Financial Release

Scripps Networks Interactive reports full year and fourth quarter 2017 operating results

Full Year 2017 Financial Highlights:

  • Record consolidated operating revenues of $3.6 billion, an increase of 4.7%;
  • Consolidated income from operations before income taxes of $1.3 billion, an increase of 2.6%;
  • Consolidated adjusted segment profit(1) of $1.5 billion, an increase of 2.2%;
  • Consolidated net income attributable to Scripps Networks Interactive of $623.9 million, a decrease of 7.4%; and
  • Consolidated adjusted net income(1) attributable to Scripps Networks Interactive of $752.6 million, an increase of 16.9%.

Fourth Quarter 2017 Financial Highlights:

  • Record consolidated operating revenues of $956.1 million, an increase of 7.6%;
  • Consolidated income from operations before income taxes of $325.9 million, an increase of 72.2%;
  • Consolidated adjusted segment profit(1) of $371.1 million, an increase of 9.0%;
  • Consolidated net income attributable to Scripps Networks Interactive of $65.9 million, an increase of 26.5%; and
  • Consolidated adjusted net income(1) attributable to Scripps Networks Interactive of $181.9 million, an increase of 46.2%.

KNOXVILLE, Tenn., Feb. 26, 2018 (GLOBE NEWSWIRE) -- Scripps Networks Interactive, Inc. (Nasdaq:SNI) today reported operating results for the full year and fourth quarter 2017.

In 2017, HGTV was ranked the No. 1 ad-supported cable network for upscale women 25-54 in sales prime for the eleventh consecutive year and was the No. 2 cable network for women 25-54. Food Network finished 2017 as the No. 8 cable network for women 25-54, and Travel Channel delivered a 5% improvement in its adult 25-54 sales prime ratings. TVN, a leading multi-platform media business in Poland, grew its share of audience by 5% for viewers 16-49 in 2017.

In the fourth quarter of 2017, both HGTV and Food Network ranked in the top-10 for advertising supported cable networks for women 25-54 in sales prime, and Travel Channel delivered a 5% improvement in its adult 25-54 sales prime ratings. TVN was the No. 1 media company for the 16-49 demographic for the fourth quarter, growing its audience share by 2%.

Scripps Lifestyle Studios, the digital content division of Scripps Networks Interactive, delivered a record-breaking year, generating more than 19 billion global video views on various digital platforms, nearly three times more than the previous year. Video views benefited in part from the inclusion of millennial-targeted food content brand, Spoon University, the launch of the new food-focused digital brand, Genius Kitchen, and expansion of the Scripps Lifestyle Studios offering to international markets.

Kenneth W. Lowe, Chairman, President and Chief Executive Officer, said, “Scripps Networks Interactive finished a pivotal 2017 year with a strong fourth quarter, executing on our strategic objectives and delivering financially with record revenue and growing segment profit. We reached new consumers through the thousands of compelling experiences created by Scripps Lifestyle Studios. We invested in our core business as well as our fast-growing digital offerings, allowing us to capitalize on the popularity of our powerful lifestyle brands across the globe. And, of course, we announced our merger with Discovery Communications, creating an unmatched opportunity to deliver our real-life content to a greater number of audiences.”

Lowe continued, “We have great momentum as we head into 2018. Our incredible teams remain intently focused on doing what we do best: creating great lifestyle content that connects with audiences through ideas, information and inspiration. We are excited about the prospects for the combination with Discovery and are diligently working toward finalizing the transaction to bring these two great companies together.”

Full Year 2017 Consolidated Results
Consolidated operating revenues for 2017 were $3.6 billion, an increase of 4.7% compared with the prior year. Advertising revenues were $2.5 billion, an increase of 3.7%, and distribution revenues were $955.4 million, an increase of 6.8% compared with the prior year.

Consolidated income from operations before income taxes for 2017 was $1.3 billion, an increase of 2.6% compared with the prior year. Consolidated adjusted segment profit(1) was $1.5 billion, an increase of 2.2% compared with the prior year. The improvement in consolidated income from operations before income taxes reflects an increase in operating revenues, higher foreign currency transaction gains, lower interest expense and a decline in goodwill and other intangible asset write-downs compared with the prior year. These favorable variances were partially offset by increased investments in programming, marketing and data as well as merger related expenses.

Consolidated net income attributable to Scripps Networks Interactive for 2017 decreased 7.4% to $623.9 million, or $4.76 per diluted share, compared with the prior year, primarily driven by the negative variances mentioned in the prior paragraph as well as a higher effective tax rate driven by the impact of tax law changes enacted in the U.S. and Poland. These unfavorable variances were partially offset by an increase in operating revenues, higher foreign currency transaction gains, lower interest expense and a decline in goodwill and other intangible asset write-downs. Consolidated adjusted net income(1) attributable to Scripps Networks Interactive increased 16.9% to $752.6 million, or $5.74 per diluted share, reflecting an increase in operating revenues, higher foreign currency transaction gains, and lower interest expense compared with the prior year. These favorable variances were partially offset by increased investments in programming, marketing and data.

