifestyle media |
$ | 295,785 | $ | 306,309 | ||||
Corporate and other |
(38,869 | ) | (35,575 | ) | ||||
|
|
|
|
|||||
Total segment profit |
256,916 | 270,734 | ||||||
Depreciation and amortization of intangible assets |
(28,590 | ) | (31,294 | ) | ||||
(Losses) gains on disposal of property and equipment |
(2,516 | ) | 152 | |||||
Interest expense, net |
(12,967 | ) | (12,431 | ) | ||||
Equity in earnings of affiliates |
18,945 | 22,261 | ||||||
Miscellaneous, net |
5,531 | 273 | ||||||
|
|
|
|
|||||
Income from operations before income taxes |
$ | 237,319 | $ | 249,695 | ||||
|
|
|
|
|||||
As of | ||||||||
(in thousands) |
March 31, 2015 |
December 31, 2014 |
||||||
Assets: |
||||||||
Lifestyle media |
$ | 2,892,099 | $ | 2,864,089 | ||||
Corporate and other |
1,043,525 | 1,803,543 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,935,624 | $ | 4,667,632 | ||||
|
|
|
|
No single customer provides more than 10% of our revenues.
Assets held by our businesses outside of the United States totaled $582 million and $590 million at March 31, 2015 and December 31, 2014, respectively.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and the notes to the condensed consolidated financial statements. This discussion and analysis should be read in conjunction with those condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This discussion and the information contained in the notes to the condensed consolidated financial statements contain certain forward-looking statements that are based on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers tastes; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words believe, expect, anticipate, estimate, intend and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty. We undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.
OVERVIEW
Scripps Networks Interactive (the Company) is one of the leading developers of lifestyle-oriented content for linear and interactive video platforms including television and the internet with respected, high-profile brands. Our businesses engage audiences and efficiently serve advertisers by delivering entertaining and highly useful content that focuses on specifically defined topics of interest.
We seek to engage audiences that are highly desirable to advertisers with entertaining and informative lifestyle content that is produced for television, the internet and any other media platforms consumers choose. We intend to expand and enhance our lifestyle brands through creating popular new programming and content, distributing on various platforms, such as mobile phones, tablets and video-on-demand, licensing of content and branded consumer products and increasing our international footprint.
We manage our operations through our reportable operating segment, lifestyle media. Lifestyle media includes our national television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Lifestyle media also includes websites that are associated with the aforementioned television brands and other internet-based businesses serving home, food and travel related categories.
Our businesses earn revenue from advertising sales, affiliate fees and ancillary sales, including the licensing of content and consumer products. Programming expenses, employee costs and sales and marketing expenses are our primary operating costs.
Lifestyle media generated revenues of approximately $634 million in the first quarter of 2015, which represented 96 percent of our consolidated revenues, compared with $625 million and 97 percent in the first quarter of 2014. Lifestyle media generates revenue principally from the sale of advertising time on national television networks and interactive media platforms and from affiliate fees paid by cable and television systems, telecommunication service providers and other distributors that carry our network programming. Advertising revenues for lifestyle media may be affected by the strength of advertising markets and general economic conditions and may also fluctuate depending on the success of our programming, as measured by viewership at any given time, and by seasonality. Lifestyle media also earns revenue from the licensing of content to third parties and brands for consumer products, such as videos, books, kitchenware and tools.
Programming expense, employee costs, and sales and marketing expenses are the primary operating costs of our lifestyle media segment. Program amortization represented 47 percent of lifestyle media expenses in the first quarter of 2015, reflecting our continued investment in the improved quality and variety of programming on our networks. We incur sales and marketing expenses to support brand-building initiatives at all of our television networks.
