UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2016

OR

For the transition period from                      to                     

Commission File Number 1-34004

 

SCRIPPS NETWORKS INTERACTIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (865) 694-2700

 

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  ☒    No  ☐

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

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

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 31, 2016 there were 95,257,365 of the Registrant’s Class A Common Shares outstanding and 33,850,481 of the Registrant’s Common Voting Shares outstanding.

 

 

 

 

 

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INDEX

SCRIPPS NETWORKS INTERACTIVE, INC.

 

 

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data and par value amounts)

 

 

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)

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands) 

 

See notes to condensed consolidated financial statements.

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

(in thousands, except share data)

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

As used in the notes to the condensed consolidated financial statements, the terms “SNI,” “Scripps,” “the Company,” “we,” “our,” “us” or similar terms 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.

Description of Business

SNI operates in the media industry and has interests in domestic and international television networks and internet-based media properties.

The Company has two reportable segments: U.S. Networks and International Networks. U.S. Networks includes our six domestic television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Additionally, U.S. Networks includes websites associated with the aforementioned television brands and other internet and mobile businesses serving home, food, travel and other lifestyle-related categories. U.S. Networks also includes our digital content studio, Scripps Networks Lifestyle Studio.  

International Networks includes TVN S.A. (“TVN”), which operates a portfolio of free-to-air and pay-TV lifestyle and entertainment networks in Poland, including TVN, TVN24, TVN Style, TTV, TVN Turbo, TVN24 Biznes i Świat. Also included in TVN is TVN Media, an advertising sales house. Additionally, International Networks includes the lifestyle-oriented networks available in the United Kingdom (“UK”), other European markets, the Middle East and Africa (“EMEA”), Asia Pacific (“APAC”), Latin America and the Caribbean. International Networks also includes our 50.0 percent share of the results of UKTV, a general entertainment and lifestyle channel platform in the UK.

Basis of Presentation

The condensed consolidated financial statements include the accounts of SNI and its majority-owned or controlled subsidiaries. Investments in business entities in which the Company does not have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method of accounting. 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 Annual Report on Form 10-K for the year ended December 31, 2015.

Unaudited Interim Financial Statements

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 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates, judgements and assumptions that affect the amounts and disclosures reported in the condensed consolidated financial statements and accompanying notes. 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 management’s 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

During the second quarter of 2016, the Company adopted new guidance related to the accounting for employee share-based payments. This change resulted in a reclassification in 2016 of $0.1 million of the cumulative effect from 2015 and 2014 of forfeited share-based

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payments from retained earnings to additional paid-in capital on our condensed consolidated balance sheets and our condensed consolidated statements of shareholders’ equity.  

 

 

 

Issued and Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to share-based compensation, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including forfeitures, accounting for income taxes and statutory withholding requirements. Additionally, this guidance provides clarity around presentation of items within the statements of cash flows. We adopted this guidance in the second quarter of 2016. This implementation did not have a material effect on our condensed consolidated financial statements and related disclosures.

Issued and Not Yet Adopted

In October 2016, the FASB issued new accounting guidance related to variable interest entities, Interests Held Through Related Parties Under Common Control, which amends the consolidation guidance applied to indirect interests in the entity held through related parties under common control with the reporting entity when determining whether it is the primary beneficiary of a variable interest entity. The guidance is effective for us on January 1, 2017, and early adoption is permitted. We are currently reviewing the guidance to determine any impact that its application may have on our condensed consolidated financial statements and related disclosures. We expect this assessment to be completed by the fourth quarter of 2016.

In August 2016, the FASB issued new accounting guidance related to statements of cash flows, Classification of Certain Cash Receipts and Cash Payments, which is intended to clarify existing guidance on classification issues and reduce potential diversity in practice. The guidance identifies cash flow situations whereby there has been diversity in application and provides specific guidance as to the treatment. The guidance requires retrospective application and is effective for us on January 1, 2018, and early adoption is permitted. We are currently reviewing the guidance to determine any impact that its application may have on our condensed consolidated financial statements and related disclosures. We expect this assessment to be completed by the fourth quarter of 2016.

In March 2016, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations within the new revenue recognition guidance by clarifying the indicators. This guidance updates the revenue recognition guidance issued in May 2014, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers, which 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 guidance will replace most existing revenue recognition guidance in GAAP. The guidance is effective for us on January 1, 2018, and early adoption is permitted. We are performing an assessment of the new guidance to determine the impact it will have on our condensed consolidated financial statements and related disclosures. We expect this assessment to be completed by mid-2017.

In March 2016, the FASB issued new accounting guidance related to investments, Investments – Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting, which simplifies the accounting for a transition to equity method investment of accounting as a result of an increase in level of ownership or degree of influence and eliminates the requirement to retroactively adjust the investment for all periods the investment was held. The amendments in the update require that an entity that has an available-for-sale equity security becomes qualified for the equity method of accounting if they recognize earnings through the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment qualifies for equity method treatment. The guidance is effective for us on January 1, 2017, and early adoption is permitted. We do not expect the new guidance to have a material effect on our condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued new accounting guidance related to leases, Leases, which requires the recognition of an asset and liability arising from leasing arrangements for leases extending beyond an initial period of twelve months. The guidance will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective for us on January 1, 2019, and early adoption is permitted. We are currently evaluating the new guidance to determine the impact it will have on our condensed consolidated financial statements and related disclosures. We expect this assessment to be completed by mid-2017.

In January 2016, the FASB issued new accounting guidance related to financial assets and liabilities, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments not accounted for under the equity method to be

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measured at fair value with changes recognized in net income. Additionally, the guidance simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairments, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requiring an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when an entity has elected to measure the liability at fair value, requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset either on the balance sheet or in the accompanying notes and clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance will reduce diversity in current practice. The guidance is effective for us on January 1, 2018, and early adoption is not permitted. We have evaluated the guidance and do not expect it to have a material impact on our condensed consolidated financial statements and related disclosures

 

 

3.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 share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in our basic and diluted EPS number of shares outstanding.

The following table presents information about basic and diluted weighted average shares outstanding:

 

 

For the three and nine months ended September 30, 2016 and September 30, 2015, the anti-dilutive share-based awards were not included in the computation of diluted weighted average shares outstanding.

 

 

 

On July 1, 2015 (the “Acquisition Date”), the Company, through an indirect wholly-owned subsidiary, acquired 100.0 percent of the outstanding shares of N-Vision B.V., a Dutch limited liability company (“N-Vision”) that held a majority interest in TVN, for approximately €1,440.0 million, or $1,608.6 million, comprised of cash consideration of €584.0 million, or $652.4 million, and principal amounts of debt assumed of  €856.0 million, or $956.2 million, including €556.0 million, or $621.1 million, of debt directly attributed to TVN (the “Acquisition”).  The Acquisition was funded with a portion of the net proceeds from the Company’s $1,500.0 million debt offering executed in June 2015 (the “Financing”) (see Note 10 – Debt). The majority of the remaining debt proceeds were used to purchase the residual outstanding shares of TVN through a tender offer for approximately $831.5 million (the “Tender Offer”) and a subsequent squeeze-out for approximately $22.4 million (the “Squeeze-out”), which were both completed during the third quarter of 2015. Together, the Acquisition, Tender Offer and Squeeze-out are referred to herein as the “Transactions”. Total consideration for the Transactions was approximately $2,462.5 million.

The primary purpose of the Acquisition was to obtain N-Vision’s 52.7 percent controlling interest in the voting shares of TVN, a public media company listed on the Warsaw Stock Exchange (the “WSE”).

We incurred transaction and integration related expenses of $12.0 million and $8.4 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $14.1 million and $22.8 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, associated with the Acquisition. These transaction and integration expenses are included within selling, general and administrative in our condensed consolidated statements of operations and reduced our net income attributable to SNI by $9.6 million and $5.2 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $10.9 million and $14.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

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The Acquisition was accounted for using the acquisition method of accounting, which requires, among other things, that we allocate the purchase price to the assets acquired and liabilities assumed based on their fair values as of the Acquisition Date. We have reported the results of operations for TVN in our condensed consolidated financial statements for the period beginning on the Acquisition Date.

The following table summarizes the final fair values of the assets acquired and liabilities assumed as of the Acquisition Date.

 

 

The following table represents the fair value of identifiable intangible assets and their assumed estimated useful lives.    

 

 

As a result of the Acquisition, we recognized goodwill of $1,239.6 million. The purchase price was assigned to assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition Date, and the excess was allocated to goodwill as shown in the Balance Sheet Classification table above.  Goodwill represents the value we expect to achieve through the Acquisition and is recorded in the International Networks segment. The fair value of this goodwill is not deductible for U.S. income tax purposes.