Fourth Quarter 2017 Consolidated Results
Consolidated operating revenues for the fourth quarter of 2017 were $956.1 million, an increase of 7.6% compared with the prior year period. Advertising revenues were $678.1 million, an increase of 5.7%, and distribution revenues were $244.3 million, an increase of 10.5% compared with the prior year period.

Consolidated income from operations before income taxes for the fourth quarter of 2017 was $325.9 million, an increase of 72.2% compared with the prior year period. Consolidated adjusted segment profit(1) was $371.1 million, an increase of 9.0% compared with the prior year period. The improvement in consolidated income from operations before income taxes reflects an increase in operating revenues, higher foreign currency transaction gains, lower interest expense and a decline in goodwill and other intangible asset write-downs compared with the prior year period. These favorable variances were partially offset by increased investments in programming, marketing and data as well as merger related expenses.

Consolidated net income attributable to Scripps Networks Interactive for the fourth quarter of 2017 increased 26.5% to $65.9 million, or $0.50 per diluted share, compared with the prior year period, primarily driven by an increase in operating revenues, higher foreign currency transaction gains, lower interest expense and a decline in goodwill and other intangible asset write-downs. These favorable variances were partially offset by increased investments in programming, marketing and data and merger related expenses as well as a higher effective tax rate driven by the impact of tax law changes enacted in the U.S. and Poland. Consolidated adjusted net income(1) attributable to Scripps Networks Interactive increased 46.2% to $181.9 million, or $1.38 per diluted share, reflecting an increase in operating revenues, higher foreign currency transaction gains and lower interest expense compared with the prior year period. These favorable variances were partially offset by increased investments in programming, marketing and data.

Fourth Quarter 2017 Segment Results

Segment Profit and Adjusted Segment Profit - Q4 2017 and 2016  
  U.S. Networks   International Networks   Corporate and Other   Consolidated  
  Three months ended   Three months ended   Three months ended   Three months ended  
  December 31,   December 31,   December 31,   December 31,  
(in thousands) 2017   2016   2017   2016   2017   2016   2017   2016  
Income (loss) from operations before income taxes $ 323,173   $ 308,023   $ 56,569   $ (30,866 ) $ (53,800 ) $ (87,911 ) $ 325,942   $ 189,246  
Interest (expense) income, net   (108 )   (67 )   114     (4,344 )   (21,618 )   (25,501 )   (21,612 )   (29,912 )
Equity in earnings of affiliates   3,291     2,995     6,286     12,524     -     -     9,577     15,519  
(Loss) gain on derivatives   -     -     -     -     (1,848 )   4,008     (1,848 )   4,008  
Miscellaneous, net   3,504     3,654     15,244     3,538     1,203     (35,312 )   19,951     (28,120 )
Operating income (loss)   316,486     301,441     34,925     (42,584 )   (31,537 )   (31,106 )   319,874     227,751  
Depreciation   10,882     15,285     3,493     3,240     618     (722 )   14,993     17,803  
Amortization   10,978     10,079     15,883     30,876     -     -     26,861     40,955  
Goodwill write-down   -     -     505     57,878     -     -     505     57,878  
Segment profit (loss)   338,346     326,805     54,806     49,410     (30,919 )   (31,828 )   362,233     344,387  
Merger related expenses   504     -     2     -     8,402     -     8,908     -  
TVN transaction and integration expenses   -     -     -     32     -     996     -     1,028  
TVN purchase price accounting impact   -     -     -     (8,501 )   -     -     -     (8,501 )
Reorganization costs   -     1,779     -     -     -     1,815     -     3,594  
Adjusted segment profit (loss) $ 338,850   $ 328,584   $ 54,808   $ 40,941   $ (22,517 ) $ (29,017 ) $ 371,141   $ 340,508  
                                                 

U.S. Networks’ operating revenues for the fourth quarter of 2017 were $758.7 million, an increase of 3.8% compared with the prior year period. Advertising revenues were $529.9 million, an increase of 1.3% compared with the prior year period, reflecting the continued strength in pricing in the U.S. advertising market for our lifestyle brands, partially offset by lower impressions delivered. U.S. Networks’ distribution revenues were $213.6 million, an increase of 10.5% compared with the prior year period. This improvement was driven by annual rate increases and includes an adjustment related to a distribution agreement negotiated in the fourth quarter of 2017, which contributed 400 basis points of growth. Also contributing to the increase were revenues generated from over-the-top and non-linear distribution platforms, partially offset by subscriber declines.

U.S. Networks’ income from operations before income taxes for the fourth quarter of 2017 was $323.2 million, an increase of 4.9% compared with the prior year period. U.S. Networks’ adjusted segment profit(1) was $338.9 million, an increase of 3.1% compared with the prior year period. The improvement in both U.S. Networks’ income from operations before income taxes and adjusted segment profit(1) was primarily driven by an increase in operating revenues partially offset by increased investments in marketing and data compared with the prior year period.