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We also have established lifestyle media brands internationally. Our lifestyle-oriented channels are available in the United Kingdom (UK), other European markets, the Middle East and Africa (EMEA), Asia-Pacific (APAC) and Latin America. The results for our international businesses are not separately identified as a reportable segment and are included within our corporate and other segment caption. We currently broadcast 22 channels reaching approximately 148 million cumulative subscribers under the HGTV, DIY, Food Network, Asian Food Channel (AFC), Fine Living and Travel Channel brands. Our broadcast channels are distributed in 30 languages with channel feeds customized according to language in more than 176 countries and territories. In addition to the broadcast networks, we also license a portion of our programming to other broadcasters that can be seen in over 220 countries and territories.
Our international businesses generated revenues of $24.1 in the first quarter of 2015, which represented 3.7 percent of our consolidated revenues compared with $18.7 million and 2.9 percent in the first quarter of 2014. These businesses earn revenues from advertising sales, affiliate fees and the licensing of programming to third parties. In the first quarter of 2015, revenues from advertising sales, affiliate fees and program licensing were approximately 28 percent, 46 percent and 26 percent, respectively, of total revenue for our international businesses. Satellite transmission fees, programming expenses, employee costs, and sales and marketing expenses are the primary operating costs for our international businesses.
The growth of our international business, both organically and through acquisitions and joint ventures, has been, and continues to be a strategic priority of the Company. In the first quarter of 2015, we announced the intent to acquire a controlling interest in Polish television operator TVN. TVN is one of the leading media companies in Poland, with a portfolio of free-to-air and pay TV lifestyle and entertainment channels, including TVN, TVN 7, TVN Style, TTV, TVN Turbo as well as Polands leading 24 hour news channel, TVN24, and business news channel TVN24 Biznes i Swiat. Also included within TVN is TVN Media, Polands leading advertising sales house.
In the fourth quarter of 2014, we launched HGTV in Singapore. In the third quarter of 2014, we launched of Food Network in Brazil. In the first quarter of 2014, we launched the Fine Living Network in Italy on digital terrestrial television.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used could materially change the financial statements. We believe the accounting for Programs and Program Licenses, Revenue Recognition, Acquisitions, Goodwill, Finite-Lived Intangible Assets and Income Taxes to be our most critical accounting policies and estimates. A detailed description of these accounting policies is included in the Critical Accounting Policies and Estimates section of Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes in those accounting policies.
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RESULTS OF OPERATIONS
The competitive landscape in our business is affected by multiple media platforms competing for consumers and advertising dollars. We strive to create popular programming that resonates with viewers across a variety of demographic groups, develop brands and create new media platforms through which we can capitalize on the audiences we aggregate.
Consolidated results of operations were as follows:
Three months ended March 31, |
||||||||||||
(in thousands) |
2015 | 2014 | Change | |||||||||
Operating revenues |
$ | 658,250 | $ | 643,749 | 2.3 | % | ||||||
Operating expenses: |
||||||||||||
Cost of services, excluding depreciation and amortization of intangible assets |
199,147 | 181,138 | 9.9 | % | ||||||||
Selling, general and administrative |
202,187 | 191,877 | 5.4 | % | ||||||||
Depreciation and amortization of intangible assets |
28,590 | 31,294 | (8.6 | )% | ||||||||
Losses (gains) on disposal of property and equipment |
2,516 | (152 | ) | 1,755.3 | % | |||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
432,440 | 404,157 | 7.0 | % | ||||||||
|
|
|
|
|
|
|||||||
Operating income |
225,810 | 239,592 | (5.8 | )% | ||||||||
Interest expense, net |
(12,967 | ) | (12,431 | ) | 4.3 | % | ||||||
Equity in earnings of affiliates |
18,945 | 22,261 | (14.9 | )% | ||||||||
Miscellaneous, net |
5,531 | 273 | 1,926.0 | % | ||||||||
|
|
|
|
|
|
|||||||
Income from operations before income taxes |
237,319 | 249,695 | (5.0 | )% | ||||||||
Provision for income taxes |
(71,249 | ) | (76,906 | ) | (7.4 | )% | ||||||
|
|
|
|
|
|
|||||||
Net income |
166,070 | 172,789 | (3.9 | )% | ||||||||
Net income attributable to noncontrolling interests |
(42,227 | ) | (44,493 | ) | (5.1 | )% | ||||||
|
|
|
|
|
|
|||||||
Net income attributable to SNI |
$ | 123,843 | $ | 128,296 | (3.5 | )% | ||||||
|
|
|
|
|
|
The increase in operating revenues for the first quarter of 2015 reflects a slight percent increase in advertising revenues and a 4.1 percent increase in affiliate fee revenues. Advertising revenues at our lifestyle media segment increased $0.5 million in the first quarter of 2015 compared with the first quarter of 2014. Slight increases in both pricing and number of advertising units sold were partially offset by under delivery of audience impressions. Affiliate fee revenues at our lifestyle media segment increased $7.7 million, or 4.0 percent, in the first quarter of 2015 compared with the first quarter of 2014. The increase in affiliate fee revenues was primarily due to contractual rate increases. Revenues from our international businesses also increased $5.3 million, or 28 percent, in the first quarter of 2015 compared with the first quarter of 2014, primarily reflecting increases in programming licensing revenues.