 

We utilized various valuation techniques to determine fair value, primarily discounted cash flow analyses and excess earnings valuation approaches, each of which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy (see Note 6 – Fair Value Measurement).  Under these valuation approaches, we are required to make estimates and assumptions about sales, operating

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margins, growth rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. 

 

The following unaudited pro forma information presents the combined results of operations as if the Transactions had occurred at the beginning of fiscal year 2015, combining TVN’s pre-acquisition results with our historical results. The 2016 condensed consolidated financial statements include the results of TVN for the entire period. The pro forma results contained in the following table include adjustments for amortization of acquired intangibles, depreciation expense, transaction costs, interest expense as a result of the Financing and related income taxes. Any potential cost savings or other operational efficiencies that could result from the Transactions are not included in these pro forma results. These pro forma results do not necessarily reflect what would have occurred if the Acquisition had taken place January 1, 2015, nor do they represent the results that may occur in the future.

 

 

We did not recognize any contingent consideration arising from the Transactions.

 

On June 16, 2016 we acquired a new network distribution right in Italy for €10.4 million, or approximately $11.6 million. The new distribution right was recorded as an intangible asset with a 4 year straight-line amortizable life. The acquisition of this asset is reflected as an investing activity within our condensed consolidated statements of cash flows.

 

 

 

Restructuring Plan

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 (the “Restructuring Plan”). We also announced that we would be closing our Cincinnati office location in late 2015 and relocating certain positions to our Knoxville headquarters. Our operating results do not reflect any impact for the three months ended September 30, 2016 and include $3.3 million of expense for severance, retention, benefits, relocation costs and accelerated depreciation incurred as a result of the Restructuring Plan for the three months ended September 30, 2015. As a result, net income attributable to SNI was not impacted for the three months ended September 30, 2016 and was reduced by $2.1 million for the three months ended September 30, 2015. Our operating results include a gain of $0.3 million and an expense of $14.5 million for severance, retention benefits, relocation costs and accelerated depreciation incurred as a result of the Restructuring Plan for the nine months ended September 30, 2016 and September 30, 2015, respectively. As a result, net income attributable to SNI was increased by $0.2 million and reduced by $9.0 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. The Restructuring Plan was substantially completed as of December 31, 2015.

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A rollforward of the liability related to the Restructuring charges by segment is as follows:

 

 

Reorganization

During the fourth quarter of 2015, we committed to undertaking activities intended to streamline and integrate the management of our domestic networks, creating a cohesive and holistic organization (the “Reorganization”). As part of the Reorganization, we announced we would be relocating certain employees during 2016. Our operating results include $1.5 million and $0.8 million of expense for severance, retention, benefits and relocation costs incurred as a result of the Reorganization for the three months ended September 30, 2016 and September 30, 2015, respectively. As a result, net income attributable to SNI was reduced by $0.9 million and $0.5 million for the three months ended September 30, 2016 and September 30, 2015, respectively. Our operating results include $12.7 million and $0.8 million of expense for severance, retention, benefits and relocation costs incurred as a result of the Reorganization for the nine months ended September 30, 2016 and September 30, 2015, respectively. As a result, net income attributable to SNI was reduced by $7.9 million and $0.5 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. We anticipate that the Reorganization will be completed by the end of 2016.

A rollforward of the liability related to the Reorganization charges by segment is as follows:

 

 

The liability for both the Restructuring Plan and Reorganization is included within accrued liabilities on our condensed consolidated balance sheets.  

 

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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.

There have been no transfers of assets or liabilities between the fair value measurement classifications during the periods presented.

Recurring Measurements

 

 

 

Foreign currency derivatives include free-standing 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.

At December 31, 2015, we determined the fair value of our redeemable non-controlling interest in Travel Channel 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 10.5 percent is also a key assumption in our discounted cash flow valuation model. On February 25, 2016, we agreed to pay the non-controlling interest owner $99.0 million to acquire the remaining 35.0 percent interest in Travel Channel, resulting in our 100.0 percent ownership (see Note 14 – Redeemable Non-controlling Interest and Non-controlling Interest).

Other Financial Instruments

The carrying values of our financial instruments do not materially differ from their estimated fair values as of September 30, 2016 and December 31, 2015, except for debt, which is disclosed in Note 10 – Debt, and redeemable non-controlling interests, which is disclosed in Note 14 – Redeemable Non-controlling Interests and Non-controlling Interest.

Non-Recurring Measurements

The majority of the Company’s non-financial instruments, which include goodwill, other intangible assets and property and equipment, are not required to be carried at fair value on a recurring basis; however, if certain triggering events occur, or at least

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annually for goodwill, such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of cost or fair value.

 

 

Investments consisted of the following:

 

 

Investments accounted for using the equity method include the following:

 

UKTV

 

UKTV receives financing through a loan provided by us. The loan, totaling $98.7 million and $112.1 million as of September 30, 2016 and December 31, 2015, respectively, is reported within other non-current assets on our condensed consolidated balance sheets and effectively acts as a revolving credit 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”). SNI and its partner in the venture share equally in the profits of the entity, have equal representation on UKTV’s 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, BBC Worldwide Limited, 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 UKTV’s 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. As of September 30, 2016 and December 31, 2015, the Company’s investment in UKTV was $307.5 million and $353.4 million, respectively.

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A portion of the purchase price from our 50.0 percent investment in UKTV was attributed to amortizable intangible assets, which are included in the carrying value of our UKTV investment. Amortization expense attributed to intangible assets recognized upon acquiring our interest in UKTV reduces the equity in earnings we recognize from our UKTV investment. Accordingly, equity in earnings of affiliates includes our $5.8 million and $11.3 million proportionate share of UKTV’s results for the three months ended September 30, 2016 and September 30, 2015, respectively, which were reduced by amortization of $3.2 million and $4.3 million for the three months ended September 30, 2016 and September 30, 2015, respectively. Equity in earnings of affiliates includes our $29.8 million and $35.3 million proportionate share of UKTV’s results for the nine months ended September 30, 2016 and September 30, 2015, respectively, which were reduced by amortization of $10.0 million and $12.7 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. The table below summarizes estimated amortization that we expect to reduce the Company’s equity in UKTV’s earnings for future periods:  

 

nC+

The Company, through its ownership of TVN, has an investment in nC+, which is managed under the terms of a shareholders’ agreement. The nC+ shareholders’ agreement contains various standard provisions with regards to the management of the business and related matters, as well as terms regarding disposition of ownership by either party. A portion of the purchase price from our 32.0 percent investment in nC+ was attributed to amortizable intangible assets, which are included in the carrying value of our nC+ investment. Amortization expense attributed to intangible assets recognized upon acquiring our interest in nC+ reduces the equity in earnings we recognize from our nC+ investment. The table below summarizes estimated amortization that we expect to reduce the Company’s equity in nC+’s earnings for future periods:

Fox-BRV Southern Sports Holdings

On February 24, 2016, the Company sold its 7.3 percent equity interest in Fox-BRV Southern Sports Holdings (“Fox Sports South”) to the controlling interest holder for a sale price of $225.0 million upon the exercise of the Company’s put right. The sale of this ownership interest resulted in a gain of $208.2 million for the nine months ended September 30, 2016, which is recorded in gain on sale of investments in our condensed consolidated statements of operations and as both a gain on sale of investments within operating activities and as a cash inflow from sale of investments within investing activities in our condensed consolidated statements of cash flows. Further, the gain on sale resulted in tax expense of approximately $73.6 million for the nine months ended September 30, 2016.

 

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On June 12, 2016, an investment in which the Company accounted for using the cost method was sold. The proceeds from the sale totaled $1.5 million and resulted in a $16.4 million loss recognized for the nine months ended September 30, 2016, which is recorded in gain on sale of investments in our condensed consolidated statements of operations and as both a gain on sale of investments within operating activities and as a cash inflow from sale of investments within investing activities in our condensed consolidated statements of cash flows.

 

During the third quarter of 2016, the Company, through TVN, notified the controlling interest holder of Onet that it is exercising its rights under the put option of its agreement. Discussions are currently ongoing regarding the value of the Company’s interest and the associated timing of finalization. The Company expects this process to result in resolution and execution by the end of 2016.  

 

During the third quarter 2016, the Company invested $5.0 million in Pluto TV, which has been accounted for as a cost method investment. Additionally, the Company invested another $4.7 million in Refinery29 earlier in 2016.

