Attached files
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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, 2011
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) | |
312 Walnut Street | ||
Cincinnati, Ohio | 45202 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (513) 824-3200
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 29, 2011 there were 133,754,907 of the Registrants Class A Common shares outstanding and 34,359,113 of the Registrants Common Voting shares outstanding.
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INDEX TO SCRIPPS NETWORKS INTERACTIVE, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011
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As used in this Quarterly Report on Form 10-Q, the terms we, our, us or SNI may, depending on the context, refer to Scripps Networks Interactive, Inc., to one or more of its consolidated subsidiary companies or to all of them taken as a whole.
ITEM 1. | FINANCIAL STATEMENTS |
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
ITEM 4. | CONTROLS AND PROCEDURES |
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
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, 2010 to be the most significant and there have been no material changes.
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ITEM 2. | UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS |
There were no sales of unregistered equity securities during the quarter for which this report is filed.
Under a share repurchase program authorized by the Board of Directors on July 29, 2008, we were authorized to repurchase up to 5 million Class A Common shares. 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 program.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
There were no defaults upon senior securities during the quarter for which this report is filed.
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 E-1 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 5, 2011 |
BY: | /s/ Joseph G. NeCastro | ||||
Joseph G. NeCastro | ||||||
Chief Administrative Officer and Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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Index to Financial Information
Item |
Page | |||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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F-16 | ||||
F-16 | ||||
F-17 | ||||
F-18 | ||||
F-19 | ||||
F-21 | ||||
F-23 | ||||
F-24 | ||||
F-25 | ||||
F-26 |
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SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
( in thousands, except per share data ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 793,664 | $ | 549,897 | ||||
Accounts and notes receivable (less allowances: 2011 - $5,453; 2010 - $5,185) |
491,091 | 538,734 | ||||||
Programs and program licenses |
289,351 | 271,204 | ||||||
Other current assets |
33,330 | 86,411 | ||||||
Total current assets |
1,607,436 | 1,446,246 | ||||||
Investments |
52,281 | 48,536 | ||||||
Property and equipment, net |
247,038 | 247,601 | ||||||
Goodwill |
666,502 | 666,502 | ||||||
Other intangible assets, net |
619,188 | 632,990 | ||||||
Programs and program licenses (less current portion) |
258,715 | 252,522 | ||||||
Unamortized network distribution incentives |
78,040 | 82,339 | ||||||
Other non-current assets |
12,117 | 11,696 | ||||||
Total Assets |
$ | 3,541,317 | $ | 3,388,432 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 11,092 | $ | 10,719 | ||||
Program rights payable |
26,388 | 26,256 | ||||||
Customer deposits and unearned revenue |
31,886 | 31,377 | ||||||
Employee compensation and benefits |
29,453 | 53,557 | ||||||
Accrued marketing and advertising costs |
16,864 | 19,172 | ||||||
Other accrued liabilities |
55,259 | 68,361 | ||||||
Total current liabilities |
170,942 | 209,442 | ||||||
Deferred income taxes |
92,451 | 96,593 | ||||||
Long-term debt |
884,432 | 884,395 | ||||||
Other liabilities (less current portion) |
125,689 | 117,708 | ||||||
Total liabilities |
1,273,514 | 1,308,138 | ||||||
Redeemable noncontrolling interests |
161,522 | 158,148 | ||||||
Equity: |
||||||||
SNI shareholders equity: |
||||||||
Preferred stock, $.01 par - authorized: 25,000,000 shares; none outstanding |
||||||||
Common stock, $.01 par: |
||||||||
Class A - authorized: 240,000,000 shares; issued and outstanding: 2011 - 133,701,273 shares; 2010 - 133,288,144 shares |
1,337 | 1,332 | ||||||
Voting - authorized: 60,000,000 shares; issued and outstanding: 2011 - 34,359,113 shares; 2010 - 34,359,113 shares |
344 | 344 | ||||||
Total |
1,681 | 1,676 | ||||||
Additional paid-in capital |
1,413,051 | 1,371,050 | ||||||
Retained earnings |
502,864 | 414,972 | ||||||
Accumulated other comprehensive income (loss) |
(11,112 | ) | (11,525 | ) | ||||
Total SNI shareholders equity |
1,906,484 | 1,776,173 | ||||||
Noncontrolling interest |
199,797 | 145,973 | ||||||
Total equity |
2,106,281 | 1,922,146 | ||||||
Total Liabilities and Equity |
$ | 3,541,317 | $ | 3,388,432 | ||||
See notes to condensed consolidated financial statements.
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SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ( UNAUDITED )
( in thousands, except per share data ) | Three months ended March 31, |
|||||||
2011 | 2010 | |||||||
Operating Revenues: |
||||||||
Advertising |
$ | 323,717 | $ | 289,163 | ||||
Network affiliate fees, net |
145,437 | 136,799 | ||||||
Referral fees |
53,809 | 35,955 | ||||||
Other |
13,004 | 7,476 | ||||||
Total operating revenues |
535,967 | 469,393 | ||||||
Costs and Expenses: |
||||||||
Employee compensation and benefits |
84,982 | 71,290 | ||||||
Program amortization |
90,301 | 89,908 | ||||||
Marketing and advertising |
59,784 | 56,422 | ||||||
Other costs and expenses |
63,775 | 76,619 | ||||||
Total costs and expenses |
298,842 | 294,239 | ||||||
Depreciation, Amortization, and Losses (Gains): |
||||||||
Depreciation |
16,056 | 15,680 | ||||||
Amortization of intangible assets |
13,806 | 15,767 | ||||||
Losses (gains) on disposal of property and equipment |
16 | 148 | ||||||
Total depreciation, amortization, and losses (gains) |
29,878 | 31,595 | ||||||
Operating income |
207,247 | 143,559 | ||||||
Interest expense |
(8,615 | ) | (8,481 | ) | ||||
Equity in earnings of affiliates |
9,658 | 6,176 | ||||||
Miscellaneous, net |
224 | (597 | ) | |||||
Income from operations before income taxes |
208,514 | 140,657 | ||||||
Provision for income taxes |
63,197 | 44,875 | ||||||
Net income |
145,317 | 95,782 | ||||||
Less: net income attributable to noncontrolling interests |
44,792 | 23,324 | ||||||
Net income attributable to SNI |
$ | 100,525 | $ | 72,458 | ||||
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 |
$ | .60 | $ | .44 | ||||
Net income attributable to SNI common shareholders per diluted share of common stock |
$ | .59 | $ | .43 | ||||
See notes to condensed consolidated financial statements.