Cost of services, which consists of program amortization and the costs associated with distributing our content, increased 9.9 percent in the first quarter of 2015 compared with the respective period in 2014. Program amortization attributed to our continued investment in the improved quality and variety of programming at our networks represents the largest expense and is the primary driver of fluctuations in cost of services. Program amortization increased $21.7 million in the first quarter of 2015 compared with 2014. Additionally, cost of services for the first quarter of 2015 includes a $1.5 million charge for severance, retention and benefit costs incurred related to employee reduction programs that were initiated in the fourth quarter of 2014.
Selling, general and administrative expenses, which primarily consists of sales and marketing expenses and employee costs, increased 5.4 percent in the first quarter of 2015 compared with the respective period in 2014. Transaction related costs of $10.2 million incurred as a result of our pending acquisition of a controlling interest in TVN and severance, retention and benefit costs of $3.4 million incurred related to the employee reduction programs initiated in the fourth quarter of 2014 contributed to the increase in selling, general and administrative expenses in the first quarter of 2015 compared with the same period of 2014.
Interest expense, net primarily reflects the interest incurred on our outstanding borrowings. For 2015 and 2014, our outstanding borrowings included $500 million aggregate principal amount Senior Notes that bear interest at 2.70%. In November 2014, we issued $500 million aggregate principal amount Senior Notes that bear interest at 2.75% and mature on November 15, 2019, and $500 million aggregate principal amount of 3.90% Senior Notes due November 15, 2024. We also had $885 million of 3.55% Senior Notes outstanding throughout 2014 that matured and were repaid on January 15, 2015. Interest expense increased in the first quarter of 2015 compared with the first quarter of 2014 due to higher average debt levels.
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Equity in earnings of affiliates represents the proportionate share of net income or loss from each of our equity method investments. Included in equity in earnings of affiliates is our proportionate 50% share of results from UKTV. Amortization expense attributed to intangible assets recognized upon acquiring our interest in UKTV reduces equity in earnings we recognize from the UKTV investment. Accordingly, equity in earnings of affiliates includes our $11.1 million proportionate share of UKTVs results in the first quarter of 2015 and $12.2 million in the first quarter of 2014, which were reduced by amortization of $4.2 million and $4.8 million in the first quarter of 2015 and 2014, respectively.
We recognized foreign exchange gains of $0.9 million and foreign exchange losses of $0.1 million in the first quarter of 2015 and 2014, respectively. These gains and losses, reported within miscellaneous, net in our condensed consolidated statements of operations, relate to realized and unrealized foreign exchange on the Companys foreign denominated asset and liability balances.
Our effective income tax rate was 30.0 percent in the first quarter of 2015 compared to 30.8 percent in the first quarter of 2014.
Non-controlling owners hold a 31 percent interest in the Food Network Partnership, a 35 percent interest in the Travel Channel and a 30 percent interest in our Food Network Latin America international operation. The non-controlling owners proportionate share of these businesses results are captured within net income attributable to non-controlling interests in our condensed consolidated statements of operations.
