Scripps Networks Interactive, Inc. (SNI)

FORM 10-Q | Quarterly Report
Scripps Networks Interactive, Inc. (Form: 10-Q, Received: 11/03/2017 14:29:51)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-34004

 

SCRIPPS NETWORKS INTERACTIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

Ohio

61-1551890

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

9721 Sherrill Boulevard

Knoxville, TN

37932

(Address of principal executive offices)

(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 31, 2017 there were 96,065,143 of the Registrant’s Class A Common Shares outstanding and 33,850,481 of the Registrant’s Common Voting Shares outstanding.

 

 

 

 


 

INDEX

SCRIPPS NETWORKS INTERACTIVE, INC.

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Balance Sheets

 

3

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income

 

5

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

Condensed Consolidated Statements of Shareholders’ Equity

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1A.

 

Risk Factors

 

41

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

41

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

41

 

 

 

 

 

Item 5.

 

Other Information

 

41

 

 

 

 

 

Item 6.

 

Exhibits

 

41

 

 

 

 

 

Index of Exhibits

 

42

 

 

 

 

 

Signatures

 

43

 

 

2


 

SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS ( UNAUDITED )

(in thousands, except share and par value amounts)

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,729

 

 

$

122,937

 

Accounts receivable, net of allowances: 2017 - $16,891; 2016 - $26,118

 

 

815,116

 

 

 

808,133

 

Programs and program licenses, net

 

 

651,997

 

 

 

591,378

 

Prepaid expenses and other current assets

 

 

74,567

 

 

 

135,651

 

Total current assets

 

 

1,656,409

 

 

 

1,658,099

 

Programs and program licenses, net (less current portion)

 

 

484,468

 

 

 

500,022

 

Investments

 

 

730,562

 

 

 

699,481

 

Property and equipment, net of accumulated depreciation: 2017 - $362,072; 2016 - $354,435

 

 

318,875

 

 

 

286,399

 

Goodwill, net

 

 

1,788,794

 

 

 

1,642,169

 

Intangible assets, net

 

 

1,102,208

 

 

 

1,092,682

 

Deferred income taxes

 

 

208,543

 

 

 

175,291

 

Other non-current assets

 

 

186,555

 

 

 

146,151

 

Total Assets

 

$

6,476,414

 

 

$

6,200,294

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

40,797

 

 

$

42,223

 

Accrued liabilities

 

 

165,147

 

 

 

152,480

 

Employee compensation and benefits

 

 

90,294

 

 

 

123,506

 

Program rights payable

 

 

73,564

 

 

 

70,403

 

Deferred revenue

 

 

150,247

 

 

 

77,987

 

Current portion of debt

 

 

-

 

 

 

249,932

 

Total current liabilities

 

 

520,049

 

 

 

716,531

 

Debt (less current portion)

 

 

2,665,867

 

 

 

2,952,454

 

Other non-current liabilities

 

 

318,541

 

 

 

302,881

 

Total liabilities

 

 

3,504,457

 

 

 

3,971,866

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Scripps Networks Interactive ("SNI") shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par - authorized: 25,000,000 shares; none outstanding

 

 

 

 

 

 

Common stock, $0.01 par:

 

 

 

 

 

 

 

 

Class A Common Shares - authorized: 240,000,000 shares; issued and outstanding: 2017 - 96,060,044 shares; 2016 - 95,491,477 shares

 

 

961

 

 

 

954

 

Common Voting Shares - authorized: 60,000,000 shares; issued and outstanding: 2017 - 33,850,481 shares; 2016 - 33,850,481 shares

 

 

339

 

 

 

339

 

Total common stock

 

 

1,300

 

 

 

1,293

 

Additional paid-in capital

 

 

1,438,724

 

 

 

1,390,411

 

Retained earnings

 

 

1,315,549

 

 

 

871,766

 

Accumulated other comprehensive loss

 

 

(86,000

)

 

 

(363,701

)

SNI shareholders’ equity

 

 

2,669,573

 

 

 

1,899,769

 

Non-controlling interest  (Note 14)

 

 

302,384

 

 

 

328,659

 

Total equity

 

 

2,971,957

 

 

 

2,228,428

 

Total Liabilities and Equity

 

$

6,476,414

 

 

$

6,200,294

 

See notes to condensed consolidated financial statements.