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SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )
( in thousands ) | Three months ended March 31, |
|||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 145,317 | $ | 95,782 | ||||
Depreciation and amortization of intangible assets |
29,862 | 31,447 | ||||||
Amortization of network distribution costs |
10,193 | 7,107 | ||||||
Program amortization |
90,301 | 89,908 | ||||||
Equity in earnings of affiliates |
(9,658 | ) | (6,176 | ) | ||||
Program payments |
(115,384 | ) | (86,965 | ) | ||||
Capitalized network distribution incentives |
(3,237 | ) | (1,850 | ) | ||||
Dividends received from equity investments |
5,845 | 5,523 | ||||||
Deferred income taxes |
(3,893 | ) | (7,168 | ) | ||||
Stock and deferred compensation plans |
9,022 | 6,234 | ||||||
Changes in certain working capital accounts: |
||||||||
Accounts receivable |
47,408 | (1,639 | ) | |||||
Other assets |
(2,010 | ) | 524 | |||||
Accounts payable |
331 | 22,184 | ||||||
Accrued employee compensation and benefits |
(24,513 | ) | (19,431 | ) | ||||
Accrued income taxes |
57,792 | 23,553 | ||||||
Other liabilities |
(17,679 | ) | (9,277 | ) | ||||
Other, net |
6,166 | 9,296 | ||||||
Cash provided by operating activities |
225,863 | 159,052 | ||||||
Cash Flows from Investing Activities: |
||||||||
Additions to property and equipment |
(15,430 | ) | (16,312 | ) | ||||
Purchase of noncontrolling interest |
(14,400 | ) | ||||||
Other, net |
20 | (1,222 | ) | |||||
Cash provided by (used in) investing activities |
(15,410 | ) | (31,934 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Dividends paid |
(12,633 | ) | (12,378 | ) | ||||
Dividends paid to noncontrolling interest |
(15,227 | ) | (55,642 | ) | ||||
Noncontrolling interest capital contribution |
52,804 | |||||||
Proceeds from stock options |
10,745 | 8,817 | ||||||
Other, net |
(2,083 | ) | (1,956 | ) | ||||
Cash provided by (used in) financing activities |
33,606 | (61,159 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(292 | ) | 632 | |||||
Increase (decrease) in cash and cash equivalents |
243,767 | 66,591 | ||||||
Cash and cash equivalents: |
||||||||
Beginning of year |
549,897 | 254,370 | ||||||
End of period |
$ | 793,664 | $ | 320,961 | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest paid, excluding amounts capitalized |
$ | 15,965 | $ | 167 | ||||
Income taxes paid |
2,330 | 19,312 | ||||||
See notes to condensed consolidated financial statements.
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SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS EQUITY ( UNAUDITED )
( in thousands, except share data ) | SNI Shareholders | Redeemable | ||||||||||||||||||||||||||
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interest |
Total Equity |
Noncontrolling Interests (Temporary Equity) |
||||||||||||||||||||||
Balance as of December 31, 2009 |
$ | 1,658 | $ | 1,271,209 | $ | 113,853 | $ | (3,004 | ) | $ | 151,336 | $ | 1,535,052 | $ | 113,886 | |||||||||||||
Net income (loss) |
72,458 | 27,268 | 99,726 | (3,944 | ) | |||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||
Change in foreign currency translation adjustment, net of tax of ($471) |
472 | 93 | 565 | (118 | ) | |||||||||||||||||||||||
Pension liability adjustment, net of tax of ($14) |
23 | 23 | ||||||||||||||||||||||||||
Other comprehensive income (loss) |
588 | (118 | ) | |||||||||||||||||||||||||
Total comprehensive income (loss) |
100,314 | (4,062 | ) | |||||||||||||||||||||||||
Redemption of noncontrolling interest in FLN |
(14,400 | ) | ||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value adjustments |
(9,172 | ) | (9,172 | ) | 9,172 | |||||||||||||||||||||||
Dividend paid to noncontrolling interest |
(55,642 | ) | (55,642 | ) | ||||||||||||||||||||||||
Dividends: declared and paid - $.075 per share |
(12,378 | ) | (12,378 | ) | ||||||||||||||||||||||||
Convert 120,000 Voting Shares to Class A Common Shares |
||||||||||||||||||||||||||||
Stock-based compensation expense |
5,574 | 5,574 | ||||||||||||||||||||||||||
Exercise of employee stock options: 308,324 shares issued |
3 | 8,814 | 8,817 | |||||||||||||||||||||||||
Other stock-based compensation, net: 111,542 shares issued; |
||||||||||||||||||||||||||||
80,432 shares repurchased; 927 shares forfeited |
(3,028 | ) | (3,028 | ) | ||||||||||||||||||||||||
Tax benefits of compensation plans |
1,296 | 1,296 | ||||||||||||||||||||||||||
Balance as of March 31, 2010 |
$ | 1,661 | $ | 1,283,865 | $ | 164,761 | $ | (2,509 | ) | $ | 123,055 | $ | 1,570,833 | $ | 104,596 | |||||||||||||
Balance as of December 31, 2010 |
$ | 1,676 | $ | 1,371,050 | $ | 414,972 | $ | (11,525 | ) | $ | 145,973 | $ | 1,922,146 | $ | 158,148 | |||||||||||||
Net income (loss) |
100,525 | 41,501 | 142,026 | 3,291 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||
Change in foreign currency translation adjustment, net of tax of ($40) |
359 | 114 | 473 | 83 | ||||||||||||||||||||||||
Pension liability adjustment, net of tax of ($34) |
54 | 54 | ||||||||||||||||||||||||||
Other comprehensive income (loss) |
527 | 83 | ||||||||||||||||||||||||||
Total comprehensive income (loss) |
142,553 | 3,374 | ||||||||||||||||||||||||||
Contribution by noncontrolling interest to Food Network Partnership |
52,804 | 52,804 | ||||||||||||||||||||||||||
Effect of capital contributions to Food Network Partnership |
25,368 | (25,368 | ) | |||||||||||||||||||||||||
Dividends paid to noncontrolling interest |
(15,227 | ) | (15,227 | ) | ||||||||||||||||||||||||
Dividends: declared and paid - $.075 per share |
(12,633 | ) | (12,633 | ) | ||||||||||||||||||||||||
Stock-based compensation expense |
7,126 | 7,126 | ||||||||||||||||||||||||||
Exercise of employee stock options: 314,172 shares issued |
3 | 10,742 | 10,745 | |||||||||||||||||||||||||
Other stock-based compensation, net: 177,620 shares issued; |
||||||||||||||||||||||||||||
75,862 shares repurchased; 2,801 shares forfeited |
2 | (3,406 | ) | (3,404 | ) | |||||||||||||||||||||||
Tax benefits of compensation plans |
2,171 | 2,171 | ||||||||||||||||||||||||||
Balance as of March 31, 2011 |
$ | 1,681 | $ | 1,413,051 | $ | 502,864 | $ | (11,112 | ) | $ | 199,797 | $ | 2,106,281 | $ | 161,522 | |||||||||||||
See notes to condensed consolidated financial statements.