 

 

Activity related to goodwill by business segment consisted of the following:

 

 

Intangible assets consisted of the following:

 

 

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Amortization expense associated with intangible assets for each of the next five years is expected to be as follows:

 

 

 

The following table outlines the details within other accrued liabilities:

 

 

 

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Debt consisted of the following:

 

 

Revolving Credit Facility

In March 2014, we entered into a five-year revolving credit facility (the “Facility”) that permitted $650.0 million in aggregate borrowings with an expiration date of March 2019. In May 2015, we entered into the Amended Revolving Credit Facility (the “Amended Revolving Credit Facility”) to amend the Facility. The Amended Revolving Credit Facility provides $250.0 million additional revolving loan capacity, which increased permitted borrowings up to an aggregate principal amount of $900.0 million and may be increased to $1,150.0 million at our option. Additionally, the Amended Revolving Credit Facility extended the maturity date of the Facility to March 2020, with the exception of $32.5 million, which remains scheduled to mature in March 2019.

Borrowings under the Amended Revolving Credit Facility incur interest charges based on the Company’s credit rating, with drawn amounts incurring interest at LIBOR plus a range of 69 to 130 basis points, and a facility fee ranging from 6 to 20 basis points, also subject to the Company’s credit ratings.

The Company had no outstanding borrowings during the quarter or as of September 30, 2016. Outstanding letters of credit totaled $0.8 million under the Amended Revolving Credit Facility at September 30, 2016. There were outstanding borrowings of $389.2 million and outstanding letters of credit of $1.1 million under the Amended Revolving Credit Facility at December 31, 2015.

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Term Loan

In June 2015, we entered into a $250.0 million senior unsecured Term Loan (the “Term Loan”) agreement.  The Term Loan has a maturity date in June 2017, with outstanding borrowings incurring interest at LIBOR plus a range of 62.5 to 137.5 basis points, subject to the Company’s credit ratings. The weighted average interest rate on the Term Loan was 1.57% for the three months ended September 30, 2016. The Term Loan is classified within current portion of debt on our condensed consolidated balance sheets.

Senior Notes

Our $500.0 million aggregate principal amount of 2.70% Senior Notes mature in December 2016 (the “2016 Notes”). Interest is paid on the 2016 Notes on June 15 and December 15 of each year. The balance outstanding on the 2016 Notes is classified within current portion of debt on our condensed consolidated balance sheets.

On September 20, 2016, TVN Finance Corporation III AB (“TVN Finance Corp.”), an indirect, wholly-owned subsidiary of the Company, executed a third partial pre-payment of the 2020 TVN Notes totaling €45.1 million, comprised of principal of €43.0 million, accrued but unpaid interest of €0.8 million and premium of €1.3 million.

 

Debt Issuance Costs

 

Amounts capitalized and included as a reduction against debt on our condensed consolidated balance sheets included $16.3 million, net of current portion, of debt issuance costs as of September 30, 2016 and $20.4 million, net of current portion, as of December 31, 2015. Debt issuance costs related to the Amended Revolving Credit Facility of $1.2 million are included within other non-current assets on our condensed consolidated balance sheets. We amortized $1.6 million and $10.0 million of debt issuance and debt discount costs for the three months ended September 30, 2016 and September 30, 2015, respectively, net within interest expense in our condensed consolidated statements of operations. We amortized $5.2 million and $11.9 million of debt issuance and debt discount costs for the nine months ended September 30, 2016 and September 30, 2015, respectively, within interest expense, net in our condensed consolidated statements of operations.

Debt Covenants

The Amended Revolving Credit Facility, the Term Loan, all of our Senior Notes and the 2020 TVN Notes include certain affirmative and negative covenants, including limitations on the incurrence of additional indebtedness and maintenance of a maximum leverage ratio.

 

 

The Company offers various post-retirement benefits to its employees, including a defined benefit pension plan (the “Pension Plan”) and a non-qualified supplemental employee retirement plan (the “SERP”). The SERP, which is unfunded, provides defined pension benefits, in addition to what is provided under the Pension Plan, to eligible executives based on average earnings, years of service and age at retirement.

In 2009, the Pension Plan was amended whereby no additional service benefits will be earned by participants after December 31, 2009. The amount of eligible compensation that is used to calculate a plan participant’s pension benefit will continue to include any compensation earned by the employee through December 31, 2019, after which time all plan participants will have a frozen pension benefit.

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The components of the Pension Plan and SERP expense consisted of the following:

 

 

In the fourth quarter of 2014, we announced the Restructuring Plan, providing each affected employee the benefit of an additional three years of credited service related to the applicable Pension Plan and SERP for which they qualify (see Note 5 – Employee Termination Programs). The special termination benefits charge represents the cost of providing these additional benefits to the employees retiring under the terms of the Restructuring Plan.

We did not make any contributions to fund the Pension Plan during the three months ended September 30, 2016 or September 30, 2015. We made a contribution of $10.0 million to fund the Pension Plan during the nine months ended September 30, 2016 and did not make any contributions during the nine months ended September 30, 2015.

We made $2.9 million and $1.7 million in SERP benefit payments for the three months ended September 30, 2016 and September 30, 2015, respectively, and $4.6 million and $2.5 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. We anticipate an additional $1.0 million in SERP benefit payments during the remainder of 2016.

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 use corporate-owned life insurance contracts held in a rabbi trust to support the plan. We had investments within this rabbi trust valued at $45.0 million, including $28.2 million of cash surrender value of Company-owned life insurance contracts and $16.8 million held in mutual funds, at September 30, 2016. We had investments within this rabbi trust valued at $42.8 million, including $27.0 million of cash surrender value of Company-owned life insurance contracts and $15.8 million held in mutual funds, at December 31, 2015. These mutual funds are valued using Level 1 and Level 2 inputs. These instruments are included within other non-current assets on our condensed consolidated balance sheets. Gains or losses related to these insurance contracts are included within miscellaneous, net in our condensed consolidated statements of operations. The unsecured obligation to pay the deferred compensation, including deferred directors’ fees, adjusted to reflect the positive or negative performance of investment measurement options selected by each participant, totaled $3.9 million and $3.6 million at September 30, 2016 and December 31, 2015, respectively, and is included within employee compensation and benefits on our condensed consolidated balance sheets, as well as $47.7 million and $42.0 million at September 30, 2016 and December 31, 2015, respectively, which is included within other non-current liabilities on our condensed consolidated balance sheets.

 

 

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The following table outlines the details within other liabilities:

 

 

 

In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, on occasion we 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. We do not enter into currency exchange rate derivative instruments for speculative purposes.  

The free-standing derivative forward contracts are used to offset our exposure to the change in value of specific foreign currency denominated assets and liabilities. These derivatives are not designated as hedges. Changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in functional currency value of foreign currency denominated assets and liabilities. The gross notional amount of these contracts outstanding was zero and $118.6 million at September 30, 2016 and December 31, 2015, respectively. The cash flow settlements from these derivative contracts are primarily reported within investing activities in the condensed consolidated statements of cash flows. 

We recognized $2.8 million and $4.1 million of net gains from these forward contracts for the three months ended September 30, 2016 and September 30, 2015, respectively, and $13.8 million and $47.2 million of net gains from these forward contracts for the nine months ended September 30, 2016 and September 30, 2015, respectively, included within gain on derivatives in the condensed consolidated statements of operations. Additionally, we have foreign exchange transaction gains of $19.3 million and $17.0 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and foreign exchange transaction gains of $4.9 million and losses of $35.3 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, which are included within miscellaneous, net in our condensed consolidated statements of operations.

 

 

Redeemable Non-controlling Interests

A non-controlling owner previously held a 35.0 percent residual interest in the Travel Channel. The owner of the non-controlling interest had a put option requiring us to purchase their interest, and we had a call option to acquire their interest. We exercised our call option and executed a contract on February 25, 2016, for an agreed upon price of $99.0 million. We now own 100.0 percent of Travel Channel.

 

In September 2016 we reached an agreement with the owner of the non-controlling interest in Food Network Latin America (“FNLA”) to purchase their interest in the entity for $4.5 million.  This transaction is expected to be completed in the fourth quarter of 2016. 

 

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The following table summarizes the activity for account balances whose fair value measurements are estimated utilizing Level 3 inputs:

 

 

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.

Non-controlling Interest

The Food Network and Cooking Channel are operated and organized under the terms of a general partnership (the “Partnership”). The Company and a non-controlling owner hold interests in the Partnership. During the fourth quarter of 2016, the Partnership agreement was extended and specifies a dissolution date of December 31, 2020. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits the Company, as holder of 80.0 percent 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 winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.

