Company: Scripps Networks Interactive, Inc.
CIK: 1430602
SIC: 4841
Filing Date: 2016-02-25 00:00:00

ITEM 1 - BUSINESS
ITEM 1. BUSINESS
BUSINESS OVERVIEW
We operate in the media industry and are one of the leading global developers of lifestyle-oriented content for linear and interactive video platforms, including television and the internet, with respected, high-profile brands. Our businesses engage audiences and efficiently serve advertisers by delivering entertaining and highly-useful content that focuses on specifically-defined topics of interest.
We seek to engage audiences worldwide that are highly-desirable to advertisers with entertaining and informative lifestyle content that is produced for television, the internet and alternative media platforms. We intend to expand and enhance our lifestyle brands through creating popular new programming content, extending distribution on various platforms, such as mobile devices, streaming services, tablets and video-on-demand, licensing of content to third parties and of brands for consumer products and increasing our international footprint.
The Company was incorporated under the law of the State of Ohio on October 27, 2007 in connection with our July 1, 2008 spin-off from The E.W. Scripps Company.
On July 1, 2015, we completed the acquisition of N-Vision B.V. (“N-Vision”, the “Acquisition”), the majority owner of TVN, a Polish media company, which operates a portfolio of free-to-air and pay-TV lifestyle and entertainment networks, including TVN, TVN24, TVN Style, TTV, TVN Turbo, TVN24 Biznes i Świat. Also included in TVN is TVN Media, an advertising sales house.
In September 2015, we purchased the remaining outstanding shares of TVN through a tender offer (the “Tender Offer”) and subsequent squeeze-out (the “Squeeze-out”). Together, the Acquisition, Tender Offer and Squeeze-out are referred to herein as the Transactions (the “Transactions”) (see Note 4 - Acquisitions). As a result of the Transactions, the international operating segment which was previously not significant, has become significant. Therefore, the Company now has two reportable segments: U.S. Networks, previously referred to as Lifestyle Media, and International Networks. As a result of these changes to our reportable segments, certain prior period segment results have been recast to reflect the current presentation.
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. Food Network and Cooking Channel are included in the Food Network Partnership, of which we own 68.7 percent. We also own 65.0 percent of Travel Channel. The call option for the 35.0 percent interest in Travel Channel became exercisable on December 15, 2015, and on January 6, 2016, we notified the non-controlling interest owner of our intention to execute our call option, as a result of which we will own 100.0 percent of Travel Channel (see Note 24 - Subsequent Events). Each of our networks is distributed by cable and satellite distributors, telecommunication service providers and certain non-linear service providers.
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”) and Latin America. Additionally, International Networks includes TVN.
As used in our consolidated financial statements, 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.
Our businesses earn revenue from advertising sales, affiliate fees and ancillary sales, including licensing of our content to third parties and of brands for consumer products.
BUSINESS SEGMENTS
Our Chief Operating Decision Maker (“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 call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items included in net income determined in accordance with GAAP.
Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are, therefore, excluded from segment profit. Additionally, financing, tax structure and divestiture decisions are excluded from the performance measure of our businesses, enabling us to evaluate operating performance based upon current economic conditions and decisions made by the managers of those businesses in the current period.
U.S. Networks
U.S. Networks generates revenues principally from advertising sales and affiliate fees paid for the right to distribute our programming content. U.S. Networks also earns revenue from the licensing of content to third parties and of brands for consumer products, such as videos, books, kitchenware and tools.
Advertising revenue generated by our domestic television networks depends on viewership ratings, as determined by Nielsen Media Research and other third-party research companies, and advertising rates paid by advertisers for delivery of advertisements to certain viewer demographics. Revenue from advertising is subject to seasonality, market-based variations and general economic conditions. Advertising revenue is typically highest in the second and fourth quarters and can fluctuate relative to the popularity of specific programming, time of day an advertisement is run and seasonal demand of advertisers.
Revenues from affiliates are negotiated with individual distributors and can typically result in multi-year carriage agreements that contain scheduled rate increases. Affiliate fees we receive are determined by the number of subscribers with access to the programming of our various networks.
Programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of U.S. Networks. Marketing and advertising expenses are incurred to support brand-building initiatives at all of our networks.
Our lifestyle-oriented interactive businesses are focused on the internal development and acquisition of interactive media that is intended to diversify sources of revenue and enhance our competitive advantage as a leading provider of home, food, travel and lifestyle content.
The lifestyle-oriented interactive businesses consist of multiple websites, including, but not limited to, our six network-branded websites, HGTV.com, Foodnetwork.com, Travelchannel.com, DIYNetwork.com, Cookingchanneltv.com and GACTV.com. In addition to serving as home websites for the television networks, the websites provide informational and instructional content on specific topics within their respective lifestyle content categories. Revenue generated by our lifestyle interactive businesses is derived
primarily from the sale of display, banner and video advertising. The Company also operates uLive, a digital brand launched in 2014 that distributes video programming and expands our lifestyle content into new categories, such as parenting, beauty and wellness. uLive presents original video, as well as content aggregated from numerous partners, and generates revenue by delivering advertising to viewers of the programming. All of our interactive businesses benefit from archived television network programming, of which approximately 94.3 percent is owned by us. Our ownership of programming enables us to efficiently and economically repurpose it for use on websites and mobile platforms, including video-on-demand and streaming services.
The lifestyle-oriented websites accounted for approximately 5.0 percent of the U.S. Networks’ total operating revenues in 2015. The strategic focus of the lifestyle-oriented interactive businesses is to grow advertising revenues by increasing views and video plays and attracting more unique visitors to our websites through site enhancements and additional video. Our strategy also includes attracting a broader audience through placing our video programming on national video streaming sites, developing new sources of revenue that capitalize on traffic growth at our websites and capitalizing on the movement of advertising dollars to mobile platforms.
We also have investments in several entities in which we do not own a controlling interest (see Note 7 - Investments).
HGTV
HGTV is available in approximately 93.4 million domestic television households and is simulcast in high definition (“HD”). HGTV programming content commands an audience interested specifically in home-related topics. HGTV is television's premier network dedicated solely to topics such as decorating, interior design, home remodeling, landscape design and real estate. HGTV strives to engage audiences by creating original programming that is entertaining, instructional and informative. HGTV appeals more strongly to female viewers with higher incomes in the 18 to 49 and 25 to 54 age ranges. HGTV ranked second among women in the 25 to 54 age range and eighth among all adult viewers in the 25 to 54 age range for cable networks.
Programming on HGTV includes House Hunters, House Hunters International, Fixer Upper, Flip or Flop, The Property Brothers and Ellen’s Design Challenge. The network also has developed successful programming events, including the HGTV Dream Home Giveaway, HGTV Smart Home Giveaway, HGTV Urban Oasis Giveaway and annual live coverage of the Tournament of Roses Parade. Many of the programs on HGTV feature, or are hosted by, high-profile television personalities such as Chip and Joanna Gaines; Tarek and Christina El Moussa; Drew and Jonathan Scott; Ellen DeGeneres and cousins Anthony Carrino and John Colaneri.
Food Network
Food Network is available in approximately 95.0 million U.S. television households and is simulcast in HD. We currently own 68.7 percent of the Food Network and are the managing partner. The Tribune Media Company (“Tribune”) has a non-controlling interest of 31.3 percent in Food Network.
Food Network programming content attracts audiences interested in food-related topics such as food preparation, dining out, entertaining, food manufacturing, nutrition and healthy eating. Food Network engages audiences by creating original programming that is entertaining, instructional and informative. Food Network appeals more strongly to female viewers with higher incomes in the 18 to 49 and 25 to 54 age ranges. Food Network ranked within the top 10 cable networks for women in the 25 to 54 age range.
Programming on Food Network includes primetime series Beat Bobby Flay, Burgers, Brew and ‘Que, Chopped, Cutthroat Kitchen, Diners, Drive-ins and Dives, Food Network Star and Guy’s Grocery Games, as well as daytime series Giada in Italy, The Kitchen, Pioneer Woman and Trisha’s Southern Kitchen. Food Network hosts include high-profile television personalities such as Valerie Bertinelli, Anne Burrell, Alex Guarnaschelli, Alton Brown, Bobby Flay, Giada De Laurentiis, Guy Fieri, Rachael Ray, Ree Drummond, Robert Irvine and Trisha Yearwood.
Travel Channel
Travel Channel is available in approximately 88.6 million domestic television households and is simulcast in HD. We currently own 65.0 percent of Travel Channel. On January 6, 2016, we notified the owner of the non-controlling interest of our intention to execute our call option to purchase their interest, resulting in 100.0 percent ownership of Travel Channel (see Note 24 - Subsequent Events).
Travel Channel programming content attracts travel enthusiasts and is a leading travel multi-media brand offering quality television, video and mobile entertainment and information. Travel Channel programming appeals to viewers who are more affluent than the average cable viewer and skews slightly toward adult men in the 18 to 49 age range.
Programming on Travel Channel includes Hotel Impossible, Mysteries at the Museum, Bizarre Foods, Trip Flip, Booze Traveler, Expedition Unknown and Ghost Adventures. Many of the programs on Travel Channel feature, or are hosted by, high-profile
television personalities such as Andrew Zimmern, Samantha Brown, Don Wildman, Anthony Melchiorri, Bert Kreischer, Jack Maxwell, Josh Gates and Zak Bagans.
DIY Network
DIY Network is available in approximately 61.2 million U.S. television households and is simulcast in HD. DIY Network programming provides entertaining and informational content across a broad range of do-it-yourself categories including home building, home improvement and renovations, gardening and landscaping. DIY Network appeals more strongly to male viewers with higher incomes in the 18 to 49 and 25 to 54 age ranges.
Programming on DIY Networks includes Rehab Addict, Vanilla Ice Project, Building Alaska, First Time Flippers, Tiny House Big Living and the various Crashers series. Many of the programs on DIY Network feature, or are hosted by, television personalities such as Nicole Curtis, Jason Cameron, Alison Victoria and Chris Lambton.
Cooking Channel
Cooking Channel is available in approximately 64.9 million domestic households and is simulcast in HD. We currently own 68.7 percent of this network, which represents a controlling interest. Tribune has a non-controlling interest of 31.3 percent in Cooking Channel.
Cooking Channel programming caters to avid food lovers by focusing on food information and instructional cooking and delivers content focused on baking, ethnic cuisine, wine and spirits, healthy and vegetarian cooking and kids' foods. The Cooking Channel appeals more strongly to female viewers with higher incomes in the 18 to 49 and 25 to 54 age ranges.
Programming on Cooking Channel includes Carnival Eats, Unique Eats, Sweet Genius, Dinner at Tiffani’s, Food Fact or Fiction, Man Fire Food, Rev Run’s Sunday Suppers and Tia Mowry at Home. Cooking Channel hosts include notable television personalities such as Haylie Duff, Tia Mowry, Rev Run and Justine Simmons and Tiffani Thiessen.
Great American Country
Great American Country is available in approximately 58.1 million U.S. television households and is simulcast in HD. Great American Country provides its viewers with programming that celebrates the country lifestyle and includes the country music experience, music performance specials, live concerts and country music videos.
Programming on Great American Country includes Going RV, Flea Market Flip, Log Cabin Living, Celebrity Motor Homes and the Top 20 Country Countdown.
International Networks
International Networks generates revenues principally from advertising sales, affiliate fees and the licensing of programming to third parties. Satellite transmission fees, programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of International Networks.
We currently broadcast 39 international channel feeds, reaching approximately 265 million cumulative subscribers under the HGTV, DIY, Food Network, AFC, Cooking Channel, Fine Living and Travel Channel brands, as well as the TVN network portfolio. Our broadcast networks are distributed in 29 languages, with channel feeds customized according to language in more than 175 countries and territories. In addition to the broadcast networks, we also license a portion of our programming to other broadcasters around the world.
Internationally, we also have joint-venture partnerships with BBC Worldwide for UKTV and its suite of 10 general entertainment and lifestyle networks in the UK, Direct TV for Food Network Latin American (“FNLA”) in Latin America, and Shaw Media for HGTV, DIY Network and Food Network in Canada. Subsequent to year end, Corus Entertainment, Inc. entered into an agreement to acquire Shaw Media.
In 2010, the Company launched its first international pay-television channel through Food Network in the UK. The channel first launched on pay-television, then expanded its distribution in 2012 to free-to-air on Freeview, initially in primetime, and then as a full 24-hour broadcast channel in 2013. Currently, Food Network is the top lifestyle channel and the third most viewed non-scripted factual channel in the UK. Food Network is also available across EMEA, APAC and Latin America.
In 2014, the Company acquired AFC, a complementary channel brand to Food Network. AFC, which is based in Singapore, broadcasts 24 hours a day, seven days a week and reaches about 8.0 million subscribers in 11 markets.
Travel Channel International Ltd. (“TCI”) was acquired in 2013 along with its base of operations in London. TCI is broadcast in 21 languages across a wide network of affiliates throughout EMEA and APAC. In 2014, TCI also became available on Freeview in primetime in the UK.
In early 2014, we launched the Fine Living Network in Italy on the digital terrestrial television. Since its launch, over 40.0 percent of Italy’s television population has tuned into the channel. In late 2014, we launched HGTV in Singapore. HGTV is the first channel dedicated to the home and lifestyle category across APAC.
During 2015 we also acquired TVN, which operates a portfolio of free-to-air and pay-TV lifestyle and entertainment networks, including TVN, TVN24, TVN Style, TTV, TVN Turbo, TVN24 Biznes i Świat. Also included in TVN is TVN Media, an advertising sales house.
Competition
Cable, satellite and telecommunications network programming is a highly-competitive business in the U.S. and worldwide. Our television networks and interactive businesses generally compete for advertising revenue with other cable and broadcast television networks, online and mobile outlets, radio programming and print media. Our television networks and interactive business also compete for their target audiences with all forms of programming and other media provided to viewers, including broadcast networks, local over-the-air television stations, competitors’ pay and basic cable television networks and video-on-demand services, streaming services, online activities and other forms of news, information and entertainment. Additionally, our networks compete with other television networks for affiliate fees derived from distribution agreements with cable television and satellite operators, telecommunication service providers and other distributors.
Intellectual Property
Our intellectual property (“IP”) assets include copyrights in television content, trademarks and servicemarks in brands, names and logos, websites, and licenses from third parties. To defend these assets, we rely upon a combination of common law, statutory and contractual legal protections. There can be no assurance, however, of the degree to which these measures will be successful. Moreover, effective IP protection may be either unavailable or limited in certain foreign territories. Policing unauthorized use of our products and services and related IP is difficult and costly. Third parties may challenge the validity or scope of our IP from time to time, and the success of any such challenges could result in the limitation or loss of IP rights. Irrespective of their validity, such claims may result in substantial costs and diversion of resources which could have an adverse effect on our operations. In addition, piracy, which encompasses the theft of our signal and unauthorized use of our content in the digital environment, continues to present a threat to revenues.
Regulatory Matters
The Company is subject to and affected by laws and regulations of U.S. federal, state and local governmental authorities as well as to the laws and regulations of international countries and bodies, such as the European Union (the “EU”). These laws and regulations are subject to change. Additionally, the Federal Communications Commission (the “FCC”) regulates cable television and satellite operators and telecommunication providers, which could affect our networks indirectly.
Closed Captioning
All of our cable networks must provide closed-captioning programming for the hearing impaired. The 21st Century Communications and Video Accessibility Act of 2011 also requires us to provide closed captioning on certain video programming that we offer on the internet.
CALM Act
FCC rules require multichannel video programming distributors to ensure that all commercials comply with specified volume standards. Our affiliation agreements generally require us to certify compliance with such standards.
“Must-Carry” Requirements
The FCC’s implementation of the statutory “must-carry” obligations requires cable operators and multichannel video programming distributors to give broadcasters preferential access to channel space. In contrast, programming television networks, such as ours, have no guaranteed right of carriage on these systems. This may reduce the amount of channel space that is available for carriage of our television networks by these systems.
Regulation of the Internet and Mobile Applications
We operate numerous websites and make available mobile applications (“apps”) which we use to distribute information about our programs and to engage more deeply with our viewers. The operation of these websites, video programming and apps are subject to a range of federal, state and local laws, such as privacy and consumer protection regulations.
Employees
As of December 31, 2015, we had approximately 3,500 full-time equivalent employees globally.

ITEM 1A - RISK FACTORS
ITEM 1A. RISK FACTORS
A number of significant risk factors could materially affect our specific business operations and cause our performance to differ materially from any future results projected or implied by our prior statements. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company. The risks and uncertainties our Company faces, however, are not limited to those set forth in the risk factors described below.
Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
If any of the following risks or uncertainties develops into actual events, these events could have a material effect on our business, financial condition or results of operations. In such case, the trading price of our common shares could decline.
Changes in public and consumer tastes and preferences could reduce demand for our services and reduce profitability of our businesses.
Each of our networks provides content and services whose success is primarily dependent upon acceptance by the public. We must consistently create and distribute offerings that appeal to the prevailing consumer tastes at any point in time. Audience preferences change frequently, and it is a challenge to anticipate what content will be successful at any point. Other factors, including the availability of alternative forms of entertainment and leisure time activities, general economic conditions and the growing competition for consumer discretionary spending may also affect the audience for our content and services. If our networks do not achieve sufficient consumer acceptance, revenues may decline and adversely affect our profitability.
If we are unable to maintain distribution agreements with cable and satellite distributors and telecommunications service providers (“Distributors”) at acceptable rates and terms, our revenues and profitability could be negatively affected.
We enter into multi-year contracts for our national television networks with Distributors. Our long-term distribution arrangements enable us to reach a large percentage of cable households across the United States. As these contracts expire, we must renew or renegotiate them. If we are unable to renew them on acceptable terms or at rates similar to those in other affiliate contracts, we may lose distribution rights and/or affiliate fee revenues.
These distribution agreements may also include “most favored nation” (“MFN”) clauses. Such clauses typically provide that, in the event we enter into an agreement with another Distributor on more favorable terms, those terms must be offered to the Distributor holding the MFN right, subject to certain exceptions and conditions. The MFN clauses within our distribution agreements are generally complex. Parties may interpret them differently and reach a conflicting view of compliance of that held by the Company, which, if proven correct, could have an adverse effect on our financial condition or results of operations.
The loss of a significant affiliate arrangement on basic programming tiers could reduce distribution of our networks, thereby adversely affecting affiliate fee revenue, subjecting certain of our intangible assets to possible impairments and potentially impacting our ability to sell advertising or the rates we charge for such advertising.
Three of our networks that are carried on digital tiers are dependent upon the willingness of consumers to pay for such tiers, as well as our ability to negotiate favorable carriage agreements on widely accepted digital tiers.
Further consolidation among cable and satellite operators and telecommunications service providers could adversely affect our revenues, profitability and financial condition of our businesses. Consolidation among Distributors has given the largest cable and satellite television systems considerable leverage in their relationship with programmers. The two largest cable and the two largest satellite television system operators provide service to approximately 69 percent of U.S. households receiving cable or satellite television service today.
Continued consolidation within the industry could reduce the number of Distributors available to carry our programming, subject our affiliate fee revenue to greater volume discounts and further increase the negotiating leverage of the cable and satellite television system operators and telecommunications service providers which could have an adverse effect on our financial condition or results of operations.