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SCRIPPS NETWORKS INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
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 financial statements and the related notes should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in our 2010 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, cash flows, accumulated other comprehensive income (loss) 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). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results and outcomes may differ 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.
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:
( in thousands ) | Three months ended | |||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Weighted-average shares outstanding: |
||||||||
Basic |
168,426 | 166,000 | ||||||
Share options |
1,268 | 1,031 | ||||||
Diluted weighted-average shares outstanding |
169,694 | 167,031 | ||||||
Anti-dilutive share awards |
432 | 3,314 | ||||||
For 2011 and 2010, we had stock options that were anti-dilutive and accordingly were not included in the computation of diluted weighted-average shares outstanding.
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3. Accounting Standards Updates and Recently Issued Accounting Standards Updates
Recently Issued Accounting Standards Updates
In January 2010, an update was issued to the Fair Value Measurements Disclosures Topic, ASC 820, which requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. This update was effective for us on January 1, 2010, except for Level 3 reconciliation disclosures which was effective for us on January 1, 2011. The update did not have an impact on the disclosures in our condensed consolidated financial statements.
In December 2010, an update was made to the IntangiblesGoodwill and Other Topic, ASC 350, which provides guidance for all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The update modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This update become effective for us on January 1, 2011 and did not have an impact on our condensed consolidated financial statements.
4. Other Charges and Credits
Food Network Partnership noncontrolling interest - During 2010, we completed the rebranding of the Fine Living Network (FLN) to the Cooking Channel and subsequently contributed the membership interest of the Cooking Channel to the Food Network Partnership (the Partnership) in August of 2010. In accordance with the terms of the Partnership agreement, the noncontrolling interest owner was required to make a pro-rata capital contribution to maintain its proportionate interest in the Partnership. At the close of our 2010 fiscal year, the noncontrolling owner had not made the required $52.8 million contribution, and its ownership interest in the Partnership was diluted from 31 percent to 25 percent. Accordingly, for the four months following the Cooking Channel contribution, profits were allocated to the noncontrolling owner at its reduced ownership percentage, reducing net income attributed to noncontrolling interest by $8.0 million in 2010.
In February 2011, the noncontrolling owner made the $52.8 million pro-rata contribution to the Partnership and its ownership interest was returned to the pre-dilution percentage as if this pro-rata contribution had been made as of the date of the Cooking Channel contribution. The retroactive impact of restoring the noncontrolling owners interest in the Partnership increased net income attributable to noncontrolling interest $8.0 million in the first quarter of 2011. Net income attributable to SNI was decreased $4.7 million.
Travel Channel and other costs - Operating results in the first quarter of 2010 include $15.5 million of costs incurred related to the Travel Channel integration. Operating results in 2010 also include $11.0 million of marketing and legal expenses incurred to support the companys affiliate agreement renewal negotiations for Food Network and HGTV. These items reduced net income attributable to SNI $12.1 million.
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5. 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 which are 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. |
There have been no transfers of assets or liabilities between the fair value measurement classifications for the three months ended March 31, 2011. The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011:
( in thousands ) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 706,700 | $ | 706,700 | $ | $ | ||||||||||
Temporary equity: |
||||||||||||||||
Redeemable noncontrolling interests |
$ | 161,522 | $ | $ | $ | 161,522 | ||||||||||
The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2010:
( in thousands ) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 485,465 | $ | 485,465 | $ | $ | ||||||||||
Temporary equity: |
||||||||||||||||
Redeemable noncontrolling interests |
$ | 158,148 | $ | $ | $ | 158,148 | ||||||||||
We determine the fair value of the redeemable noncontrolling interests by using market data, appraised values, discounted cash flow analyses or by applying comparable market multiples to the respective businesses current forecasted results (Refer to Note 9Redeemable Noncontrolling Interests and Noncontrolling Interest for additional information).
The following table summarizes the activity for account balances whose fair value measurements are estimated utilizing level 3 inputs:
( in thousands ) | Redeemable Noncontrolling Interests | |||||||
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Beginning period balance |
$ | 158,148 | $ | 113,886 | ||||
Redemption of noncontrolling interest |
(14,400 | ) | ||||||
Net income (loss) |
3,291 | (3,944 | ) | |||||
Noncontrolling interest share of foreign currency translation |
83 | (118 | ) | |||||
Fair value adjustment |
9,172 | |||||||
Ending period balance |
$ | 161,522 | $ | 104,596 | ||||
The net income (loss) amounts reflected in the table above are reported within the net income attributable to noncontrolling interests line in our condensed consolidated statements of operations.
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6. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following:
( in thousands ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Goodwill |
$ | 666,502 | $ | 666,502 | ||||
Other intangible assets: |
||||||||
Amortizable intangible assets: |
||||||||
Carrying amount: |
||||||||
Acquired network distribution |
514,952 | 514,944 | ||||||
Customer lists |
197,907 | 197,917 | ||||||
Copyrights and other trade names |
77,477 | 78,057 | ||||||
Other |
19,908 | 19,908 | ||||||
Total carrying amount |
810,244 | 810,826 | ||||||
Accumulated amortization: |
||||||||
Acquired network distribution |
(50,150 | ) | (43,624 | ) | ||||
Customer lists |
(105,709 | ) | (99,812 | ) | ||||
Copyrights and other trade names |
(18,177 | ) | (17,497 | ) | ||||
Other |
(17,020 | ) | (16,903 | ) | ||||
Total accumulated amortization |
(191,056 | ) | (177,836 | ) | ||||
Total other intangible assets, net |
619,188 | 632,990 | ||||||
Total goodwill and other intangible assets, net |
$ | 1,285,690 | $ | 1,299,492 | ||||
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Goodwill and activity related to amortizable intangible assets by business segment were as follows:
( in thousands ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Goodwill: |
||||||||
Lifestyle Media |
$ | 510,484 | $ | 510,484 | ||||
Interactive Services |
156,018 | 156,018 | ||||||
Total goodwill |
$ | 666,502 | $ | 666,502 | ||||
( in thousands ) | ||||||||||||||||
Lifestyle Media |
Interactive Services |
Corporate | Total | |||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Balance as of December 31, 2010 |
$ | 597,938 | $ | 34,910 | $ | 142 | $ | 632,990 | ||||||||
Foreign currency translation adjustment |
4 | 4 | ||||||||||||||
Amortization |
(10,429 | ) | (3,357 | ) | (20 | ) | (13,806 | ) | ||||||||
Balance as of March 31, 2011 |
$ | 587,509 | $ | 31,553 | $ | 126 | $ | 619,188 | ||||||||
Estimated amortization expense of intangible assets for each of the next five years is as follows: $42.0 million for the remainder of 2011, $52.1 million in 2012, $46.6 million in 2013, $44.5 million in 2014, $34.6 million in 2015, $33.4 million in 2016 and $366 million in later years.