Business Segment Results - As discussed in Note 16 - Segment Information to the condensed consolidated financial statements, our chief operating decision maker evaluates the operating performance of our businesses and makes decisions about the allocation of resources to the businesses using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items that are included in net income determined in accordance with GAAP.
Items excluded from segment profit generally result from decisions made in prior periods or by corporate executives rather than the managers of the businesses. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are, therefore, excluded from the measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from the performance measure of our business enables us to evaluate operating performance based upon current economic conditions and decisions made by the managers of those businesses in the current period.
In the fourth quarter of 2014, we made changes to our management reporting structure related to operating results from our uLive business. In conjunction with this change in our reporting structure, we now report the results of uLive within the lifestyle media reportable segment rather than within the corporate and other caption. For comparability purposes, prior year segment results have also been reclassified to reflect the impact of this management reporting change. This reclassification only affects our segment reporting and does not change our consolidated operating revenues, operating income or net income.
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Table of Contents
Information regarding the operating performance of our business segments and a reconciliation of such information to the condensed consolidated financial statements is as follows:
Three months ended March 31, |
||||||||||||
(in thousands) |
2015 | 2014 | Change | |||||||||
Segment operating revenues: |
||||||||||||
Lifestyle media |
$ | 634,185 | $ | 625,095 | 1.5 | % | ||||||
Corporate and other |
24,065 | 18,737 | 28.4 | % | ||||||||
Intersegment eliminations |
| (83 | ) | 100 | % | |||||||
|
|
|
|
|
|
|||||||
Total operating revenues |
$ | 658,250 | $ | 643,749 | 2.3 | % | ||||||
|
|
|
|
|
|
|||||||
Segment profit (loss): |
||||||||||||
Lifestyle media |
$ | 295,785 | $ | 306,309 | (3.4 | )% | ||||||
Corporate and other |
(38,869 | ) | (35,575 | ) | 9.3 | % | ||||||
|
|
|
|
|
|
|||||||
Total segment profit |
256,916 | 270,734 | (5.1 | )% | ||||||||
Depreciation and amortization of intangible assets |
(28,590 | ) | (31,294 | ) | (8.6 | )% | ||||||
(Losses) gains on disposal of property and equipment |
(2,516 | ) | 152 | 1,755.3 | % | |||||||
Interest expense, net |
(12,967 | ) | (12,431 | ) | 4.3 | % | ||||||
Equity in earnings of affiliates |
18,945 | 22,261 | (14.9 | )% | ||||||||
Miscellaneous, net |
5,531 | 273 | 1,926.0 | % | ||||||||
|
|
|
|
|
|
|||||||
Income from operations before income taxes |
$ | 237,319 | $ | 249,695 | (5.0 | )% | ||||||
|
|
|
|
|
|
Corporate and other includes the results of the lifestyle-oriented channels we operate in EMEA, APAC and Latin America, operating results from the international licensing of our national networks programming and other interactive and digital business initiatives that are not associated with our lifestyle media or international businesses. Corporate and other includes segment losses from international operations of $3.4 million in the first quarter of 2015 compared with $8.4 million in the first quarter of 2014. Corporate and other also includes transaction related costs of $10.2 million in the first quarter of 2015 that are associated with our pending acquisition of a controlling interest in TVN.
A reconciliation of segment profit to operating income determined in accordance with GAAP for each business segment follows:
Three months ended March 31, |
||||||||
(in thousands) |
2015 | 2014 | ||||||
Operating income |
$ | 225,810 | $ | 239,592 | ||||
Depreciation and amortization of intangible assets: |
||||||||
Lifestyle media |
24,652 | 26,563 | ||||||
Corporate and other |
3,938 | 4,731 | ||||||
Losses (gains) on disposal of property and equipment: |
||||||||
Lifestyle media |
3,547 | (152 | ) | |||||
Corporate and other |
(1,031 | ) | | |||||
|
|
|
|
|||||
Total segment profit |
$ | 256,916 | $ | 270,734 | ||||
|
|
|
|
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Table of Contents
Lifestyle media Lifestyle media includes six national television networks, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Lifestyle media also includes websites that are associated with the aforementioned television brands and other internet-based businesses serving home, food and travel related categories.