 

 

Capital Stock

SNI’s capital structure includes Common Voting Shares and Class A Common Shares. Our Amended and Restated Articles of Incorporation provide that the holders of Class A Common Shares, who are not entitled to vote on any other matters except as required by Ohio law, are entitled to elect the greater of three or one-third of the directors. The Common Voting Shares and Class A Common Shares have equal dividend distribution rights.

Incentive Plans

The Scripps Networks Interactive, Inc. 2015 Long-Term Incentive Plan (the “2015 LTI Plan”) provides for long-term equity incentive compensation for key employees and members of the Company’s Board of Directors (the “Board”). The 2015 LTI Plan authorizes the grant of equity-based compensation to non-employee directors, officers and other key employees in the form of incentive or non-qualified stock options, stock appreciation rights, restricted shares, restricted stock units (“RSUs”), performance shares, performance-based restricted stock units (“PBRSUs”) and other share-based awards and dividend equivalents. The Company has reserved 8.0 million Class A Common Shares for issuance under the 2015 LTI Plan.

The 2015 LTI Plan will remain in effect until February 2025, unless terminated sooner by the Board. Termination will not affect outstanding grants and awards. The 2015 LTI Plan replaced the Scripps Networks Interactive, Inc. 2008 Long-Term Incentive Plan (the “Prior LTI Plan”), and no further awards will be made under the Prior LTI Plan; however, awards granted under the Prior LTI Plan remain outstanding in accordance with their terms.

We satisfy stock option exercises and vested stock awards with newly-issued shares. Shares available for future share compensation grants totaled 6.7 million at September 30, 2016.

During the nine months ended September 30, 2016, the Company granted 0.6 million stock options and 0.6 million RSUs, including PBRSUs under the 2015 LTI Plan. During the nine months ended September 30, 2015, the Company granted 0.4 million stock options and 0.3 million RSUs, including PBRSUs. The number of shares ultimately issued for PBRSUs will depend upon performance compared to specified metrics. The fair values for stock options are estimated on the grant date using a lattice-based binomial model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

Share-based compensation was as follows:

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Unrecognized share-based compensation expense was as follows as of September 30, 2016:

 

Share Repurchase Programs

We have share repurchase programs (“Repurchase Programs”) authorized by the Board that permit us to acquire the Company’s Class A Common Shares. We did not repurchase any shares during the three months ended September 30, 2016 and September 30, 2015, respectively, and we did not repurchase any shares for the nine months ended September 30, 2016. During the nine months ended September 30, 2015, we repurchased 4.0 million shares for approximately $288.5 million, including 3.0 million shares repurchased for approximately $216.8 million from Scripps family members.

As of September 30, 2016, $1,512.5 million in authorization remains available for repurchase under the Repurchase Programs. All shares repurchased under the Repurchase Programs are retired and returned to authorized and unissued shares. There is no expiration date for the Repurchase Programs, and we are under no commitment or obligation to repurchase any particular amount of Class A Common Shares under the Repurchase Programs.

 

 

Changes in the accumulated other comprehensive income or loss (“AOCI”) balance by component consisted of the following:

 

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Amounts reported in the table above are net of income tax.

Amounts reclassified to net earnings for Pension Plan and SERP liability adjustments relate to the amortization of actuarial losses. These amounts are included within selling, general and administrative in our condensed consolidated statements of operations and totaled $1.2  million and $1.1 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $3.2 million and $3.5 million for the nine months ended September 30, 2016 and September 30, 2015, respectively (see Note 11 - Employee Benefit Plans).

 

 

The Company’s operating segments are determined based upon our management and internal reporting structure.  

The Company has two reportable segments: U.S. Networks and International Networks. 

U.S. Networks includes our six domestic television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Additionally, U.S. Networks includes websites associated with the aforementioned television brands and other internet and mobile businesses serving home, food, travel and other lifestyle-related categories. U.S. Networks also includes our digital content studio, Scripps Networks Lifestyle Studio. The Food Network and Cooking Channel are included in the Partnership, of which we own 68.7 percent. Each of our networks is distributed by cable and satellite distributors, telecommunication service providers and certain non-linear providers, such as those providing streaming or on-demand services. U.S. Networks earns revenue primarily from the sale of advertising time and from distribution fees paid by distributors of our content. U.S. Networks also earns revenue from licensing of content to third parties and of brands for consumer products, such as videos, books, kitchenware and tools.

International Networks includes the TVN lifestyle-oriented networks as well as those available in the UK, EMEA, APAC and Latin America. International Networks also includes our 50.0 percent share of the results of UKTV, a general entertainment and lifestyle channel platform in the UK.

Corporate and Other includes the results of businesses not separately identified as reportable segments for external financial reporting purposes and will continue to be disclosed separately from the results of U.S. Networks and International Networks. The Company generally does not allocate employee-related corporate overhead costs to its reportable segments, but rather classifies these expenses within Corporate and Other.

Intersegment revenue eliminations are included in Corporate and Other and totaled $6.4 million and $3.5 million for the three months ended September 30, 2016 and September 30, 2015, respectively, and $19.5 million and $13.3 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

Our Chief Operating Decision Maker (“CODM”), whom we have identified as our Chief Executive Officer, evaluates the operating performance of our businesses and makes decisions about the allocation of resources to the businesses using a measure we refer to as 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:

 

 

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No single customer provides more than 10.0 percent of our revenues.

Assets held by our businesses and physically located outside of the United States totaled $3,093.4 million and $3,238.2 million at September 30, 2016 and December 31, 2015, respectively.

 

 

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MANAGEMENT’S 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, and include, without limitation, statements relating to future cash flow from operating activities, the payment of future dividends and the anticipated timing of the completion of the Reorganization as well as statements expressing general views about our future operating results from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include, without limitation, changes in advertising demand and other economic conditions; consumers’ tastes; program costs; labor relations; technological developments; risks related to the integration of TVN and international operations; competitive pressures; interest rates; regulatory rulings; reliance on third-party vendors for various products and services; and other risk factors described in our annual report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) and other filings with the Securities and Exchange Commission. 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 as of which the statement is made.

OVERVIEW

We are a global media company with respected high-profile brands and are a leading developer of lifestyle-oriented content providing primarily home, food and travel-related programming via multiple methods of distribution including television, the internet, digital platforms and licensing arrangements. The SNI portfolio of networks includes HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country within and outside the United States, and Fine Living, AFC and TVN’s portfolio of networks outside the United States. 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 by producing entertaining and informative lifestyle content. We intend to expand and enhance our lifestyle brands by: creating popular new programming and content; extending distribution on various platforms, such as over-the-top services, mobile devices, on-demand services and online streaming; licensing of content to third parties and of brands for consumer products; and increasing our international footprint. We have a large library of content which we produced and own the rights to indefinitely, enabling us to exploit original content quickly and/or repackage content in an expedited and cost effective manner.

The Company has two reportable segments: U.S. Networks and International Networks.

The Company’s focus is on strengthening our linear networks and expanding reach, including in both digital and international. As part of our effort to expand in the digital market, we launched Scripps Networks Lifestyle Studio in the fourth quarter of 2015, which is included in U.S. Networks.

The growth of our international business, through acquisition and joint ventures as well as organically, has been, and continues to be, a strategic priority for the Company. In the second quarter of 2016, we launched HGTV as a free-to-air channel in New Zealand as a first of its kind offering in the region. During 2015, we completed the acquisition of TVN S.A., a Polish media company, which operates a portfolio of 13 free-to-air and pay-TV lifestyle and entertainment networks; launched Travel Channel as a 24/7 free-to-air channel in the UK; expanded distribution of Food Network across Latin America and HGTV in Asia-Pacific; launched Food Network in Australia in partnership with Special Broadcasting Service (“SBS”); and secured a large volume output deal with Nine in Australia to launch Food Network and HGTV-branded blocks on newly-launched 9LIFE, Australia’s first free-to-air lifestyle network.

Consolidated operating revenues increased $27.0 million, or 3.5 percent, while consolidated operating income decreased $13.1 million, or 4.8 percent, for the three months ended September 30, 2016 compared with the same period in 2015, driven by programming related expenses. Consolidated income from operations before income taxes increased $19.4 million, or 8.2 percent, for the three months ended September 30, 2016 compared with the same period in 2015, primarily driven by $19.3 million of foreign currency transaction gains in 2016 compared with $17.0 million of foreign currency transaction losses in the same period in 2015 and a reduction in interest expense as a result of less debt outstanding in 2016.