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7. Long-Term Debt
Long-term debt consisted of the following:
( in thousands ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Senior notes |
$ | 884,432 | $ | 884,395 | ||||
Fair value of long-term debt* |
$ | 905,181 | $ | 906,547 | ||||
* | Fair value was estimated based on current rates available to the Company for debt of the same remaining maturity. |
On December 15, 2009, a majority-owned subsidiary of SNI issued a total of $885 million of aggregate principal amount Senior Notes through a private placement. The Senior Notes mature on January 15, 2015 bearing interest at 3.55%. Interest is paid on the Senior Notes on January 15th and July 15th of each year. The Senior Notes are guaranteed by SNI. Cox TMI, Inc., a wholly-owned subsidiary of Cox Communications, Inc. and 35% owner in the Travel Channel has agreed to indemnify SNI for all payments made in respect of SNIs guarantee.
We have a Competitive Advance and Revolving Credit Facility (the Facility) that permits $550 million in aggregate borrowings and expires in June 2013. The Facility bears interest based upon the Companys credit ratings, with drawn amounts bearing interest at Libor plus 175 basis points and undrawn amounts bearing interest at 25 basis points. There were no outstanding borrowings under the Facility at March 31, 2011 or December 31, 2010.
The Facility and Senior Notes agreements include certain affirmative and negative covenants, including the incurrence of additional indebtedness and maintenance of a maximum leverage ratio. We were in compliance with all debt covenants as of March 31, 2011.
As of March 31, 2011, we had outstanding letters of credit totaling $1.1 million.
8. Other Liabilities
Other liabilities consisted of the following:
( in thousands ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Liability for pension and post employment benefits |
$ | 52,458 | $ | 52,583 | ||||
Deferred compensation |
18,089 | 16,193 | ||||||
Liability for uncertain tax positions |
47,044 | 42,694 | ||||||
Other |
8,098 | 6,238 | ||||||
Other liabilities (less current portion) |
$ | 125,689 | $ | 117,708 | ||||
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9. Redeemable Noncontrolling Interests and Noncontrolling Interest
Redeemable Noncontrolling Interests
As of December 31, 2009, a noncontrolling interest held an approximate 6% residual interest in our Fine Living Network (FLN). In January 2010, we reached agreement with the noncontrolling interest owner to acquire their 6% residual interest in FLN for cash consideration of $14.4 million.
A noncontrolling interest holds a 35% residual interest in the Travel Channel. The noncontrolling interest has the right to require us to repurchase their interest and we have an option to acquire their interest. The noncontrolling interest will receive the fair value for their interest at the time their option is exercised. The put option on the noncontrolling interest in the Travel Channel becomes exercisable in 2014. The call option becomes exercisable in 2015.
A noncontrolling interest holds an 11% residual interest in our international venture with Chello Zone Media. The noncontrolling interest has the right to require us to repurchase their interest and we have an option to acquire their interest. The noncontrolling interest will receive the greater of $3.4 million or fair value for their interest at the time their option is exercised. The put and call options on the noncontrolling interest in the venture become exercisable in 2012.
Our condensed consolidated balance sheets include a redeemable noncontrolling interests balance of $162 million at March 31, 2011 and $158 million at December 31, 2010.
Noncontrolling Interest
A noncontrolling interest holds a 31% residual interest in the Food Network partnership, which is comprised of the Food Network and the Cooking Channel. The partnership agreement specifies a dissolution date of December 31, 2012. If the term of the partnership is not extended prior to that date, the agreement permits the Company, as the holder of approximately 80% of the applicable votes, to reconstitute the partnership and continue its business. If the partnership is not extended or reconstituted, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.
10. Stock Based Compensation
We have a Long-Term Incentive Plan (the Plan) which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2010. The Plan provides for long-term performance compensation for key employees. A variety of discretionary awards for employees are authorized under the plan, including incentive or non-qualified stock options, stock appreciation rights, restricted or nonrestricted stock awards and performance awards.
During the first quarter of 2011, the Company granted 0.4 million stock options and 0.3 million restricted share awards, including performance share awards. The number of shares ultimately issued for the performance share awards depends upon the specified performance conditions attained. Share based compensation costs totaled $7.1 million for the first quarter of 2011 and $5.6 million for the first quarter of 2010.
Compensation costs of share options are estimated on the date of grant using a lattice-based binomial model. The weighted-average assumptions used in the model were as follows:
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Weighted-average fair value of stock options granted |
$ | 18.90 | $ | 13.73 | ||||
Assumptions used to determine fair value: |
||||||||
Dividend yield |
0.56 | % | 0.76 | % | ||||
Risk-free rate of return |
2.30 | % | 2.53 | % | ||||
Expected life of options (years) |
5.0 | 5.0 | ||||||
Expected volatility |
38.90 | % | 38.24 | % |
As of March 31, 2011, $10.7 million of total unrecognized stock-based compensation costs related to stock options is expected to be recognized over a weighted-average period of 1.8 years. In addition, $27.4 million of total unrecognized stock-based compensation cost related to restricted stock awards, including performance awards, is expected to be recognized over a weighted-average period of 1.7 years.
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11. Employee Benefit Plans
The Company offers various postretirement benefits to its employees.
The components of benefit plan expense consisted of the following:
( in thousands) | Three months ended | |||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Interest cost |
$ | 885 | $ | 761 | ||||
Expected return on plan assets, net of expenses |
(741 | ) | (610 | ) | ||||
Actuarial (gain)/loss |
16 | |||||||
Total for defined benefit plans |
160 | 151 | ||||||
Supplemental executive retirement plan (SERP) |
488 | 441 | ||||||
Defined contribution plans |
5,047 | 4,174 | ||||||
Total |
$ | 5,695 | $ | 4,766 | ||||
We contributed $0.3 million to fund current benefit payments for our nonqualified supplemental executive retirement plan (SERP) during the first quarter 2011. We anticipate contributing $1.8 million to fund the SERPs benefit payments during the remainder of fiscal 2011. We made contributions totaling $6.0 million to our SNI Pension Plan in the second quarter 2011.
12. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
( in thousands ) | Three months ended | |||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Comprehensive Income (Loss): |
||||||||
Net income |
$ | 145,317 | $ | 95,782 | ||||
Other comprehensive income (loss): |
||||||||
Currency translation, net of income tax |
556 | 447 | ||||||
Pension liability adjustments, net of income tax |
54 | 23 | ||||||
Total comprehensive income |
145,927 | 96,252 | ||||||
Comprehensive income attributable to noncontrolling interest |
44,989 | 23,299 | ||||||
Comprehensive income attributable to SNI |
$ | 100,938 | $ | 72,953 | ||||
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13. Segment Information
The Company determines its business segments based upon our management and internal reporting structure. Our reportable segments are strategic businesses that offer different products and services.