International Networks’ operating revenues for the fourth quarter of 2017 were $203.7 million, an increase of 23.2% compared with the prior year period, reflecting positive foreign currency effects and an increase in operating revenues. Operating revenues at TVN increased 11.7% in local currency compared with the prior year period.

International Networks’ income from operations before income taxes for the fourth quarter of 2017 was $56.6 million compared with a loss of $30.9 million in the prior year period. The improvement in International Networks’ income from operations before income taxes was primarily driven by an increase in operating revenues, higher foreign currency gains and a decline in goodwill and other intangible asset write-downs, partially offset by an increase in operating expenses compared with the prior year period. International networks’ adjusted segment profit(1) was $54.8 million, an increase of 33.9% compared with the prior year period. The improvement in International Networks’ adjusted segment profit(1) was primarily driven by an increase in operating revenues and higher foreign currency gains, partially offset by an increase in operating expenses compared with the prior year period.

(1) This earnings release contains several metrics, including consolidated segment profit (loss), consolidated adjusted segment profit (loss), adjusted net income (loss), adjusted net income (loss) per diluted share and free cash flow that are not calculated in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP"). Refer to the Non-GAAP Financial Measures section of this press release for discussion of consolidated segment profit (loss), consolidated adjusted segment profit (loss), adjusted net income (loss), adjusted net income (loss) per diluted share and free cash flow and a reconciliation to their respective most comparable financial measure calculated in accordance with GAAP.

Guidance
Due to the pending merger with Discovery Communications, Scripps Networks Interactive will not issue full year 2018 guidance.

Conference Call Information
Due to the pending merger with Discovery Communications, Scripps Networks Interactive will not hold a conference call for investors in connection with the issuance of this earnings release.

Forward-Looking Statements
This press release contains certain forward-looking statements related to the company’s businesses that are based on management’s 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 forward-looking statements, including changes in advertising demand and other economic conditions as well as other reasons described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section and under the caption entitled “Forward-Looking Statements” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our most recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The company undertakes no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.

About Scripps Networks Interactive, Inc.
Scripps Networks Interactive, Inc. (Nasdaq:SNI) is one of the leading developers of engaging lifestyle content in the home, food and travel categories for television, the Internet and emerging platforms. The company's lifestyle media portfolio includes leading TV and entertainment brands HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. Its digital division Scripps Lifestyle Studios, creates compelling content for online, social and mobile platforms. International operations include TVN, Poland’s premier multi-platform media company; UKTV, an independent commercial joint venture with BBC Worldwide; Asian Food Channel, the first pan-regional TV food network in Asia; and lifestyle channel Fine Living Network. The company’s global networks and websites reach millions of consumers across North and South America, Asia-Pacific, Europe, the Middle East and Africa. Scripps Networks Interactive is headquartered in Knoxville, Tenn. For more information, please visit http://www.scrippsnetworksinteractive.com.

Where to Find Additional Information
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. This communication may be deemed to be solicitation material in respect of the proposed merger between Discovery and Scripps. In connection with the proposed merger, Discovery has filed a registration statement on Form S-4, containing a joint proxy statement/prospectus with the SEC, which was declared effective by the SEC on October 19, 2017. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS, BECAUSE IT CONTAINS IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus and other documents filed by Discovery and Scripps with the SEC at http://www.sec.gov. Free copies of the joint proxy statement/prospectus and each company’s other filings with the SEC may also be obtained from the respective companies. Free copies of documents filed with the SEC by Scripps will be made available free of charge on Scripps’ investor relations website at http://ir.scrippsnetworksinteractive.com. Free copies of documents filed with the SEC by Discovery will be made available free of charge on Discovery’s investor relations website at www.corporate.discovery.com.

Participants in the Solicitation
Scripps and its directors and executive officers, and Discovery and its directors and executive officers, may be deemed to be participants in the solicitation of proxies from the holders of Scripps Class A common shares and common voting shares in respect of the proposed merger. Information about the directors and executive officers of Scripps is set forth in Scripps’ proxy statement for its 2017 annual meeting of shareholders, which was filed with the SEC on March 29, 2017. Information about the directors and executive officers of Discovery is set forth Discovery’s proxy statement for its 2017 annual meeting of shareholders, which was filed with the SEC on April 5, 2017. Investors may obtain additional information regarding the interest of such participants by reading the joint proxy statement/prospectus regarding the proposed merger.