 

 

3


 

SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ( UNAUDITED )

(in thousands, except per share amounts)

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

$

567,403

 

 

$

556,425

 

 

$

1,827,152

 

 

$

1,774,928

 

 

Distribution

 

233,064

 

 

 

221,702

 

 

 

711,129

 

 

 

673,216

 

 

Other

 

25,058

 

 

 

24,958

 

 

 

67,410

 

 

 

64,590

 

 

Total operating revenues

 

825,525

 

 

 

803,085

 

 

 

2,605,691

 

 

 

2,512,734

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services, excluding depreciation and amortization

 

318,292

 

 

 

298,207

 

 

 

897,182

 

 

 

864,873

 

 

Selling, general and administrative

 

224,192

 

 

 

200,820

 

 

 

643,959

 

 

 

590,774

 

 

Depreciation

 

14,736

 

 

 

20,370

 

 

 

43,356

 

 

 

53,756

 

 

Amortization

 

17,400

 

 

 

25,771

 

 

 

66,655

 

 

 

82,487

 

 

Total operating expenses

 

574,620

 

 

 

545,168

 

 

 

1,651,152

 

 

 

1,591,890

 

 

Operating income

 

250,905

 

 

 

257,917

 

 

 

954,539

 

 

 

920,844

 

 

Interest expense, net

 

(23,092

)

 

 

(32,609

)

 

 

(71,547

)

 

 

(99,529

)

 

Equity in earnings of affiliates

 

8,758

 

 

 

8,473

 

 

 

50,181

 

 

 

55,863

 

 

(Loss) gain on derivatives

 

(3,446

)

 

 

2,827

 

 

 

(9,454

)

 

 

13,860

 

 

(Loss) gain on sale of investments

 

(2,442

)

 

 

 

 

 

(1,026

)

 

 

191,824

 

 

Miscellaneous, net

 

2,854

 

 

 

21,276

 

 

 

62,575

 

 

 

5,670

 

 

Income from operations before income taxes

 

233,537

 

 

 

257,884

 

 

 

985,268

 

 

 

1,088,532

 

 

Provision for income taxes

 

70,454

 

 

 

76,043

 

 

 

286,693

 

 

 

333,393

 

 

Net income

 

163,083

 

 

 

181,841

 

 

 

698,575

 

 

 

755,139

 

 

Less: net income attributable to non-controlling interests

 

(38,995

)

 

 

(35,844

)

 

 

(140,512

)

 

 

(133,637

)

 

Net income attributable to SNI

$

124,088

 

 

$

145,997

 

 

$

558,063

 

 

$

621,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to SNI Class A Common and Common Voting shareholders per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.95

 

 

$

1.13

 

 

$

4.29

 

 

$

4.80

 

 

Diluted

$

0.95

 

 

$

1.12

 

 

$

4.26

 

 

$

4.78

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

130,313

 

 

 

129,586

 

 

 

130,158

 

 

 

129,485

 

 

Diluted

 

131,262

 

 

 

130,124

 

 

 

130,949

 

 

 

130,022

 

 

See notes to condensed consolidated financial statements.