Lifestyle Media includes our national television networks, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and GAC. Lifestyle Media also includes websites that are associated with the aforementioned television brands and other Internet-based businesses, such as HGTVPro.com and FrontDoor.com, serving food, home 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 cable and satellite television systems.
Interactive Services includes our online comparison shopping service, Shopzilla, and its related online comparison shopping brands, BizRate, Beso and Tada. Our product comparison shopping services help consumers find products offered for sale on the Web by online retailers. Shopzilla also operates a Web-based consumer feedback network within the BizRate brand that collects consumer reviews of stores and products. The Interactive Services businesses earn revenue primarily from referral fees and advertising paid by participating online retailers.
Each of our segments may provide advertising, programming or other services to our other reportable segments. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits, and other shared services, are allocated to our business segments. 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 business segment. Corporate assets are primarily cash and cash equivalents, property and equipment primarily used for corporate purposes, and deferred income taxes.
Our chief operating decision maker evaluates the operating performance of our reportable segments and makes decisions about the allocation of resources to the reportable segments using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.
Information regarding our business segments is as follows:
( in thousands ) | Three months ended | |||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Segment operating revenues: |
||||||||
Lifestyle Media |
$ | 473,553 | $ | 428,564 | ||||
Interactive Services |
55,136 | 37,606 | ||||||
Corporate/intersegment eliminations |
7,278 | 3,223 | ||||||
Total operating revenues |
$ | 535,967 | $ | 469,393 | ||||
Segment profit (loss): |
||||||||
Lifestyle Media |
$ | 244,605 | $ | 186,199 | ||||
Interactive Services |
9,875 | 4,875 | ||||||
Corporate |
(17,355 | ) | (15,920 | ) | ||||
Total segment profit |
237,125 | 175,154 | ||||||
Depreciation and amortization of intangible assets |
(29,862 | ) | (31,447 | ) | ||||
Gains (losses) on disposal of property and equipment |
(16 | ) | (148 | ) | ||||
Interest expense |
(8,615 | ) | (8,481 | ) | ||||
Equity in earnings of affiliates |
9,658 | 6,176 | ||||||
Miscellaneous, net |
224 | (597 | ) | |||||
Income from operations before income taxes |
$ | 208,514 | $ | 140,657 | ||||
( in thousands ) | As of | |||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Assets: |
||||||||
Lifestyle Media |
$ | 2,660,890 | $ | 2,681,691 | ||||
Interactive Services |
255,684 | 267,190 | ||||||
Corporate |
624,743 | 439,551 | ||||||
Total assets |
$ | 3,541,317 | $ | 3,388,432 | ||||
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No single customer provides more than 10% of our total operating revenues. The Company earns international revenues from its Shopzilla business. It also earns international revenue from our national television networks programming in international markets.
14. Subsequent Event
During the second quarter of 2011, our Board of Directors approved the sale of our Shopzilla business and its related online comparison shopping brands. On April 28, 2011, we signed a definitive agreement to sell the business for consideration of approximately $165 million. Beginning in the second quarter of 2011, Shopzillas assets, liabilities and results of operations will be presented as discontinued operations within our condensed consolidated financial statements for all periods presented.
As currently proposed, we anticipate the sale will result in a pre-tax loss of $45 million to $50 million. We expect the transaction to close on or around May 31, 2011 upon satisfaction of normal and customary closing conditions.
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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. You should read this discussion and analysis in conjunction with those financial 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.
Scripps Networks Interactive is a leading lifestyle content and Internet search company with respected, high-profile television and interactive brands. Our businesses engage audiences and efficiently serve advertisers by delivering entertaining and useful content that focuses on specifically defined topics of interest.
We manage our operations through two reportable operating segments, Lifestyle Media and Interactive Services. Lifestyle Media includes our national television networks, Home and Garden Television (HGTV), Food Network, Travel Channel, DIY Network (DIY), Cooking Channel and Great American Country (GAC). We completed the rebranding of Fine Living Network (FLN) to the Cooking Channel on May 31, 2010. The Cooking Channel is a 24-hour network that explores the food content genre at a more detailed level, including expert advice and techniques. Lifestyle Media also includes websites that are associated with the aforementioned television brands and other Internet-based businesses such as HGTVPro.com and FrontDoor.com, serving food, home and travel related categories. Our Lifestyle Media branded websites consistently rank at or near the top in their respective lifestyle categories on a unique visitor basis.
Our Interactive Services operating segment includes the online comparison shopping and consumer information service, Shopzilla, and its related online comparison shopping brands, BizRate, Beso and Tada. Shopzilla sites collectively rank among the top comparison shopping websites in the United States and among the countrys top 10 general retail sites.
Operating revenues in the first quarter of 2011 increased 14 percent to $536 million compared with the same period a year ago, while segment profit for the period was $237 million compared with $175 million a year earlier, a 35 percent increase.
Lifestyle Media revenues increased 11 percent to $474 million in the first quarter of 2011 compared with the same period in 2010. Segment profit in the first quarter of 2011 was $245 million compared with $186 million in the first quarter of 2010. Segment profit in 2010 was impacted by $14.1 million of costs that were incurred for the transition of the Travel Channel business into SNI and $11.0 million of marketing and legal expenses incurred to support the companys affiliate agreement renewal negotiations for Food Network and HGTV.
For the first quarter 2011, HGTV was the 13th highest ranked ad-supported cable network. HGTVs audience ratings were level with the first quarter of 2010 and advertising sales increased 9 percent over the same period. At Food Network, prime time viewing was up 13 percent compared with the March 2010 making it the highest March prime time in Food Networks history, although total day ratings in the quarter were flat relative to the prior year. Food Network finished the first quarter as the 8th ranked ad-supported cable network in prime time. After launching in May 2010, Cooking Channel continues to grow beyond expectations. The prime time audience for the month of March improved 19 percent over the comparable period in 2010 with Fine Living, while total day viewership was up 27 percent compared with March 2010. At Travel Channel, 2010 was the highest rated year ever for the network. The network is aggressively assembling a new slate of programming for 2011 to further build on these positive ratings trends. In 2011, the network delivered the highest prime time
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audience for March in its history. Lifestyle Media continues to focus on driving ratings growth for all our national television networks through popular programming and identifying opportunities to extend our nationally recognized brands to create new revenue streams.
At Interactive Services, revenues in the first quarter of 2011 were $55.1 million compared with $37.6 million in the first quarter of 2010. The improved results are attributed to the strong operating results in Europe and to the ongoing efforts to enhance the competitive position of the online comparison shopping sites. Specifically, the company has increased consumer engagement with its websites by expanding the comprehensiveness of product search results and developing consumer-friendly page layouts. The company also has been working to increase the value of its websites as search-based marketing platforms for online retail merchants.