Contact: Scripps Networks Interactive, Inc.
Investors: Mike Gallentine, 865-560-4473, MGallentine@scrippsnetworks.com;
Media: Dylan Jones, 865-560-5068, DJones@scrippsnetworks.com; or
Kristin Alm, 865-560-4316, KAlm@scrippsnetworks.com

                                 
SCRIPPS NETWORKS INTERACTIVE, INC.                                
CONSOLIDATED STATEMENTS OF OPERATIONS  
(in thousands, except per share data)        
  Three months ended December 31,   Year ended December 31,  
              % Change               % Change  
  2017   2016   Fav /
(Unfav)
  2017   2016   Fav /
(Unfav)
 
Operating revenues:                                    
Advertising $ 678,105   $ 641,475     5.7 % $ 2,505,257   $ 2,416,403     3.7 %
Distribution   244,275     221,151     10.5 %   955,404     894,367     6.8 %
Other   33,736     26,075     29.4 %   101,146     90,665     11.6 %
Total operating revenues   956,116     888,701     7.6 %   3,561,807     3,401,435     4.7 %
Operating expenses:                                    
Cost of services, excluding depreciation and amortization   356,812     328,355     (8.7 )%   1,253,994     1,193,228     (5.1 )%
Selling, general and administrative   237,071     215,959     (9.8 )%   881,030     806,733     (9.2 )%
Depreciation   14,993     17,803     15.8 %   58,349     71,559     18.5 %
Amortization   26,861     40,955     34.4 %   93,516     123,442     24.2 %
Goodwill write-down   505     57,878     99.1 %   505     57,878     99.1 %
Total operating expenses   636,242     660,950     3.7 %   2,287,394     2,252,840     (1.5 )%
Operating income   319,874     227,751     40.4 %   1,274,413     1,148,595     11.0 %
Interest expense, net   (21,612 )   (29,912 )   27.7 %   (93,159 )   (129,441 )   28.0 %
Equity in earnings of affiliates   9,577     15,519     (38.3 )%   59,758     71,382     (16.3 )%
(Loss) gain on derivatives   (1,848 )   4,008     (146.1 )%   (11,302 )   17,868     (163.3 )%
(Loss) gain on sale of investments   -     -   NM     (1,026 )   191,824     (100.5 )%
Miscellaneous, net   19,951     (28,120 )   170.9 %   82,526     (22,450 )   467.6 %
Income from operations before income taxes   325,942     189,246     72.2 %   1,311,210     1,277,778     2.6 %
Provision for income taxes   210,166     96,937     (116.8 )%   496,859     430,330     (15.5 )%
Net income   115,776     92,309     25.4 %   814,351     847,448     (3.9 )%
Less: net income attributable to non-controlling interests   (49,904 )   (40,216 )   (24.1 )%   (190,416 )   (173,853 )   (9.5 )%
Net income attributable to SNI $ 65,872   $ 52,093     26.5 % $ 623,935   $ 673,595     (7.4 )%
                                     
Net income attributable to SNI Class A Common and Common Voting shareholders per share of common stock:                                    
Basic $ 0.51   $ 0.40     27.5 % $ 4.79   $ 5.20     (7.9 )%
Diluted $ 0.50   $ 0.40     25.0 % $ 4.76   $ 5.18     (8.1 )%
Weighted average shares outstanding:                                    
Basic   130,392     129,661           130,217     129,529        
Diluted   131,353     130,350           131,063     130,104        
                                     

 

SCRIPPS NETWORKS INTERACTIVE, INC.                
CONSOLIDATED BALANCE SHEETS   
(in thousands, except share and par value amounts)  
 
  December 31,  
  2017   2016  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 130,357     $ 122,937  
Accounts receivable, net of allowances: 2017 - $13,162; 2016 - $26,118     914,812       808,133  
Programs and program licenses, net     634,588       591,378  
Prepaid expenses and other current assets     68,763       135,651  
Total current assets     1,748,520       1,658,099  
Programs and program licenses, net (less current portion)     474,714       500,022  
Investments     740,810       699,481  
Property and equipment, net of accumulated depreciation: 2017 - $370,826; 2016 - $354,435     333,068       286,399  
Goodwill, net     1,819,693       1,642,169  
Intangible assets, net     1,109,672       1,092,682  
Deferred income taxes     104,859       175,291  
Other non-current assets     190,344       146,151  
Total Assets   $ 6,521,680     $ 6,200,294  
LIABILITIES AND EQUITY                
Current liabilities:                
Accounts payable   $ 48,149     $ 42,223  
Accrued liabilities     189,656       152,480  
Employee compensation and benefits     102,327       123,506  
Program rights payable     85,004       70,403  
Deferred revenue     148,134       77,987  
Current portion of debt           249,932  
Total current liabilities     573,270       716,531  
Debt (less current portion)     2,522,005       2,952,454  
Other non-current liabilities     315,217       302,881  
Total liabilities     3,410,492       3,971,866  
Commitments and contingencies (Note 20)                
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 - 96,204,627 shares; 2016 - 95,491,477 shares     962       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     1,301       1,293  
Additional paid-in capital     1,448,723       1,390,411  
Retained earnings     1,341,974       871,766  
Accumulated other comprehensive loss     (13,809 )     (363,701 )
SNI shareholders’ equity     2,778,189       1,899,769  
Non-controlling interest (Note 17)     332,999       328,659  
Total equity     3,111,188       2,228,428  
Total Liabilities and Equity   $ 6,521,680     $ 6,200,294  
                 

