sni-10q_20170630.htm

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.

Non-accelerated filer (Do not check if a smaller reporting company) ☐Smaller reporting 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 July 31, 2017 there were 95,962,256 of the Registrant’s Class A Common Shares outstanding and 33,850,481 of the Registrant’s Common Voting Shares outstanding.

SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
(in thousands, except share and par value amounts)

	June 30,				December 31,
	2017				2016
ASSETS
Current assets:
Cash and cash equivalents		$	131,557			$	122,937
Accounts receivable, net of allowances: 2017 - $14,203; 2016 - $26,118			912,018				808,133
Programs and program licenses, net			641,611				591,378
Prepaid expenses and other current assets			68,225				135,651
Total current assets			1,753,411				1,658,099
Programs and program licenses, net (less current portion)			500,256				500,022
Investments			723,740				699,481
Property and equipment, net of accumulated depreciation: 2017 - $356,939; 2016 - $354,435			315,543				286,399
Goodwill, net			1,756,514				1,642,169
Intangible assets, net			1,122,323				1,092,682
Deferred income taxes			192,753				175,291
Other non-current assets			152,029				146,151
Total Assets		$	6,516,569			$	6,200,294
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	25,728			$	42,223
Accrued liabilities			134,371				152,480
Employee compensation and benefits			72,296				123,506
Program rights payable			69,959				70,403
Deferred revenue			119,977				77,987
Current portion of debt			-				249,932
Total current liabilities			422,331				716,531
Debt (less current portion)			2,979,729				2,952,454
Other non-current liabilities			319,736				302,881
Total liabilities			3,721,796				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 - 95,936,980 shares; 2016 - 95,491,477 shares			959				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			1,298				1,293
Additional paid-in capital			1,425,611				1,390,411
Retained earnings			1,230,668				871,766
Accumulated other comprehensive loss			(143,353	)			(363,701	)
SNI shareholders’ equity			2,514,224				1,899,769
Non-controlling interest (Note 13)			280,549				328,659
Total equity			2,794,773				2,228,428
Total Liabilities and Equity		$	6,516,569			$	6,200,294
See notes to condensed consolidated financial statements.

SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ( UNAUDITED )
(in thousands, except per share amounts)
	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Operating revenues:
Advertising	$	663,034		$	646,648		$	1,259,749		$	1,218,503
Distribution		239,685			223,446			478,065			451,514
Other		22,327			22,677			42,352			39,632
Total operating revenues		925,046			892,771			1,780,166			1,709,649
Operating expenses:
Cost of services, excluding depreciation and amortization		299,851			286,999			578,890			566,666
Selling, general and administrative		212,397			191,133			419,767			389,954
Depreciation		13,660			16,089			28,620			33,386
Amortization		25,058			25,654			49,255			56,716
Total operating expenses		550,966			519,875			1,076,532			1,046,722
Operating income		374,080			372,896			703,634			662,927
Interest expense, net		(24,203	)		(33,175	)		(48,455	)		(66,920	)
Equity in earnings of affiliates		20,974			21,712			41,423			47,390
(Loss) gain on derivatives		(3,672	)		8,267			(6,008	)		11,033
Gain (loss) on sale of investments		1,416			(16,373	)		1,416			191,824
Miscellaneous, net		32,181			(21,672	)		59,721			(15,606	)
Income from operations before income taxes		400,776			331,655			751,731			830,648
Provision for income taxes		115,099			98,303			216,239			257,350
Net income		285,677			233,352			535,492			573,298
Less: net income attributable to non-controlling interests		(51,602	)		(48,744	)		(101,517	)		(97,793	)
Net income attributable to SNI	$	234,075		$	184,608		$	433,975		$	475,505

Net income attributable to SNI Class A Common and Common Voting shareholders per share of common stock:
Basic	$	1.80		$	1.42		$	3.34		$	3.67
Diluted	$	1.79		$	1.42		$	3.32		$	3.66
Weighted average shares outstanding:
Basic		130,233			129,562			130,079			129,434
Diluted		130,884			130,141			130,790			129,971
See notes to condensed consolidated financial statements.

SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ( UNAUDITED )
(in thousands)
	Three months ended June 30,								Six months ended June 30,
	2017				2016				2017			2016
Net income		$	285,677			$	233,352		$	535,492		$	573,298
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax: 2017 - ($8) and ($3); 2016 - $2,306 and ($810)			151,644				(122,814	)		218,103			(81,231	)
Pension Plan and SERP liability adjustments, net of tax: 2017 - $23 and ($476); 2016 - ($380) and ($760)			1,395				666			2,268			1,332
Comprehensive income			438,716				111,204			755,863			493,399
Less: comprehensive income attributable to non-controlling interests			(51,623	)			(48,181	)		(101,540	)		(97,995	)
Comprehensive income attributable to SNI		$	387,093			$	63,023		$	654,323		$	395,404
See notes to condensed consolidated financial statements.