During the second quarter of 2011, our Board of Directors approved the sale of our Shopzilla business and its related online comparison shopping brands. On April 28, 2011, we entered into a definitive agreement to sell the business for total consideration of approximately $165 million. Beginning in the second quarter of 2011, Shopzillas assets, liabilities and results of operations will be presented as discontinued operations within our condensed consolidated financial statements for all periods presented.
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 and Combined 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, 2010. There have been no significant changes in those accounting policies.
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The trends and underlying economic conditions affecting the operating performance and future prospects differ for each of our business segments, although the competitive landscape in both segments is affected by multiple media platforms competing for consumers and advertising dollars. In our Lifestyle Media division, we strive to create popular programming that resonates across a variety of demographic groups, develop brands and create new media platforms through which we can capitalize on the audiences we aggregate. In the Interactive Services division, we attract and monetize user traffic to our websites by providing a consumer-friendly, online shopping experience and providing participating online merchants with a valued marketing alternative.
Consolidated results of operations were as follows:
( in thousands ) | Three months ended March 31, |
|||||||||||
2011 | 2010 | Change | ||||||||||
Operating revenues |
$ | 535,967 | $ | 469,393 | 14.2 | % | ||||||
Costs and expenses |
(298,842 | ) | (294,239 | ) | 1.6 | % | ||||||
Depreciation and amortization of intangible assets |
(29,862 | ) | (31,447 | ) | (5.0 | )% | ||||||
Gains (losses) on disposal of property and equipment |
(16 | ) | (148 | ) | (89.2 | )% | ||||||
Operating income |
207,247 | 143,559 | 44.4 | % | ||||||||
Interest expense |
(8,615 | ) | (8,481 | ) | 1.6 | % | ||||||
Equity in earnings of affiliates |
9,658 | 6,176 | 56.4 | % | ||||||||
Miscellaneous, net |
224 | (597 | ) | |||||||||
Income from operations before income taxes |
208,514 | 140,657 | 48.2 | % | ||||||||
Provision for income taxes |
(63,197 | ) | (44,875 | ) | 40.8 | % | ||||||
Net income |
145,317 | 95,782 | 51.7 | % | ||||||||
Net income attributable to noncontrolling interests |
(44,792 | ) | (23,324 | ) | 92.0 | % | ||||||
Net income attributable to SNI |
$ | 100,525 | $ | 72,458 | 38.7 | % | ||||||
The increase in operating revenues for the first quarter of 2011 compared with the prior-year period was due to solid growth in advertising sales and affiliate fee revenue from our national television networks. The increase in advertising sales at Lifestyle Media reflects strong pricing and sales in both our upfront and scatter market for advertising spots. The increase in affiliate fee revenues reflects the contractual rate increases at HGTV and Food Network as well as subscriber growth at all of our networks. A $17.5 million year-over-year increase in Interactive Services revenue also contributed to the increase in operating revenues. Stronger operating results in Europe and improvement in the online shopping experience for consumers and merchants contributed to the growth in Interactive Services revenues.
Costs and expenses in the first quarter of 2010 include $15.5 million of costs related to the transition of the Travel Channel business into SNI and $11.0 million of marketing and legal expenses incurred in the first quarter of 2010 to support the companys affiliate agreement renewal negotiations for Food Network and HGTV. Excluding these 2010 expenses, costs and expenses increased 12 percent in the first quarter of 2011 compared with the same quarter in 2010. An increase in employee costs from the hiring of positions held vacant since the economic downturn contributed to the increase in costs and expenses.
In December of 2009, a majority-owned subsidiary of SNI issued a total of $885 million aggregate principal amount Senior Notes through a private placement. The Senior Notes bear interest at 3.55%. We expect interest expense will be $33 million to $35 million for the full-year of 2011.
The increase in equity in earnings of affiliates reflects the growing contribution from both our Fox Southern Sports investment and the Food Network Magazine.
Our effective income tax rate was 30.3% in the first quarter of 2011 compared with 31.9% in the first quarter of 2010. The favorable decrease in our effective income tax rate during 2011 reflects the income tax effect of attributing higher income for the Food Network partnership to the noncontrolling owner. See the noncontrolling interest discussion in MD&A that follows.
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We anticipate that our effective tax rate will be approximately 31 to 33 percent for the full-year of 2011.
In August of 2010, we contributed the Cooking Channel to the Food Network partnership. At the close of our 2010 fiscal year, the noncontrolling owner had not made a required pro-rata capital contribution to the partnership and its ownership interest was diluted from 31 percent to 25 percent. Accordingly, for the four months following the Cooking Channel Contribution, profits from the partnership were allocated to the noncontrolling owner at its reduced ownership percentage. During the first quarter of 2011, the noncontrolling interest made the pro-rata contribution to the Partnership and its ownership interest was restored to 31 percent as if the contribution had been made as of the date of the Cooking Channel contribution. The retroactive impact of restoring the noncontrolling owners interest in the Partnership increased net income attributable to noncontrolling interest $8.0 million in the first quarter of 2011.
Net income attributable to noncontrolling interests increased due to the increased profitability of both the Food Network partnership and the Travel Channel. We expect net income attributable to noncontrolling interests will be $160 million to $170 million for the full-year of 2011.
Business Segment Results - As discussed in Note 13Segment Information to the condensed consolidated financial statements, our chief operating decision maker evaluates the operating performance of the reportable segments and makes decisions about the allocation of resources to the reportable segments using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.
Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. 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 our business segment performance measure enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.
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Information regarding the operating performance of our business segments and a reconciliation of such information to the condensed consolidated financial statements is as follows:
( in thousands ) | Three months ended March 31, |
|||||||||||
2011 | 2010 | Change | ||||||||||
Segment operating revenues: |
||||||||||||
Lifestyle Media |
$ | 473,553 | $ | 428,564 | 10.5 | % | ||||||
Interactive Services |
55,136 | 37,606 | 46.6 | % | ||||||||
Corporate/intersegment eliminations |
7,278 | 3,223 | ||||||||||
Total operating revenues |
$ | 535,967 | $ | 469,393 | 14.2 | % | ||||||
Segment profit (loss): |
||||||||||||
Lifestyle Media |
$ | 244,605 | $ | 186,199 | 31.4 | % | ||||||
Interactive Services |
9,875 | 4,875 | ||||||||||
Corporate |
(17,355 | ) | (15,920 | ) | 9.0 | % | ||||||
Total segment profit |
237,125 | 175,154 | 35.4 | % | ||||||||
Depreciation and amortization of intangible assets |
(29,862 | ) | (31,447 | ) | (5.0 | )% | ||||||
Gains (losses) on disposal of property and equipment |
(16 | ) | (148 | ) | (89.2 | )% | ||||||
Interest expense |
(8,615 | ) | (8,481 | ) | 1.6 | % | ||||||
Equity in earnings of affiliates |
9,658 | 6,176 | 56.4 | % | ||||||||
Miscellaneous, net |
224 | (597 | ) | |||||||||
Income from operations before income taxes |
$ | 208,514 | $ | 140,657 | 48.2 | % | ||||||
Corporate includes the operating results of the venture we formed with Chello Zone Media (Chello), operating results from the international licensing of our national networks programming, and the costs associated with our international expansion initiatives. The venture with Chello, of which we own 89 percent, was formed to launch new lifestyle-oriented channels in Europe, the Middle East and Africa.