 

SCRIPPS NETWORKS INTERACTIVE, INC.                        
CONSOLIDATED STATEMENTS OF CASH FLOWS                        
(in thousands)      
    Year ended December 31,  
    2017     2016     2015  
Operating Activities:                        
Net income   $ 814,351     $ 847,448     $ 778,473  
Adjustments to reconcile net income to cash provided by operating activities:                        
Depreciation     58,349       71,559       73,112  
Amortization     93,516       123,442       68,647  
Goodwill write-down     505       57,878        
Investment write-down           10,701        
Program amortization     997,862       934,419       783,456  
Program payments     (993,420 )     (915,486 )     (875,554 )
Equity in earnings of affiliates     (59,758 )     (71,382 )     (80,916 )
Share-based compensation     40,219       35,198       29,568  
Loss (gain) on derivatives     11,302       (17,868 )     (50,256 )
Loss (gain) on sale of investments     1,026       (191,824 )      
(Gain) loss on foreign currency transactions     (86,690 )     16,137       22,430  
Dividends received from equity investments     77,780       65,277       93,624  
Deferred income taxes     67,854       (10,427 )     (24,678 )
Changes in working capital accounts:                        
Accounts receivable, net     (86,022 )     (2,462 )     (79,070 )
Other assets     8,962       (17,657 )     (12,702 )
Accounts payable     1,926       8,887       (1,501 )
Deferred revenue     70,252       (17,150 )     44,040  
Accrued / refundable income taxes     94,371       29,480       41,201  
Other liabilities     (32,304 )     11,790       32,360  
Other, net     (24,287 )     (19,134 )     (29,250 )
Cash provided by operating activities     1,055,794       948,826       812,984  
Investing Activities:                        
Additions to property and equipment     (75,641 )     (74,406 )     (52,480 )
Collections of note receivable     4,547       4,073       4,655  
Purchase of investments     (21,112 )     (15,916 )     (35,023 )
Sale of investments     46,733       226,484        
Purchase of subsidiary companies, net of cash acquired     (10,320 )     (450 )     (539,309 )
Investment in intangible           (11,634 )      
Foreign currency call option premium                 (16,000 )
Settlements of derivatives     (11,302 )     18,482       65,824  
Other, net     2,079       (5,902 )     (32,167 )
Cash (used in) provided by investing activities     (65,016 )     140,731       (604,500 )
Financing Activities:                        
Proceeds from debt     630,000       475,000       3,180,764  
Repayments of debt     (1,315,000 )     (890,000 )     (1,930,000 )
Debt issuance costs                 (14,491 )
Early extinguishment of debt           (380,648 )     (652,104 )
Purchases of non-controlling interests     (15 )     (103,500 )     (853,853 )
Dividends paid to non-controlling interests     (186,116 )     (157,687 )     (189,539 )
Dividends paid     (156,684 )     (129,725 )     (118,857 )
Repurchases of Class A Common Shares                 (288,502 )
Proceeds from stock options     23,662       15,110       9,207  
Other, net     1,070       (3,993 )     (18,368 )
Cash used in financing activities     (1,003,083 )     (1,175,443 )     (875,743 )
Effect of exchange rate changes on cash and cash equivalents     19,725       (14,621 )     12,539  
Increase (decrease) in cash and cash equivalents     7,420       (100,507 )     (654,720 )
Cash and cash equivalents - beginning of period     122,937       223,444       878,164  
Cash and cash equivalents - end of period   $ 130,357     $ 122,937     $ 223,444  
Supplemental Cash Flow Disclosures:                        
Interest paid, excluding amounts capitalized   $ 93,472     $ 131,158     $ 95,336  
Income taxes paid   $ 341,801     $ 408,275     $ 318,920  

Non-GAAP Financial Measures 
In addition to results prepared in accordance with GAAP provided in this press release, the company has also presented consolidated segment profit (loss), consolidated adjusted segment profit (loss), adjusted net income (loss), adjusted net income (loss) per diluted share and free cash flow.

The company evaluates the operating performance of its businesses and uses a financial measure referred to as segment profit (loss). Consolidated segment profit (loss) is the aggregate of the segment profit for each of our two reportable segments. Segment profit (loss) is defined as income (loss) from operations before income taxes, excluding depreciation, amortization, goodwill write-down, interest expense, net, equity in earnings of affiliates, gain (loss) on derivatives, gain (loss) on sale of investments, other miscellaneous non-operating expenses and income taxes, which are included in net income (loss) determined in accordance with GAAP.