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Consolidated operating revenues increased $346.3 million, or 16.0 percent, and consolidated operating income increased $92.0 million, or 11.1 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, both driven primarily by the inclusion of TVN for the full nine month period in 2016 compared with only three months in 2015. Consolidated income from operations before income taxes increased $246.3 million, or 29.2 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, primarily driven by a $208.2 million gain recognized on the sale of our 7.3 percent equity interest in Fox Sports South in the first quarter of 2016, partially offset by a $16.4 million loss recognized on the sale of a cost investment in the second quarter of 2016. This $191.8 net increase was further offset by a reduction of $33.3 million in gain on derivatives for the nine months ended September 30, 2016, primarily as a result of exercising our call option on €584.0 million to fund the Acquisition last year and incremental debt service costs this year associated with the Financing obtained in the second quarter of 2015 for the Transactions, as well as the assumed debt of TVN.

Although the international business experienced growth, primarily through the acquisition of TVN as noted above, U.S. Networks continues to account for the majority of the Company’s performance. U.S. Networks generated operating revenues of $686.3 million, representing 85.5 percent of consolidated operating revenues, for the three months ended September 30, 2016 compared with $660.9 million, representing 85.1 percent of consolidated operating revenues, for the three months ended September 30, 2015. U.S. Networks generated operating revenues of $2,140.8 million, representing 85.2 percent of consolidated operating revenues, for the nine months ended September 30, 2016 compared with $2,014.9 million, representing 93.0 percent of consolidated operating revenues, for the nine months ended September 30, 2015. The reduced contribution of U.S. Networks’ operating revenues as a percentage of consolidated operating revenues for the nine months ended September 30, 2016 compared with the same period in 2015 was primarily driven by the acquisition of TVN in the third quarter of 2015.

International Networks generated operating revenues of $123.2 million, representing 15.3 percent of consolidated operating revenues, for the three months ended September 30, 2016 compared with $118.7 million, representing 15.3 percent of consolidated operating revenues, for the three months ended September 30, 2015. International Networks generated operating revenues of $391.6 million, representing 15.6 percent of consolidated operating revenues, for the nine months ended September 30, 2016 compared with $164.9 million, representing 7.6 percent of consolidated operating revenues, for the nine months ended September 30, 2015. The year-over-year increase of International Networks’ operating revenues as a percentage of consolidated operating revenues for the nine months ended September 30, 2016 compared with the same period in 2015 was primarily driven by the acquisition of TVN in the third quarter of 2015.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with 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 the 2015 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, acquisitions, goodwill, finite-lived intangible assets, income taxes and revenue recognition 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2015 Form 10-K. We adopted one accounting standard during the nine months ended September 30, 2016 related to the accounting for share-based compensation (see Note 2 – Accounting Standards Updates).

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 lifestyle-oriented programming that resonates with viewers across a variety of demographic groups by developing relatable content through strong brands that engage audiences.

 

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Consolidated Results of Operations

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

 

 

NM designates the change is not meaningful

Consolidated operating revenues increased $27.0 million, or 3.5 percent, for the three months ended September 30, 2016 compared with the same period in 2015, with growth in advertising revenues, partially offset by a slight decline in distribution revenues.

Advertising revenues increased $28.6 million, or 5.4 percent, for the three months ended September 30, 2016 compared with the respective period in 2015, driven by strong pricing and improved ratings at U.S. Networks during the quarter. Advertising revenues are affected by the strength of advertising markets and general economic conditions and fluctuate based on the success of our programming, as measured by viewership, and seasonality. The amount of advertising revenue we earn is a function of pricing negotiated with advertisers, number of advertising spots sold and audience impressions delivered.

Distribution revenues decreased $3.2 million, or 1.4 percent, for the three months ended September 30, 2016 compared with the respective period in 2015, driven by a rate equalization resulting from the consolidation of certain distributor agreements, partially offset by negotiated contractual rate increases and revenues generated from new over-the-top and non-linear entrants, such as those providing streaming or on-demand services. Distribution agreements with cable and satellite distributors 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.

Cost of services, which consists of program amortization and the costs associated with distributing our content, increased $28.1 million, or 10.4 percent, for the three months ended September 30, 2016 compared with the same period in 2015, primarily driven by additional investments in programming. Program amortization, which represents the largest expense and is the primary driver of fluctuations in cost of services, increased $27.6 million, or 13.5 percent, for the three months ended September 30, 2016 compared with the respective period in 2015, reflecting our continued investment in the improved quality and variety of programming on our networks. Cost of services also included $1.0 million of Reorganization costs incurred during the three months ended September 30, 2016.

Selling, general and administrative, which primarily consists of employee costs, marketing and advertising expenses, administrative costs and costs of facilities, increased $7.2 million, or 3.7 percent, for the three months ended September 30, 2016 compared with the same period in 2015. The year-over-year increase was driven by $12.0 million of TVN transaction and integration related expenses

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and $0.5 million of Reorganization costs incurred during the three months ended September 30, 2016, partially offset by $8.4 million of TVN and transaction and integration related expenses, $2.6 million of costs related to the Restructuring Plan and $0.8 million of Reorganization costs incurred during the three months ended September 30, 2015.

Amortization of intangible assets, which reflects the expense associated with intangible assets primarily identified through business acquisitions, increased $2.8 million, or 12.4 percent, for the three months ended September 30, 2016 compared with the same period in the prior year, primarily driven by the Acquisition.

Interest expense, net primarily reflects the interest incurred on our outstanding borrowings. Interest expense, net decreased $17.8 million, or 35.3 percent, for the three months ended September 30, 2016 compared with the same period in the prior year, driven by less debt outstanding at the end of the third quarter of 2016.

We increased our borrowing activity in the second quarter of 2015 to generate funds necessary to complete the Transactions. The additional activity resulted in the following debt as of September 30, 2016, including $1,500.0 million of Senior Notes issued in June 2015, comprised of the 2020 Notes, the 2022 Notes and the 2025 Notes, as well as the $250.0 million Term Loan. Also outstanding as of September 30, 2016 were the 2016 Notes, the 2019 Notes and the 2024 Notes. We also assumed debt as part of the Acquisition, including the 2020 TVN Notes for which a portion was repaid in 2015 and 2016, with the remainder outstanding (See Note 10 – Debt). Interest expense, net also includes interest income of $1.2 million and $1.3 million related to the UKTV note for the three months ended September 30, 2016 and 2015, respectively.

Equity in earnings of affiliates, which represents the proportionate share of net income or loss from each of our equity method investments, decreased $14.9 million, or 63.8 percent, for the three months ended September 30, 2016 compared with the same period in the prior year, primarily driven by the sale of our 7.3 percent equity interest in Fox Sports South in the first quarter of 2016. Included in equity in earnings of affiliates, representing a significant component of the balance, is our 50.0 percent proportionate share of results from UKTV. Amortization expense attributed to intangible assets recognized upon acquiring our interest in UKTV reduces the equity in earnings we recognize from our UKTV investment. Accordingly, equity in earnings of affiliates includes our $5.8 million and $11.3 million proportionate share of UKTV’s results for the three months ended September 30, 2016 and September 30, 2015, respectively, which were reduced by amortization of $3.2 million and $4.3 million for the three months ended September 30, 2016 and September 30, 2015, respectively.

Miscellaneous, net represented a $21.3 million addition to operating income during the three months ended September 30, 2016 compared with a $9.5 million loss in the same period in the prior year, primarily driven by $19.3 million of foreign currency transaction gains for the three months ended September 30, 2016 compared with $17.0 million of foreign currency transaction losses in the same period in 2015.

Our effective income tax rate was 29.5 percent for the third quarter of 2016 compared with 31.5 percent for the same period in 2015. The favorable variance in the year-over-year tax rate was primarily driven by an increase in the tax benefits resulting from differences in the U.S. statutory rate and that of foreign jurisdictions, partially offset by an overall decrease in the tax benefits associated with equity earnings recognized for the three months ended September 30, 2016.

 

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Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

Consolidated operating revenues increased $346.3 million, or 16.0 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, with growth in both advertising and distribution revenues.

Advertising revenues increased $308.9 million, or 21.1 percent, for the nine months ended September 30, 2016 compared with the respective period in 2015, driven by the inclusion of TVN for the full nine month period in 2016, strong pricing and improved ratings at U.S. Networks during the quarter.

Distribution revenues increased $24.1 million, or 3.7 percent, for the nine months ended September 30, 2016 compared with the respective period in 2015, driven by the inclusion of TVN for the full nine month period in 2016, negotiated contractual rate increases and revenues generated from new over-the-top and non-linear entrants, such as those providing streaming or on-demand services, partially offset by a rate equalization resulting from the consolidation of certain distributor agreements.