Our continued investment in international expansion initiatives increased the segment loss at corporate by $1.9 million in the first quarter of 2011 and $1.8 million in the first quarter of 2010. International operating losses are expected to be $5 million to $10 million for the full-year of 2011.
A reconciliation of segment profit to operating income determined in accordance with accounting principles generally accepted in the United States of America is as follows:
( in thousands ) | Three months ended March 31, |
|||||||
2011 | 2010 | |||||||
Operating income |
$ | 207,247 | $ | 143,559 | ||||
Depreciation and amortization of intangible assets: |
||||||||
Lifestyle Media |
21,049 | 22,615 | ||||||
Interactive Services |
8,301 | 8,394 | ||||||
Corporate |
512 | 438 | ||||||
Losses (gains) on disposal of property and equipment: |
||||||||
Lifestyle Media |
16 | 121 | ||||||
Interactive Services |
27 | |||||||
Total segment profit |
$ | 237,125 | $ | 175,154 | ||||
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Lifestyle Media Lifestyle Media includes six national television networks and a collection of Internet businesses.
Our Lifestyle Media division earns revenue primarily from the sale of advertising time on our national networks, affiliate fees paid by cable and satellite television operators that carry our network programming, the licensing of its content to third parties, the licensing of its brands for consumer products and from the sale of advertising on our Lifestyle Media affiliated websites. Employee costs and programming costs are Lifestyle Medias primary expenses. The demand for national television advertising is the primary economic factor that impacts the operating performance of our networks.
Operating results for Lifestyle Media were as follows:
( in thousands ) | Three months ended March 31, |
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2011 | 2010 | Change | ||||||||||
Segment operating revenues: |
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Advertising |
$ | 321,759 | $ | 287,269 | 12.0 | % | ||||||
Network affiliate fees, net |
144,088 | 135,903 | 6.0 | % | ||||||||
Other |
7,706 | 5,392 | 42.9 | % | ||||||||
Total segment operating revenues |
473,553 | 428,564 | 10.5 | % | ||||||||
Segment costs and expenses: |
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Employee compensation and benefits |
59,558 | 52,864 | 12.7 | % | ||||||||
Program amortization |
89,568 | 89,497 | 0.1 | % | ||||||||
Other segment costs and expenses |
79,822 | 100,004 | (20.2 | )% | ||||||||
Total segment costs and expenses |
228,948 | 242,365 | (5.5 | )% | ||||||||
Segment profit |
$ | 244,605 | $ | 186,199 | 31.4 | % | ||||||
Supplemental Information: |
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Billed network affiliate fees |
$ | 153,964 | $ | 142,152 | ||||||||
Program payments |
114,405 | 86,965 | ||||||||||
Depreciation and amortization |
21,049 | 22,615 | ||||||||||
Capital expenditures |
9,668 | 10,962 | ||||||||||
Positive prime time audience trends and strong pricing and sales in both our upfront and scatter market for advertising spots resulted in double-digit advertising growth in the first quarter of 2011 compared with the first quarter of 2010.
Distribution agreements with cable and satellite television systems require that the distributor pay SNI affiliate fees over the terms of the agreements in exchange for our programming. The increase in network affiliate fees was primarily attributed to contractual rate increases for HGTV and Food Network. Subscriber growth at all of our networks also contributed to the increases in network affiliate fees.
We expect operating revenues at Lifestyle Media will increase 10 percent to 12 percent for the full year of 2011.
The increase in employee compensation and benefits reflects the hiring of positions held vacant since the economic downturn.
We continued our investment in the quality and variety of programming at our networks during the first quarter of 2011. Programming expenses are expected to increase 6 percent to 9 percent for the full year of 2011.
The decrease in other costs and expenses is attributed to 2010 including $14.1 million of transition costs that were incurred for the Travel Channel business and $11.0 million of marketing and legal expenses to support the companys affiliate agreement renewal negotiations for Food Network and HGTV.
Lifestyle Medias non-programming expenses for the full year of 2011 are expected to be flat to down 2 percent.
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Supplemental financial information for Lifestyle Media is as follows:
( in thousands ) | Three months ended March 31, |
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2011 | 2010 | Change | ||||||||||
Operating revenues by brand: |
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Food Network |
$ | 174,045 | $ | 151,932 | 14.6 | % | ||||||
HGTV |
171,364 | 161,617 | 6.0 | % | ||||||||
Travel Channel |
61,999 | 56,896 | 9.0 | % | ||||||||
DIY |
23,345 | 18,648 | 25.2 | % | ||||||||
Cooking Channel / FLN (1) |
15,267 | 13,784 | 10.8 | % | ||||||||
GAC |
6,464 | 6,406 | 0.9 | % | ||||||||
Digital Businesses |
19,381 | 18,043 | 7.4 | % | ||||||||
Other |
2,223 | 1,826 | 21.7 | % | ||||||||
Intrasegment eliminations |
(535 | ) | (588 | ) | (9.0 | )% | ||||||
Total segment operating revenue |
$ | 473,553 | $ | 428,564 | 10.5 | % | ||||||
Subscribers (2): |
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Food Network |
100,400 | 99,700 | 0.7 | % | ||||||||
HGTV |
99,800 | 99,000 | 0.8 | % | ||||||||
Travel Channel |
96,000 | 95,700 | 0.3 | % | ||||||||
DIY |
54,000 | 53,400 | 1.1 | % | ||||||||
Cooking Channel / FLN (1) |
57,500 | 57,000 | 0.9 | % | ||||||||
GAC |
59,800 | 58,500 | 2.2 | % | ||||||||
(1) | The Cooking Channel, a replacement for FLN, premiered on May 31, 2010. |
(2) | Subscriber counts are according to the Nielsen Homevideo Index of homes that receive cable networks. |
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Interactive Services Interactive Services includes our online comparison shopping service, Shopzilla, and its related online comparison shopping brands, BizRate, Beso and Tada.
Our product comparison shopping services help consumers find products offered for sale on the Web by online retailers. Shopzilla also operates a Web-based consumer feedback network within the BizRate brand that collects consumer reviews of stores and products.
Our Interactive Services businesses earn revenue primarily from referral fees and advertising paid by participating online retailers.