Our networks face significant competitive pressures related to attracting consumers and advertisers. Failure by us to maintain our competitive advantage may affect the profitability of our networks.
We face substantial competition from alternative providers of similar services. Our national television networks compete for viewers with other broadcast and national television networks and with home video products and internet usage, as well as with other programming providers for carriage of programming. Additionally, our national television networks compete for advertising revenues with a variety of other media alternatives, including other broadcast and national television networks, the internet, newspapers, radio stations and print media. Our websites compete for visitors and advertising dollars with other forms of media aimed at attracting similar audiences and, therefore, must provide popular content in order to maintain and increase site traffic. Competition may divert consumers from our services, which could reduce the profitability of our networks.
Changes in consumer behavior resulting from new technologies and distribution platforms may impact the performance of our networks.
We must adapt to advances in technologies and distribution platforms related to content transfer to ensure that our content remains desirable and widely available to our audiences. The ability to anticipate and take advantage of new and future sources of revenue from technological developments will affect our ability to continue to increase our revenue and expand our business. Additionally, we must adapt to the changing consumer behavior driven by advances in technology, such as video-on-demand, and devices, such as tablets and mobile, providing consumers the ability to view content from remote locations and enabling general preferences for user-generated and interactive content. Changes of these types may impact our traditional distribution methods for our content. If we cannot ensure that our distribution methods and content allow us to reach our target audiences, there could be a negative effect on our business.
Our business is subject to risks of adverse changes in laws and regulations.
Our programming services and the distributors of our programming, including cable and satellite operators, telecommunication providers and internet companies, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the FCC, as well as by state and local governments. The U.S. Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect our operations. For example, legislators and regulators continue to consider rules that would effectively require cable television operators to offer all programming on an à la carte basis, which would allow viewers to subscribe to individual networks rather than a package of networks, and/or require programmers to sell channels to distributors on an à la carte basis. Certain cable television operators and other distributors have already introduced tiers, or more targeted network packages, to their customers that may or may not include some or all of our networks. The unbundling of programming could reduce distribution of certain of our networks, thereby leading to reduced viewership and increased marketing expenses and affecting our ability to compete for or attract the same level of advertising dollars or distribution fees.
Changes in economic conditions in the United States, the regional economies in which we operate or in specific industry sectors could adversely affect the profitability of our businesses.
Approximately 61.3 percent of our consolidated revenues in 2015 were derived from marketing and advertising spending in the United States and approximately 6.0 percent of our consolidated revenues in 2015 were derived from marketing and advertising spending in Poland including revenues from our advertising representation business in Poland. Advertising and marketing spending is sensitive to economic conditions and tends to decline in recessionary periods. A global or regional economic decline could reduce advertising prices and volume, resulting in a decrease in our advertising revenues.
The loss of key talent or inability to identify and locate new and engaging talent could disrupt our business and adversely affect the profitability of our businesses.
Our business depends upon the continued efforts, abilities and expertise of our corporate and divisional executive teams and entertainment personalities. We employ or contract with entertainment personalities who may have loyal audiences. These individuals are important to audience endorsement of our programs and other content. There can be no assurance that these individuals will remain with us or retain their current audiences. If we fail to retain key individuals or if our entertainment personalities lose their current audience base, our operations could be adversely affected.
We are subject to risks related to our international operations.
We have operations and investments in a number of foreign jurisdictions. The inherent economic risks of doing business in international markets that are beyond our control include, among other things (i) changes in the economic environment, (ii) changes in local regulatory requirements, including restrictions on content, imposition of local content quotas and restrictions on foreign ownership, (iii) differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property, (iv) exchange controls, tariffs and other trade barriers, (v) foreign taxation, (vi) anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations, (vii) foreign privacy and data protection laws and regulation and changes in these laws, (viii) shifting consumer preferences regarding the viewing of video programming, (ix) corruption, (x) confiscation, (xi) currency inconvertibility, (xii) nationalization of assets and (xiii), in some markets, increased risk of economic and geopolitical instability. Additionally, the local currencies in which our international operations conduct their business could change in value relative to the U.S. dollar, exposing our results to exchange rate fluctuations.
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects.
Furthermore, some foreign markets where we and our partners operate may be more adversely affected by current economic conditions than the U.S. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing economic or political environment in the regions where we do business. Acts of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could adversely affect our results of operations.
Global economic conditions may have an adverse effect on our business.
Our business is significantly affected by prevailing economic conditions and by disruptions to financial markets. We derive substantial revenues from advertisers, and these expenditures are sensitive to general economic conditions and consumer buying patterns. Financial instability or a general decline in economic conditions in the U.S. and other countries where our networks are distributed could adversely affect advertising rates and volume, resulting in a decrease in our advertising revenues.
Decreases in U.S. and consumer discretionary spending in other countries where our networks are distributed may affect cable television and other video service subscriptions, in particular with respect to digital service tiers on which certain of our programming networks are carried. This could lead to a decrease in the number of subscribers receiving our programming from multi-channel video programming distributors, which could have a negative impact on our viewing subscribers and affiliation fee revenues. Similarly, a decrease in viewing subscribers would also have a negative impact on the number of viewers actually watching the programs on our programming networks, which could also impact the rates we are able to charge advertisers.
Economic conditions affect a number of aspects of our businesses worldwide and impact the businesses of our partners who purchase advertising on our networks and reduce their spending on advertising. Economic conditions can also negatively affect the ability of those with whom we do business to satisfy their obligations to us. The general worsening of current global economic conditions could
adversely affect our business, financial condition or results of operations, and the worsening of economic conditions in certain parts of the world, specifically, could impact the expansion and success of our businesses in such areas.
We assumed significant debt in connection with our acquisition of TVN, and we may incur additional debt in the future. Such debt could adversely affect our business, financial condition or results of operations.
In connection with our acquisition of TVN and the related financing, we incurred additional debt, including the assumption of existing TVN debt (see Note 4 - Acquisitions). We currently depend on cash on hand and cash flows from operations to make scheduled principal and cash interest payments on our debt. We expect to be able to meet the estimated principal and interest payments on our debt through a combination of cash on hand, expected cash flows from operations and the use of our revolving credit facility. Additionally, we may incur further debt in the future for other corporate purposes.
The potentially significant negative consequences on our financial condition and results of operations that could result from our substantial debt include:
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limitations on our ability to obtain additional debt or equity financing for working capital, capital expenditures, service line development, debt service requirements, acquisitions and general corporate or other purposes;
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instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances would have the potential of accelerating the maturity of some or all of our outstanding debt;
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the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs and capital expenditures, that could improve our competitive position, results of operations or share price;
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requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
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exposing us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest;
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increasing our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions and adverse changes in government regulations;
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compromising our flexibility to plan for, or react to, competitive challenges in our business and limiting our ability to adjust to changing market conditions;
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the possibility that we could be put at a competitive disadvantage with competitors that do not have as much debt as we do and competitors that may be in a more favorable position to access additional capital resources; and
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limitations on our ability to execute business development and acquisition activities to support our strategies.
Our operations outside the United States may be adversely affected by the operation of laws in those jurisdictions.
Our operations in non-U.S. jurisdictions are in many cases subject to the laws of the jurisdictions in which they operate rather than U.S. law. Laws in some jurisdictions differ in significant respects from those in the U.S., and these differences can affect our ability to react to changes in our business and our rights or ability to enforce rights may be different than would be expected under U.S. law.
Moreover, enforcement of laws in some overseas jurisdictions can be inconsistent and unpredictable, which can affect both our ability to enforce our rights and to undertake activities that we believe are beneficial to our business. In addition, the business and political climate in some jurisdictions may encourage corruption, which could reduce our ability to compete successfully in those jurisdictions while remaining in compliance with local laws or United States anti-corruption laws applicable to our businesses. As a result, our ability to generate revenue and our expenses in non-U.S. jurisdictions may differ from what would be expected if U.S. law governed these operations.
We face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of our programming services, damage to our brands and reputation, legal exposure and financial losses
Our online, mobile and app offerings, as well as our internal systems, involve the storage and transmission of our and our users’ proprietary information, and we and our partners rely on various technology systems in connection with the production and distribution of our programming. Although we monitor our security measures regularly, they may be breached due to employee error, computer malware, viruses, hacking and phishing attacks or otherwise. Additionally, outside parties may attempt to fraudulently
induce employees or users to disclose sensitive or confidential information in order to gain access to our data or our users’ data. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in a loss of our or our users’ proprietary information, a disruption of our services or a reduction of the revenues we are able to generate from such services, damage to our brands and reputation, a loss of confidence in the security of our offerings and services and significant legal and financial exposure, each of which could potentially have an adverse effect on our business.
If we are unable to successfully integrate key acquisitions, our business results could be negatively impacted.
We may continue to grow through acquisitions in certain markets. Acquisitions involve risks, including difficulties in integrating acquired operations, diversions of management resources, debt incurred in financing such acquisitions and other unanticipated problems and liabilities. If we are unable to mitigate these risks, the integration and operations of an acquired business could be adversely impacted. Similarly, declines in business performance and the related effect on the fair values of goodwill and other intangible assets could trigger impairment charges, which could materially affect our reported net earnings.
Financial market conditions may impede access to or increase the cost of financing our operations and investments.
The on-going changes in U.S. and global credit and equity markets may make it more difficult for many businesses to obtain financing on acceptable terms. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. A decrease in these ratings could increase our cost of borrowing or make it more difficult for us to obtain future financing.
Foreign exchange rate fluctuations may adversely affect our operating results and financial conditions.
We have significant operations in a number of foreign jurisdictions and certain of our operations are conducted and certain of our debt obligations are denominated in foreign currencies. The value of these currencies fluctuates relative to the U.S. dollar. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. As a result, we are exposed to exchange rate fluctuations, which could have an adverse effect on our results of operations and net asset balances. There is no assurance that downward trending currencies will rebound or that stable currencies will remain unchanged in any period or for any specific market.
Events that reflect negatively on our brands could diminish our brand reputation.
Any event that could negatively impact our brands and brand reputation could have a material impact to our consolidated earnings.
Variability in our earnings may result in disparate tax impacts.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates.
Loss of satellite signal or transmission may affect profitability of our business.
Our revenues rely on our ability to stay on air to broadcast our content to a wide variety of audiences. Any outages in delivery, whether due to satellite or fiber transmission disruption, could impede our ability to delivery audience impressions and result in additional liabilities and reduced revenue streams.
The concentrated ownership of our Common Voting Shares limits the ability of the holders of our class A common shares to influence corporate matters.
We have two classes of common stock: common voting shares and class A common shares. Holders of class A common shares are entitled to elect the greater of three or one-third of the members of the Board of Directors (the “Board”), but are not permitted to vote on any other matters except as required by Ohio law. Holders of common voting shares are entitled to elect the remainder of the Board and to vote on all other matters. Approximately 92 percent of the common voting shares are subject to the Amended and Restated Scripps Family Agreement (the “Scripps Family Agreement”). The provisions of the Scripps Family Agreement fully govern the transfer and voting of common voting shares subject to the agreement. As a result, the holders of the common voting shares subject to
the Scripps Family Agreement currently have the ability to elect two-thirds of the Board and to direct the outcome of any matter that does not require a vote of the class A common shares. Additionally, some of the signatories to the Scripps Family Agreement are also directors of the Company, which could create conflicts of interest in certain situations. This concentrated control limits the ability of the holders of class A common shares to influence corporate matters and could potentially enable the Company to take actions that these shareholders would not view as beneficial. As a result, the market price of our class A common shares could be adversely affected.

ITEM 1B - UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2 - PROPERTIES
ITEM 2. PROPERTIES
We own approximately 174 thousand square feet of office space including our corporate headquarters in Knoxville, TN and our TVN headquarters in Warsaw, Poland. Additionally, we lease approximately 164 thousand square feet of other facilities to support our global operations in other locations including New York, NY, Washington D.C., Miami, FL, London, England and Singapore.
Management believes its properties are adequate to support the business efficiently and that the properties and equipment therein have been well maintained.

ITEM 3 - LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various lawsuits and claims in the ordinary course of business.
From time to time, we receive notices from third parties claiming that we are infringing their IP rights. Claims of IP infringement could require us to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the IP in question. In addition, certain agreements may require us to indemnify the other party for certain third-party IP infringement claims, which could increase our damages and our costs of defending against such claims. Even if the claims are without merit, defending against the claims can be time-consuming and costly.
The costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in those matters (including those matters described above) and developments or assertions by or against us relating to IP rights and IP licenses, could have a material effect on the Company’s business, financial condition and operating results. No current legal matters are expected to result in any material loss.

ITEM 4 - RESERVED
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive Officers of the Company
Our executive officers as of February 25, 2016 were as follows:
Name
Age
Position
Kenneth W. Lowe
Chairman, President and Chief Executive Officer (since July 2008); President, Chief Executive Officer and Director, The E.W. Scripps Company (2000 to 2008)
Lori A. Hickok
Executive Vice President, Chief Financial Officer (since February 2015); Executive Vice President, Finance (2010 to 2015); Senior Vice President, Finance (2008 to 2010); Vice President and Controller, The E. W. Scripps Company (2002 to 2008)
Burton Jablin
Chief Operating Officer (since September 2015); President, Scripps Networks (2013 to 2015); President, Home Category (2010 to 2013), President, HGTV (2008 to 2010); President HGTV, The E. W. Scripps Company (2001 to 2008)
Cynthia L. Gibson
Executive Vice President, Chief Legal Officer and Corporate Secretary (since December 2012); Executive Vice President, Legal Affairs (2009 to 2012)
Mark S. Hale
Executive Vice President, Global Operations and Chief Technology Officer (since February 2010); Senior Vice President, Technology Operations and Chief Technology Officer (2008 to 2010); Senior Vice President/Technology Operations, The E. W. Scripps Company (2006 to 2008)
Nello-John Pesci, Jr.
Executive Vice President, Chief Human Resources Officer (since February 2015); Executive Vice President, Human Resources (2014 to 2015); Senior Vice President, Human Resources (2010 to 2014); Global Human Resources Leader, The Procter & Gamble Company (1991 to 2010)
PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our class A common shares are traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “SNI.” As of January 31, 2016, there were approximately 51,000 owners of our class A common shares based on security position listings and 74 owners of our common voting shares, which do not have an established public trading market.
The following table reflects the range of high and low selling prices of our class A common shares by quarterly period:
The following table provides information about the Company purchases of equity securities that are registered by the Company pursuant to section 12 of the Exchange Act (i.e., our class A common shares) during the quarter ended December 31, 2015:
Under the existing share repurchase programs (the “Repurchase Programs”), at December 31, 2015, the Company is permitted to acquire up to a cumulative amount of $3,000.0 million of class A common 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.
There were no sales of unregistered equity securities during the quarter ended December 31, 2015.
Dividends
The Company paid a quarterly cash dividend for its class A common shares and common voting shares of $0.23 per share, $0.20 per share and $0.15 per share in 2015, 2014 and 2013, respectively. The declaration and payment of dividends is evaluated by the Company’s Board of Directors (“Board”). Future dividends are subject to our earnings, financial condition and capital requirements.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our class A common shares with the comparable cumulative return of the S&P 500 index, the NYSE index and an index based on a peer group of media companies for the five years ended December 31, 2015. The performance graph assumes that the value of the investment in our class A common shares, the S&P 500 index, the NYSE index and peer group of media companies was $100 on December 31, 2010, and that all dividends were reinvested.
Comparison of Cumulative Total Return
Assumes $100 Invested on December 31, 2010
Assumes Dividend Reinvested
Year Ended December 31, 2015
The companies that comprise our peer group for this comparison include AMC Networks, Inc., Discovery Communications, Inc., The Walt Disney Company, Time Warner, Inc., Twenty-First Century Fox, Inc. and Viacom, Inc.
The peer group index is weighted based on market capitalization.

ITEM 6 - SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information of this Form 10-K.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations required by this item is filed as part of this Form 10-K and incorporated into this Item 7 by reference.. See Index to Consolidated Financial Statement Information of this Form 10-K.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk information required by this item is filed as part of this Form 10-K and incorporated into this Item 7A by reference. See Index to Consolidated Financial Statement Information of this Form 10-K.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this item are filed as part of this Form 10-K and incorporated into this Item 8 by reference. See Index to Consolidated Financial Statement Information of this Form 10-K.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A - CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
The Controls and Procedures required by this item are filed as part of this Form 10-K and incorporated into this Item 9A by reference. See Index to Consolidated Financial Statement Information of this Form 10-K.

ITEM 9B - OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3) to Form 10-K.
Information required by Item 10 of Form 10-K relating to directors is incorporated by reference to the material captioned “Election of Directors” in our definitive proxy statement for the Annual Meeting of Shareholders (“Proxy Statement”). Information regarding Section 16(a) compliance is incorporated by reference to the material captioned “Section 16(a) Beneficial Ownership Compliance” in the Proxy Statement.
We have adopted a code of ethics that applies to all employees, officers and directors of SNI. We also have a Code of Business Conduct and Ethics for the CEO and Senior Financial Officers. This code of ethics meets the requirements defined by Item 406 of Regulation S-K and the requirement of a code of business conduct and ethics under NYSE listing standards. Copies of our codes of ethics are posted on our website at www.scrippsnetworksinteractive.com. In addition, we will provide a printed copy of our code of ethics, free of charge, upon written request to: Investor Relations, Scripps Networks Interactive, Inc., 9721 Sherrill Blvd., Knoxville, TN 37932.
Information regarding our audit committee financial experts is incorporated by reference to the material captioned “Corporate Governance” in the Proxy Statement.
The Proxy Statement will be filed with the SEC in connection with our 2016 Annual Meeting of Shareholders.

ITEM 11 - EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the materials captioned “Compensation Discussion and Analysis,” “Executive Compensation Tables” and “Director Compensation” in the Proxy Statement.

ITEM 12 - SECURITY OWNERSHIP
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference to the materials captioned “Report on the Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information” in the Proxy Statement.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference to the materials captioned “Proposal 2 - Ratification of Independent Registered Public Accountants” and “Related Party Transactions” in the Proxy Statement.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference to the material captioned “Independent Auditors” in the Proxy Statement.
PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
Financial Statements and Supplemental Schedule
(a) The consolidated financial statements of SNI are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information.
The reports of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, dated February 25, 2016, are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information.
(b) The Company’s consolidated supplemental schedule is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Schedules.
Exhibits
The information required by this item appears in the Exhibits Index as part of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCRIPPS NETWORKS INTERACTIVE, INC.
Dated: February 25, 2016
By:
/s/ Kenneth W. Lowe
Kenneth W. Lowe
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Kenneth W. Lowe
Chairman, President and
February 25, 2016
Kenneth W. Lowe
Chief Executive Officer
(Principal Executive Officer)
/s/ Lori A. Hickok
Executive Vice President, Chief Financial Officer
February 25, 2016
Lori A. Hickok
(Principal Financial and Accounting Officer)
/s/ Gina L. Bianchini
Director
February 25, 2016
Gina L. Bianchini
/s/ Michael R. Costa
Director
February 25, 2016
Michael R. Costa
/s/ David A. Galloway
Director
February 25, 2016
David A. Galloway
/s/ Donald E. Meihaus
Director
February 25, 2016
Donald E. Meihaus
/s/ Jarl Mohn
Director
February 25, 2016
Jarl Mohn
/s/ Richelle P. Parham
Director
February 25, 2016
Richelle P. Parham
/s/ Nicholas B. Paumgarten
Director
February 25, 2016
Nicholas B. Paumgarten
/s/ Mary Peirce
Director
February 25, 2016
Mary Peirce
/s/ Jeffrey Sagansky
Director
February 25, 2016
Jeffrey Sagansky
/s/ Wesley W. Scripps
Director
February 25, 2016
Wesley W. Scripps
/s/ Ronald W. Tysoe
Director
February 25, 2016
Ronald W. Tysoe
SCRIPPS NETWORKS INTERACTIVE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Page
1.