Cost of services increased $200.5 million, or 30.2 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, primarily driven by the inclusion of TVN for the full nine month period in 2016 and additional investments in programming. Program amortization, which represents the largest expense and is the primary driver of fluctuations in cost of services, increased $147.0 million, or 27.9 percent, for the nine months ended September 30, 2016 compared with the respective period in 2015, reflecting our continued investment in the improved quality and variety of programming on our networks as well as the inclusion of TVN. Cost of services also included $4.0 million of Reorganization costs incurred during the nine months ended September 30, 2016 and $2.6 million of costs related to the Restructuring Plan incurred during the nine months ended September 30, 2015.

Selling, general and administrative increased $16.4 million, or 2.9 percent, for the nine months ended September 30, 2016 compared with the same period in 2015. The year-over-year increase was driven by the inclusion of TVN for the full nine month period in 2016, $14.1 million of TVN transaction and integration related expenses and $8.7 million of Reorganization costs incurred during the nine months ending September 30, 2016, partially offset by $22.8 million of TVN transaction and integration related expenses, $10.5 million of costs related to the Restructuring Plan and $0.8 million of Reorganization costs incurred during the nine months ended September 30, 2015.

Amortization of intangible assets increased $36.2 million, or 78.3 percent, for the nine months ended September 30, 2016 compared with the same period in the prior year, primarily driven by the Acquisition.

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Interest expense, net increased $19.3 million, or 24.1 percent, for the nine months ended September 30, 2016 compared with the same period in the prior year, reflecting additional outstanding borrowings associated with the Financing obtained in the second quarter of 2015 for the Transactions as well as the assumed debt of TVN.

We increased our borrowing activity in the second quarter of 2015 to generate funds necessary to complete the Transactions. The additional activity resulted in the following debt as of September 30, 2016, including $1,500.0 million of Senior Notes issued in June 2015, comprised of the 2020 Notes, the 2022 Notes and the 2025 Notes, as well as the $250.0 million Term Loan. Also outstanding as of September 30, 2016 were the 2016 Notes, the 2019 Notes and the 2024 Notes. We also assumed debt as part of the Acquisition, including the 2020 TVN Notes for which a portion was repaid in 2015 and 2016 with the remainder outstanding (See Note 10 – Debt).  Interest expense, net also includes interest income of $3.9 million and $4.1 million related to the UKTV note for the nine months ended September 30, 2016 and September 30, 2015, respectively.

Equity in earnings of affiliates decreased $13.8 million, or 19.8 percent, for the nine months ended September 30, 2016 compared with the same period in the prior year, primarily due to the exclusion of our share of Fox Sports South’s financial results for a portion of the nine months ended September 30, 2016. Equity in earnings of affiliates includes our $29.8 million and $35.3 million proportionate share of UKTV’s results for the nine months ended September 30, 2016 and September 30, 2015, respectively, which were reduced by amortization of $10.0 million and $12.7 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

Gain on sale of investments totaled $191.8 million for the nine months ended September 30, 2016, with $208.2 million driven by the sale of our 7.3 percent equity interest in Fox Sports South in the first quarter of 2016, partially offset by a $16.4 million loss incurred on the sale of a cost method investment in the second quarter of 2016.

Miscellaneous, net represented a $5.7 million addition to operating income during the nine months ended September 30, 2016 compared with a $23.2 million loss in the same period in the prior year, primarily driven by $4.9 million of foreign currency transaction gains for the nine months ended September 30, 2016 compared with $35.3 million of foreign currency transaction losses for the same period in 2015, partially offset by $8.7 million adjustment to a contingent liability during the nine months ended September 30, 2015.

Our effective income tax rate was 30.6 percent for the nine months ended September 30, 2016 compared with 31.7 percent for the same period in 2015. The variance in the year-over-year tax rate was primarily driven by an overall increase in the tax benefits resulting from differences in the U.S. statutory rate and that of foreign jurisdictions, partially offset by a reduction in the tax benefits attributable to income allocated to our non-controlling interest.

Business Segment Results

As discussed in Note 17 - Segment Information to the condensed consolidated financial statements, our CODM evaluates the operating performance of our businesses and makes decisions about the allocation of resources to the businesses using a non-GAAP measure we refer to as 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.

Total segment profit is the aggregate of the segment profit for each of our two reportable segments. Total segment profit is a non-GAAP financial measure and is not intended to replace operating income, the most directly comparable GAAP financial measure.  Our management believes that total segment profit is a useful measure of the operating profitability of our business since the measure allows for an evaluation of the performance of our segments without regard to the effect of interest, depreciation and amortization and certain other items. For this reason, operating performance measures, such as total segment profit, are used by analysts and investors in our industry. Total segment profit is not a measure of consolidated operating results under GAAP and should not be considered superior to, as a substitute for or as an alternative to, operating income or any other measure of consolidated operating results under GAAP.

Items excluded from segment profit generally result from decisions made in prior periods and/or by corporate executives rather than the managers of the segments. Depreciation and amortization charges are a result of decisions made in prior periods regarding the allocation of resources and are, therefore, excluded from segment profit. Also excluded from segment profit are financing, tax structuring and acquisition and divestiture decisions, which are generally made by corporate executives. Excluding these items from the performance measure of our segments enables management to evaluate operating performance based on current economic conditions and decisions made by segment managers 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:

Consolidated Results of Operations

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

 

 

NM designates the change is not meaningful

 

 

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Nine Months ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

U.S. Networks

U.S. Networks includes our six national television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Additionally, U.S. Networks includes websites associated with the aforementioned television brands and other internet and mobile businesses serving home, food, travel and other lifestyle-related categories. U.S. Networks also includes our digital content studio, Scripps Networks Lifestyle Studios. We own 100.0 percent of each network, with the exception of Food Network and Cooking Channel, of which we own 68.7 percent. Each of our networks is distributed by cable and satellite distributors, telecommunication service providers and certain non-linear providers, such as those providing streaming or on-demand services.

 

U.S. Networks earns revenue primarily from the sale of advertising time and from distribution fees paid by distributors of our content. U.S. Networks also earns revenue from licensing of content to third parties and of brands for consumer products.

 

Programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of U.S. Networks.

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U.S. Networks’ Results of Operations

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

 

 

U.S. Networks generated operating revenues of $686.3 million and $660.9 million for the three months ended September 30, 2016 and September 30, 2015, respectively, representing 85.5 percent and 85.1 percent of consolidated operating revenues in the respective periods and a $25.4 million, or 3.8 percent, increase year-over-year.

The year-over-year increase in U.S. Networks’ operating revenues included a $29.7 million, or 6.6 percent, growth in advertising revenues during the three months ended September 30, 2016 compared with the respective period in 2015, primarily driven by strong pricing and improved ratings at the majority of our networks. Advertising revenues represented 69.6 percent and 67.8 percent of total operating revenues for U.S. Networks for the three months ended September 30, 2016 and 2015, respectively.

Advertising revenue growth was partially offset by a $5.0 million, or 2.5 percent, decrease in distribution revenues during the three months ended September 30, 2016 compared with the respective period in 2015, primarily driven by a rate equalization resulting from the consolidation of certain distribution agreements, partially offset by negotiated contractual rate increases and revenues generated from new over-the-top and non-linear entrants, such as those providing streaming or on-demand services.

Cost of services increased $26.4 million, or 13.4 percent, for the three months ended September 30, 2016 compared with the same period in 2015, primarily driven by additional investments in programming. Program amortization represented 50.7 percent and 49.1 percent of U.S. Networks’ operating expenses for the three months ended September 30, 2016 and September 30, 2015, respectively. Cost of services also included $1.0 million of Reorganization costs incurred during the three months ended September 30, 2016.

Selling, general and administrative increased $3.3 million, or 2.4 percent, for the three months ended September 30, 2016 compared with the same period in 2015. Selling, general and administrative included $0.3 million of Reorganization costs incurred during the three months ended September 30, 2016 and $0.8 million of Reorganization costs and $0.7 million of costs related to the Restructuring Plan incurred during the nine months ended September 30, 2015.

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Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

U.S. Networks generated operating revenues of approximately $2,140.8 million and $2,014.9 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, representing 85.2 percent and 93.0 percent of consolidated operating revenues in the respective periods and a $125.9 million, or 6.2 percent, increase year-over-year. Despite the 6.2 percent growth in U.S. Networks’ operating revenues during the nine months ended September 30, 2016 compared with the same period in 2015, the U.S. Networks’ contribution of operating revenues to consolidated operating revenues decreased on a percentage basis, primarily driven by the inclusion of TVN for the full nine month period in 2016, thereby increasing International Networks’ contribution of operating revenues to consolidated operating revenues.

