XNYS:SNI Scripps Networks Interactive Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

 

 

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  x    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  x    No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2012 there were 117,643,762 of the Registrant’s Class A Common shares outstanding and 34,317,173 of the Registrant’s Common Voting shares outstanding.

 

 

 


Table of Contents

INDEX TO SCRIPPS NETWORKS INTERACTIVE, INC.

REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012

 

Item No.

        Page  
PART I - FINANCIAL INFORMATION   
1    Financial Statements      3   
2    Management’s Discussion and Analysis of Financial Condition and Results of Operations      3   
3    Quantitative and Qualitative Disclosures About Market Risk      3   
4    Controls and Procedures      3   
PART II - OTHER INFORMATION   
1    Legal Proceedings      3   
1A    Risk Factors      3   
2    Unregistered Sales of Equity and Use of Proceeds      4   
3    Defaults Upon Senior Securities      4   
4    Mine Safety Disclosures      4   
5    Other Information      4   
6    Exhibits      4   
   Signatures      5   

 

 

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PART I

As used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us” or “SNI” 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.

ITEM 1.    FINANCIAL STATEMENTS

The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.

ITEM 4.    CONTROLS AND PROCEDURES

The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.

PART II

ITEM 1.    LEGAL PROCEEDINGS

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

ITEM 1A.    RISK FACTORS

A wide range of risks may affect our business and financial results, now and in the future; however, we consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011 to be the most significant and there have been no material changes.

 

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ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

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

The following table provides information about Company purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2012:

 

                          Maximum  
                   Total Number      Dollar Value  
     Total             of Shares Purchased      of Shares that May  
     Number of      Average      as Part of Publicly      Yet Be Purchased  
     Shares      Price Paid      Announced Plans      Under the Plans  

Period

   Purchased      per Share      or Programs      Or Programs  

1/1/12 - 1/31/12

     722,150       $ 44.34         722,150       $ 468,027,502   

2/1/12 - 2/29/12

     1,624,300         44.35         1,624,300         395,994,549   

3/1/12 - 3/31/12

     3,145,715         46.40         3,145,715         250,048,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,492,165       $ 45.52         5,492,165       $ 250,048,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Under a share repurchase program authorized by the Board of Directors in June 2011, we were authorized to repurchase $1 billion of Class A Common shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

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

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

The information required by this item is filed as part of this Form 10-Q. See Index to Exhibits at page E-1 of this Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

SCRIPPS NETWORKS INTERACTIVE, INC.

Dated: May 9, 2012     BY:   /s/ Joseph G. NeCastro
    Joseph G. NeCastro
   

Chief Administrative Officer and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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Index to Financial Information

 

Item

   Page  

Condensed Consolidated Balance Sheets

     F-2   

Condensed Consolidated Statements of Operations

     F-3   

Condensed Consolidated Statements of Comprehensive Income

     F-4   

Condensed Consolidated Statements of Cash Flows

     F-5   

Condensed Consolidated Statements of Shareholders’ Equity

     F-6   

Notes to Condensed Consolidated Financial Statements

     F-7   

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

     F-18   

Quantitative and Qualitative Disclosures About Market Risk

     F-26   

Controls and Procedures

     F-28   

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share data)

 

     As of  
     March 31,     December 31,  
     2012     2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 645,530      $ 760,092   

Accounts and notes receivable (less allowances: 2012—$4,638; 2011—$5,000)

     512,799        553,022   

Programs and program licenses

     355,224        336,305   

Other current assets

     44,384        66,549   
  

 

 

   

 

 

 

Total current assets

     1,557,937        1,715,968   

Investments

     473,600        455,267   

Property and equipment, net

     224,440        219,845   

Goodwill

     532,035        510,484   

Other intangible assets, net

     545,364        556,095   

Programs and program licenses (less current portion)

     320,522        299,089   

Unamortized network distribution incentives

     39,686        46,239   

Other non-current assets

     155,298        158,683   
  

 

 

   

 

 

 

Total Assets

   $ 3,848,882      $ 3,961,670   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accounts payable