Operating results for lifestyle media were as follows:
Three months ended March 31, |
||||||||||||
(in thousands) |
2015 | 2014 | Change | |||||||||
Segment operating revenues: |
||||||||||||
Advertising |
$ | 428,551 | $ | 428,022 | 0.1 | % | ||||||
Network affiliate fees, net |
197,827 | 190,171 | 4.0 | % | ||||||||
Other |
7,807 | 6,902 | 13.1 | % | ||||||||
|
|
|
|
|
|
|||||||
Total segment operating revenues |
634,185 | 625,095 | 1.5 | % | ||||||||
|
|
|
|
|
|
|||||||
Segment costs and expenses: |
||||||||||||
Cost of services |
184,239 | 166,506 | 10.7 | % | ||||||||
Selling, general and administrative |
154,161 | 152,281 | 1.2 | % | ||||||||
|
|
|
|
|
|
|||||||
Total segment costs and expenses |
338,400 | 318,787 | 6.2 | % | ||||||||
|
|
|
|
|
|
|||||||
Segment profit |
$ | 295,785 | $ | 306,309 | (3.4 | )% | ||||||
|
|
|
|
|
|
|||||||
Supplemental Information:
|
||||||||||||
Program amortization |
$ | 159,051 | $ | 137,750 | ||||||||
Program payments |
195,686 | 181,299 | ||||||||||
Depreciation and amortization |
24,652 | 26,563 | ||||||||||
Capital expenditures |
7,670 | 11,184 |
The amount of advertising revenue we earn is a function of the pricing negotiated with advertisers, the number of advertising spots sold and audience impressions delivered. Advertising revenues in the first quarter of 2015 were relatively flat compared with the first quarter of 2014. Slight increases in both pricing and number of advertising units sold were partially offset by under delivery of audience impressions.
Distribution agreements with cable and satellite television systems and telecommunication service providers require distributors to pay us fees over the terms of the agreements in exchange for certain rights to distribute our content. The amount of revenue earned from our distribution agreements is dependent on the rates negotiated in the agreements and the number of subscribers that receive our networks. The increase in network affiliate fees in the first quarter 2015 compared with the first quarter of 2014 was primarily attributed to scheduled rate increases. The total number of subscribers receiving our networks from cable and satellite television operators, telecommunications providers, digital distributors and other distribution platforms decreased slightly in the first quarter of 2015 compared with the respective period of 2014.
The increase in cost of services reflects our continued investment in the improved quality and variety of programming at our networks. Program amortization increased $21.3 million in the first quarter of 2015 compared with the first quarter of 2014.
Selling, general and administrative expenses in the first quarter of 2015 compared with 2014 was relatively flat as increases in sales and marketing costs were partially offset by decreases in employee costs. Fluctuations in selling, general and administrative expenses from quarter to quarter can also be impacted by the timing of marketing campaigns.
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Table of Contents
Supplemental financial information for lifestyle media included the following:
Three months ended March 31, |
||||||||||||
(in thousands) |
2015 | 2014 | Change | |||||||||
Operating revenues by brand: |
||||||||||||
HGTV |
$ | 237,301 | $ | 227,215 | 4.4 | % | ||||||
Food Network |
217,298 | 218,973 | (0.8 | )% | ||||||||
Travel Channel |
75,917 | 79,741 | (4.8 | )% | ||||||||
DIY Network |
38,390 | 35,142 | 9.2 | % | ||||||||
Cooking Channel |
30,623 | 28,298 | 8.2 | % | ||||||||
Great American Country |
7,354 | 7,104 | 3.5 | % | ||||||||
Digital Businesses |
24,374 | 26,193 | (6.9 | )% | ||||||||
Other |
3,433 | 3,260 | 5.3 | % | ||||||||
Intrasegment eliminations |
(505 | ) | (831 | ) | (39.2 | )% | ||||||
|
|
|
|
|
|
|||||||
Total segment operating revenues |
$ | 634,185 | $ | 625,095 | 1.5 | % | ||||||
|
|
|
|
|
|
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity are cash and cash equivalents on hand, cash flows from operations, available borrowing capacity under our Competitive Advance and Revolving Credit Facility (the Facility) and access to capital markets. Advertising provides between 65 percent and 70 percent of total operating revenues, so cash flow from operating activities can be adversely affected during recessionary periods. Our cash and cash equivalents totaled $155 million at March 31, 2015 and $878 million at December 31, 2014. Our Facility permits $650 million in aggregate borrowings and expires in March 2019. There were $350 million of borrowings under the Facility at March 31, 2015. In the fourth quarter of 2014, we issued $1 billion aggregate principal amount Senior Notes whose funds were primarily used to repay the $885 million Senior Notes that matured on January 15, 2015.