 

 


4


 

SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ( UNAUDITED )

(in thousands)

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

163,083

 

 

$

181,841

 

 

$

698,575

 

 

$

755,139

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax: 2017 - ($72) and ($74); 2016 - $92 and ($718)

 

 

56,290

 

 

 

30,983

 

 

 

274,393

 

 

 

(50,248

)

Pension Plan and SERP liability adjustments, net of tax: 2017 - ($645) and ($1121); 2016 - ($432) and ($1,192)

 

 

1,089

 

 

 

756

 

 

 

3,357

 

 

 

2,088

 

Comprehensive income

 

 

220,462

 

 

 

213,580

 

 

 

976,325

 

 

 

706,979

 

Less: comprehensive income attributable to non-controlling interests

 

 

(39,021

)

 

 

(35,822

)

 

 

(140,561

)

 

 

(133,817

)

Comprehensive income attributable to SNI

 

$

181,441

 

 

$

177,758

 

 

$

835,764

 

 

$

573,162

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5


 

SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )

(in thousands)

 

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

698,575

 

 

$

755,139

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

43,356

 

 

 

53,756

 

Amortization

 

 

66,655

 

 

 

82,487

 

Program amortization

 

 

709,046

 

 

 

673,797

 

Program payments

 

 

(749,353

)

 

 

(703,123

)

Equity in earnings of affiliates

 

 

(50,181

)

 

 

(55,863

)

Share-based compensation

 

 

34,276

 

 

 

29,352

 

Loss (gain) on derivatives

 

 

9,454

 

 

 

(13,860

)

Loss (gain) on sale of investments

 

 

1,026

 

 

 

(191,824

)

Dividends received from equity investments

 

 

56,102

 

 

 

52,090

 

Deferred income taxes

 

 

(30,994

)

 

 

(44,656

)

Changes in working capital accounts:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,278

 

 

 

36,974

 

Other assets

 

 

8,343

 

 

 

(9,043

)

Accounts payable

 

 

(4,294

)

 

 

(6,808

)

Deferred revenue

 

 

72,554

 

 

 

6,851

 

Accrued / refundable income taxes

 

 

70,901

 

 

 

72,354

 

Other liabilities

 

 

(27,775

)

 

 

(9,854

)

Other, net

 

 

(81,604

)

 

 

(5,101

)

Cash provided by operating activities

 

 

833,365

 

 

 

722,668

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(60,150

)

 

 

(47,909

)

Collections of note receivable

 

 

3,545

 

 

 

3,134

 

Purchase of investments

 

 

(18,738

)

 

 

(10,211

)

Sale of investments

 

 

51,082

 

 

 

226,484

 

Purchase of subsidiary companies, net of cash acquired

 

 

(5,658

)

 

 

(450

)

Investment in intangible

 

 

 

 

 

(11,634

)

Settlements of derivatives

 

 

(9,454

)

 

 

14,474

 

Other, net

 

 

(8,483

)

 

 

(8,228

)

Cash (used in) provided by investing activities

 

 

(47,856

)

 

 

165,660

 

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

450,000

 

 

 

 

Repayments of debt

 

 

(990,000

)

 

 

(390,000

)

Early extinguishment of debt

 

 

 

 

 

(52,864

)

Purchases of non-controlling interests

 

 

 

 

 

(99,000

)

Dividends paid to non-controlling interests

 

 

(166,836

)

 

 

(143,557

)

Dividends paid

 

 

(117,474

)

 

 

(97,092

)

Proceeds from stock options

 

 

18,671

 

 

 

6,900

 

Other, net

 

 

(11,482

)

 

 

(4,783

)

Cash used in financing activities

 

 

(817,121

)

 

 

(780,396

)

Effect of exchange rate changes on cash and cash equivalents

 

 

23,404

 

 

 

(1,803

)

(Decrease) increase in cash and cash equivalents

 

 

(8,208

)

 

 

106,129

 

Cash and cash equivalents - beginning of period

 

 

122,937

 

 

 

223,444

 

Cash and cash equivalents - end of period

 

$

114,729

 

 

$

329,573

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

 

 

 

Interest paid, excluding amounts capitalized

 

$

50,859

 

 

$

54,090

 

Income taxes paid

 

$

250,745

 

 

$

309,536

 

See notes to condensed consolidated financial statements.