The company uses segment profit (loss) to assess the operating results and performance of its businesses and makes decisions about the allocation of resources to businesses using this financial measure. The company believes segment profit (loss) is relevant to investors because it allows them to analyze and evaluate the operating performance of its segments consistent with management. Depreciation and amortization charges are a result of decisions made in prior periods regarding the allocation of resources and are, therefore, excluded from segment profit (loss). Also excluded from segment profit (loss) are financing, tax structuring and acquisition and divestiture decisions, which are generally made by corporate executives. Excluding these items from the performance measure of our businesses enables management to evaluate operating performance based on current economic conditions and decisions made by the managers of the businesses in the current period.

The company defines consolidated adjusted segment profit (loss) and adjusted net income (loss) as segment profit (loss) and net income (loss), respectively, excluding the impact of items not routine in nature and defines adjusted net income (loss) per diluted share as net income (loss) per diluted share, excluding the impact of items not routine in nature. The company believes consolidated adjusted segment profit (loss), adjusted net income (loss) and adjusted net income (loss) per diluted share are relevant to investors because it allows them to analyze the performance of segments excluding the impact of items not routine in nature or core to regular business operations.

The company defines free cash flow as cash provided by operating activities less dividends paid to non-controlling interests and additions to property and equipment. The company measures free cash flow as believes it is an important indicator for management and investors as to its liquidity, including the ability to reduce debt, make strategic investments and return capital to shareholders.

Consolidated segment profit (loss), consolidated adjusted segment profit (loss), adjusted net income (loss), adjusted net income (loss) per diluted share and free cash flow are non-GAAP measures and should be considered in addition to, but not as a substitute for, income (loss) from operations before income taxes, net income (loss), net income (loss) per diluted share, cash flow from operating activities and other measures of financial performance reported in accordance with GAAP. Since consolidated segment profit (loss), consolidated adjusted segment profit (loss), adjusted net income (loss), adjusted net income (loss) per diluted share and free cash flow are not measures of financial performance calculated in accordance with GAAP, these non-GAAP measures may not be comparable to similar measures with similar titles used by other companies. Supplemental schedules providing a reconciliation of the non-GAAP measure to its respective most comparable financial measure in accordance with GAAP are included within this press release on the following pages.

Segment Profit and Adjusted Segment Profit - Q4 2017 and 2016  
  U.S. Networks   International Networks   Corporate and Other   Consolidated  
  Three months ended   Three months ended   Three months ended   Three months ended  
  December 31,   December 31,   December 31,   December 31,  
(in thousands) 2017   2016   2017   2016   2017   2016   2017   2016  
Income (loss) from operations before income taxes $ 323,173   $ 308,023   $ 56,569   $ (30,866 ) $ (53,800 ) $ (87,911 ) $ 325,942   $ 189,246  
Interest (expense) income, net   (108 )   (67 )   114     (4,344 )   (21,618 )   (25,501 )   (21,612 )   (29,912 )
Equity in earnings of affiliates   3,291     2,995     6,286     12,524     -     -     9,577     15,519  
(Loss) gain on derivatives   -     -     -     -     (1,848 )   4,008     (1,848 )   4,008  
Miscellaneous, net   3,504     3,654     15,244     3,538     1,203     (35,312 )   19,951     (28,120 )
Operating income (loss)   316,486     301,441     34,925     (42,584 )   (31,537 )   (31,106 )   319,874     227,751  
Depreciation   10,882     15,285     3,493     3,240     618     (722 )   14,993     17,803  
Amortization   10,978     10,079     15,883     30,876     -     -     26,861     40,955  
Goodwill write-down   -     -     505     57,878     -     -     505     57,878  
Segment profit (loss)   338,346     326,805     54,806     49,410     (30,919 )   (31,828 )   362,233     344,387  
Merger related expenses   504     -     2     -     8,402     -     8,908     -  
TVN transaction and integration expenses   -     -     -     32     -     996     -     1,028  
TVN purchase price accounting impact   -     -     -     (8,501 )   -     -     -     (8,501 )
Reorganization costs   -     1,779     -     -     -     1,815     -     3,594  
Adjusted segment profit (loss) $ 338,850   $ 328,584   $ 54,808   $ 40,941   $ (22,517 ) $ (29,017 ) $ 371,141   $ 340,508  
                                                 

 