Selected Financial Data
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Overview
Results of Operations
2015 Compared with 2014
2014 Compared with 2013
Business Segment Results
U.S. Networks
International Networks
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
3.
Quantitative and Qualitative Disclosures About Market Risk
4.
Controls and Procedures
5.
Reports of Independent Registered Public Accounting Firm
6.
Consolidated Balance Sheets
7.
Consolidated Statements of Operations
8.
Consolidated Statements of Comprehensive Income
9.
Consolidated Statements of Cash Flows
10.
Consolidated Statements of Shareholders’ Equity
11.
Notes to Consolidated Financial Statements
Selected Financial Data
Five-Year Financial Highlights
Notes to Selected Financial Data
(1) Operating revenues and segment profit (loss) represent the measures used to evaluate the operating performance of our business segments in accordance with financial accounting standards for disclosures about segments of an enterprise and related information. See “Business Segment Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2) Segment profit is a supplemental non-GAAP financial measure. Our CODM evaluates the operating performance of our business and makes decisions about the allocation of resources to the businesses using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items that are included in net income determined in accordance with GAAP. For a reconciliation of this financial measure to operating income, see “Business Segment Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(3) In the fourth quarter of 2014, we modified our management reporting structure related to the operating results from our uLive business. In conjunction with this change in reporting structure, we now report the results of uLive within U.S. Networks rather than within Corporate and Other.
As a result of the Acquisition of N-Vision (see Note 4 - Acquisitions), our international operating segment has become significant. Therefore, the Company now has two reportable segments: U.S. Networks, previously referred to as Lifestyle Media, and International Networks. As a result of the above-mentioned changes, certain prior period segment results have been recast to reflect the current presentation.
(4) Our income tax provision in 2012 reflects an income tax benefit of $213.0 million arising from the reversal of valuation allowances on deferred tax assets related to capital loss carry-forwards. Previously, the Company had estimated that it would be unable to use any of the capital loss carry-forwards generated from the sale of our Shopzilla and uSwitch businesses. As a consequence of a restructuring that was completed to achieve a more efficient tax structure, the Company recognized a $574.0 million capital gain that utilized substantially all of its capital loss carry-forwards. This income tax benefit was partially offset by $23.1 million of state income tax expenses recognized on the capital gain that utilized these capital loss carry-forwards.
(5) On December 15, 2009, we acquired a 65.0 percent controlling interest in Travel Channel. In connection with this acquisition, a majority-owned subsidiary of SNI completed a private placement of $885.0 million aggregate amount of 3.55% principal Senior Notes that matured and were repaid in 2015.
(6) In 2011, we completed the sale of $500.0 million aggregate principal amount of 2.70% Senior Notes due 2016 (the “2016 Notes”).
(7) In 2014, we completed the sale of $500.0 million aggregate principal amount of 2.75% Senior Notes due 2019 (the “2019 Notes”) and $500.0 million aggregate principal amount of 3.90% Senior Notes due 2024 (the “2024 Notes”).
(8) In 2015, we amended our revolving credit facility (“Amended Revolving Credit Facility”) to permit borrowings up to an aggregate principal amount of $900.0 million, which may be increased to $1,150 at our option. We also completed the sale of $600.0 million aggregate principal amount of 2.80% Senior Notes due 2020 (the “2020 Notes”), $400.0 million aggregate principal amount of 3.50% Senior Notes due 2022 (the “2022 Notes”) and $500.0 million aggregate principal amount of 3.95% Senior Notes due 2025 (the “2025 Notes”). During 2015, we also entered into a $250.0 million senior unsecured loan (“Term Loan”) that matures in June 2017.
On September 15, 2015 TVN executed a 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.
On November 16, 2015, TVN Finance Corporation III AB (“TVN Finance Corp.”), an indirect wholly-owned subsidiary of the Company, executed a second partial pre-payment of the 2020 TVN Notes totaling €45.6 million, comprised of principal of €43.0 million, accrued but unpaid interest of €1.3 million and premium of €1.3 million. At December 31, 2015, €344.0 million was outstanding on the 2020 TVN Notes.
(9) 2015 includes activity related to the TVN Transactions.
(10) In connection with the adoption of the FASB guidance on Imputation of Interest (see Note 3 - Accounting Standards Updates), we reclassified $10.2 million from other non-current assets to debt, less current portion in 2014 and an immaterial amount from other non-current assets to current portion of debt in 2014.
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 upon the consolidated financial statements and the notes thereto. You should read this discussion in conjunction with those financial statements.
Forward-Looking Statements
This discussion and the information contained in the notes to the consolidated financial statements contain certain forward-looking statements that are based on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which, in most instances, are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; program costs; labor relations; technological developments; risk related to the integration of TVN and international operations; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services and other risks, trends and uncertainties discussed under “Risk Factors” in Part I, Item 1A and elsewhere in this Annual Report on Form 10-K. 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 statement to reflect events or circumstances after the date the statement is made.
Overview
SNI is one of the leading global developers of lifestyle-oriented content for linear and interactive video platforms, including television and the internet, with respected, high-profile brands. We seek to engage audiences that are highly-desirable to advertisers with entertaining and informative lifestyle content that is produced for television, the internet and alternative media platforms. We intend to expand and enhance our lifestyle brands through creating popular new programming and content, extending distribution on various platforms, such as mobile phones, tablets and video-on-demand, licensing of content to third parties and of brands for consumer products and increasing our international footprint.
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. During 2015, we completed the acquisition of TVN, 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”); 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.
We currently broadcast 39 international channel feeds, reaching approximately 265 million cumulative subscribers under the HGTV, DIY, Food Network, AFC, Cooking Channel, Fine Living and Travel Channel brands, as well as the TVN network portfolio. Our broadcast networks are distributed in 29 languages, with channel feeds customized according to language in more than 175 countries and territories. In addition to the broadcast networks, we also license a portion of our programming to other broadcasters around the world.
Consolidated operating revenues increased $352.8 million, or 13.2 percent, in 2015 compared with 2014 and $134.6 million, or 5.3 percent, in 2014 compared with 2013. We manage our operations through two reportable segments, U.S. Networks and International Networks.
Despite the growth in the international business noted above, U.S. Networks continues to account for the majority of the Company’s performance. U.S. Networks generated operating revenues of $2,716.7 million, representing 90.0 percent of our consolidated operating revenues, in 2015 compared with $2,588.4 million, representing 97.1 percent of our consolidated operating revenues, in 2014 and $2,466.1 million, representing 97.4 percent of our consolidated operating revenue, in 2013. U.S. Networks generates revenue principally from advertising sales and from affiliate fees paid for the right to distribute our programming content. Programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of U.S. Networks.
International Networks generated operating revenues of $327.9 million, representing 10.9 percent of our consolidated operating revenues, in 2015 compared with $90.2 million, representing 3.4 percent of our consolidated operating revenues, in 2014, primarily driven by the inclusion of TVN for six months in 2015, and $75.7 million, representing 3.0 percent of our consolidated operating revenues, in 2013. International Networks generates revenues primarily from advertising sales, affiliate fees and the licensing of programming to third parties. Satellite transmission fees, programming expenses, employee costs and marketing and advertising expenses are the primary operating costs of International Networks.
Results of Operations
The competitive landscape in our business is affected by multiple media platforms competing for consumers and advertising dollars. We strive to create popular programming that resonates with viewers across a variety of demographic groups, develop strong brands and create new media platforms through which we can capitalize on the audiences we aggregate.
Consolidated Results of Operations
2015 Compared with 2014
Consolidated operating revenues increased $352.8 million, or 13.2 percent, in 2015 compared with 2014, primarily attributed to continued growth in advertising sales and affiliate fee revenues from our domestic television networks, as well as the inclusion of TVN results for six months in 2015. Consolidated advertising revenues increased $246.1 million, or 13.6 percent, in 2015 compared with 2014. The increase in advertising revenues was primarily driven by higher demand and pricing in the U.S. market and the inclusion of TVN results for six months in 2015. Consolidated affiliate fee revenues increased $75.8 million, or 9.5 percent, in 2015 compared with 2014, primarily due to negotiated contractual rate increases and the inclusion of TVN results for six months in 2015.
Cost of services, which consists of program amortization and costs associated with distributing our content, increased $208.5 million, or 26.8 percent, in 2015 compared with 2014, inclusive of the results of TVN for six months in 2015. Program amortization, which represents the largest expense and is the primary driver of fluctuations in cost of services, increased $162.2 million, or 26.1 percent, in 2015 compared with 2014, reflecting our continued investment in the improved quality and variety of programming on our networks and higher than normal program impairments. Additionally, cost of services in 2015 includes $2.8 million of costs for severance retention and related retirement benefit costs, as well as relocation expenses, incurred as a result of the initiation of a program in the fourth quarter of 2014 offering early retirement and eliminating certain positions (the “Restructuring Plan”), while 2014 includes $3.9 million of these costs.
Selling, general and administrative, which primarily consists of employee costs, marketing and advertising expenses, administrative costs and costs of facilities, increased $20.4 million, or 2.7 percent, in 2015 compared with 2014, inclusive of the results of TVN for six months in 2015. Selling, general and administrative in 2015 includes $28.2 million of TVN transaction and integration costs. Selling, general and administrative in 2015, also includes a $13.3 million of costs related to the Restructuring Plan and $3.2 million of costs related to the activities undertaken in the fourth quarter of 2015 to integrate the networks (the “Reorganization”). Selling, general and administrative in 2014 includes $10.5 million of costs related to the Restructuring Plan and $9.7 million related to contract termination costs.
The $9.0 million, or 7.0 percent, increase in depreciation and amortization of intangible asset in 2015 compared with 2014 reflects the impact of the Transactions in 2015 and the related incremental amortization as a result of purchase price accounting.
Interest expense, net primarily reflects the interest incurred on our outstanding borrowings. At December 31, 2014, we had $885.0 million aggregate principal amount of 3.55% Senior Notes due 2015 outstanding throughout 2014 that were repaid in January 2015 and the 2016 Notes that were outstanding for all of 2014 and 2015. In November 2014, we issued $1,000.0 million of Senior Notes, comprised of the 2019 Notes and the 2024 Notes. Additionally, we increased our borrowing activity to generate funds necessary to complete the Transactions, all of which were completed during the third quarter of 2015. The additional activity resulted in an incremental $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. We also assumed debt as part of the Transactions, including the 2018 TVN Notes, the 2020 TVN Notes and the TVN Facility and Cash Loan. Interest expense, net increased $55.4 million in 2015 compared with 2014 due to higher average debt levels. Interest expense, net also includes interest income of $6.9 million in 2015 and $6.7 million in 2014, primarily related to the UKTV note.
Equity in earnings of affiliates represents the proportionate share of net income or loss from each of our equity method investments. Included in equity in earnings of affiliates is our proportionate 50.0 percent share of results from UKTV. Amortization expense attributed to intangible assets recognized upon acquiring our interest in UKTV reduces equity in earnings we recognize from the UKTV investment. Accordingly, equity in earnings of affiliates includes our $46.5 million proportionate share of UKTV’s results in 2015 and $44.5 million for our proportionate share of UKTV’s results in 2014, which were reduced by amortization of $16.8 million in 2015 and $19.0 million in 2014. Equity in earnings of affiliates also includes ($5.6) million related to nC+ and Onet, TVN’s equity investments, in 2015.
Gain (loss) on derivatives represents realized and unrealized positions on derivative contracts, primarily related to foreign currency hedges. We recognized $50.3 million of gains in 2015 compared with $2.8 million of gains in 2014, primarily as a result of various hedge contracts executed for the TVN Transactions in 2015.
Miscellaneous, net includes foreign currency exchange transaction gains and losses, which represented a $22.4 million net loss in 2015 compared with a $4.2 million net loss in 2014. Also included in miscellaneous, net in 2015 is an $8.3 million gain on extinguishment of debt.
Our effective tax rate was 30.6 percent in 2015 and 29.3 percent in 2014 primarily driven by a decrease in the tax impact of our non-controlling interest benefit in 2015, state taxes in connection with changes in state tax laws and rates enacted in 2015 and certain non-deductible expenses incurred in 2015 related to the Transactions.
Non-controlling owners hold a 31.3 percent interest in the Food Network Partnership and a 35.0 percent interest in the Travel Channel. The non-controlling owners’ proportionate share of the results of these businesses are captured in the net income attributable to non-controlling interests caption within the consolidated statements of operations and represents the continued profitability of both the Food Network Partnership and Travel Channel.
2014 Compared with 2013
Consolidated operating revenues increased $134.7 million, or 5.3 percent, in 2014 compared with 2013, primarily attributed to continued growth in advertising sales and affiliate fee revenues from our domestic television networks. Consolidated advertising revenues increased $98.7 million, or 5.7 percent, in 2014 compared with 2013. The increase in consolidated advertising revenues was primarily attributed to higher pricing from advertising units sold. Consolidated affiliate fee revenues increased $41.0 million, or 5.4 percent, in 2014 compared with 2013, primarily due to negotiated contractual rate increases.
Cost of services, which consists of program amortization and costs associated with distributing our content, increased $79.6 million, or 11.4 percent, in 2014 compared with 2013. Program amortization, which represents the largest expense and is the primary driver of fluctuations in cost of services, increased $64.5 million, or 11.6 percent, in 2014 compared with 2013, reflecting our continued investment in the improved quality and variety of programming on our networks. Additionally, cost of services in 2014 includes $3.9 million of costs related to the Restructuring Plan.
Selling, general and administrative, which primarily consists of employee costs, marketing and advertising expenses, administrative costs and costs of facilities, increased $35.7 million, or 4.9 percent, in 2014 compared with 2013. Increases in marketing and advertising costs and $9.7 million of contract termination costs incurred in 2014 contributed to the increase in selling, general and administrative in 2014 compared with 2013. Selling, general and administrative in 2014 also includes $10.5 million of costs related to the Restructuring Plan.
The $11.0 million, or 9.4 percent, increase in depreciation and amortization of intangible assets in 2014 compared with 2013 reflects the impact of the AFC acquisition in 2013 and depreciation incurred on capitalized software and website development costs.
In 2013, we recorded a $24.7 million non-cash charge to write-down the goodwill associated with TCI.
Interest expense, net primarily reflects the interest incurred on our outstanding borrowings. For 2014 and 2013, our outstanding borrowings included $885.0 million aggregate principal amount of 3.55% Senior Notes due 2015 and the 2016 Notes. In November 2014, we issued the 2019 Notes and the 2024 Notes. Interest expense, net increased $4.0 million in 2014 compared with 2013 due to higher average debt levels driven by the 2019 Notes and 2024 Notes issued in late 2014.
Equity in earnings of affiliates represents the proportionate share of net income or loss from each of our equity method investments. Included in equity in earnings of affiliates is our proportionate 50.0 percent share of results from UKTV. Amortization expense attributed to intangible assets recognized upon acquiring our interest in UKTV reduces equity in earnings we recognize from the UKTV investment. Accordingly, equity in earnings of affiliates includes our $44.5 million proportionate share of UKTV’s results in 2014 and $36.8 million for our proportionate share of UKTV’s results in 2013, which were reduced by amortization of $19.0 million in 2014 and $18.0 million in 2013.
Gain (loss) on derivatives represents realized and unrealized positions on derivative contracts, primarily related to foreign currency hedges. We recognized $2.8 million of gains in 2014 compared with $7.1 million of losses in 2013.
Miscellaneous, net includes foreign exchange transaction gains and losses, which represented a $4.2 million net loss in 2014 compared with a $2.8 million net gain in 2013.
Our effective tax rate was 29.3 percent in 2014 and 31.1 percent in 2013. The effective tax rate in 2013 was impacted by the impairment charge recorded for the write-down of TCI’s goodwill, which was not deductible for income tax purposes.
Non-controlling owners hold a 31.3 percent interest in the Food Network Partnership and a 35.0 percent interest in the Travel Channel. The non-controlling owners’ proportionate share of the results of these businesses are captured in the net income attributable to non-controlling interests caption within the consolidated statements of operations and represents the continued profitability of both the Food Network Partnership and Travel Channel.
Business Segment Results
As discussed in Note 21-Segment Information to the consolidated financial statements, our CODM evaluates the operating performance of our businesses and makes decisions about the allocation of resources to the business using a non-GAAP measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items included in net income determined in accordance with GAAP.
Items excluded from segment profit generally result from decisions made in prior periods or by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are, therefore, excluded from this measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from the performance measures of our businesses enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those businesses in the current period.
As a result of the acquisition of N-Vision (see Note 4 - Acquisitions), our international operating segment has become significant. Therefore, the Company now has two reportable segments: U.S. Networks, previously referred to as Lifestyle Media, and International Networks. As a result of these changes to our reportable segments, certain prior period segment results have been recast to reflect the current presentation.
Information regarding the operating performance of our business segments and a reconciliation of such information to the consolidated financial statements is as follows:
A reconciliation of segment profit to operating income determined in accordance with GAAP is as follows:
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. The Food Network and Cooking Channel are included in the Food Network Partnership, of which we own 68.7 percent. We also own 65.0 percent of Travel Channel. Each of our networks is distributed by cable and satellite distributors and telecommunication service providers. U.S. Networks earns revenue primarily from the sale of advertising time and from affiliate fees paid by distributors of our content.
U.S. Networks’ Results of Operations
Operating revenues increased $128.3 million, or 5.0 percent, in 2015 compared with 2014 and $122.3 million, or 5.0 percent, in 2014 compared with 2013, with growth in each year-over-year period coming from both advertising sales and affiliate fee revenues. Advertising revenues increased $63.9 million, or 3.6 percent, in 2015 compared with 2014 and $90.5 million, or 5.3 percent, in 2014 compared with 2013, with pricing driving the growth in each year-over-year period. Operating revenues from advertising sales represented 68.2 percent, 69.1 percent and 68.9 percent of total operating revenues for the segment for 2015, 2014 and 2013, respectively. The amount of advertising revenue we earn is a function of the pricing negotiated with advertisers, the number of advertising spots sold and audience impressions delivered.
Advertising revenue was supplemented with affiliate fee revenue growth of $44.2 million, or 5.8 percent, in 2015 compared with 2014 and $35.4 million, or 4.9 percent, in 2014 compared with 2013, with growth in each year-over-year period primarily attributed to negotiated contractual rate increases, which was slightly offset by a decrease in the number of subscribers receiving our networks. Operating revenues from affiliate fees represented 29.5 percent, 29.2 percent and 29.2 percent of total operating revenues for the
segment for 2015, 2014 and 2013, respectively. Distribution agreements with cable and satellite television systems and telecommunication service providers require distributors to pay SNI fees over the terms of the agreements in exchange for certain rights to distribute our content. The amount of revenue earned from our distribution agreements is dependent on the rates negotiated in the agreements and the number of subscribers that receive our networks.