SCRIPPS NETWORKS INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )
(in thousands)
	Six months ended June 30,
	2017			2016
Operating Activities:
Net income	$	535,492		$	573,298
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		28,620			33,386
Amortization		49,255			56,716
Program amortization		453,910			441,608
Program payments		(501,221	)		(477,132	)
Equity in earnings of affiliates		(41,423	)		(47,390	)
Share-based compensation		27,598			24,679
Loss (gain) on derivatives		6,008			(11,033	)
Gain on sale of investments		(1,416	)		(191,824	)
Dividends received from equity investments		40,305			38,247
Deferred income taxes		(20,922	)		(31,190	)
Changes in working capital accounts:
Accounts receivable, net		(91,377	)		(23,533	)
Other assets		8,518			(9,356	)
Accounts payable		(18,823	)		26,985
Deferred revenue		42,061			5,629
Accrued / refundable income taxes		78,462			87,453
Other liabilities		(68,039	)		(53,241	)
Other, net		(24,758	)		6,505
Cash provided by operating activities		502,250			449,807
Investing Activities:
Additions to property and equipment		(44,155	)		(24,297	)
Collections of note receivable		2,533			2,135
Purchase of investments		(18,722	)		(4,711	)
Sale of investments		48,248			226,484
Purchase of subsidiary companies, net of cash acquired		(10,320	)		—
Investment in intangible		—			(11,634	)
Settlements of derivatives		(6,008	)		11,016
Other, net		(10,286	)		(8,443	)
Cash (used in) provided by investing activities		(38,710	)		190,550
Financing Activities:
Proceeds from debt		410,000			—
Repayments of debt		(635,000	)		(390,000	)
Purchases of non-controlling interests		—			(99,000	)
Dividends paid to non-controlling interests		(149,650	)		(125,604	)
Dividends paid		(78,267	)		(64,695	)
Proceeds from stock options		12,592			6,246
Other, net		(25,832	)		1,754
Cash used in financing activities		(466,157	)		(671,299	)
Effect of exchange rate changes on cash and cash equivalents		11,237			(6,579	)
Increase (decrease) in cash and cash equivalents		8,620			(37,521	)
Cash and cash equivalents - beginning of period		122,937			223,444
Cash and cash equivalents - end of period	$	131,557		$	185,923
Supplemental Cash Flow Disclosures:
Interest paid, excluding amounts capitalized	$	48,672		$	52,147
Income taxes paid	$	161,228		$	202,570
See notes to condensed consolidated financial statements.


	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							475,505			(80,101	)		95,833			491,237			2,162
Redeemable non-controlling interest fair value adjustments							2,162									2,162			(2,162	)
Purchase of non-controlling interest																-			(99,000	)
Dividends paid to non-controlling interests													(125,604	)		(125,604	)
Dividends declared and paid: $0.50 per share							(64,695	)								(64,695	)
Share-based compensation				24,679												24,679
Exercise of employee share options: 169,775 shares issued		1		6,245												6,246
Other share-based compensation, net: 230,094 shares issued; 67,610 shares repurchased		2		(2,768	)											(2,766	)
Impact of ASC 718 implementation				66			(66	)								-
Tax impact of compensation plans				(407	)											(407	)
June 30, 2016	$	1,290	$	1,375,306		$	718,292		$	(210,334	)	$	283,474		$	2,168,028		$	-

December 31, 2016	$	1,293	$	1,390,411		$	871,766		$	(363,701	)	$	328,659		$	2,228,428		$	-
Comprehensive income							433,975			220,348			101,540			755,863
Tax impact of purchase of non-controlling interest							3,194									3,194
Dividends paid to non-controlling interests													(149,650	)		(149,650	)
Dividends declared and paid: $0.60 per share							(78,267	)								(78,267	)
Share-based compensation				27,598												27,598
Exercise of employee share options: 266,337 shares issued		3		12,589												12,592
Other share-based compensation, net: 260,202 shares issued; 81,036 shares repurchased		2		(4,987	)											(4,985	)
June 30, 2017	$	1,298	$	1,425,611		$	1,230,668		$	(143,353	)	$	280,549		$	2,794,773		$	-

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.

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, travel and other 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.

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.

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.

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 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 historical 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.

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 income statement 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 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 March 2016, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations within the new revenue recognition guidance by clarifying the indicators. This guidance updates the revenue recognition guidance issued in May 2014, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in GAAP. The guidance is effective January 1, 2018, and early adoption is permitted. We have partially completed our assessment of the new guidance to determine the impact it will have on our condensed consolidated financial statements and related disclosures, including identifying new processes and controls to support our revenue recognition under the new guidance. 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 on the amount or timing of revenue recognized as a result of the adoption of this guidance. We expect the remainder of our assessment and the resulting changes to our processes and controls to be completed by late 2017.

In February 2016, the FASB issued new accounting guidance related to leases, Leases, which requires the recognition of an asset and liability arising from leasing arrangements for leases extending beyond an initial period of twelve months. The guidance will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective January 1, 2019, and early adoption is permitted. We

have partially completed our evaluation of the new guidance to determine the impact it will have on our condensed consolidated financial statements and related disclosures, including identifying new processes and controls to support our lease accounting under the new guidance. We expect the remainder of our assessment and the resulting changes to our processes and controls to be completed by late 2017.

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.

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

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)

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	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

Signatures		41

Index of Exhibits		42

	Three months ended June 30,				Six months ended June 30,
( in thousands )	2017		2016		2017		2016
Basic weighted average shares outstanding		130,233		129,562		130,079		129,434
Effect of dilutive securities:
Unvested share units and shares held by employees		319		230		299		212
Stock options held by employees and directors		332		349		412		325
Diluted weighted average shares outstanding		130,884		130,141