The year-over-year increase in U.S. Networks’ operating revenues included a $132.5 million, or 9.7 percent, growth in advertising revenues during the nine months ended September 30, 2016 compared with the respective period in 2015, primarily driven by strong pricing and improved ratings at the majority of our networks. Advertising revenues represented 70.3 percent and 68.2 percent of total operating revenues for U.S. Networks for the nine months ended September 30, 2016 and 2015, respectively.

Advertising revenue growth was partially offset by an $8.1 million, or 1.3 percent, decrease in distribution revenues during the nine months ended September 30, 2016 compared with the respective period in 2015, primarily driven by a rate equalization resulting from the consolidation of certain distribution agreements, partially offset by negotiated contractual rate increases and revenues generated from new over-the-top and non-linear entrants, such as those providing streaming or on-demand services.

Cost of services increased $77.5 million, or 13.8 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, primarily driven by additional investments in programming. Program amortization represented 49.7 percent and 46.0 percent of U.S. Networks’ operating expenses for the nine months ended September 30, 2016 and September 30, 2015, respectively. Cost of services also included $4.0 million of Reorganization costs incurred during the nine months ended September 30, 2016 and $2.6 million of costs related to the Restructuring Plan incurred during the nine months ended September 30, 2015.

Selling, general and administrative decreased $10.1 million, or 2.4 percent, for the nine months ended September 30, 2016 compared with the same period in 2015, primarily driven by the timing of certain marketing programs, $4.7 million of costs related to the Restructuring Plan and $0.8 million of Reorganization costs incurred during the nine months ended September 30, 2015, partially offset by $4.8 million of Reorganization costs incurred during the nine months ended September 30, 2016.  

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U.S. Networks’ Supplemental Information

 

 

International Networks

International Networks includes TVN, which operates a portfolio of free-to-air and pay-TV lifestyle and entertainment networks in Poland, including TVN, TVN24, TVN Style, TTV, TVN Turbo, TVN24 Biznes i Świat. Also included in TVN is TVN Media, an advertising sales house. Additionally, International Networks includes the lifestyle-oriented networks available in the UK, EMEA, APAC,  Latin America and the Caribbean. International Networks also includes our 50.0 percent share of the results of UKTV, a general entertainment and lifestyle channel platform in the UK.

We currently distribute HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel, AFC and Fine Living Network, as well as the TVN network portfolio, in more than 175 countries and territories around the world. Our networks are broadcast in 30 languages via 41 unique channel feeds reaching more than 300 million cumulative subscribers. In addition to the broadcast networks, we also license a portion of our programming to other broadcasters around the world.  

International Networks earns revenue primarily from the sale of advertising time and from distribution fees paid by distributors of our content. International Networks also earns revenue from licensing of content to third parties, commissions on ad sales and sales of merchandise inventory.

Satellite transmission fees, programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of International Networks.

 

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International Networks’ Results of Operations

 

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

 

International Networks generated operating revenues of approximately $123.2 million and $118.7 million for the three months ended September 30, 2016 and September 30, 2015, respectively, representing 15.3 percent of consolidated operating revenues in both periods and a $4.5 million, or 3.8 percent increase year-over-year.

The year-over-year increase in International Networks’ operating revenues during the three months ended September 30, 2016 compared with the respective period in 2015 included a $1.7 million, or 6.6 percent, increase in distribution revenues, primarily driven by distribution growth across all lifestyle regions.  

Distribution revenue growth was partially offset by a $1.1 million, or 1.4 percent, decrease in advertising revenues during the three months ended September 30, 2016 compared with the respective period in 2015. Advertising revenues represented 64.0 percent and 67.4 percent of total operating revenues for International Networks for the three months ended September 30, 2016 and September 30, 2015, respectively.

Cost of services increased $3.8 million, or 5.0 percent, for the three months ended September 30, 2016 compared with the same period in 2015. Program amortization represented 29.4 percent and 27.0 percent of International Networks’ operating expenses for the three months ended September 30, 2016 and September 30, 2015, respectively.

Selling, general and administrative increased $7.8 million, or 24.2 percent, for the three months ended September 30, 2016 compared with the same period in 2015, primarily driven by $11.2 million of TVN transaction and integration related expenses incurred during the three months ended September 30, 2016.

Amortization of intangible assets increased $2.8 million, or 22.1 percent, for the three months ended September 30, 2016 compared with the same period in the prior year, primarily driven by additional amortization related to an acquired network distribution channel in Italy, as well as the impacts of foreign currency.

Equity in earnings of affiliates decreased $8.3 million, or 65.9 percent, for the three months ended September 30, 2016 compared with the same period in the prior year, primarily driven by ad sales and foreign currency impacts at certain of our equity investments.

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Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

International Networks generated operating revenues of approximately $391.6 million and $164.9 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, representing 15.6 percent and 7.6 percent of consolidated operating revenues in the respective periods and a $226.8 million increase year-over-year. The increase in International Networks’ contribution of operating revenues to consolidated operating revenues on a percentage basis for the nine months ended September 30, 2016 compared with the same period in 2015 is primarily driven by the inclusion of TVN for the full nine month period in 2016, thereby increasing International Networks’ contribution of operating revenues to consolidated operating revenues.

The year-over-year increase in International Networks’ operating revenues during the nine months ended September 30, 2016 compared with the respective period in 2015 included a $176.4 million increase in advertising revenues, primarily driven by the inclusion of TVN for the full nine month period in 2016.

Advertising revenues represented 68.7 percent and 56.3 percent of total operating revenues for International Networks for the nine months ended September 30, 2016 and 2015, respectively.  Advertising revenue growth was supplemented by a $32.1 million increase in distribution fees during the nine months ended September 30, 2016 compared with the respective period in 2015, also primarily driven by the inclusion of TVN for the full nine month period in 2016.

Cost of services increased $129.4 million for the nine months ended September 30, 2016 compared with the same period in 2015, primarily due to the inclusion of TVN for the full nine month period in 2016. Program amortization represented 31.4 percent and 24.2 percent of International Networks’ operating expenses for the nine months ended September 30, 2016 and September 30, 2015, respectively.

Selling, general and administrative increased $40.9 million for the nine months ended September 30, 2016 compared with the same period in 2015, primarily driven by the inclusion of TVN for the full nine month period in 2016 and $11.1 million of TVN transaction and integration related expenses incurred during the nine months ended September 30, 2016, partially offset by $1.0 million of TVN transaction and integration related expenses incurred during the nine months ended September 30, 2015.

Amortization of intangible assets increased $36.1 million for the nine months ended September 30, 2016 compared with the same period in the prior year, primarily driven by the Acquisition.

Corporate and Other

Corporate and Other includes the results of businesses not separately identified as reportable segments for external financial reporting purposes and will continue to be disclosed separately from the results of U.S. Networks and International Networks. The Company generally does not allocate employee payroll costs to its reportable segments, but rather classifies these expenses within Corporate and

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Other. However, certain corporate costs, including information technology, pension and other employee benefits and other shared service functions, are allocated to our businesses. These 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.

The Corporate and Other loss includes $0.9 million of TVN transaction and integration related expenses and $0.2 million of Reorganization costs incurred during the three months ended September 30, 2016 and $7.8 million of TVN transaction and integration related expenses and $1.9 million of expenses related to the Restructuring Plan incurred during the three months ended September 30, 2015.  

The Corporate and Other loss includes $3.9 million of Reorganization costs and $3.0 million of TVN transaction and integration related expenses incurred during the nine months ended September 30, 2016 and $21.7 million of TVN transaction and integration related expenses and $5.8 million of expenses related to the Restructuring Plan incurred during the nine months ended September 30, 2015.  

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 Amended Revolving Credit Facility and access to capital markets. Advertising provided 70.6 percent of total operating revenues for the year-to-date period, so cash flow from operating activities can be adversely affected during recessionary periods. Our cash and cash equivalents totaled $329.6 million at September 30, 2016 and $223.4 million at December 31, 2015. Our Amended Revolving Credit Facility permits $900.0 million in aggregate borrowings, with the option to increase up to $1,150.0 million, and expires in March 2020, with the exception of $32.5 million, which expires in March 2019. There were no borrowings outstanding under the Amended Revolving Credit Facility at September 30, 2016. In the fourth quarter of 2014, we issued $1,000.0 million aggregate principal amount of Senior Notes whose funds were primarily used to repay the $885.0 million Senior Notes that matured in January 2015. In the second quarter of 2015, we issued $1,500.0 million aggregate principal amount of Senior Notes, whose net proceeds were primarily used to fund the Transactions, and also entered into the $250.0 million Term Loan agreement.  