The increase in cost of services in 2015 compared with 2014 and in 2014 compared with 2013 reflects our continued investment in the improved quality and variety of programming on our networks. Program amortization increased $89.5 million, or 14.8 percent, in 2015 compared with 2014 and $60.6 million, or 11.1 percent, in 2014 compared with 2013, and represented 50.5 percent, 46.0 percent and 43.6 percent of US Networks’ total operating segment costs and expenses in 2015, 2014 and 2013, respectively. The year-over-year fluctuation in program amortization is impacted by program asset impairments that totaled $69.8 million in 2015, $38.4 million in 2014 and $32.0 million in 2013. Cost of services includes $2.8 million and $3.9 million of costs in 2015 and 2014, respectively, related to the Restructuring Plan.
Selling, general and administrative decreased $17.0 million, or 2.8 percent, in 2015 compared with 2014 and increased $3.9 million, or 0.6 percent, in 2014 compared with 2013. Selling, general and administrative in 2015 and 2014 includes $5.8 million and $8.2 million, of costs, respectively, related to the Restructuring Plan. Also included in 2015 is $3.1 million of costs related to the Reorganization. The 2.8 percent decrease in selling, general and administrative in 2015 reflects the benefit of reduced on-going employee costs associated with the Restructuring Plan.
U.S. Networks’ Supplemental Information
(1)
Subscriber counts are according to the Nielsen Homevideo Index of homes that receive cable networks.
International Networks
International Networks includes the lifestyle-oriented networks available in the UK, EMEA, APAC and Latin America. Additionally, the International Networks segment includes TVN.
International Networks’ Results of Operations
Operating revenues increased $237.7 million, in 2015 compared with 2014 with growth coming from both advertising sales and affiliate fee revenues, primarily attributed to the inclusion of TVN results for six months in 2015. Advertising revenues increased $182.2 million in 2015 compared with 2014, driven by the inclusion of TVN results for six months in 2015, while affiliate fee revenues increased $31.6 million, in 2015 compared with 2014, also driven by the inclusion of TVN for six months in 2015. Operating revenues from advertising sales were 64.3 percent, 31.9 percent and 27.2 percent of total operating revenues for the segment for 2015, 2014 and 2013, respectively. Operating revenues from affiliate fees were 22.8 percent, 47.9 percent and 49.8 percent of total operating revenues for the segment for 2015, 2014 and 2013, respectively.
The increase in cost of services in 2015 compared with 2014 and 2014 compared with 2013 reflects our continued investment in the improved quality and variety of programming on our networks. Program amortization increased $66.1 million in 2015 compared with 2014, primarily due to the inclusion of TVN for six months in 2015, and represents 29.3 percent and 16.0 percent of International Networks segment costs and expenses in 2015 and 2014, respectively.
Selling, general and administrative in 2015 increased $26.2 million, or 40.6 percent, in 2015 compared with 2014, primarily due to the inclusion of TVN for six months in 2015, which includes $4.6 million of TVN transaction and integration cost.
Equity in earnings of affiliates for International Networks accounts for nearly 50.0 percent of the consolidated equity in earnings of affiliates and is driven by the results of UKTV. Our 50.0 percent portion of UKTV’s earnings, net of amortization, were $29.7 million in 2015 compared with $25.5 million in 2014, representing a $4.2 million, or 16.5 percent increase year-over-year.
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-related corporate overhead costs to its reportable segments, but rather classifies these expenses within Corporate and 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 segment loss amounts in 2015 include $23.6 million for TVN transaction and integration costs and $7.5 million of costs related to the Restructuring Plan, while 2014 includes $2.3 million of costs related to the Restructuring Plan.
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 revenues provide approximately 68.3 percent of total consolidated operating revenues, so cash flow from operating activities can be adversely affected during recessionary periods. Our cash and cash equivalents totaled $223.4 million at December 31, 2015 and $878.2 million at December 31, 2014. We have an Amended Revolving Credit Facility which 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 $389.2 million of borrowings outstanding under the Amended Revolving Credit Facility at December 31, 2015. 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. In the second quarter of 2015, we also entered into a $250.0 million Term Loan agreement.
Our cash flow has been used primarily to fund acquisitions and investments, develop new businesses, acquire shares of our common stock, pay dividends on our common stock and repay debt. We expect cash flows from operating activities in 2016 will provide sufficient liquidity to fund our operations, including the repayment of the $500.0 million 2016 Note due in December 2016.
Cash Flows
Cash and cash equivalents decreased $654.8 million in 2015, and increased $191.8 million in 2014 and $248.8 million in 2013. Components of these changes are discussed below in more detail.
Operating Activities
Cash provided by operating activities totaled $814.2 million in 2015, $777.6 million in 2014 and $877.2 million in 2013. Segment profit totaled $1,245.7 million in 2015, $1,121.8 million in 2014 and $1,102.5 million in 2013. Growth in operating revenues of $128.3 million, or 5.0 percent, in 2015 compared with 2014 for U.S. Networks contributed to the year-over-year increases in segment profit for U.S. Networks. Our Acquisition of TVN is the primary driver of the 263.6 percent growth in segment profit in 2015 compared with 2014 for our International Networks segment. Program payments exceeded the program amortization recognized in our consolidated statements of operations by $92.1 million in 2015, $104.4 million in 2014 and $70.9 million in 2013, reducing cash provided by operating activities for those respective periods. Cash provided by operating activities was also reduced for income taxes and interest payments paid, totaling $414.3 million in 2015, $355.4 million in 2014 and $275.4 million in 2013 and was increased for dividends received from equity investments, totaling $93.6 million in 2015, $104.2 million in 2014 and $83.9 million in 2013.
Investing Activities
Cash used in investing activities totaled $604.5 million in 2015, $78.3 million in 2014 and $168.0 million in 2013. Capital expenditures totaled $52.5 million in 2015, $53.8 million in 2014, and $73.0 million in 2013.
In the third quarter of 2015, we acquired N-Vision for consideration of $539.3 million of cash outflows, net of cash acquired, plus debt assumed. This resulted in a 52.7 percent controlling interest in TVN. Additionally, in 2015 we paid a $16.0 million premium for a call option on Euros to fund the Transactions, which is included as a cash outflow, while the $65.8 million settlement on various derivatives contracts related to the Transactions positively impacted cash flows in 2015.
In April 2013, we acquired AFC for net consideration of $64.4 million.
Financing Activities
Cash used in financing activities totaled $877.0 in 2015, $505.0 million in 2014, and $460.9 million in 2013.
Our 2015 financing activities include $853.9 million paid to acquire the 47.3 percent non-controlling interest of outstanding TVN shares through the Tender Offer and Squeeze-out.
In November 2014, we issued $1,000.0 million aggregate principal amount of Senior Notes consisting of $500.0 million of the 2019 Notes and $500.0 million of the 2024 Notes.
In June 2015, we issued $1,500.0 million aggregate principal amount of Senior Notes consisting of $600 million of the 2020 Notes, $400.0 million of the 2022 Notes and $500.0 million of the 2025 Notes. As a result of issuing the $1,500.0 million in Senior Notes, we incurred $14.5 million of deferred loan costs. In June, we also entered into the $250.0 million Term Loan.
During 2015, we incurred $1,435.5 million of draws on our Amended Credit Revolving Facility and made $1,045.0 million of repayments.
In January 2015, we repaid the $885.0 million aggregate principal amount of 3.55% Senior Notes due 2015.
In July 2015, we retired the €300.0 million 2021 PIK Notes. In September 2015 we redeemed €43.0 million of the 2020 TVN Notes. In November 2015 we redeemed €43.0 million of the 2020 TVN Notes and retired all of the €116.6 million 2018 TVN Notes.
Our Repurchase Programs authorized by the Board permits us to acquire the Company’s class A common 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. During 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. During 2014, we repurchased 15.4 million shares for approximately $1,199.0 million, including 4.5 million shares repurchased for $339.5 million from Scripps family members. During 2013, we repurchased 3.9 million shares for $253.2 million.
We have paid quarterly dividends since our inception as a public company on July 1, 2008. During the first quarter of 2015, the Board approved an increase in the quarterly dividend rate to $0.23 per share. Total dividend payments to shareholders of our common stock were $118.9 million in 2015, $112.9 million in 2014 and $88.4 million in 2013. We currently expect that quarterly cash dividends will continue to be paid in the future. However, future dividends are subject to our earnings, financial condition and capital requirements.
Pursuant to the terms of the Food Network Partnership agreement, the Partnership is required to distribute available cash to the general partners. After providing distributions to the partners for respective tax liabilities, available cash is then applied against any capital contributions made by partners prior to distributions based upon each partners’ ownership interest in the Partnership. During 2012, remaining outstanding capital contributions were returned to the respective partners. Cash distributions to Food Network’s non-controlling interest partner were $164.2 million in 2015, $189.3 million in 2014 and $154.1 million in 2013. Cash distributions to Travel Channel’s non-controlling interest partner were $13.0 million in 2015, $27.6 million in 2014 and $6.4 million in 2013.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include the following four categories: obligations under certain guarantees or contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements; obligations under certain derivative instruments; and obligations under material variable interests.
We may use operational and economic hedges, as well as currency exchange rate and interest rate derivative instruments, to manage the impact of currency exchange rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, we may enter into derivative instruments, principally forward currency exchange rate 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 currency exchange rate derivative instruments for speculative purposes. We have not entered into arrangements that fall under any of the four categories noted above and that would be reasonably likely to have a current or future material effect on our results of operations, liquidity or financial condition.
Our contractual obligations under certain contracts are included in the following table.
Contractual Obligations
A summary of our contractual cash commitments as of December 31, 2015 were as follows:
In the ordinary course of business, we enter into multi-year contracts to obtain distribution of our networks, license or produce programming, secure on-air talent, lease office space and equipment, obtain satellite transmission services and purchase other goods and services.
Debt
Principal payments on long-term debt reflect the repayment of various fixed rate notes assuming repayment will occur upon expiration of the fixed rate notes. Interest payments on the fixed rate notes are projected based on contractual rate and maturity of the note.
Programming
Program licenses generally require payments over the terms of the licenses. Licensed programming includes both programs that have been delivered and are available for telecast and programs that have not yet been produced. If the programs are not produced, our commitments would generally expire without obligation.
We also enter into contracts with certain independent producers for the production of programming that airs on our national television networks. Production contracts generally require us to purchase a specified number of episodes of the program.
We expect to enter into additional program licenses and production contracts to meet our future programming needs.
Talent Contracts
We secure on-air talent for our national television networks through multi-year talent agreements. Certain agreements may be terminated under certain circumstances or at certain dates prior to expiration. We expect our employment and talent contracts will be renewed or replaced with similar agreements upon their expiration. Amounts due under the contracts, assuming the contracts are not terminated prior to their expiration, are included in the contractual commitments table.
Operating Leases
We obtain certain office space under multi-year lease agreements. Leases for office space are generally not cancelable prior to their expiration.
Leases for operating and office equipment are generally cancelable by either party on 30 to 90 day notice; however, we expect such contracts will remain in force throughout the terms of the leases. The amounts included in the table above represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration.
Generally, we expect our operating leases will be renewed or replaced with similar agreements upon their expiration.
Pension Obligations
We sponsor a qualified defined benefit pension plan (“Pension Plan”) that covers substantially all employees. We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”).
Contractual commitments summarized in the contractual obligations table include payments to meet minimum funding requirements of our Pension Plan in 2015 and estimated benefit payments for our SERP. Estimated payments for the SERP have been estimated over a ten year period. Accordingly, the amounts in the over 5 years column include estimated payments for the 2021 through 2025 periods. While benefit payments under these plans are expected to continue beyond 2025, we believe it is not practicable to estimate payments beyond this period.
Income Tax Obligations
The contractual obligations table does not include any amounts for income taxes due to the fact that we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes. As of December 31, 2015, our reserves for income taxes totaled $101.9 million and are reflected in other liabilities on our consolidated balance sheets (see Note 12-Income Taxes).
Other Purchase Commitments
We obtain satellite transmission, audience ratings, market research and certain other services under multi-year agreements. These agreements are generally not cancelable prior to expiration of the service agreement. We expect such agreements will be renewed or replaced with similar agreements upon their expiration.
We may also enter into contracts with certain vendors and suppliers. These contracts typically do not require the purchase of fixed or minimum quantities and generally may be terminated at any time without penalty. Included in the table of contractual obligations are purchase orders placed as of December 31, 2015. Purchase orders placed with vendors, including those with whom we maintain contractual relationships, are generally cancelable prior to shipment. While these vendor agreements do not require us to purchase a minimum quantity of goods or services, and we may generally cancel orders prior to shipment, we expect expenditures for goods and services in future periods will approximate those in prior years.
Redemption of Non-controlling Interests in Subsidiary Companies
The non-controlling interest holder of Travel Channel has a put option requiring us to repurchase their interest, and we have a call option right to acquire their interest. The put option on the non-controlling interest became exercisable on August 18, 2015, and our call option became exercisable on December 15, 2015. We have notified the owner of the non-controlling interest of our intention to execute the call option. The non-controlling interest holder will receive negotiated value at the time either option is exercised (see Note 24- Subsequent Events). The table of contractual obligations does not include amounts for the repurchase of non-controlling interests.
The Food Network and Cooking Channel are operated and organized under the terms of the Partnership. The Company and a non-controlling owner hold interests in the Partnership. During the fourth quarter of 2014, the Partnership was extended and specifies a dissolution date of December 31, 2016. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits the Company, as a 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.
During the year, the Company purchased all of the outstanding shares of TVN through a series of transactions (see Note 4 Acquisitions).
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires us to make a variety of decisions that 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 consolidated financial statements.
Note 2-Summary of Significant Accounting Policies to the consolidated financial statements describes the significant accounting policies we have selected for use in the preparation of our consolidated financial statements and related disclosures. We believe the following to be the most critical accounting policies, estimates and assumptions affecting our reported amounts and related disclosures.
Programs and Program Licenses
Production costs for programs produced by us or for us are capitalized as program assets. Such costs include capitalizable direct costs, production overhead, development costs and acquired production costs. Program licenses, which represent approximately 6 percent of our program assets, generally have fixed terms, limits the number of times we can air the programs and require payments over the terms of the licenses. Licensed program assets and liabilities are recorded when programs become available for broadcast. Program assets are amortized to expense over the estimated useful lives of the programs based on future cash flows. The amortization of program assets generally results in an accelerated method over the estimated useful lives.
Estimated future cash flows can change based upon market acceptance, advertising and network affiliate fee rates, the number of subscribers receiving our networks and program usage. Accordingly, we periodically review revenue estimates and planned usage and revise our assumptions if necessary. If actual demand or market conditions are less favorable than projected, a write-down to net realizable value is recorded. Development costs for programs that we have determined will not be produced are written off.
Acquisitions
Assets acquired and liabilities assumed in a business combination are recorded at fair value. We generally determine fair values using comparisons to market transactions and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment for estimating future cash flows of the asset and expected period of time over which those cash flows will occur and an appropriate discount rate. Changes in such estimates could affect the amounts allocated to individual identifiable assets. While we believe our assumptions are reasonable, if different assumptions were made, the amounts allocated to finite-lived and indefinite-lived intangible assets could differ substantially from the reported amounts and the associated amortization charge, if required, could also differ.
Goodwill
Goodwill for each reporting unit is tested for impairment at the reporting unit level as least annually, or when events occur or circumstances change that would indicate the fair value of a reporting unit may be below its carrying value. As of December 31, 2015, our reporting units for purposes of performing the impairment test for goodwill were U.S. Networks, International Networks conducting business in EMEA, International Networks conducting business in APAC and TVN. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.
To determine the fair value of a reporting unit, we generally use market data, appraised values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset or business, the expected period of time over which those cash flows will occur and the determination of an appropriate discount rate. Changes in our estimates and projections or changes in our established reporting units could materially affect the determination of fair value for each reporting unit.
The annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required.
As of December 31, 2015, the fair value of our U.S. Networks reporting unit substantially exceeded its carrying value. Based on management’s evaluation, the fair value of each of the other reporting units also exceeded carrying value. Therefore, there were no impairment charges recorded in 2015.
A significant portion of net assets in our EMEA and APAC reporting units are comprised of the assets acquired in the Travel Channel International (“TCI”) and AFC business acquisitions, respectively. We completed the TCI acquisition in 2012 and recorded a partial goodwill write-down of $24.7 million and completed the AFC acquisition in 2013.
Finite-Lived Intangible Assets
Finite-lived intangible assets (e.g., network distribution relationships, tradenames, broadcast licenses, customer and advertiser lists, and other acquired rights) are tested for impairment when a triggering event occurs. Such triggering events include the significant disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related asset. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison of undiscounted future cash flows to the carrying value of the asset. If the carrying value of such asset exceeds the undiscounted cash flows, the asset is deemed to be impaired. Impairment would then be measured as the difference between the fair value of the asset and its carrying value with fair value, generally determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset for sale and certain other criteria are met (e.g., the asset can be disposed of currently, appropriate levels of authority have approved the sale or there is an actively pursuing buyer), the impairment test involves comparing the asset’s carrying value to its fair value. To the extent the carrying value is greater than the asset’s fair value, an impairment loss is recognized for the difference.
Significant judgments in this area involve determining whether a triggering event has occurred, estimating future cash flows of the assets involved and selecting the discount rate to be applied in determining fair value.
Income Taxes
The application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood of whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.
We have deferred tax assets and record valuation allowances to reduce such deferred tax assets to the amount that is more likely than not to be realized. We consider on-going prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we determine that the deferred tax asset we would realize would be greater or less than the net amount recorded, an adjustment is made to the tax provision in that period.
Revenue Recognition
Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured.
New Accounting Standards
A discussion of recently issued accounting pronouncements is provided in Note 3-Accounting Standards Updates and Recently Issued Accounting Standards Updates of the notes to consolidated financial statements.
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 reduce exposure to risks from fluctuations in interest rates and foreign currency exchange rates and to limit the impact of our earnings and cash flows. 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.
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 our borrowings is dependent on
interest rate conditions and the timing of our financing needs. Aggregate principal amounts of outstanding debt at December 31, 2015 included $1,483.9 million of Senior Notes issued in June 2015, which includes the 2020 Notes, the 2022 Notes and the 2025 Notes, a $249.1 million Term Loan, also issued in June 2015, $988.0 million of Senior Notes issued in November 2014, which includes the 2019 Notes and the 2024 Notes, $499.2 million of the 2016 Notes issued in December 2011 and $400.0 million TVN 2020 Notes assumed as part of the Transactions. A 100 basis point increase or decrease in the blended level of interest rates, respectively, would decrease or increase the total aggregate fair value of all outstanding Senior Notes by approximately $157.5 million and $137.8 million, respectively.
The following table presents additional information about market-risk-sensitive financial instruments as of December 31:
We are also subject to interest rate risk associated with the notes receivable acquired in the UKTV transaction. The notes, totaling $112.1 million at December 31, 2015 and $116.2 million at December 31, 2014, effectively act as a revolving credit facility for UKTV. The note accrues interest at variable rates related to either the spread over LIBOR or other identified market indices. Because the notes receivable are variable rate, the carrying amount of such note receivable is believed to approximate fair value.