Segment Profit and Adjusted Segment Profit - Year-to-Date 2017 and 2016  
  U.S. Networks   International Networks   Corporate and Other   Consolidated  
  Year ended   Year ended   Year ended   Year ended  
  December 31,   December 31,   December 31,   December 31,  
(in thousands) 2017   2016   2017   2016   2017   2016   2017   2016  
Income (loss) from operations before income taxes $ 1,375,928   $ 1,559,099   $ 127,622   $ 68,229   $ (192,340 ) $ (349,550 ) $ 1,311,210   $ 1,277,778  
Interest (expense) income, net   (491 )   (232 )   616     (25,042 )   (93,284 )   (104,167 )   (93,159 )   (129,441 )
Equity in earnings of affiliates   20,292     23,943     39,466     47,439     -     -     59,758     71,382  
(Loss) gain on derivatives   -     -     -     -     (11,302 )   17,868     (11,302 )   17,868  
Gain (loss) on sale of investments   -     208,197     (526 )   -     (500 )   (16,373 )   (1,026 )   191,824  
Miscellaneous, net   11,777     13,259     28,935     98,740     41,814     (134,449 )   82,526     (22,450 )
Operating income (loss)   1,344,350     1,313,932     59,131     (52,908 )   (129,068 )   (112,429 )   1,274,413     1,148,595  
Depreciation   43,288     59,298     12,546     12,205     2,515     56     58,349     71,559  
Amortization   40,691     40,220     52,825     83,222     -     -     93,516     123,442  
Goodwill write-down   -     -     505     57,878     -     -     505     57,878  
Segment profit (loss)   1,428,329     1,413,450     125,007     100,397     (126,553 )   (112,373 )   1,426,783     1,401,474  
Merger related expenses   1,411     -     2     -     27,856     -     29,269     -  
TVN transaction and integration expenses   -     17     -     11,168     -     3,953     -     15,138  
TVN purchase price accounting impact   -     -     -     (8,501 )   -     -     -     (8,501 )
Restructuring costs   -     (29 )   -     -     -     (281 )   -     (310 )
Reorganization costs   -     10,565     -     -     -     5,784     -     16,349  
Adjusted segment profit (loss) $ 1,429,740   $ 1,424,003   $ 125,009   $ 103,064   $ (98,697 ) $ (102,917 ) $ 1,456,052   $ 1,424,150  
                                                 

 

Adjusted Net Income - Q4 2017  
  Three months ended December 31, 2017  
(in thousands, except per share data) Cost of
services,
excluding
depreciation
and
amortization
  Selling,
general and
administrative
  Depreciation
and
amortization
  Loss on
derivatives
  Loss on
sale of
investments
  Miscellaneous,
net
  Provision
for
income
taxes
  Net
income
attributable
to SNI (A)
  Earnings
per
diluted
share
 
GAAP measure                                                      
As reported $ 356,812   $ 237,071   $ 41,854   $ (1,848 ) $ -   $ 19,951   $ 210,166   $ 65,872   $ 0.50  
Merger related expenses   (193 )   (8,715 )   -     -     -     -     -     5,523     0.04  
Tax law changes impact   -     -     -     -     -     -     (110,493 )   110,493     0.84  
As adjusted $ 356,619   $ 228,356   $ 41,854   $ (1,848 ) $ -   $ 19,951   $ 99,673   $ 181,888   $ 1.38  
                                                       
(A) Merger related expenses tax effected at 38% statutory tax rate.  

 

Adjusted Net Income - Q4 2016  
  Three months ended December 31, 2016  
(in thousands, except per share data) Cost of
services,
excluding
depreciation
and
amortization
  Selling,
general and
administrative
  Depreciation
and
amortization
  Goodwill
write-down
  Gain on
derivatives
  Gain on
sale of
investments
  Miscellaneous,
net
  Net
income
attributable
to SNI (A)
  Earnings
per
diluted
share
 
GAAP measure                                                      
As reported $ 328,355   $ 215,959   $ 58,758   $ 57,878   $ 4,008   $ -   $ (28,120 ) $ 52,093   $ 0.40  
Goodwill write-down   -     -     -     (57,878 )   -     -     -     57,878     0.44  
Intangible assets write-down   -     -     (15,943 )   -     -     -     -     13,233     0.10  
Investments write-down   -     -     -     -     -     -     10,701     8,668     0.07  
TVN transaction and integration expenses   -     (1,028 )   -     -     -     -     -     637     -  
Reorganization costs   (1,568 )   (2,026 )   -     -     -     -     -     2,228     0.02  
Gain on extinguishment of debt   -     -     -     -     -     -     (4,254 )   (3,446 )   (0.03 )
TVN purchase price accounting impact   8,501     -     -     -     -     -     -     (6,886 )   (0.05 )
As adjusted $ 335,288   $ 212,905   $ 42,815   $ -   $ 4,008   $ -   $ (21,673 ) $ 124,406   $ 0.95  
                                                       
(A) Items tax effected at 38% statutory tax rate, with the exception of the following: $57.9 million goodwill write-down, which has a 0% effective tax rate; $15.9 million intangible assets write-down, which has a 17% effective tax rate; and $4.3 million gain on extinguishment of debt, $10.7 million investments write-down and $8.5 million TVN purchase price accounting impact, which have a 19% effective tax rate.  