Our cash flow has been used primarily to fund acquisitions and investments, develop new businesses, acquire shares of our common stock under a share repurchase program (the repurchase program), pay dividends on our common stock and repay debt. We expect cash flow from operating activities in 2015 will provide sufficient liquidity to fund our normal operations
Cash Flows
Cash and cash equivalents decreased $723 million for the three months ended March 31, 2015 and decreased $177 million for the comparable three months ended 2014. Components of these changes are discussed below in more detail.
Operating Activities Cash provided by operating activities totaled $275 million for the three months ended 2015 and $218 million for the three months ended 2014.
Segment profit generated from our business segments totaled $257 million for the first quarter of 2015 and $271 million for the first quarter of 2014. Increases in program amortization and $10.2 million of TVN transaction expenses partially offset by growth in consolidated operating revenues of 2.3 percent contributed to the decrease in segment profit in the first quarter of 2015 compared with the first quarter of 2014. Program payments exceeded the program amortization recognized in our statement of operations by $37.9 million for the first quarter of 2015 and $44.4 million for the first quarter of 2014, reducing cash provided by operating activities for these periods. Cash provided by operating activities is also impacted by payments and refunds for income taxes and payments for interest. In the first quarter of 2015, we received net income tax refunds of $35.8 million and paid interest of $16.4 million. We received net income tax refunds of $0.3 million and paid interest of $15.4 million in the first quarter of 2014.
Investing Activities Cash used in investing activities totaled $46.9 million and $10.6 million for the first quarter of 2015 and 2014, respectively and included capital expenditures of $9.4 million and $9.2 million for first quarter of 2015 and 2014, respectively.
On March 14, 2015, the Company, through a wholly-owned subsidiary, entered into a definitive agreement to purchase a controlling interest in TVN for cash consideration of 584 million Euros. Additionally, the Company will assume 840 million Euros in debt. TVN is one of the leading media companies in Poland, with a portfolio of free-to-air and pay TV lifestyle and entertainment channels. The agreement is subject to regulatory approvals and will result in an initial ownership of 52.7%. Following completion of the acquisition, the Company will also launch a mandatory public tender offer under Polish law to further increase its ownership interest. The transaction is expected to be completed during the third quarter of 2015, and we anticipate funding the transaction by accessing the public debt market and from borrowing against the Facility. To minimize the volatility in the TVN purchase price that may result from Euro to U.S. Dollar currency exchange rate changes, we entered into a foreign currency option contract during the first quarter that effectively sets the U.S. Dollar cash consideration for the transaction. We paid a $16 million premium to provide the Company a call option on 584 million Euros at a cost of $625 million. The foreign currency option contract will be settled on June 30, 2015.
A non-controlling owner holds a 35% residual interest in the Travel Channel. The non-controlling owner of that interest has a put option right requiring us to repurchase their interest, and we have a call option right to acquire their outstanding interest. The put option became exercisable on August 18, 2014, and our call option becomes exercisable on December 15, 2015. The non-controlling interest holder will receive appraised fair value for their interest following the exercise of the put or call options. As of March 31, 2015, we valued the non-controlling interest in the Travel Channel at $97.6 million.