 

 

6


 

SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ( UNAUDITED )  

( in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Non-controlling Interest

 

 

Total Equity

 

 

Redeemable Non-controlling Interests

 

December 31, 2015

$

1,287

 

 

$

1,347,491

 

 

$

305,386

 

 

$

(130,233

)

 

$

313,245

 

 

$

1,837,176

 

 

$

99,000

 

Comprehensive income

 

 

 

 

 

 

 

 

 

621,502

 

 

 

(48,340

)

 

 

132,252

 

 

 

705,414

 

 

 

1,565

 

Redeemable non-controlling interest fair value adjustments

 

 

 

 

 

 

 

 

 

(2,935

)

 

 

 

 

 

 

 

 

 

 

(2,935

)

 

 

2,935

 

Purchase of non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

(99,000

)

Addition to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

26

 

 

 

 

 

Dividends paid to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143,557

)

 

 

(143,557

)

 

 

 

 

Dividends declared and paid: $0.75 per share

 

 

 

 

 

 

 

 

 

(97,092

)

 

 

 

 

 

 

 

 

 

 

(97,092

)

 

 

 

 

Share-based compensation

 

 

 

 

 

29,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,352

 

 

 

 

 

Exercise of employee share options: 184,541 shares issued

 

2

 

 

 

6,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,900

 

 

 

 

 

Other share-based compensation, net: 352,240 shares issued; 118,021 shares repurchased

 

2

 

 

 

(5,278

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,276

)

 

 

 

 

Impact of ASC 718 implementation

 

 

 

 

 

66

 

 

 

(66

)

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

Tax impact of compensation plans

 

 

 

 

 

(361

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(361

)

 

 

 

 

September 30, 2016

$

1,291

 

 

$

1,378,168

 

 

$

826,795

 

 

$

(178,573

)

 

$

301,966

 

 

$

2,329,647

 

 

$

4,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

$

1,293

 

 

$

1,390,411

 

 

$

871,766

 

 

$

(363,701

)

 

$

328,659

 

 

$

2,228,428

 

 

$

-

 

Comprehensive income

 

 

 

 

 

 

 

 

 

558,063

 

 

 

277,701

 

 

 

140,561

 

 

 

976,325

 

 

 

 

 

Tax impact of purchase of non-controlling interest

 

 

 

 

 

 

 

 

 

3,194

 

 

 

 

 

 

 

 

 

 

 

3,194

 

 

 

 

 

Dividends paid to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(166,836

)

 

 

(166,836

)

 

 

 

 

Dividends declared and paid: $0.90 per share

 

 

 

 

 

 

 

 

 

(117,474

)

 

 

 

 

 

 

 

 

 

 

(117,474

)

 

 

 

 

Share-based compensation

 

 

 

 

 

34,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,276

 

 

 

 

 

Exercise of employee share options: 370,840 shares issued

 

4

 

 

 

18,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,671

 

 

 

 

 

Other share-based compensation, net: 282,499 shares issued; 84,772 shares repurchased

 

3

 

 

 

(4,630

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,627

)

 

 

 

 

September 30, 2017

$

1,300

 

 

$

1,438,724

 

 

$

1,315,549

 

 

$

(86,000

)

 

$

302,384

 

 

$

2,971,957

 

 

$

-

 

See notes to condensed consolidated financial statements.

 

7


 

SCR IPPS NETWORKS INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.

Description of Business and Basis of Presentation

As used in the notes to the condensed consolidated financial statements, the terms “SNI,” “Scripps,” “the Company,” “we,” “our,” “us” or similar terms may, depending on the context, refer to Scripps Networks Interactive, Inc., to one or more of its consolidated subsidiary companies or to all of them taken as a whole.

Description of Business

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

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

U.S. Networks includes our six domestic television networks: HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Additionally, U.S. Networks includes websites associated with the aforementioned television brands and other internet and digital businesses serving home, food and travel lifestyle-related categories. U.S. Networks also includes our digital content studio, Scripps Networks Lifestyle Studio. We own 100.0 percent of each of our networks, with the exception of Food Network and Cooking Channel, of which we own 68.7 percent.