We were in compliance with all financial covenants as of September 30, 2016.

Our cash flow year-to-date has primarily been used to fund investments, develop new businesses, pay dividends on our common stock and repay debt. We expect cash flow from operating activities in 2016 will provide sufficient liquidity to fund our normal operations, including repayment of the 2016 Notes.

 

Cash Flows

 

A summary of cash provided by or used in operating, investing and financing activities is shown in the following table:

 

 

Cash and cash equivalents increased $106.1 million for the nine months ended September 30, 2016 and decreased $630.8 million for the nine months ended September 30, 2015. Components of these changes are discussed below in more detail.

 

Operating Activities

Cash provided by operating activities totaled $722.7 million and $657.9 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

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Net income totaled $755.1 million for the nine months ended September 30, 2016 and $575.6 million for the nine months ended September 30, 2015. Contributing to the increase in net income were increased revenues, reduced marketing expenses and a $191.8 million net gain on sale of investments, partially offset by a $147.0 million increase in program amortization.

Program payments exceeded program amortization by $29.3 million for the nine months ended September 30, 2016 and $61.2 million for the nine months ended September 30, 2015, 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. During the nine months ended September 30, 2016, we made income tax payments of $309.5 million and paid interest of $54.1 million. During the nine months ended September 30, 2015, we made income tax payments of $258.3 million and paid interest of $68.3 million.

Investing Activities

Cash provided by investing activities totaled $165.7 million for the nine months ended September 30, 2016, and cash used by investing activities totaled $589.5 million for the nine months ended September 30, 2015. Capital expenditures totaled $47.9 million and $32.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. During the nine months ended September 30, 2016, we received $226.5 million of cash from the sale of investments, including the sale of our 7.3 percent equity interest in Fox Sports South.

During the nine months ended September 30, 2015, we paid $539.3 million for the Acquisition. Additionally, during the nine months ended September 30, 2015, we paid a $16.0 million premium for a call option on Euros to fund the Acquisition, which was partially offset by a cash inflow of $63.3 million related to the settlements of derivatives related to the Transactions. Also, during the nine months ended September 30, 2015, we had cash outflows of $32.6 million for the purchases of investments, including Refinery 29 and Thrive Market.  

Financing Activities

Cash used in financing activities totaled $780.4 million and 690.6 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

During the nine months ended September 30, 2015, we incurred cash outflows of $853.9 million related to the TVN Tender Offer and Squeeze-out.  While the initial 52.7% controlling interest acquired through N-Vision is reflected as an investing activity, the remaining 47.3% is treated as a financing activity in the condensed consolidated statements of cash flows.

In June 2015, we issued $1,500.0 million aggregate principal amount of Senior Notes comprised of $600.0 million aggregate principal amount of the 2020 Notes, $400.0 million aggregate principal amount of the 2022 Notes and $500.0 million aggregate principal amount of the 2025 Notes. During the second quarter of 2015, we also entered into the $250.0 million Term Loan agreement that matures in 2017.

The Amended Revolving Credit Facility permits $900.0 million in aggregate borrowings and expires in March 2020, with the exception of $32.5 million which expires March 2019. During the nine months ended September 30, 2016, we did not borrow any additional funds, but made repayments totaling $390.0 million under the Amended Revolving Credit Facility, resulting in no borrowings outstanding under the Amended Revolving Credit Facility at September 30, 2016. During the nine months ended September 30 2015, we borrowed $1,305.0 million under the Facility and made repayments of $1,005.0 million.

During the nine months ended September 30, 2016, we made a partial redemption of $52.9 million related to the TVN 2020 Notes. During the nine months ended September 30, 2015, we had cash outflows of $49.8 million related to a partial redemption of the TVN 2020 Notes and full repayment of TVN’s term loan. During the nine months ended September 30, 2015, we made an early redemption of the €300 million Senior PIK Toggle Notes due 2021, which resulted in a cash outflow of $404.3 million related to the early extinguishment of debt.  While this is a component of the purchase price allocation, the cash flow impact is reflected as a financing activity for the quarter in the condensed consolidated statements of cash flows.

In November 2014, we issued $1,000.0 million aggregate principal amount of Senior Notes comprised of $500.0 million aggregate principal amount of the 2019 Notes and $500.0 million aggregate principal amount of the 2024 Notes. Net proceeds from these Senior Notes were utilized for general corporate purposes including, but not limited to, the repayment of our $885.0 million 3.55% Senior Notes due 2015. We also have $500.0 million aggregate principal amount of the 2016 Notes.

We have share Repurchase Programs authorized by the Board that permit us to acquire the Company’s Class A Common Shares. During the nine months ended September 30, 2016, we did not repurchase any shares. During the nine months ended September 30, 2015, we repurchased 4.0 million shares for $288.5 million, including 3.0 million shares repurchased for $216.8 million from Scripps family members. As of September 30, 2016, $1,512.5 million in authorization remains available for repurchase under the Repurchase

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Programs. All shares repurchased under the Repurchase Programs are retired and returned to authorized and unissued shares. There is no expiration date for the Repurchase Programs, and we are under no commitment or obligation to repurchase any particular amount of Class A Common Shares under the Repurchase Programs.

We have paid quarterly dividends since our inception as a public company on July 1, 2008. During the first quarter of 2016, the Board approved an increase in the quarterly dividend rate to $0.25 per share from $0.23 per share. Total dividend payments to holders of our Class A Common Shares and Common Voting Shares were $97.1 million and $89.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. 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.

A non-controlling owner held a 35.0 percent residual interest in the Travel Channel as of December 31, 2015. On February 25, 2016, we acquired the residual interest for cash consideration of $99.0 million.

Pursuant to the terms of the Food Network Partnership agreement, the Partnership is required to distribute available cash to the general partners. Cash distributions to Food Network’s non-controlling interest partner were $143.6 million and $145.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. We did not have any cash distributions to Travel Channel’s non-controlling interest holder during the nine months ended September 30, 2016 and had $9.9 million for the nine months ended September 30, 2015, respectively. We expect cash distributions to non-controlling interest owners to approximate $165.0 million in total for 2016.

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 Amended Revolving Credit Facility as borrowings bear interest at LIBOR plus a spread that is determined relative to our Company’s 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 $1,500.0 million aggregate principal amount of Senior Notes in June 2015, $1,000.0 million aggregate principal amount of Senior Notes in November 2014 and $500.0 million aggregate principal amount of Senior Notes in December 2011. We also have the TVN 2020 Notes outstanding. A 100 basis point increase in the interest rate would decrease the fair value of the aggregate principal amount of our total combined Senior Notes by approximately $144.1 million, whereas a 100 basis point decrease in the interest rate would increase the fair value of the aggregate principal amount of our total combined Senior Notes by approximately $130.8 million.

The following table presents additional information about market-risk-sensitive financial instruments:

 

 

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We are also subject to interest rate risk associated with the notes receivable acquired in the UKTV investment (see Note 7 – Investments). The notes accrue interest at variable rates related to either the spread over LIBOR or other identified market indices. Because interest on the note receivable is variable, the carrying amount of such note receivable is believed to approximate fair value.

We conduct business in various countries outside the United States, resulting in exposure to movements in foreign exchange rates when translating from the local currency to the functional currency (see Note 13- Derivative Financial Instruments).

CONTROLS AND PROCEDURES

The Company’s 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 company’s internal control over financial reporting includes those policies and procedures that:

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 (the “Exchange Act”)) was evaluated as of September 30, 2016. 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 as of September 30, 2016.

 

 

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PART II

 

 

We are involved in litigation arising in the ordinary course of business, none of which is expected to result in material loss.

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 2015 Form 10-K to be the most significant.

There were no sales of unregistered equity securities during the quarter for which this report is filed.

We have share Repurchase Programs authorized by the Board that permit us to acquire the Company’s Class A Common Shares.

As of September 30, 2016, $1,512.5 million in authorization remains available for repurchase under the Repurchase Programs. There is no expiration date for the Repurchase Programs, and we are under no commitment or obligation to repurchase any particular amount of Class A Common Shares under the Repurchase Programs.

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 September 30, 2016:

 

 

There were no defaults upon senior securities during the quarter for which this report is filed.

Not applicable.

None.

The information required by this item is filed as part of this Form 10-Q. See Index of Exhibits to this Form 10-Q.

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SIGNATURES

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.

 

 

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INDEX OF EXHIBITS

Number and Description of Exhibit

 

 

 

 

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