We conduct business in various countries outside the United States, resulting in exposure to movements in foreign exchange rates when translating from the foreign local currency to the U.S. Dollar. Our primary exposures to foreign currencies are the exchange rates between the U.S. Dollar and the Canadian Dollar, the U.S. Dollar and the British Pound, the U.S. Dollar and the Euro, the U.S. Dollar and the Polish Zloty, the British Pound and the Euro and the Euro and the Polish Zloty. Reported earnings and assets may be reduced in periods in which the U.S. Dollar increases in value relative to these currencies.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts. The change in fair value of non-designated contracts is included within gain (loss) on derivatives in our consolidated statements of operations. The gross notional amount of these contracts outstanding was the U.S. Dollar equivalent of $118.6 million at December 31, 2015 and $124.3 million at December 31, 2014. A sensitivity analysis of changes in the fair value of all foreign exchange rate derivative contracts at December 31, 2015 indicates that if the U.S. Dollar strengthened/weakened by 10.0 percent against the British Pound, the fair value of these contracts would increase/decrease by approximately $11.8 million. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying assets being hedged. These off-setting gains and losses are not reflected in the above analysis.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the Company’s internal controls over financial reporting
(as defined in Exchange Act Rule 13a-15(f)) during the fourth quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
SNI’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 accounting principles generally accepted in the United States of America (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
As required by Section 404 of the Sarbanes Oxley Act of 2002, management assessed the effectiveness of Scripps Networks Interactive and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015. Management’s assessment is based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2015.
Our assessment of the effectiveness of internal control over financial reporting did not include the internal controls of TVN as we are currently assessing their control environment, as permitted by Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of internal controls over financial reporting during the first year of an acquisition. TVN revenues for the six months ended December 31, 2015 (the period SNI owned TVN) were $224.7 million, representing 7.4 percent of our consolidated revenue for the twelve months ended December 31, 2015. TVN assets totaled $2,588.5 million and represent approximately 38.8 percent of our consolidated assets at December 31, 2015.
The Company’s independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2015.
Date: February 25, 2016
BY:
/s/ Kenneth W. Lowe
Kenneth W. Lowe
Chairman, President and Chief Executive Officer
/s/ Lori A. Hickok
Lori A. Hickok
Executive Vice President, Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Scripps Networks Interactive, Inc.
Knoxville, Tennessee
We have audited the internal control over financial reporting of Scripps Networks Interactive, Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at TVN S.A., acquired through the purchase of N-Vision B.V. on July 1, 2015 and the subsequent purchase of the non-controlling interest in TVN S.A. during the third quarter of 2015, and whose financial statements constitute 38.8% of total assets, 7.4% of revenues and less than 1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2015. Accordingly, our audit did not include the internal control over financial reporting at TVN S.A. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule of the Company as of and for the year ended December 31, 2015 and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 25, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Scripps Networks Interactive, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Scripps Networks Interactive, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule at Page S-2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Scripps Networks Interactive, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 25, 2016
SCRIPPS NETWORKS INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
SCRIPPS NETWORKS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See notes to consolidated financial statements.
SCRIPPS NETWORKS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See notes to consolidated financial statements.
SCRIPPS NETWORKS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
SCRIPPS NETWORKS INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
As used in the notes to the 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. (“SNI”), to one or more of its consolidated subsidiary companies or to all of them taken as a whole.
Description of Business
We operate in the media industry and have interests in domestic and international television networks and internet-based media properties.
Scripps acquired 100% of TVN S.A. (“TVN”) in the third quarter of 2015 through a series of three distinct transactions (see Note 4 - Acquisitions). As a result of these transactions, the Company now has two reportable segments: U.S. Networks, previously referred to as Lifestyle Media, 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.
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”) and Latin America. Additionally, International Networks includes TVN, which operates a portfolio of free-to-air and pay-TV lifestyle and entertainment networks, including TVN, TVN24, TVN Style, TTV, TVN Turbo, TVN24 Biznes i Świat. Also included in TVN is TVN Media, an advertising sales house.
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of SNI and its majority-owned subsidiary companies after elimination of intercompany accounts and transactions. Consolidated subsidiary companies include general partnerships and limited liability companies in which more than a 50 percent residual interest is owned. Investments in 20 percent to 50 percent owned companies and partnerships or companies and partnerships in which we exercise significant influence over the operating and financial policies are accounted for using the equity method. The results of companies acquired or disposed of are included in the consolidated financial statements from the effective date of acquisition or up to the date of disposal.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions that affect reported amounts and the related disclosures, including the selection of appropriate accounting principles that reflect the economic substance of the underlying transactions 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.
Our consolidated financial statements include estimates, judgments, and assumptions used in accounting for business acquisitions and dispositions, asset impairments, equity method investments, revenue recognition, program assets, depreciation and amortization, pension plans, share-based compensation, income taxes, redeemable non-controlling interests in subsidiaries, fair value measurements and contingencies.
While we re-evaluate our estimates and assumptions on an on-going basis, actual results could differ from those estimated at the time consolidated financial statements were prepared.
Concentration Risks
Approximately 68.3 percent of our operating revenues are derived from advertising. Operating results can be affected by changes in the demand for such services both nationally and in individual markets.
The six largest cable television systems and the two largest direct broadcast satellite television systems in the United States (“U.S.”) provide service to more than 91.8 percent of homes receiving HGTV, Food Network and Travel Channel. The loss of distribution of our networks by any of these cable or satellite television systems could adversely affect our business.
Foreign Currency Translation
Substantially all of our international subsidiaries use the local currency of their respective country as their functional currency. Assets and liabilities of such international subsidiaries are translated using end-of-period exchange rates while results of operations are translated using the average exchange rates throughout the year.
Equity is translated at historical exchange rates, with the resulting cumulative translation adjustment included as a component of accumulated other comprehensive loss within shareholders’ equity, net of applicable taxes.
Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency using end-of-period exchange rates. Gains or losses resulting from such remeasurement are recorded in income. Foreign exchange gains and losses are included within miscellaneous, net in the consolidated statements of operations.
Reclassifications
Certain amounts within operating activities in our consolidated statements of cash flows for 2014 and 2013 have been reclassified to conform with current year presentation. During 2015, amounts totaling $3.9 million and $10.0 million, previously reported within stock and deferred compensation plans for 2014 and 2013, respectively, have been reclassified to other, net. Amounts totaling $2.8 million and $7.1 million, previously reported within other, net, for 2014 and 2013, respectively, have been reclassified to (gain) loss on derivatives. Amounts totaling $6.8 million and $9.7 million, previously reported within accrued employee compensation and benefits, for 2014 and 2013, respectively, have been reclassified to other liabilities. Amounts totaling $7.0 million for 2014 and 2013, previously reported within amortization of network distribution costs have been reclassified to other, net from operating activities in our consolidated statements of cash flows. Additionally, amounts totaling ($19.3) million and $23.9 million, previously reported within other liabilities, for 2014 and 2013, respectively, have been reclassified to deferred revenue. These reclassifications did not have an impact on the reported cash provided by operating activities in our consolidated statements of cash flows for 2014 or 2013.
We also made a reclassification to conform to the current year presentation in our consolidated statements of operations for 2014 and 2013 between miscellaneous, net and gain (loss) on derivatives totaling $2.8 million and ($7.1) million, respectively. This adjustment did not impact reported net income for 2014 or 2013.
As part of our normal operations, we develop and, in some instances, purchase content in the United States and license it to certain of our international operations. In conjunction with our change in reporting of two reportable segments, we changed where we present intercompany program license revenues. Accordingly, we reclassified $9.8 million of revenues previously recorded in Corporate and Other to U.S. Networks for the first six months of 2015 related to these activities. Additionally, $13.0 million and $10.4 million of revenues from these activities for 2014 and 2013, respectively are now reflected in U.S. Networks.
In addition to the segment changes noted above, in the fourth quarter of 2014, we modified our management reporting structure related to the operating results from our uLive business. In conjunction with this change in reporting structure, we now report the results of uLive within U.S. Networks, formally referred to as Lifestyle Media, rather than within Corporate and Other. This reclassification only affected our segment reporting and did not change our consolidated operating revenues, operating income or net income.
In connection with the adoption of the Financial Accounting Standards Board (“FASB”) guidance on Balance Sheet Classification of Deferred Taxes (see Note 3 - Accounting Standards Updates), we reclassified $41.8 million from current to non-current deferred income tax assets for 2014.
In connection with the adoption of the FASB guidance on Imputation of Interest (see Note 3 - Accounting Standards Updates), we reclassified $10.2 million from other non-current assets to debt (less current portion) and an immaterial amount from other non-current assets to current portion of debt for 2014.
As a result of these changes to our reportable segments, certain prior period segment results have been recast to reflect the current presentation (see Note 21 - Segment Information). A reconciliation of segment results between those previously reported and those as revised is included below:
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with an original maturity of less than three months. Cash equivalents, which primarily consist of money market funds, are carried at cost plus accrued income, which approximates fair value.
Accounts Receivable
We extend credit to customers based upon our assessment of the customer’s financial condition. Collateral is generally not required from customers. Allowances for credit losses are generally based on trends, economic conditions, review of aging categories, historical experience and specific identification of customers at risk of default.
Investments
We have investments that are accounted for using both the equity method and cost method of accounting. We utilize the equity method to account for investments in equity securities if our investment gives us the ability to exercise significant influence over operating and financial policies of the investee. Under the equity method of accounting, investments are initially recorded at cost and subsequently increased or decreased to reflect our proportionate share of net earnings or losses of the equity method investees. Cash
payments to equity method investees, such as additional investments, loans, advances and expenses incurred on behalf of investees, as well as dividends from equity method investees, are recorded as adjustments to the investment balances. Goodwill and other intangible assets arising from the acquisition of an equity method investment are included in the carrying value of the investment. As goodwill is not reported separately, it is not separately tested for impairment. Instead, the entire equity method investment is tested for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
We utilize the cost method to account for investments where we do not have the ability to exercise significant influence over operating and financial policies of the investee. Our cost method investments, which are all in private companies, are recorded at cost and not adjusted to reflect our proportionate share of net earnings or losses of the cost method investee.
We regularly review our investments to determine if there has been any other-than-temporary decline in values. These reviews require management judgments that often include estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred. We evaluate, among other factors, the extent to which the investments carrying value exceeds fair value, the duration of the decline in fair value below carrying value and the current cash position, earnings and cash forecasts and near term prospects of the investee. The carrying value of an investment is adjusted when a decline in fair value below cost is determined to be other-than-temporary.
Programs and Program Licenses
Programming is either produced by us or for us by independent production companies or licensed under agreements with independent producers.
Costs of programs produced include capitalizable direct costs, production overhead, development costs and acquired production costs. Production costs for programs produced are capitalized. Costs to produce live programming that are not expected to be rebroadcast are expensed as incurred. Program licenses generally have fixed terms, limit the number of times we can air the programs and require payments over the terms of the licenses. Licensed program assets and liabilities are recorded when programs become available for broadcast. Program licenses are not discounted for imputed interest. Program assets are amortized over the estimated useful lives of the programs based on future cash flows and are included within cost of services in the consolidated statements of operations. The amortization of program assets generally results in an accelerated method over the estimated useful lives.
Estimated future cash flows can change based upon market acceptance, advertising and network affiliate fee rates, the number of subscribers receiving our networks and program usage. Accordingly, we periodically review revenue estimates and planned program usage and revise our assumptions if necessary. If actual demand or market conditions are less favorable than projected, a write-down to net realizable value is recorded. Development costs for programs that we have determined will not be produced are written off.
Deposits and the portion of the unamortized balance expected to be amortized within one year are classified as a current asset within programs and program licenses on the consolidated balance sheets, while those expected to be amortized after one year are separately stated as a non-current asset on the consolidated balance sheets.
Program liabilities payable within one year are classified as a current liability within program rights payable on the consolidated balance sheets. Program liabilities payable after one year are included in other non-current liabilities on the consolidated balance sheets. The carrying value of our program rights liabilities approximate fair value.
Property and Equipment
Property and equipment, including internal use software, is carried at historical cost less accumulated depreciation and impairments. Costs incurred in the preliminary project stage to develop or acquire internal use software or websites are expensed as incurred. Upon completion of the preliminary project stage and management authorization of the project, costs to acquire or develop internal use software, which primarily include coding, designing and developing system interfaces, installation and testing, are capitalized if it is probable the project will be completed and the software will be used for its intended function. Costs incurred after implementation, such as maintenance and training, are expensed as incurred.
Depreciation is computed using a straight-line method over estimated useful lives as follows:
Category
Buildings and improvements
Useful Life
35 to 45 years
Leasehold improvements
Term of lease or useful life
Program production equipment
3 to 15 years
Office and other equipment
3 to 10 years
Computer hardware and software
3 to 5 years
Goodwill
Goodwill represents the cost of acquisitions in excess of the fair value of the acquired businesses’ tangible assets and separately identifiable intangible assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually, or when events occur or circumstances change that would indicate the fair value of a reporting unit may be below its carrying value. We perform our annual impairment review during the fourth quarter. A reporting unit is defined as operating segments or groupings of businesses one level below the operating segment level. As of December 31, 2015, our reporting units for purposes of performing the impairment test for goodwill were U.S. Networks, International Networks conducting business in EMEA, International Networks conducting business in APAC and TVN.
Finite-Lived Intangible Assets
Finite-lived intangible assets consist mainly of the value assigned to network distribution relationships, tradenames, broadcast licenses, customer and advertiser lists and other acquired rights.
Network distribution relationships represent the value assigned to programming services’ relationships with cable and satellite television systems and telecommunication service providers that distribute its programs. These relationships and distribution provide the opportunity to deliver advertising to viewers. We amortize these contractual relationships on a straight-line basis over the terms of the distribution contracts and expected renewal periods, which approximate 20 years.
Customer and advertiser lists, trade names and other intangible assets are amortized in relation to their expected future cash flows or on a straight-line basis over estimated useful lives of up to 25 years.
Impairment of Long-Lived Assets
Long-lived assets, primarily property and equipment and finite-lived intangible assets, are reviewed for impairment whenever events or circumstances indicate the fair value of the assets may be below its carrying value. Recoverability for long-lived assets is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the undiscounted cash flows are less than the carrying amount of the assets, then the carrying value of the assets are written down to estimated fair values, which are primarily based on forecasted discounted cash flows. Fair value of long-lived assets is determined based on a combination of discounted cash flows and market approaches.
Income Taxes
Some of our consolidated subsidiary companies are general partnerships and limited liability companies, which are treated as partnerships for tax purposes. Generally, income taxes on partnership income and losses accrue to the individual partners. Accordingly, our consolidated financial statements do not include any significant provision for income taxes on the non-controlling partners’ share of those consolidated subsidiary companies’ income.
No provision has been made for U.S. or foreign income taxes that could result from future remittances of undistributed earnings of our foreign subsidiaries that management intends to indefinitely reinvest outside the United States.
Deferred income taxes are provided for temporary differences between the tax basis and reported amounts of assets and liabilities that will result in taxable or deductible amounts in future years. Our temporary differences primarily result from intangible assets, investments and deferred compensation. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, on a tax return. Interest and penalties associated with such tax positions are included in the tax provision. The liability for additional taxes and interest is included within other liabilities (less current portion) on the consolidated balance sheets.
Revenue Recognition
Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. Revenue is reported net of sales taxes, value added taxes and other taxes collected from our customers.
Our primary sources of revenue are from the sale of television, internet and mobile advertising and fees for programming services per subscriber (“network affiliate fees”).
Revenue recognition policies for each source of revenue are described below.
Advertising
Advertising revenue is recognized, net of agency commissions, when advertisements are displayed. Internet and mobile advertising includes (i) fixed duration campaigns whereby a banner, text or other advertisement appears for a specified period of time for a fee; (ii) impression-based campaigns where the fee is based upon the number of times an advertisement appears in web pages viewed by a user; and (iii) click-through based campaigns where the fee is based upon the number of users who click on an advertisement and are directed to the advertiser’s website. Advertising revenue from fixed duration campaigns are recognized over the period in which the advertising appears. Internet and mobile advertising revenue that is based upon the number of impressions delivered or the number of click-throughs achieved is recognized as impressions are delivered or click-throughs occur.
Advertising contracts may guarantee the advertiser a minimum audience for the programs in which their advertisements are broadcast over the term of the advertising contracts. We provide the advertiser with additional advertising time if we do not deliver the guaranteed audience size. If we determine we have not delivered the guaranteed audience, an accrual for “make-good” advertisements is recorded as a reduction of revenue. The estimated make-good accrual is adjusted throughout the term of the advertising contracts.
Network Affiliate Fees
Cable and satellite television operators and telecommunication service providers generally pay a network affiliate fee for the right to distribute our programming under the terms of multi-year distribution contracts. Network affiliate fees are reported net of volume discounts earned by the distributors and incentive costs offered to system operators in exchange for initial multi-year distribution contracts. We recognize network affiliate fees as revenue over the term of the contracts, including any free periods. Network launch incentives are capitalized as assets upon launch of our programming and amortized against network affiliate fees based on the ratio of each period’s revenue to expected total revenue over the term of the contracts.
Network affiliate fees due to us, net of applicable discounts, are reported to us by cable and satellite television operators and telecommunication service providers. Such information is generally not received until after the close of the reporting period. Therefore, reported network affiliate fee revenues are based upon our estimates of the number of subscribers receiving our programming and the amount of volume-based discounts each cable and satellite television operator and telecommunication provider is entitled to receive. We subsequently adjust these estimated amounts based upon the actual amounts of network affiliate fees received. Such adjustments have not been significant.
Revenues associated with digital distribution arrangements are recognized when we transfer control and the rights to distribute the content to a customer.
Merchandise Sales
TVN operates a teleshopping business, which includes selling merchandise to individual customers. Merchandise sales are recognized when goods are shipped to the customer, with a right to return within ten days. Historical experience is used to estimate and provide for such returns at the time of sale.
Cost of Services
Cost of services reflects the cost of providing our broadcast signal, programming and other content to respective distribution platforms. The expenses captured within cost of services in our consolidated statements of operations include programming, satellite transmission fees, production and operations and other direct costs. Cost of services also includes the cost incurred to buy or produce inventory for TVN’s teleshopping business.
Marketing and Advertising
Marketing and advertising costs, which totaled $169.1 million in 2015, $160.4 million in 2014 and $144.5 million in 2013 and are reported within selling, general and administrative in the consolidated statements of operations, include costs incurred to promote our businesses and to attract traffic to our websites. Advertising production costs are deferred and expensed the first time the advertisement is shown. Other marketing and advertising costs are expensed as incurred.
Share-Based Compensation
We have a Long-Term Incentive Plan (the “LTI Plan”), that was amended in the second quarter of 2015 (the “Amended LTI Plan”) and which is described more fully in Note 19 - Capital Stock and Share Compensation Plans. The Amended LTI Plan provides for long-term performance compensation for key employees and members of the Board of Directors (the “Board”). A variety of discretionary awards for employees and non-employee directors are authorized under the Amended LTI Plan, including incentive or non-qualified stock options, stock appreciation rights, restricted shares, restricted share units (“RSUs”), performance-based restricted share units (“PBRSUs”) and other share-based awards and dividend equivalents.