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

Basis of Presentation

The condensed consolidated financial statements include the accounts of SNI and its majority-owned or controlled subsidiaries after elimination of intercompany accounts and transactions. Investments in which the Company lacks control but has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method of accounting. Investments in entities in which SNI has no control or significant influence over and is not the primary beneficiary are accounted for using the cost method of accounting.

The results of companies acquired or disposed of are included in the condensed consolidated financial statements from the effective date of acquisition or up to the date of disposal, respectively.

Unaudited Interim Financial Statements

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. These unaudited condensed consolidated financial statements and the related footnotes hereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity include all normal recurring adjustments necessary for their fair presentation in conformity with GAAP. The year end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts and related disclosures reported in the condensed consolidated financial statements and accompanying footnotes, including the selection of appropriate accounting principles that reflect the economic substance of the

8


 

underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, judgment is applied based on analysis of the relevant circumstances, including historic al experience, actuarial studies and other assumptions. Actual results could differ from estimates.

Interim results are not necessarily indicative of the results that may be expected for any future interim periods or for a full year.

 

 

2.

Accounting Standards Updates

Issued and Adopted

 

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to the scope of modification accounting for equity awards, Compensation – Stock Compensation, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective December 15, 2017, and early adoption is permitted. We early adopted this guidance in the second quarter of 2017. This implementation did not have a material effect on our condensed consolidated financial statements or related disclosures.

 

In March 2017, the FASB issued new accounting guidance related to the presentation of net periodic pension costs and net periodic postretirement benefit costs, Compensation – Retirement Benefits, which requires that employers sponsoring postretirement benefit plans disaggregate the service cost component from the other components of net benefit cost. The standard also provides explicit guidance on how to present the service cost and other components of net benefit cost in the statement of operations and allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance is effective December 15, 2017, and early adoption is permitted. We early adopted this guidance in the first quarter of 2017. This implementation did not have a material effect on our condensed consolidated financial statements or related disclosures.

 

In January 2017, the FASB issued new accounting guidance related to intangibles, Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairment test and requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting unit with a zero or negative carrying amount. The guidance is effective January 1, 2020, and early adoption is permitted. We early adopted this guidance in the first quarter of 2017. This implementation did not have an effect on our condensed consolidated financial statements or related disclosures.

 

In January 2017, the FASB issued new accounting guidance related to business combinations, Clarifying the Definition of a Business, which clarifies the definition of a business. The guidance, which impacts acquisitions, disposals, goodwill and consolidation, provides a framework to determine when an integrated set of assets and activities is considered a business. The guidance is effective December 15, 2017, and early adoption is permitted. We early adopted this guidance in the first quarter of 2017. This implementation did not have an effect on our condensed consolidated financial statements or related disclosures.

 

 

Issued and Not Yet Adopted

 

In March 2016, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations within the new revenue recognition guidance by clarifying the indicators. This guidance updates the revenue recognition guidance issued in May 2014, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance under GAAP. The guidance is effective January 1, 2018, and early adoption is permitted. We have substantially completed our assessment of the new guidance, including identifying new processes and controls to support our revenue recognition under the new guidance, to determine the impact it will have on our condensed consolidated financial statements and related disclosures. As a result of our assessment, we are tentatively planning on applying the modified retrospective method of adoption for this guidance. We have completed our assessment of the distribution revenue stream related to our top customers and concluded that it will be treated primarily as a license of intellectual property. As a result, we do not expect a material impact to the amount or timing of distribution revenue recognized as a result of the adoption of this guidance. We have substantially completed the remainder of the financial assessment and do not expect a material impact on our condensed consolidated financial statements, with the exception of new disclosures. We expect the remainder of our assessment and the resulting changes to our processes and controls to be completed in the fourth quarter of 2017.

 

9


 

In February 2016, the FASB issued new accounting guidance re lated to leases, Leases, which requires the recognition of an asset and liability arising from leasing arrangements for leases extending beyond an initial period of twelve months. The guidance will increase transparency and comparability among organization s by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective January 1, 2019, and early adoption is permitted. We have partially completed our assessment of th e new guidance and do not expect a material impact on our condensed consolidated financial statements or related disclosures. We expect to complete the remainder of our assessment and resulting changes to our processes and controls in 2018.