Financing Activities Cash used in financing activities totaled $950 million and $385 million for the first quarter of 2015 and 2014, respectively.
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We have a repurchase program authorized by the Board of Directors (the Board) that permits us to acquire the Companys Class A Common shares. During the first quarter of 2015, we repurchased 4.0 million shares for approximately $289 million, including repurchasing 3.0 million shares for approximately $217 million from Scripps family members. During the first quarter of 2014, we repurchased 3.1 million shares for approximately $250 million.
As of March 31, 2015, $1.2 billion remains available for repurchase under the repurchase program. There is no expiration date for the repurchase program, and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.
The Facility permits $650 million in aggregate borrowings and expires in March 2019. During the first quarter of 2015, we borrowed $475 million and made repayments totaling $125 million under the Facility. There were $350 million of borrowings under the Facility at March 31, 2015.
In November 2014, we issued $1 billion aggregate principal amount of Senior Notes consisting of $500 million of 2.75% Senior Notes due in 2019 and $500 million of 3.90% Senior Notes due in 2024. Net proceeds from the Senior Notes were utilized for general corporate purposes including, but not limited to, the repayment on January 15, 2015 of our $885 million 3.55% Senior Notes.
We also have $500 million of 2.70% Senior Notes that mature on December 15, 2016.
Pursuant to the terms of the Food Network general partnership agreement, the Partnership is required to distribute available cash to the general partners. Cash distributions to Food Networks non-controlling interest partner were $94.9 million and $120 million in the first quarter of 2015 and 2014, respectively. Cash distributions to Travel Channels non-controlling interest were $5.3 million in the first quarter of 2014. We expect cash distributions to non-controlling interests will approximate $175 million in 2015.
We have paid quarterly dividends since our inception as a public company on July 1, 2008. During the first quarter of 2015, the Board approved an increase in the quarterly dividend rate to $0.23 per share from $0.20 per share in the first quarter of 2014. Total dividend payments to shareholders of our common stock were $29.7 million in the first quarter of 2015 and $29.3 million in the first quarter of 2014. We currently expect that quarterly cash dividends will continue to be paid in the future. However, future dividends are not guaranteed and are subject to our earnings, financial condition and capital requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to interest rates and foreign currency exchange rates. We use, or expect to use, derivative financial instruments to modify exposure to risks from fluctuations in interest rates and foreign currency exchange rates. In accordance with our policy, we do not use derivative instruments unless there is an underlying exposure, and we do not hold or enter into financial instruments for speculative trading purposes.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our commitments, earnings and cash flows, and to reduce overall borrowing costs.
We are subject to interest rate risk associated with our Facility as borrowings bear interest at LIBOR plus a spread that is determined relative to our Companys debt rating. Accordingly, the interest we pay on these borrowings is dependent on interest rate conditions and the timing of our financing needs. The Company issued $1 billion of Senior Notes in November 2014 and issued $500 million of Senior Notes in December 2011. A 100 basis point increase or decrease in the interest rate would increase or decrease the fair value of the aggregate Senior Notes by approximately $68.9 million.
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The following table presents additional information about market-risk-sensitive financial instruments:
As of March 31, 2015 | As of December 31, 2014 | |||||||||||||||
(in thousands) |
Cost Basis |
Fair Value |
Cost Basis |
Fair Value |
||||||||||||
Financial instruments subject to interest rate risk: |
||||||||||||||||
Revolving credit facility |
$ | 350,000 | $ | 350,000 | $ | | $ | | ||||||||
3.55% senior notes due in 2015 |
| | 884,994 | 885,358 | ||||||||||||
2.70% senior notes due in 2016 |
499,797 | 513,337 | 499,766 | 514,897 | ||||||||||||
2.75% senior notes due in 2019 |
498,358 | 503,868 | 498,269 | 501,792 | ||||||||||||
3.90% senior notes due in 2024 |
496,467 | 517,955 | 496,376 | 507,948 | ||||||||||||
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|
|
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Total debt |
$ | 1,844,622 | $ | 1,885,160 | $ | 2,379,405 | $ | 2,409,995 | ||||||||
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We are also subject to interest rate risk associated with the notes receivable acquired in the UKTV transaction. The notes, totaling $111 million at March 31, 2015 and $116 million at December 31, 2014, effectively act as a revolving credit facility for UKTV. The notes accrue interest at variable rates, related to either the spread over LIBOR or other identified market indices. Because the notes receivable are variable rate, the carrying amount of such note receivable is believed to approximate fair value.