Compensation cost is based on the grant date fair value of the award. The fair value of awards that grant the employee the right to the appreciation of the underlying shares, such as stock options, is measured using a binomial lattice model. A Monte Carlo simulation model is used to determine the fair value of awards with market conditions. The fair value of awards that grant the employee the underlying shares is measured by the fair value of a class A common share of SNI stock.
Certain awards of class A common shares have performance and service conditions under which the number of shares granted is determined by the extent to which such conditions are met (“Performance Shares”). Compensation costs for Performance Shares not based on market conditions are measured by the grant date fair value of a class A common share and the number of shares earned. In periods prior to completion of the performance period, compensation costs are based on estimates of the number of shares that will be earned. Compensation costs related to Performance Shares with a market-based condition are recognized regardless of whether the market condition is satisfied, provided the requisite service has been provided.
Compensation costs, net of estimated forfeitures due to termination of employment, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. A portion of our share-based grants generally vest upon the retirement of the employee, so grants to retirement-eligible employees are expensed immediately, and grants to employees who will become retirement-eligible prior to the end of the stated vesting period are expensed over such shorter period.
Net Income per Share
The computation of basic earnings per share (“EPS”) is calculated by dividing net income attributable to SNI 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 awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS.
The following table presents information about basic and diluted weighted average shares outstanding:
3. ACCOUNTING STANDARDS UPDATES
Issued and Adopted
In November 2015, the FASB issued new accounting guidance related to the classification of deferred taxes, Balance Sheet Classification of Deferred Taxes, which requires that an entity classify deferred tax liabilities and assets as non-current amounts. The guidance requires that entities within a particular tax jurisdiction offset all deferred tax liabilities and assets, as well as any related valuation allowances, and present the amounts as a single non-current amount. The guidance is effective for us beginning in the first quarter of 2017, and early adoption is permitted. We elected to adopt this guidance in the fourth quarter of 2015 and retrospectively for all periods presented. The implementation did not have a material effect on our consolidated financial statements.
In September 2015, the FASB issued new accounting guidance related to business combinations, Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance also requires that the acquirer record, in the same period’s financial statements, the effect of changes in depreciation, amortization or other income effects on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The update also requires an entity to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for us beginning in the first quarter of 2016, and early adoption is permitted. We elected to adopt this guidance in the fourth quarter of 2015 and retrospectively for all periods presented. The implementation did not have a material effect on our consolidated financial statements.
In April 2015, the FASB issued new accounting guidance related to cloud computing fees, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on the accounting for fees paid in a cloud computing arrangement. Under the new standard, customers will apply the same criteria as vendors to determine whether such an arrangement contains a software license or is solely a service contract. The guidance is effective for us in the first quarter of 2016, and early adoption is permitted. We elected to adopt this guidance in the third quarter of 2015. The implementation did not have a material effect on our consolidated financial statements.
In April 2015, the FASB updated accounting guidance related to interest, Imputation of Interest, which provides guidance on the presentation of debt issuance costs in financial statements. To simplify presentation of debt issuance costs, debt issuance costs related to a recognized debt liability are required to be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the update. The guidance is effective for us in the first quarter of 2016, and early adoption is permitted. We elected to adopt this guidance in the third quarter of 2015 and retrospectively for all periods presented. The implementation did not have a material effect on our consolidated financial statements.
Issued and Not Yet Adopted
In May 2015, 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 U.S. GAAP when it becomes effective for us on January 1, 2018, and early adoption is permitted only for annual periods beginning after December 15, 2016. The guidance permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements and related disclosures.
4. ACQUISITIONS
On July 1, 2015 (the “Acquisition Date”), we acquired, through a wholly-owned subsidiary, 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 $1,500.0 million debt offering executed in June 2015 (the “Financing”) (see Note 13 - Debt). The majority of the remaining debt proceeds were used to purchase the remaining 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 (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”). The assets held by TVN are considered complementary to our existing business and align with our international growth strategy.
To minimize the volatility in the purchase price that may have resulted from Euro to U.S. Dollar currency exchange rate changes, we entered into a foreign currency option contract during the first quarter of 2015 that effectively set the U.S. Dollar cash consideration for the Acquisition. We paid a $16.0 million premium to provide the Company a call option on €584 million at a cost of $625.0 million. The premium is reflected both as an expense in gain (loss) on derivatives within operating activities and as a cash outflow from foreign currency call option premium within investing activities in our consolidated statements of cash flows for the year ended December 31, 2015. The foreign currency option contract was settled during the second quarter of 2015, and the $31.9 million resulting gain is included both as a gain in gain (loss) on derivatives within operating activities and a cash inflow from settlement on derivatives within investing activities in our consolidated statements of cash flows for the year ended December 31, 2015.
The net impact of the various foreign currency contracts executed as a result of the Transactions resulted in a $44.2 million net gain for the year ended December 31, 2015, which is included within gain (loss) on derivatives in our consolidated statements of operations.
We also recognized $24.2 million of net losses for the year ended December 31, 2015 related to the foreign currency effects on cash balances held for the Transactions. These losses are included within miscellaneous, net in our consolidated statements of operations.
Within three months of completing the Acquisition, the Company was required under Polish law to launch a mandatory public tender offer for a minimum ownership of 66.0 percent of TVN’s total voting shares outstanding. On June 9, 2015 the Company announced its intention to tender for all remaining outstanding voting shares of TVN to achieve 100.0 percent ownership. On July 6, 2015, the Company tendered for the remaining outstanding voting shares of TVN at a purchase price equal to 20.0 Zloty per share. Final cash consideration paid was approximately $853.9 million. The window to tender shares opened July 24, 2015 and continued through August 24, 2015, resulting in the acquisition of an additional 156.7 million shares, or a cumulative 98.8 percent ownership of TVN’s outstanding share capital. This enabled the Company to effectuate the Squeeze-out for the remaining unredeemed shares, which was completed on September 28, 2015 and resulted in 100.0 percent ownership of TVN. As part of the integration of TVN, the Company, through TVN, filed the documentation required under Polish law to effect the delisting of TVN shares from the WSE, which became effective December 3, 2015.
The incremental shares purchased through the Tender Offer and Squeeze-out were financed through a combination of cash on hand, borrowings under our $900.0 million amended revolving credit facility (the “Amended Revolving Credit Facility”) and net proceeds from our $250.0 million term loan (the “Term Loan”) (see Note 13 - Debt). The initial 52.7 percent acquisition is reflected within investing activities in our consolidated statements of cash flows, while the subsequent Tender Offer and Squeeze-out are recognized within financing activities as a purchase of non-controlling interest.
We incurred transaction and integration related costs of $28.3 million associated with the Acquisition. These transaction and integration costs are included within selling, general and administrative expenses in our consolidated statements of operations and reduced net income attributable to SNI by $17.4 million.
On July 31, 2015, the Company paid €364.9 million to retire the €300.0 million Senior PIK Toggle Notes due 2021 (“the 2021 PIK Notes”), which was debt at the parent of TVN and included as a component of the debt assumed in the Acquisition purchase price. The payment included the aggregate principal and a required make-whole component totaling €363.4 million, as well as accrued and unpaid interest of €1.5 million. The extinguishment of debt, including the make-whole component, is reflected as a financing activity in our consolidated statements of cash flows.
On September 15, 2015, TVN executed a partial pre-payment of its 7.38% Senior Notes due 2020 (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. Under the terms of the 2020 TVN Notes, TVN has the right to make a payment of 10.0 percent of the original principal amount in each rolling twelve month period prior to December 31, 2016 without an early pre-payment penalty.
On November 16, 2015, TVN Finance Corporation III AB (“TVN Finance Corp.”), an indirect wholly-owned subsidiary of the Company, executed a second partial pre-payment of the 2020 TVN Notes totaling €45.6 million, comprised of principal of €43.0 million, accrued but unpaid interest of €1.3 million and premium of €1.3 million.
On November 16, 2015, TVN Finance Corp. executed a full early redemption of its 7.88% Senior Notes due 2018 (the “2018 TVN Notes”) totaling €118.9 million, comprised of principal of €116.6 million, accrued but unpaid interest of a nominal amount and premium of €2.3 million. An additional €4.6 million was paid simultaneously in fulfillment of the November 15 coupon payment due. The extinguishment of debt is reflected as a financing activity in our consolidated statements of cash flows.
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 for the period beginning on the Acquisition Date and ended on December 31, 2015 in our consolidated financial statements.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the Acquisition Date. Certain estimated values for the Acquisition, including goodwill, investments, intangibles and deferred taxes are not yet finalized. Therefore, the preliminary purchase price allocations are subject to change as we complete our analysis of the fair value at the Acquisition Date. The purchase price was allocated based on information available at the Acquisition Date.
The following table represents the preliminary fair value of identifiable intangible assets and their assumed estimated useful lives.
As a result of the Acquisition, we preliminarily recognized goodwill of $1,259.4 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 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 margins, growth rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flow 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 2014, with TVN’s pre-acquisition results combined with our historical results. 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, 2014, nor do they represent the results that may occur in the future.
We did not recognize any contingent consideration arising from the Acquisition.
TVN contributed operating revenues of $224.7 million and operating income of $36.7 million for 2015 from the Acquisition Date through December 31, 2015.
5. EMPLOYEE AND CONTRACT TERMINATION COSTS
Restructuring Plan
During the fourth quarter of 2014, we announced a plan to provide 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 the Company would be closing its Cincinnati, OH office location in 2015 and relocating certain employees to its Knoxville, TN headquarters during 2015. Our 2015 and 2014 operating results include $17.9 million and $14.4 million, respectively, of severance, retention and related retirement benefit costs, as well as relocation and accelerated depreciation expense that was incurred as a result of the Restructuring Plan. Net income attributable to SNI was reduced by $11.1 million and $8.9 million in 2015 and 2014, respectively. The Restructuring Plan was substantially completed as of December 31, 2015.
A rollforward of the liability related to Restructuring Plan charges by segment is as follows:
Reorganization
During the fourth quarter of 2015, the Company committed to undertaking activities intended to streamline and integrate the management of its various networks, creating a cohesive and holistic organization (the “Reorganization”). As part of the Reorganization, the Company announced it would be relocating certain employees to its Knoxville, TN headquarters during 2016. Our 2015 operating results include $3.9 million of costs for severance, retention and related benefit costs incurred as a result of the Reorganization, and net income attributable to SNI was reduced by $2.4 million in 2015. We anticipate that the Reorganization will be completed by the end of 2016.
A rollforward of the liability related to the charges by segment is as follows:
Contract Termination Costs
During the second quarter of 2014, we reached an agreement to terminate the master services agreement and sales agency agreement related to services provided for our Food Network and Fine Living operations in EMEA. We also entered into an arrangement that established a transition plan for us to assume the activities associated with these provided services. Selling, general and administrative includes a $9.7 million charge in 2014 for the early termination of these agreements.
6. FAIR VALUE MEASUREMENT
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified in one of three categories described below.
·
Level 1 - Quoted prices in active markets for identical assets or liabilities.
·
Level 2 - Inputs, other than quoted market prices in active markets, that are observable either directly or indirectly. Quoted prices for similar instruments in active markets or model driven valuations in which all significant inputs and significant value drivers are observable in active markets.
·
Level 3 - Valuations derived from valuations techniques in which one or more significant inputs or significant value drivers are unobservable.
There have been no transfers of assets or liabilities between the fair value measurement classifications during the year ended December 31, 2015.
The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of December 31:
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.
We determine the fair market value of the redeemable non-controlling interest using a combination of a discounted cash flow valuation model and a market approach that applies revenues and EBITDA estimates against the calculated multiples of comparable companies. Operating revenues and EBITDA are key assumptions utilized in both the discounted cash flow valuation model and the market approach. The selected discount rate of approximately 10.5 percent is also a key assumption in our discounted cash flow valuation model (See Note 16-Redeemable Non-controlling Interests and Non-controlling Interest). Subsequent to year end we agreed to pay the non-controlling interest owner $99.0 million to acquire the 35.0 percent outstanding share of our redeemable non-controlling interest in Travel Channel (see Note 24 - Subsequent Events).
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 consolidated statements of operations.
Other Financial Instruments
The carrying values of our financial instruments do not materially differ from their estimated fair values as of December 31, 2015 and December 31, 2014 except for debt, which is disclosed in Note 13 - Debt.
Non-Recurring Measurements
The majority of the Company’s non-financial instruments, which include goodwill and 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 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.
7. INVESTMENTS
Investments consisted of the following:
During the year ended December 31, 2015, we recognized impairments on our cost method investments of $0.4 million. We did not recognize any impairments on our cost method investments during the twelve months ended December 31, 2014.
During 2015, the Company paid $30.5 million to acquire a 10.0 percent non-controlling interest in Refinery29, a web-based media site whose focus is female millennial audiences. Also in 2015, we paid $2.0 million for a minor interest in Thrive Market and $2.0 million for an incremental ownership interest in Tastemade. These investments are being accounted for under the cost method of accounting.
The Company’s acquisition of N-Vision resulted in the addition of certain equity method investments that are held by TVN or a subsidiary of TVN. On a consolidated basis, investments accounted for using the equity method include the following:
* Acquired as a part of the N-Vision Acquisition
UKTV
UKTV receives financing through a loan provided by us. The loan, totaling $112.1 million at December 31, 2015 and $116.2 million at December 31, 2014, is reported within other non-current assets on our consolidated balance sheets, effectively act 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 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 December 31, 2015 and December 31, 2014, the Company’s investment in UKTV was $353.4 million and $376.9 million, respectively.
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 recorded on these intangible assets reduces the equity in earnings recognized from our UKTV investment. The table below summarizes estimated amortization that we expect to reduce the Company’s equity in UKTV’s earnings for future periods:
nC+
TVN’s investment in nC+ is held subject to the terms of a shareholders’ agreement, which includes provisions regarding the composition of the management and supervisory boards and the appointment of their members, an exit strategy and a list of matters which require the consent of TVN. According to the shareholders’ agreement, nC+ shall distribute 75.0 percent of its distributable consolidated profits to shareholders in proportion to their pro rata share. Canal+ Group (“Canal+”), the controlling interest owner, has call options to acquire TVN’s 32.0 percent of nC+ at market value, which options are exercisable during the three month periods beginning November 30, 2015 and November 30, 2016. Additionally, TVN and Canal+ have the right following the call option periods to sell its interest in nC+ (with Canal+ having the right to require TVN to sell its shares in nC+ on the same terms) and, if not exercised, TVN has the right to require nC+ to undertake an initial public offering (“IPO”).
A portion of the purchase price from our 32.0 percent investment in nC+, as a result of the acquisition of N-Vision, was attributed to amortizable intangible assets, which is included in the carrying value of our nC+ investment. Amortization recorded on these intangible assets reduces the equity in earnings recognized from our nC+ investment.
Onet
The Company, through TVN Online Investments Holding, holds a 25.0 percent interest in Onet Holding Group (Onet Holding Sp. z o.o. and its subsidiaries, “Onet”), and Ringier Axel Springer Media AG (“RAS”) holds the remaining 75.0 percent interest and is the controlling interest owner. As TVN has significant influence on, but not control over, Onet, this investment is accounted for using the equity method of accounting. The shareholders’ agreement, which regulates the cooperation between TVN and RAS with respect to Onet and, indirectly, Onet Group (“Grupa Onet”), contains a swap option for TVN to exchange a number of TVN’s subsidiaries’ shares in Onet for the shares in RAS, which option is valid if RAS conducts an IPO. Furthermore, under the shareholders’ agreement, the following options are granted: the first put option for TVN (or its subsidiary) to sell all its shares in Onet to RAS at any time during (i) the 90-day period commencing on January 1, 2016 or (ii) the 20 business day period commencing after Onet’s shareholders’ meeting has approved its financial statements for the most recently concluded financial year, whichever period ends later; and the call option for RAS to acquire the shares in Onet’s share capital from TVN (or its subsidiary) at any time during (i) the 90-day period commencing on January 1, 2017 or (ii) the 20 business day period commencing after Onet’s shareholders’ meeting has approved its financial statements for the most recently concluded financial year, whichever period ends later; and the second put option for TVN (or its subsidiary) to sell all its shares in Onet to RAS at any time within 60 days following the expiration of the call option period.
The shareholders’ agreement also contains the standard “joint-exit” clauses allowing TVN and RAS to sell jointly all their shares in Grupa Onet held directly or indirectly (drag-along and tag-along rights). The shareholders’ agreement also contains a call option for RAS in the event that TVN no longer controls, directly or indirectly, its stake in Onet. According to the shareholders’ agreement, Onet shall distribute at least 70.0 percent of its distributable consolidated profits to shareholders in proportion to their pro rata share.
Fox-BRV Southern Sports Holdings
The Company exercises significant control over Fox-BRV Southern Sports Holdings (“Fox South”) through board positions held and, therefore, this investment is accounted for using the equity method of accounting (see Note 24 - Subsequent Events).
Aggregated statement of operations data for investments accounted for under the equity method of accounting is as follows:
Aggregated balance sheet information for investments accounted for under the equity method of accounting is as follows:
8. PROGRAMS AND PROGRAM LICENSES
Programs and program licenses consisted of the following:
In addition to the programs owned or licensed by us included in the table above, we have commitments to license certain programming that is not yet available for broadcast. Remaining obligations under contracts to purchase or license programs not yet available for broadcast totaled approximately $240.0 million and $244.0 million at December 31, 2015 and December 31, 2014, respectively. If the programs are not produced, our commitment to license the programs would generally expire without obligation.
Program and program license expense, which consists of program amortization and program impairments, is included within cost of services in our consolidated statements of operations. Program impairments totaled $70.4 million in 2015, $38.4 million in 2014 and $32.0 million in 2013.
Estimated amortization of recorded program assets and program commitments for each of the next five years is as follows:
Actual amortization in each of the next five years will exceed the amounts presented above as we will continue to produce and license additional programs.
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
Activity related to goodwill and amortizable intangible assets by segment is as follows:
Separately acquired intangible assets reflect the acquisition of certain rights that will expand our opportunity to earn future revenues. Cash payments for these acquired rights totaled $11.0 million, $10.9 million and $31.3 million in 2015, 2014 and 2013, respectively, and are reported as other, net in our consolidated statements of cash flows.
To determine the fair value of our reporting units, we used market data and discounted cash flow analyses. As the primary determination of fair value is determined using a discounted cash flow model, the resulting fair value is considered a Level 3 measurement. No impairment charges were identified as a result of our goodwill analyses in 2015 or 2014. We recorded a $24.7 million charge in 2013 to write-down goodwill associated with our EMEA reporting unit driven by delayed expansion into certain markets.
Amortization expense associated with intangible assets for each of the next five years is expected to be as follows:
11. OTHER ACCRUED LIABILITIES
Other accrued current liabilities consisted of the following:
12. INCOME TAXES
We file a consolidated U.S. federal income tax return, unitary tax returns in certain states and separate income tax returns for certain of our subsidiary companies in other states, as well as in foreign jurisdictions. Included in our federal and state income tax returns is our proportionate share of the taxable income or loss of partnerships and limited liability companies that are treated as partnerships for tax purposes (“pass-through entities”). Our consolidated financial statements do not include any significant provision for income taxes on the income of pass-through entities attributed to the non-controlling interests.