 

 

3.

Merger Agreement with Discovery Communications, Inc.

 

On July 30, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Discovery Communications, Inc., (“Discovery”) and Skylight Merger Sub, Inc., a wholly-owned subsidiary of Discovery (“Merger Sub”) pursuant to which Merger Sub will merge with and into the Company with the Company surviving as a wholly-owned subsidiary of Discovery (the “Merger”) for a purchase price reflecting a total enterprise value of approximately $14.6 billion for the Company.

 

Subject to the terms and conditions set forth in the Merger Agreement, including the collar mechanism described below, holders of the Company’s Class A Common Shares and Common Voting Shares, collectively the “SNI Shares” will receive $63.00 in cash and $27.00 (based on Discovery’s July 21, 2017 closing price) in Discovery’s Series C Common Shares (“Series C Shares”) for each SNI Share, (the “Merger Consideration”).

 

The stock portion of the Merger Consideration will be subject to a collar based on the volume weighted average price of Discovery’s Series C Shares measured cumulatively over the 15 trading days ending on the third trading day prior to closing (the “Average Discovery Price”). Holders of SNI Shares will receive 1.2096 Series C Shares if the Average Discovery Price is less than $22.32, and 0.9408 Series C Shares if the Average Discovery Price is greater than $28.70. If the Average Discovery Price is greater than or equal to $22.32 but less than or equal to $28.70, holders of SNI Shares will receive a number of Series C Shares between 1.2096 and 0.9408 equal to $27.00 in value. If the Average Discovery Price is between $22.32 and $25.51, Discovery has the option to pay additional cash instead of issuing more shares.  

 

The Merger was approved unanimously by both the Board of Directors of SNI and the Board of Directors of Discovery and is subject to review by regulatory authorities in the U.S. and other jurisdictions. The Merger Agreement is also subject to a number of conditions, including, among other things and as further described in the Merger Agreement: (i) the receipt of shareholder approval by shareholders of Discovery of the issuance of the Series C Shares by Discovery, (ii) the receipt of shareholder approval by shareholders of the Company of the Merger and the Merger Agreement, (iii) certain Required Governmental Consents (as defined in the Merger Agreement), (iv) the absence of specified adverse laws or orders, (v) the Discovery Series C Shares being approved for listing on the NASDAQ Stock Market, (vi) the SEC declaring the registration statement on Form S-4 relating to the Merger effective, (vii) the representations and warranties of the Company and Discovery being true and correct, subject to the materiality standards contained in the Merger Agreement, (viii) the parties having complied in all material respects with their respective obligations under the Merger Agreement and (ix) no Company Material Adverse Effect or Discovery Material Adverse Effect (each as defined in the Merger Agreement) having occurred since signing of the Merger Agreement.

 

The transaction is expected to close in the first quarter of 2018. The full terms of the transaction are included in the Merger Agreement dated July 30, 2017, which was included as Exhibit 2.1 to the Form 8-K filed with the SEC on July 31, 2017.

 

In connection with the Merger Agreement, we have made certain representations, warranties and covenants, including, among other things, customary covenants to conduct business in the ordinary course consistent with past practice and to refrain from taking specified actions without Discovery’s consent during the period prior to closing.

 

During the three and nine months ended September 30, 2017, we incurred $20.4 million of Merger related expenses, including $20.1 million classified as selling, general and administrative and $0.3 million classified as cost of services in our condensed consolidated statements of operations.

 

 

 

4.

Earnings per Share

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-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the calculation of both basic and diluted EPS.

10


 

 

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

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

( in thousands )

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic weighted average shares outstanding

 

 

130,313

 

 

 

129,586

 

 

 

130,158

 

 

 

129,485

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested share units and shares held by employees

 

 

405