The weighted-average interest rate on borrowings from the Facility was 1.06% during the first quarter of 2015.
We conduct business in various countries outside the United States, resulting in exposure to movements in foreign exchange rates when translating from the foreign local currency to the U.S. Dollar. Our primary exposure to foreign currencies is the exchange rates between the U.S. Dollar and the Canadian Dollar, the British Pound and the Euro. Reported earnings and assets may be reduced in periods in which the U.S. Dollar increases in value relative to those currencies.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or options. The change in fair value of non-designated contracts is included within miscellaneous, net in our condensed consolidated statements of operations. The gross notional value of foreign exchange rate derivative contracts were $747 million at March 31, 2015 and $124 million at December 31, 2014. A sensitivity analysis of changes in the fair value of all foreign exchange rate derivative contracts at March 31, 2015 indicates that if the U.S. Dollar strengthened/weakened by 10 percent against the British Pound and the Euro, the fair value of these contracts would increase/decrease by approximately $11.9 million and $62.8 million, respectively. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying assets being hedged. These offsetting gains and losses are not reflected in the above analysis.
The Companys management is responsible for establishing and maintaining adequate internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The companys internal control over financial reporting includes those policies and procedures that:
1. | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
2. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and |
3. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. |
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All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the companys internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the companys internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
We are involved in litigation arising in the ordinary course of business none of which is expected to result in material loss.
ITEM 1A. | RISK FACTORS |
A wide range of risks may affect our business and financial results, now and in the future; however, we consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2014 to be the most significant. There have been no material changes to the risk factors previously described in that 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no sales of unregistered equity securities during the quarter for which this report is filed.
We have a share repurchase program authorized by the Board that permits us to acquire the Companys Class A Common shares. On February 19, 2015, the Board authorized an additional $1 billion for the Companys repurchase program.
As of March 31, 2015, $1.2 billion remains available for repurchase under the repurchase program. There is no expiration date for the program, and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the repurchase program.
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The following table provides information about Company purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2015:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans Or Programs |
||||||||||||
1/1/15 - 1/31/15 |
488,896 | $ | 73.34 | 488,896 | $ | 411,643,925 | ||||||||||
2/1/15 - 2/28/15 |
3,497,379 | 72.24 | 3,497,379 | 1,159,000,248 | ||||||||||||
3/1/15 - 3/31/15 |
1,159,000,248 | |||||||||||||||
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Total |
3,986,275 | $ | 72.37 | 3,986,275 | $ | 1,159,000,248 | ||||||||||
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The number of shares repurchased during the first quarter represented 4.1% of Class A Common shares that were outstanding as of the beginning of the quarter.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
There were no defaults upon senior securities during the quarter for which this report is filed.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The information required by this item is filed as part of this Form 10-Q. See Index to Exhibits at page 35 of this Form 10-Q.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCRIPPS NETWORKS INTERACTIVE, INC. | ||||||
Dated: May 7, 2015 | BY: | /s/ Lori A. Hickok | ||||
Lori A. Hickok | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
10.32.D | Amendment No. 3 to Employment Agreement between the Company and Joseph G. NeCastro | |
10.34 | Employment Agreement between the Company and Lori. A. Hickok | |
31(a) | Section 302 Certifications | |
31(b) | Section 302 Certifications | |
32(a) | Section 906 Certifications * | |
32(b) | Section 906 Certifications * | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | This exhibit is furnished herewith but will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934. |
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