Food Network and Cooking Channel are operated under the terms of a general partnership agreement (“Partnership”). The Travel Channel is a limited liability company and treated as a partnership for tax purposes.
Income (loss) from operations before income taxes consisted of the following:
The determination of US/non-US is primarily based on legal entity structure, which differs from our reportable segment structure.
The provision for income taxes consisted of the following:
During the years ended December 31, 2015, December 31, 2014 and December 31, 2013, a current tax benefit of $1.2 million, $12.3 million and $4.9 million, respectively, was allocated directly to shareholders’ equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.
The difference between the statutory rate for federal income tax and the effective income tax rate was as follows:
The approximate effect of the temporary differences giving rise to deferred income tax (assets) liabilities were as follows:
As of December 31, 2015, there were $2.3 million of net operating loss carry-forwards for federal income tax purposes with expiration beginning in 2032 while there were approximately $17.9 million of net operating loss carry-forwards in various state jurisdictions with expiration dates between 2028 and 2034. Net operating loss carry-forwards in various foreign jurisdictions were approximately $736.4 million as of December 31, 2015. Some of the foreign losses have an indefinite carry-forward period and certain of the foreign losses expire beginning in 2016. A large portion of the deferred tax assets for the foreign and state loss carry-forwards have been reduced by a valuation allowance of $109.2 million, as it is more likely than not that these loss carry-forwards will not be realized.
At December 31, 2015, capital losses available to the Company totaled $25.6 million, with most of these losses scheduled to expire in 2016. Accordingly, a valuation allowance of $9.3 million was recorded on the deferred tax asset for these losses, as management believed it was more likely than not that the capital losses would not be utilized based on information available as of December 31, 2015. However, as described in Note 24 - Subsequent Events, the Company and the controlling interest owner of Fox Sports agreed to a purchase price for which the Company would exercise its put right to require the controlling interest owner to acquire SNI’s interest in this investment. The sale of the Company’s interest in Fox Sports is expected to generate a capital gain, which would enable the utilization of these capital loss carry-forwards.
The Company has recorded a valuation allowance against deferred tax assets of $123.4 million and $40.7 million as of December 31,
2015 and December 31, 2014, respectively, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management’s determination of the Company’s ability to realize these deferred tax assets may result in a decrease in the provision for income taxes. During the year ended December 31, 2015, the valuation allowance was increased by $47.3 million related to net operating losses generated by N-Vision and the TVN entities prior to the Transactions. The remainder of the valuation allowance increase is primarily related to management’s determination that it is more likely than not that certain foreign net operating losses incurred during the year ended December 31, 2015 will not be realized. Additionally as of December 31, 2015, $73.0 million of the total valuation allowance recorded relates to deferred tax assets in connection the TVN Transactions. If any portion of this valuation allowance is reversed during the measurement period, which is still open as of December 31, 2015, it is possible that the reversal could result in a credit directly to goodwill or contributed capital. However, the Company does not believe this is a likely event.
No provision has been made for United States federal and state income taxes or international income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which were approximately $105.6 million at December 31, 2015. Determination of the amount of any unrecognized deferred income tax liability on these is not practicable.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
The total net unrecognized tax benefits that would affect the effective tax rate if recognized was $78.3 million at December 31, 2015, $62.8 million at December 31, 2014 and $65.4 million at December 31, 2013. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. We have recognized interest expense of approximately $0.1 million in 2015, $0.5 million in 2014 and $2.8 million in 2013. We have accrued gross interest and penalties of approximately $11.5 million in 2015, $10.9 million in 2014 and $10.2 million in 2013.
We file income tax returns in the U.S. and in various state, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. As of December 31, 2015, the Company is no longer subject to U.S. federal examinations for years before 2012. It is possible that examinations by tax authorities in state and foreign jurisdictions may be resolved within twelve months. Exclusive of interest and penalties, it is reasonably possible that our gross unrecognized tax benefits may decrease within the next twelve months by a range of zero to $63.5 million, primarily due to settlement of tax examinations and expiration of the statute of limitations.
With a few exceptions, the Company is no longer subject to examinations by state, local or foreign tax authorities for years prior to 2011.
13. DEBT
Debt consisted of the following:
*
The fair value of the senior notes were estimated using level 2 inputs comprised of quoted prices in active markets, market indices and interest rate measurements for debt with similar remaining maturity.
Revolving Credit Facilities
On March 31, 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.
On May 18, 2015, we entered into the Amended Revolving Credit Facility to amend the Facility. The Amended Revolving Credit Facility provides $250.0 million additional revolving loan capacity permitting borrowings up to an aggregate principal amount of $900.0 million, which may be increased to $1,150.0 million at our option. Additionally, the Amended Revolving Credit Facility extends the maturity one year to a scheduled maturity of 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 outstanding borrowings of $389.2 million under the Amended Revolving Credit Facility at December 31, 2015, incurring interest at a rate of approximately 1.44% throughout the year ended December 31, 2015. The Company had $1.1 million of outstanding letters of credit under the Amended Revolving Credit Facility at December 31, 2015, and there were no outstanding borrowings or letters of credit under the Facility at December 31, 2014.
At the Acquisition Date, TVN had an outstanding revolving credit facility (the “TVN Facility”) in the amount of PLN 300.0 million and a cash loan (the “Cash Loan”) in the amount of €25.0 million bearing interest at a floating rate of EURIBOR for the relevant interest period, plus the bank’s margin. The TVN Facility and Cash Loan were scheduled to mature in June 2017, but both were repaid in full and cancelled as of December 31, 2015.
Term Loan
On June 26, 2015, we entered into a $250.0 million senior unsecured Term Loan agreement. The Term Loan has a maturity date of 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 1.37% for the year ended December 31, 2015.
Senior Notes
In November 2014, we completed the sale of $500.0 million aggregate principal amount of 2.75% Senior Notes due 2019 (the “2019 Notes”) and $500.0 million aggregate principal amount of 3.90% Senior Notes due 2024 (the “2024 Notes”). Interest is due on the 2019 Notes and 2024 Notes on May 15th and November 15th each year. Net proceeds from the issuance of these notes were utilized to repay our $885.0 million aggregate principal amount of 3.55% Senior Notes that matured in January 2015.
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 15th and December 15th of each year.
On June 2, 2015, we completed the sale of $600.0 million aggregate principal amount of 2.80% Senior Notes due 2020 (the “2020 Notes”), $400.0 million aggregate principal amount of 3.50% Senior Notes due 2022 (the “2022 Notes”) and $500.0 million aggregate principal amount of 3.95% Senior Notes due 2025 (the “2025 Notes” and together with the 2020 and 2022 Notes, the “Newly Issued Notes”). The Newly Issued Notes are unsecured senior obligations of the Company and rank equally in right of payment with the Company’s existing and future unsecured and unsubordinated indebtedness. The proceeds of the Newly Issued Notes were used, in part, to fund the Transactions (see Note 4 - Acquisitions).
Amounts capitalized and included as a reduction against long term debt on our consolidated balance sheets include $20.4 million of debt issuance costs related to the Amended Revolving Credit Facility, Term Loan and Newly Issued Notes, all of which were undertaken to finance the Transactions. We amortized $6.0 million and $3.0 million of debt issuance costs for the years ended December 31, 2015 and December 31, 2014, respectively, within interest expense, net in our consolidated statements of operations.
On July 31, 2015, the Company paid €364.9 million to retire the €300.0 million 2021 PIK Notes, which was debt at the parent of TVN and included as a component of the debt assumed in the Acquisition purchase price. The payment included the aggregate principal and a required make-whole component totaling €363.4 million, as well as accrued and unpaid interest of €1.5 million. The extinguishment of debt, including the make-whole component, is reflected as a financing activity in our consolidated statements of cash flows.
On November 19, 2010, TVN Finance Corp. issued the 2018 TVN Notes. On November 16, 2015, TVN Finance Corp. executed a full early redemption of the 2018 TVN Notes totaling €118.9 million, comprised of principal of €116.6 million, accrued but unpaid interest of a nominal amount and premium of €2.3 million. An additional €4.6 million was paid at the same time in fulfillment of the November 15 coupon payment due. The extinguishment of debt is reflected as a financing activity in our consolidated statements of cash flows.
On September 16, 2013, TVN Finance Corp. issued the 2020 TVN Notes. Prior to December 15, 2016 TVN Finance Corp may redeem up to 40 percent of the original principal amount of the 2020 TVN Notes with net cash proceeds of one or more equity offerings at a redemption price of 107.38% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. Also, prior to December 15, 2016, TVN Finance Corp. may redeem up to 10.0 percent of the original principal amount of the 2020 TVN Notes at a redemption price equal to 103.00% of the aggregate principal amount plus accrued and unpaid interest, if any, to the redemption date. A 10.0 percent redemption was executed in September 2015 and in November 2015, leaving one more opportunity to redeem another 10.0 percent at 103.00% prior to December 16, 2016. At any time prior to December 16, 2016 TVN Finance Corp. may redeem the 2020 TVN Notes in whole, but not in part, at a price equal to 100.00% of the principal amount plus the applicable make-whole premium and accrued and unpaid interest, if any, up to the redemption date. The 2020 TVN Notes are senior unsecured obligations and are governed by a number of covenants including, but not limited to, restrictions on the level of additional indebtedness, payment of dividends, sale of assets and transactions with affiliated companies.
On September 15, 2015 TVN executed a 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.
On November 16, 2015, TVN Finance Corp. executed a second partial pre-payment of the 2020 TVN Notes totaling €45.6 million, comprised of principal of €43.0 million, accrued but unpaid interest of €1.3 million and premium of €1.3 million. At December 31, 2015, €344.0 million was outstanding on the 2020 TVN Notes.
Debt Covenants
The Amended Revolving Credit Facility, Term Loan, all of our Senior Notes and the TVN debt all include certain affirmative and negative covenants, including limitations on the incurrence of additional indebtedness and maintenance of a maximum leverage ratio.
14. OTHER LIABILITIES
Other liabilities consisted of the following:
15. FOREIGN EXCHANGE RISK MANAGEMENT
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 of $118.6 million at December 31, 2015, $124.3 million December 31, 2014 and $236.0 million at December 31, 2013.
The cash flow settlements from these derivative contracts are primarily reported within investing activities in the consolidated statements of cash flows.
We recognized $50.3 million of gains in 2015, $2.8 million of gains in 2014 and $7.1 million of losses in 2013 from these forward contracts, included within gain (loss) loss on derivatives in the consolidated statements of operations. The gains and losses from these forward contracts are offset by foreign exchange transaction losses of $22.4 million that were recognized in 2015, $4.2 million of losses that were recognized in 2014 and $2.8 million of gains that were recognized in 2013. Foreign exchange transaction gains and losses are included within miscellaneous, net in our consolidated statements of operations.
16. REDEEMABLE NON-CONTROLLING INTERESTS AND NON-CONTROLLING INTEREST
Redeemable Non-controlling Interests
A non-controlling owner holds a 35.0 percent interest in the Travel Channel. The owner of the non-controlling interest has a put option requiring us to repurchase their interest, and we have a call option to acquire their interest. The owner of the non-controlling interest will receive negotiated value for their interest at the time either option is exercised. The put option on the non-controlling interest in the Travel Channel became exercisable on August 18, 2014, and our call option became exercisable on December 15, 2015. On January 6, 2016, the Company notified the owner of the non-controlling interest of its intention to exercise the call option, resulting in 100.0 percent ownership of Travel Channel (see Note 24 - Subsequent Events).
A non-controlling owner holds a 30.0 percent interest in Food Network Latin America (“FNLA”). The owner of the non-controlling interest has a put option requiring us to repurchase their interest, and we have a call option to acquire their interest. The owner of the non-controlling interest will receive fair market value for their interest at the time either option is exercised. The put option on the non-controlling interest in FNLA becomes exercisable in 2017, and our call option becomes exercisable in 2024, or upon the occurrence of other contractual call events as outlined in the agreement.
Non-controlling Interest
The Food Network and Cooking Channel are operated and organized under the terms of the Partnership. The Company and a non-controlling owner hold interests in the Partnership. During the fourth quarter of 2014, the Partnership was extended and specifies a dissolution date of December 31, 2016. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits the Company, as holder of 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.
See Note 4 - Acquisitions for further discussion regarding the non-controlling interest arising from the Transactions.
17. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
We sponsor a defined benefit pension plan (“Pension Plan”) covering a majority of our U.S.-based employees. Expense recognized in relation to the pension plan is based upon actuarial valuations. Inherent in those valuations are key assumptions including discount rates and, where applicable, expected returns on assets and projected future salary rates. The discount rates used in the valuation of the Pension Plan are evaluated annually based on current market conditions. Benefits are generally based on the employee’s compensation and years of service.
We also have a non-qualified supplemental executive retirement plan (“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, we amended the Pension Plan. In accordance with the provisions of the Pension Plan amendment, no additional service benefits will be earned by participants in the Pension Plan 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 December 31, 2019, all plan participants will have a frozen pension benefit.
The measurement date used for the Pension Plan and SERP is December 31. The components of the expense consisted of the following:
In the fourth quarter of 2014, we announced the Restructuring Plan, providing each 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 and Contract Termination Costs). The special termination charge represents the cost of providing these additional benefits to the employees retiring under the terms of the early retirement program.
During 2015 and 2014, we recognized $4.5 million and $4.3 million, respectively, of settlement charges related to lump-sum distributions from our Pension Plan and SERP. Settlement charges are recorded when total lump sum distributions for a plan’s year exceed the total projected service cost and interest cost for that plan year.
Assumptions used in determining the annual retirement plans expense were as follows:
The discount rate used to determine our future pension obligations is based on a bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans.
The expected long-term rate of return on plan assets is based on the weighted-average expected rate of return and capital market forecasts for each asset class employed. Our expected rate of return on plan assets also considers our historical compounded return on plan assets for 10 and 15 year periods.
The increase in compensation levels assumption is based on actual past experience and the near-term outlook.
Obligations and Funded Status
Defined benefit pension plan obligations and funded status are actuarially valued as of the end of each year. The following table presents information about our plan assets and obligations:
Other changes in plan assets and benefit obligations recognized in net periodic benefit cost and other comprehensive loss (income) consist of:
We expect to recognize amortization from accumulated other comprehensive (loss) income into net periodic benefit costs of $2.1 million and $2.1 million for the net actuarial loss during 2016 related to our Pension Plan and SERP, respectively.
Information for defined benefit plans with an accumulated benefit obligation in excess of plan assets was as follows:
Information for defined benefit plans with a projected benefit obligation in excess of plan assets was as follows:
Assumptions used to determine benefit obligations for the defined plans was as follows:
Plan Assets
Our investment policy is to maximize the total rate of return on plan assets to meet the long-term funding obligations of the Pension Plan. Plan assets are invested using a combination of active management and passive investment strategies. Risk is controlled through diversification among multiple asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning return targets and evaluating performance against these targets. Information related to our Pension Plan asset allocations by asset category were as follows:
U.S. equity securities include common stocks of large, medium and small companies, which are predominantly U.S.-based. Non-U.S. equity securities include common stocks of large, medium and small companies which are domiciled outside the U.S. Fixed-income
securities include securities issued or guaranteed by the U.S. government and corporate debt obligations, as well as investments in hedge fund products. Real estate investments include, but are not limited to, investments in office, retail, apartment and industrial properties.
Fair Value Measurements
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.
The following table sets forth our plan asset categories that are measured at fair value as of December 31, 2015 and the level of inputs utilized for fair value.
The following table sets forth our plan asset categories that are measured at fair value as of December 31, 2014 and the level of inputs utilized for fair value.
Cash Flows
Subsequent to year-end, the Company made a voluntarily contribution of $10.0 million to the Pension Plan investment fund. We anticipate contributing $17.5 million to fund current benefit payments for the SERP in 2016.
The estimated future benefit payments expected to be paid out of the plans for the next ten years are as follows:
Defined Contribution Retirement Plan
Substantially all U.S.-based employees of the Company are covered by a Company-sponsored defined contribution plan (“DC Plan”). The Company matches a portion of employees’ voluntary contribution to this plan and makes additional contributions to eligible employees’ 401K accounts in accordance with enhanced provisions to the DC Plan. The amount contributed to each employee’s account is a percentage of the employee’s total eligible compensation based upon age and service with the Company as of the first day of each year. Expense related to our DC plan was $17.4 million in 2015, $17.5 million in 2014 and $16.4 million in 2013.
Employees of our newly-acquired TVN subsidiary are covered by state managed defined contribution plans. Contributions to these defined contribution plans are charged to the income statement in the period to which they relate.
Executive Deferred Compensation Plan
We have an unqualified executive deferred compensation plan (“Deferred Compensation Plan”) that is available to certain management level employees and directors of the Company. Under the Deferred Compensation Plan, participants may elect to defer receipt of a portion of their annual compensation. The Deferred Compensation Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits. We may use corporate-owned life insurance contracts held in a rabbi trust to support the plan. We have investments valued at $42.8 million, including $27.0 within this rabbi trust and $15.8 million held in mutual funds, at December 31, 2015. The cash surrender value of the Company-owned life insurance contracts totaled $27.0 million and $20.7 million at December 31, 2015 and December 31, 2014, respectively, and is included within other non-current assets on our consolidated balance sheets. Gains or losses related to these insurance contracts are included within miscellaneous, net in our consolidated statements of operations. The unsecured obligation to pay the deferred compensation, including deferred directors fees, and adjusted to reflect the positive or negative performance of investment measurement options selected by each participant, totaled $42.0 million and $42.8 million at December 31, 2015 and December 31, 2014, respectively.
18. COMPREHENSIVE INCOME
Changes in the accumulated other comprehensive income or loss (“AOCI”) balance by component consisted of the following adjustments for the respective years:
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 and settlement charges. These amounts are included within selling, general and administrative in our consolidated statements of operations (see Note 17 - Employee Benefit Plans).
19. CAPITAL STOCK AND SHARE COMPENSATION PLANS
Capital Stock
SNI’s capital structure includes common voting shares and class A common shares. The 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
Our Amended LTI Plan provides for long-term equity incentive compensation for key employees and members of the Board. The Amended LTI Plan authorizes the grant of equity-based compensation to our non-employee directors, officers and other key employees in the form of incentive or non-qualified stock options, stock appreciation rights, restricted shares, RSUs, PBRSUs and other share-based awards and dividend equivalents. The Company has reserved 8.0 million class A common shares for issuance or delivery under the Amended LTI Plan.
The Amended LTI Plan will remain in effect until February 19, 2025, unless sooner terminated by the Board. Termination will not affect grants and awards then outstanding. The Amended LTI Plan replaced our LTI Plan, and no further awards will be made under the LTI Plan. However, awards granted under the LTI Plan prior to shareholder approval of the Amended LTI Plan will 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 7.9 million at December 31, 2015.
Stock Options
Stock options grant the recipient the right to purchase class A common shares at not less than 100 percent of the fair market value on the date the option is granted. Stock options granted to employees generally vest ratably over a three year period, conditioned upon the individual's continued employment through that period, while those granted to non-employee directors vest over a one year period. Stock options also generally vest immediately upon retirement, death or disability of the employee or upon a change in control of the Company or of the business in which the individual is employed. Unvested awards are forfeited if employment is terminated for other reasons. Stock options granted to employees generally have eight year terms, while those granted to non-employee directors generally vest over a one year period and have a ten year term for options granted prior to 2010. Stock options granted 2010 and later have eight year terms.