 

Adjusted Net Income - Year-to-Date 2017  
  Year ended December 31, 2017  
(in thousands, except per share data) Cost of
services,
excluding
depreciation
and
amortization
  Selling,
general and
administrative
  Depreciation
and
amortization
  Loss on
derivatives
  Loss on
sale of
investments
  Miscellaneous,
net
  Provision
for
income
taxes
  Net
income
attributable
to SNI (A)
  Earnings
per
diluted
share
 
GAAP measure                                                    
As reported $ 1,253,994   $ 881,030   $ 151,865   $ (11,302 ) $ (1,026 ) $ 82,526   $ 496,859   $ 623,935   $ 4.76  
Merger related expenses   (428 )   (28,841 )   -     -     -     -     -     18,147     0.14  
Tax law changes impact   -     -     -     -     -     -     (110,493 )   110,493     0.84  
As adjusted $ 1,253,566   $ 852,189   $ 151,865   $ (11,302 ) $ (1,026 ) $ 82,526   $ 386,366   $ 752,575   $ 5.74  
                                                       
(A) Merger related expenses tax effected at 38% statutory tax rate.  

 

Adjusted Net Income - Year-to-Date 2016  
  Year ended December 31, 2016  
(in thousands, except per share data) Cost of
services,
excluding
depreciation
and
amortization
  Selling,
general and
administrative
  Depreciation
and
amortization
  Goodwill
write-down
  Gain on
derivatives
  Gain on
sale of
investments
  Miscellaneous,
net
  Net
income
attributable
to SNI (A)
  Earnings
per
diluted
share
 
GAAP measure                                                      
As reported $ 1,193,228   $ 806,733   $ 195,001   $ 57,878   $ 17,868   $ 191,824   $ (22,450 ) $ 673,595   $ 5.18  
Goodwill write-down   -     -     -     (57,878 )   -     -     -     57,878     0.44  
Intangible assets write-down   -     -     (15,943 )   -     -     -     -     13,233     0.10  
Investments write-down   -     -     -     -     -     -     10,701     8,668     0.07  
TVN transaction and integration expenses   (17 )   (15,121 )   -     -     -     -     -     11,505     0.09  
Restructuring costs   -     310     -     -     -     -     -     (192 )   -  
Reorganization costs   (5,546 )   (10,803 )   -     -     -     -     -     10,136     0.08  
Gain on extinguishment of debt   -     -     -     -     -     -     (6,650 )   (5,387 )   (0.04 )
TVN purchase price accounting impact   8,501     -     -     -     -     -     -     (6,886 )   (0.05 )
Sale of investments   -     -     -     -     -     (191,824 )   -     (118,931 )   (0.91 )
As adjusted $ 1,196,166   $ 781,119   $ 179,058   $ -   $ 17,868   $ -   $ (18,399 ) $ 643,619   $ 4.96  
                                                       
(A) Items tax effected at 38% statutory tax rate, with the exception of the following: $57.9 million goodwill write-down, which has a 0% effective tax rate; $15.9 million intangible assets write-down, which has a 17% effective tax rate; and $11.2 million TVN transaction and integration expenses, $6.7 million gain on extinguishment of debt, $10.7 million investments write-down and $8.5 million TVN purchase price accounting impact, which have a 19% effective tax rate.  

 

Free Cash Flow - 2017 and 2016
 
  Year ended December 31,  
(in thousands)   2017     2016  
Cash provided by operating activities $ 1,055,794   $ 948,826  
Dividends paid to non-controlling interests   (186,116 )   (157,687 )
Additions to property and equipment   (75,641 )   (74,406 )
Free cash flow $ 794,037   $ 716,733  
             

 

U.S Networks Segment Operating Revenues by Network – 2017 and 2016                                    
                                     
  Three months ended December 31   Year ended December 31,  
(in thousands) 2017   2016   % Change   2017   2016   % Change  
Network                                    
HGTV $ 280,854   $ 269,390     4.3 % $ 1,138,107   $ 1,089,616     4.5 %
Food Network   257,030     245,034     4.9 %   965,567     932,617     3.5 %
Travel Channel   79,783     78,968     1.0 %   325,617     321,209     1.4 %
DIY Network   38,914     39,344     (1.1 )%   162,035     167,944     (3.5 )%
Cooking Channel   37,086     37,004     0.2 %   144,812     141,218     2.5 %
Great American Country   6,537     6,857     (4.7 )%   27,546     29,496     (6.6 )%
Digital   48,659     43,424     12.1 %   163,922     149,815     9.4 %
Other   10,455     10,797     (3.2 )%   41,601     41,259     0.8 %
Intrasegment eliminations   (575 )   (173 )   (232.4 )%   (2,165 )   (1,750 )   (23.7 )%
Segment operating revenues $ 758,743   $ 730,645     3.8 % $ 2,967,042   $ 2,871,424     3.3 %
Type                                    
Advertising $ 529,919   $ 523,330     1.3 % $ 2,069,422   $ 2,029,095     2.0 %
Distribution   213,637     193,404     10.5 %   840,175     785,849     6.9 %
Other   15,187     13,911     9.2 %   57,445     56,480     1.7 %
Segment operating revenues $ 758,743   $ 730,645     3.8 % $ 2,967,042   $ 2,871,424     3.3 %
                                     

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