Financial information for Interactive Services is as follows:
( in thousands ) | Three months ended March 31, |
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2011 | 2010 | Change | ||||||||||
Segment operating revenues |
$ | 55,136 | $ | 37,606 | 46.6 | % | ||||||
Segment costs and expenses: |
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Employee compensation and benefits |
12,042 | 9,879 | 21.9 | % | ||||||||
Marketing and advertising |
29,775 | 19,118 | 55.7 | % | ||||||||
Other segment costs and expenses |
3,444 | 3,734 | (7.8 | )% | ||||||||
Total segment costs and expenses |
45,261 | 32,731 | 38.3 | % | ||||||||
Segment profit |
$ | 9,875 | $ | 4,875 | ||||||||
Supplemental Information: |
||||||||||||
Depreciation and amortization |
$ | 8,301 | $ | 8,394 | ||||||||
Capital expenditures |
4,241 | 5,153 | ||||||||||
With the goal of engaging consumers more deeply in the online comparison shopping experience on our websites, we have increased the comprehensiveness of product search results and introduced consumer friendly page designs and functionality. Simultaneously, we have been working to increase the value of our consumer shopping services as search-based marketing platforms for retail merchants.
Operating revenues and our segment profit margin increased in the first quarter of 2011 compared with the first quarter of 2010. The improved operating results reflect the significant expansion of Shozillas share in Europe and improvement in the online shopping experience for consumers.
During the second quarter of 2011, our Board of Directors approved the sale of our Shopzilla business and its related online comparison shopping brands. On April 28, 2011, we signed a definitive agreement to sell the business for consideration of approximately $165 million. Beginning in the second quarter of 2011, Shopzillas assets, liabilities and results of operations will be presented as discontinued operations within our condensed consolidated financial statements for all periods presented.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash and cash equivalents on hand, cash flows from operations, available borrowing capacity under our revolving credit facility, and access to capital markets. Marketing services, including advertising and referral fees, provide approximately 70 percent of total operating revenues, so cash flow from operating activities is adversely affected during recessionary periods. Information about our use of cash flow from operating activities is presented in the following table:
( in thousands ) | Three months ended March 31, |
|||||||
2011 | 2010 | |||||||
Cash provided by operating activities |
$ | 225,863 | $ | 159,052 | ||||
Dividends paid, including to noncontrolling interest |
(27,860 | ) | (68,020 | ) | ||||
Stock option proceeds |
10,745 | 8,817 | ||||||
Noncontrolling interest capital contribution |
52,804 | |||||||
Other, net |
(2,375 | ) | (1,324 | ) | ||||
Cash flow amounts available for acquisitions, investments, and debt repayment |
$ | 259,177 | $ | 98,525 | ||||
Sources and uses of available cash flow: |
||||||||
Business acquisitions and net investment activity |
20 | (15,622 | ) | |||||
Capital expenditures |
(15,430 | ) | (16,312 | ) | ||||
Increase (decrease) in cash and cash equivalents |
$ | 243,767 | $ | 66,591 | ||||
Our cash flow has been used primarily to fund acquisitions and investments, develop new businesses, and repay debt. We expect cash flow from operating activities in 2011 will provide sufficient liquidity to continue the development of brands and to fund the capital expenditures necessary to support our business.
In January 2010, we acquired the remaining 6 percent residual interest in FLN for cash consideration of $14.4 million.
In December 2009, we acquired a 65 percent controlling interest in Travel Channel through a transaction structured as a leveraged joint venture between SNI and Cox TMI, Inc., a wholly owned subsidiary of Cox Communications, Inc. (Cox). Pursuant to the terms of the transaction, Cox contributed the Travel Channel business, valued at $975 million, and SNI contributed $181 million in cash to the joint venture. The joint venture also issued $885 million aggregate principal amount of 3.55% Senior Notes due 2015 at a price equal to 99.914% of the principal amount. The Notes were guaranteed by SNI. Cox has agreed to indemnify SNI for payments made in respect of SNIs guarantee.
We have a Competitive Advance and Revolving Credit Facility (the Facility) that permits $550 million in aggregate borrowings and expires in June 2013. There were no outstanding borrowings under the Facility at March 31, 2011.
In February 2011, the noncontrolling owner in the Food Network partnership made a $52.8 million cash contribution to the partnership. Pursuant to the terms of the Food Network general partnership agreement, the partnership is required to distribute available cash to the general partners. After providing distributions to the partners for respective tax liabilities, available cash is then applied against any capital contributions made by partners prior to distribution based upon each partners ownership interest in the partnership. Cash distributions to Food Networks noncontrolling interest were $15.2 million in the first quarter of 2011 and $55.6 million in the first quarter of 2010. We expect the cash distributions to the noncontrolling interest will approximate $80 million in 2011.
We have paid quarterly dividends of $.075 per share since our inception as a public company on July 1, 2008. Total dividend payments to shareholders of our common stock were $12.6 million in the first quarter of 2011 and $12.4 million in the first quarter of 2010. We currently expect that comparable quarterly cash dividends will continue to be paid in the future. Future dividends are, however, subject to our earnings, financial condition and capital requirements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Earnings and cash flow can be affected by, among other things, economic conditions, interest rate changes, and foreign currency fluctuations.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows, and to reduce overall borrowing costs. We are subject to interest rate risk associated with our credit facility as borrowings bear interest at Libor plus 175 basis points. A majority-owned subsidiary of SNI issued $885 million of Senior Notes in conjunction with our acquisition of a controlling interest in the Travel Channel. A 100 basis point increase or decrease in the level of interest rates, respectively, would decrease or increase the fair value of the Senior Notes by approximately $31.2 million and $32.6 million, respectively.
The following table presents additional information about market-risk-sensitive financial instruments:
( in thousands ) | As of March 31, 2011 | As of December 31, 2010 | ||||||||||||||
Cost Basis |
Fair Value |
Cost Basis |
Fair Value |
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Financial instruments subject to interest rate risk: |
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3.55% notes due in 2015 |
$ | 884,432 | $ | 905,181 | $ | 884,395 | $ | 906,547 |
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 foreign currency options. We held no foreign currency derivative financial instruments at March 31, 2011.
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SNIs 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 accounting principles generally accepted in the United States of America (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. |
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 period covered by this report that have materially affected, or are reasonably likely to materially affect, the companys internal control over financial reporting.
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SCRIPPS NETWORKS INTERACTIVE, INC.
Index to Exhibits
Exhibit |
Item | |
31(a) | Section 302 Certifications (filed herewith) | |
31(b) | Section 302 Certifications (filed herewith) | |
32(a) | Section 906 Certifications * | |
32(b) | Section 906 Certifications * | |
101 | The following financial information from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed with the Securities and Exchange Commission on May 5, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Accumulated Other Comprehensive Income (Loss) and Shareholders Equity, (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. * |
* | 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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