Options generally become exercisable over a three year period. Information about options outstanding and options exercisable is as follows:
The following table presents additional information on exercises of stock options:
Restricted Stock Units
Awards of RSUs are converted into equal number of class A common shares at the vesting date. The fair value of RSUs is based on the closing price of SNI’s class A common shares on the grant date. RSUs vest over a range of one to five years, conditioned upon the continued employment through that period. RSUs also generally vest immediately upon retirement, death or disability of the employee or upon a change in control of the Company or of the business in which the individual is employed. We expect all unvested RSUs to vest.
The following table presents additional information about RSUs:
In addition, PBRSUs that have been awarded represent the right to receive a grant of RSUs if certain performance measures are met. Each award specifies a target number of shares to be issued and the specific performance criteria that must be met. The number of shares that an employee receives may be less or more than the target number of shares depending on the extent to which the specified performance measures are attained. The shares earned are issued as RSUs following the performance period and vest over a three year service period from the date of issuance. During 2015, PBRSUs with a target of 61,390 class A common shares were granted with a weighted-average grant date fair value of $72.30 and have a two year performance period based on the Company’s cash flow initiatives. During 2014, PBRSUs with a target of 60,310 class A common shares were granted with a weighted-average grant date fair value of $85.10 and have a two year performance period based on total shareholder return. We expect all unvested PBRSUs to vest.
Share-Based Compensation
In accordance with share-based payment accounting guidance, compensation cost is based on the grant date fair value of the award. The fair value of awards that grant the employee the right to the appreciation of the underlying shares, such as stock options, is measured using a binomial lattice model. A Monte Carlo simulation model is used to determine the fair value of awards with market conditions. The fair value of awards that grant the employee the underlying shares is measured by the fair value of a class A common share of SNI stock.
Compensation costs, net of estimated forfeitures due to termination of employment or failure to meet performance targets, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. However, because our share-based grants generally vest upon the retirement of the employee, grants to retirement-eligible employees are expensed immediately, and grants to employees who will become retirement-eligible prior to the end of the stated vesting period are expensed over such shorter period.
The weighted-average assumptions SNI used in the model are as follows:
Dividend yield considers our historical dividend yield paid and expected dividend yield over the life of the options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the valuation model. Expected volatility is based on a combination of historical share price volatility for a longer period and the implied volatility of exchange-traded options on our class A common shares.
A summary of share-based compensation costs is as follows:
As of December 31, 2015, $2.0 million of total unrecognized share-based compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.4 years. In addition, $15.3 million of total unrecognized share-based compensation cost related to RSUs and PBRSUs, is expected to be recognized over a weighted-average period of 1.4 years.
Share Repurchase Program
We have share repurchase programs (“Repurchase Programs”) authorized by the Board that permit us to acquire the Company’s class A common shares. During 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, who are considered to be related parties. During 2014, we repurchased 15.4 million shares for $1,200.0 million, including 4.5 million shares repurchased for $339.0 million from Scripps family members. During 2013, we repurchased 3.9 million shares for $253.2 million.
As of December 31, 2015, $1,512.5 million in authorization remains available for repurchase under the existing 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.
20. COMMITMENTS AND CONTINGENCIES
We are involved in litigation arising in the ordinary course of business, none of which is expected to result in a material loss.
Our minimum payments on non-cancelable leases at December 31, 2015 are as follows:
We expect that the majority of our operating leases will be replaced with leases for similar facilities upon their expiration.
Rental expense for cancelable and non-cancelable leases at December 31, 2015 was as follows:
In the ordinary course of business, we enter into long-term service contracts to obtain satellite transmission services or to obtain other services. Liabilities for such commitments are recorded when the related services are rendered.
Minimum payments on satellite and transmission services commitments at December 31, 2015 are as follows:
We expect these contracts will be replaced with similar contracts upon their expiration.
21. SEGMENT INFORMATION
The Company’s operating segments are determined based upon our management and internal reporting structure.
In the fourth quarter of 2014, we modified our management reporting structure related to the operating results from our uLive business. In conjunction with this change in reporting structure, we now report the results of uLive within U.S. Networks rather than within Corporate and Other.
As a result of the Acquisition (see Note 4 - Acquisitions), the international operating segment that was previously insignificant, has become significant. Therefore, the Company now has two reportable segments: U.S. Networks, previously referred to as Lifestyle Media, and International Networks.
As a result of these changes to our reportable segments, certain prior period segment results have been recast to reflect the current presentation (see Note 1 - Description of Business and Basis of Presentation).
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. The Food Network and Cooking Channel are included in the Partnership, of which we own 68.7 percent. We also own 65.0 percent of Travel Channel. Each of our networks is distributed by cable and satellite distributors and telecommunication service providers. U.S. Networks earns revenue primarily from the sale of advertising time and from affiliate fees paid by distributors of our content.
International Networks includes the lifestyle-oriented networks available in the UK, EMEA, APAC and Latin America. Additionally, International Networks includes TVN.
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 the U.S. Networks and International Networks segments. The Company generally does not allocate employee-related corporate overhead costs to its reportable segments, but rather classifies these expenses within Corporate and 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.
Our Chief Operating Decision Maker (“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 call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, investment results and certain other items included in net income determined in accordance with GAAP.
Intersegment revenue and program amortization eliminations are included within Corporate and Other, and totaled $26.3 and $13.3, respectively, for the twelve months ended December 31, 2015.
Information regarding our segments is as follows:
No single customer provides more than 10.0 percent of our revenue.
Other additions to long-lived assets include investments, capitalized intangible assets and capitalized programs.
As of December 31, assets held by our businesses outside of the United States totaled $3,238.2 million for 2015, $590.0 million for 2014 and $627.0 million for 2013.
22. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized financial information is as follows:
23. RELATED PARTY TRANSACTIONS
The Company has a retransmission consent compensation agreement (the “Retransmission Agreement”) with The E. W. Scripps Company (“EWS”) as a result of the spin-off from EWS in 2008. Members of the Scripps family who are parties to the Scripps Family Amended and Restated Agreement (the “Scripps Family Agreement”) hold a controlling interest in EWS, therefore EWS is a related party of the company. The Scripps Family Agreement governs the transfer and voting of all common voting shares held by certain descendants of Robert P. Scripps, descendants of John P. Scripps, certain trusts of which descendants of John P. Scripps or Robert P. Scripps are trustees or beneficiaries and an estate of a descendent of Robert P. Scripps, who are signatories to such agreement.
Under the Retransmission Agreement, SNI made payments to EWS totaling $4.8 million, $12.6 million and $12.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts are included in selling, general and administrative in the consolidated statements of operations.
The Company surrenders a portion of its taxable losses incurred in the UK to UKTV as consortium relief in accordance with the UK tax law. UKTV compensates the Company for the use of the taxable losses at a rate of 83.3 percent. As of December 31, 2015, December 31, 2014 and December 31, 2013, the Company recognized a tax benefit related to the surrender of UK losses of approximately $7.9 million, $1.3 million and $1.4 million, respectively. The net receivable due related to these tax benefits was approximately $4.5 million, $0.8 million and $3.1 million, respectively as of December 31, 2015, December 31, 2014, and December 31, 2013.
24. SUBSEQUENT EVENTS
On January 6, 2016, the Company notified the owner of Travel Channel’s non-controlling interest of its intention to exercise its call option, resulting in 100.0 percent ownership of Travel Channel. On February 25, 2016, the companies agreed on a purchase price in the amount of $99.0 million.
On February 24, 2016, the Company and the controlling interest owner of Fox Sports agreed to a purchase price of $225.0 million for which the Company exercised its put right to require the controlling interest owner to acquire SNI’s interest in this investment.
SCRIPPS NETWORKS INTERACTIVE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts
S-2
Valuation and Qualifying Accounts
for the Years Ended December 31, 2015, 2014 and 2013 Schedule II
S-2
SCRIPPS NETWORKS INTERACTIVE, INC. INDEX TO EXHIBITS
Exhibit
Number
Description of Item
Footnote
Exhibit No.
Incorporated
2.1
Separation and Distribution Agreement between Scripps Networks Interactive, Inc. and The E. W. Scripps Company
(1)
2.01
2.2
Contribution Agreement among TCM Parent, LLC, TCM Sub, LLC, Gulliver Media Holdings, LLC, Scripps Networks Interactive, Inc., Cox TMI, Inc., and Cox Communications, Inc.
(5)
2.1
2.3
Agreement among Flextech Broadband Limited, Virgin Media Investment Holdings Limited, Southbank Media Ltd. and Scripps Networks Interactive, Inc.
(9)
2.3
2.4
Agreement for Sale and Purchase of Shares in the Capital of N-Vision B.V. among ITI Media Group Limited, Groupe Canal + S.A., Southbank Media Ltd. And Scripps Networks Interactive, Inc.1
(22)
2.1
3.1
Amended and Restated Articles of Incorporation of Scripps Networks Interactive, Inc.
(4)
3.1
3.2
Amended and Restated Code of Regulations of Scripps Networks Interactive, Inc.
(4)
3.2
4.1
Specimen Certificate of Class A Common Shares of Scripps Networks Interactive, Inc.
(3)
4.1
4.2
Indenture between Scripps Networks Interactive, Inc. and U.S. National Bank Association, as trustee
(27)
4.1
4.3
First Supplemental Indenture (2.70% Senior Notes Due 2016) between Scripps Networks Interactive, Inc. and U.S. Bank National Association, as trustee
(10)
4.2
4.4
Second Supplemental Indenture (2.75% Senior Notes Due 2019 and 3.90% Senior Notes Due 2024) between Scripps Networks Interactive, Inc. and U.S. Bank National Association, as trustee
(19)
4.1
4.5
Third Supplemental Indenture (2.80% Senior Notes Due 2020, 3.50% Senior Notes Due 2022 and 3.95% Senior Notes Due 2025) between Scripps Networks Interactive, Inc. and U.S. National Bank Association, as trustee
(24)
4.1
4.6
Form of Global Note Representing the 2016 Notes
(10)
4.3
4.7
Form of Global Note Representing the 2019 Notes
(19)
4.2
4.8
Form of Global Note Representing the 2024 Notes
(19)
4.3
4.9
Form of Global Note Representing the 2020 Notes
(24)
4.1
4.10
Form of Global Note Representing the 2022 Notes
(24)
4.1
4.11
Form of Global Note Representing the 2025 Notes
(24)
4.1
10.1
Tax Allocation Agreement between Scripps Networks Interactive, Inc. and The E. W. Scripps Company
(2)
10.13
10.2
Employee Matters Agreement between Scripps Networks Interactive, Inc. and The E. W. Scripps Company
(2)
10.12
10.3
Scripps Networks Interactive, Inc. 2015 Long-Term Incentive Plan
(21)
Appendix I
10.4
Form of Nonqualified Stock Option Agreement (2015 Long-Term Incentive Plan)
(20)
4.4
10.5
Form of Restricted Share Unit Agreement (2015 Long-Term Incentive Plan)
(20)
4.5
10.6
Form of Performance-Based Restricted Share Unit Agreement (2015 Long-Term Incentive Plan)
(20)
4.6
10.7
Form of Nonqualified Stock Option Agreement (Non-Employee Directors) (2015 Long-Term Incentive Plan)
(20)
4.7
10.8
Form of Restricted Share Unit Agreement (Non-Employee Directors) (2015 Long-Term Incentive Plan)
(20)
4.8
10.9
Scripps Networks Interactive, Inc. 2008 Long-Term Incentive Plan
(31)
10.4
10.10
Form of Nonqualified Stock Option Agreement (2008 Long-Term Incentive Plan)
(32)
10.5
10.11
Form of Performance-Based Restricted Share Unit Agreement (2008 Long-Term Incentive Plan)
(33)
10.6
10.12
Form of Restricted Share Award Agreement (2008 Long-Term Incentive Plan)
(33)
10.7
10.13
Form of Performance-Based Restricted Share Unit Agreement (2008 Long-Term Incentive Plan)
(32)
10.8
10.14
Form of Restricted Share Unit Agreement (2008 Long-Term Incentive Plan)
(32)
10.8.B
S-3
10.15
Scripps Networks Interactive, Inc. Amended and Restated Executive Annual Incentive Plan*
(21)
Appendix II
10.16
Executive Deferred Compensation Plan (amended and restated effective January 1, 2011)*
(13)
10.1
10.17
2008 Deferred Compensation and Stock Plan for Directors
(3)
10.11
10.18
Executive Change in Control Plan (as amended and restated on November 16, 2012)*
(28)
10.12
10.19
2012 Executive Change in Control Plan*
(28)
10.13
10.20
Executive Severance Plan (as amended and restated effective October 6, 2014)*
(28)
10.14
10.21
Supplemental Executive Retirement Plan*
(29)
10.20
10.22
Amendment to Supplemental Executive Retirement Plan*
(6)
10.20.B
10.23
Employee Stock Purchase Plan
(30)
10.21
10.24
Amended and Restated Scripps Family Agreement among The E. W. Scripps Company, Scripps Networks Interactive, Inc. and the Family Shareholders**2
10.25
Employment Agreement between Scripps Networks Interactive, Inc. and Kenneth W. Lowe*
(7)
10.1
10.26
Amendment to Employment Agreement between Scripps Networks Interactive, Inc. and Kenneth W. Lowe*
(8)
10.2
10.27
Amendment No. 2 to Employment Agreement between Scripps Networks Interactive, Inc. and Kenneth W. Lowe*
(11)
10.3
10.28
Amendment No. 3 to Employment Agreement between Scripps Networks Interactive, Inc. and Kenneth W. Lowe*
(16)
10.4
10.29
Employment Agreement between Scripps Networks Interactive, Inc. and Burton Jablin*
(14)
10.31
10.30
Amendment No. 1 to Employment Agreement between Scripps Networks Interactive, Inc. and Burton Jablin*
(26)
10.31A
10.31
Employment Agreement between Scripps Networks Interactive, Inc. and Joseph G. NeCastro*
(7)
10.2
10.32
Amendment No. 1 to Employment Agreement between Scripps Networks Interactive, Inc. and Joseph G. NeCastro*
(12)
10.1
10.33
Amendment No. 2 to Employment Agreement between Scripps Networks Interactive, Inc. and Joseph G. NeCastro*
(15)
10.1
10.34
Amendment No. 3 to Employment Agreement between Scripps Networks Interactive, Inc. and Joseph G. NeCastro* **
10.35
Separation Agreement and General Release between Scripps Networks Interactive, Inc. and Joseph G. NeCastro* **3
10.36
Employment Agreement between Scripps Networks Interactive, Inc. and Mark S. Hale*
(18)
10.33
10.37
Employment Agreement between Scripps Networks Interactive, Inc. and Cynthia L. Gibson*
(13)
10.35
10.38
Employment Agreement between Scripps Networks Interactive, Inc. and Lori Hickok*
(34)
10.34
10.39
Five-Year Competitive Advance and Revolving Credit Facility Agreement
(17)
10.4
10.40
Amendment to Five-Year Competitive Advance and Revolving Credit Facility Agreement
(23)
10.40A
10.41
Senior Unsecured Term Loan Agreement among Scripps Networks Interactive, Inc., Wells Fargo Bank, National Association, and the Banks
(25)
10.41
12.1
Earnings to Fixed Charge Ratio**
14.1
Code of Ethics for CEO and Senior Financial Officers
(33)
21.1
Material Subsidiaries of Scripps Networks Interactive, Inc.**
23.1
Consent of Independent Registered Public Accounting Firm**
31(a)
Section 302 Certifications**
31(b)
Section 302 Certifications**
32(a)
Section 906 Certifications**
32(b)
Section 906 Certifications**
101.INS
XBRL Instance Document†
101.SCH
XBRL Taxonomy Extension Schema Document†
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document†
S-4
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document†
101.LAB
XBRL Taxonomy Extension Label Linkbase Document†
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document†
(1)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed on June 17, 2008, Commission File No. 001-34004.
(2)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed July 7, 2008, Commission File No. 001-34004.
(3)
Incorporated by reference to Registration Statement on Form 10, filed June 11, 2008, Commission File No. 001-34004.
(4)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed March 5, 2009, Commission File No. 001-34004.
(5)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed November 10, 2009, Commission File No. 001-34004.
(6)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed March 1, 2010, Commission File No. 001-34004.
(7)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed April 1, 2010, Commission File No. 001-34004.
(8)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed October 12, 2010, Commission File No. 001-34004.
(9)
Incorporated by reference to the Scripps Networks Interactive, Inc. Quarterly Report on Form 10-Q, filed November 9, 2011.
(10)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed December 1, 2011.
(11)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed August 3, 2012.
(12)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed November 20, 2012.
(13)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed March 1, 2013.
(14)
Incorporated by reference to the Scripps Networks Interactive, Inc. Quarterly Report on Form 10-Q, filed November 12, 2013.
(15)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed November 19, 2013.
(16)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed March 5, 2014.
(17)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed April 3, 2014.
(18)
Incorporated by reference to the Scripps Networks Interactive, Inc. Quarterly Report on Form 10-Q, filed November 6, 2014.
(19)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed November 24, 2014.
(20)
Incorporated by reference to the Scripps Networks Interactive, Inc. Registration Statement on Form S-8, filed November 30, 2015.
(21)
Incorporated by reference to the Scripps Networks Interactive, Inc. definitive proxy statement, filed April 1, 2015.
(22)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed March 16, 2015.
(23)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed May 18, 2015.
(24)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed June 2, 2015.
(25)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed June 30, 2015.
(26)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed August 24, 2015.
(27)
Incorporated by reference to the Scripps Networks Interactive, Inc. Registration Statement on Form S-3, filed November 14, 2014.
(28)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed February 27, 2015.
(29)
Incorporated by reference to the Scripps Networks Interactive, Inc. Registration Statement on Form 10, filed June 6, 2008, Commission File No. 001-34004.
(30)
Incorporated by reference to the Scripps Networks Interactive, Inc. Registration Statement on Form 10, filed June 3, 2008, Commission File No. 001-34004.
(31)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed February 29, 2012.
(32)
Incorporated by reference to the Scripps Networks Interactive, Inc. Annual Report on Form 10-K, filed March 1, 2011.
(33)
Incorporated by reference to the Scripps Networks Interactive, Inc. Registration Statement on Form 10, filed March 26, 2008, Commission File No. 001-34004.
(34)
Incorporated by reference to the Scripps Networks Interactive, Inc. Current Report on Form 8-K, filed May 7, 2015.
* Indicates management contract or compensatory plan, contract or arrangement.
** Filed herewith.
† Attached as Exhibit 101 to this Annual Report on Form 10-K are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014, and 2013, (iii) Consolidated Statements of Cash Flows for the Years Ended
S-5
December 31, 2015, 2014, and 2013, (iv) Consolidated Statements of Equity for the Years Ended December 31, 2015, 2014, and 2013, and (v) Notes to Consolidated Financial Statements.
S-6

Market Capitalization: 5468804.727813721
1-Year Return: 0.00172559916973114
252-Day Return: $252_day_return