   $ 9,904      $ 12,482   

Program rights payable

     35,918        50,402   

Customer deposits and unearned revenue

     45,222        52,814   

Employee compensation and benefits

     30,206        49,920   

Accrued marketing and advertising costs

     6,549        6,838   

Other accrued liabilities

     87,755        60,443   
  

 

 

   

 

 

 

Total current liabilities

     215,554        232,899   

Deferred income taxes

     114,628        100,002   

Long-term debt

     1,384,013        1,383,945   

Other liabilities (less current portion)

     166,485        148,429   
  

 

 

   

 

 

 

Total liabilities

     1,880,680        1,865,275   
  

 

 

   

 

 

 

Redeemable noncontrolling interest

     166,265        162,750   
  

 

 

   

 

 

 

Equity:

    

SNI shareholders’ equity:

    

Preferred stock, $.01 par—authorized: 25,000,000 shares; none outstanding Common stock, $.01 par:

    

Class A—authorized: 240,000,000 shares; issued and outstanding: 2012—117,919,313 shares; 2011—122,828,359 shares

     1,179        1,228   

Voting—authorized: 60,000,000 shares; issued and outstanding: 2012—34,317,173 shares; 2011—34,317,173 shares

     343        343   
  

 

 

   

 

 

 

Total

     1,522        1,571   

Additional paid-in capital

     1,324,903        1,346,429   

Retained earnings

     257,528        364,073   

Accumulated other comprehensive income (loss)

     (27,721     (33,347
  

 

 

   

 

 

 

Total SNI shareholders’ equity

     1,556,232        1,678,726   

Noncontrolling interest

     245,705        254,919   
  

 

 

   

 

 

 

Total equity

     1,801,937        1,933,645   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 3,848,882      $ 3,961,670   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

     Three months ended  
     March 31,  
     2012     2011  

Operating Revenues:

    

Advertising

   $ 356,382      $ 322,676   

Network affiliate fees, net

     168,217        145,437   

Other

     10,746        12,718   
  

 

 

   

 

 

 

Total operating revenues

     535,345        480,831   
  

 

 

   

 

 

 

Costs and Expenses:

    

Employee compensation and benefits

     83,422        72,940   

Program amortization

     111,328        90,301   

Marketing and advertising

     30,921        30,009   

Other costs and expenses

     70,439        60,331   
  

 

 

   

 

 

 

Total costs and expenses

     296,110        253,581   
  

 

 

   

 

 

 

Depreciation, Amortization, and Losses (Gains):

    

Depreciation

     13,785        11,112   

Amortization of intangible assets

     10,731        10,449   

Losses (gains) on disposal of property and equipment

     59        16   
  

 

 

   

 

 

 

Total depreciation, amortization, and losses (gains)

     24,575        21,577   
  

 

 

   

 

 

 

Operating income

     214,660        205,673   

Interest expense

     (12,180     (8,615

Equity in earnings of affiliates

     13,913        9,658   

Miscellaneous, net

     7,154        47   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     223,547        206,763   

Provision for income taxes

     66,596        62,211   
  

 

 

   

 

 

 

Income from continuing operations, net of tax

     156,951        144,552   

Income (loss) from discontinued operations, net of tax

       765   
  

 

 

   

 

 

 

Net income

     156,951        145,317   

Less: net income attributable to noncontrolling interests

     42,048        44,792   
  

 

 

   

 

 

 

Net income attributable to SNI

   $ 114,903      $ 100,525   
  

 

 

   

 

 

 

Net income attributable to SNI common shareholders per share of common stock:

    

Basic income per share:

    

Income from continuing operations attributable to SNI common shareholders

   $ .74      $ .59   

Income (loss) from discontinued operations attributable to SNI common shareholders

     0.00        0.00   
  

 

 

   

 

 

 

Net income attributable to SNI common shareholders

   $ .74      $ .60   
  

 

 

   

 

 

 

Diluted income per share:

    

Income from continuing operations attributable to SNI common shareholders

   $ .73      $ .59   

Income (loss) from discontinued operations attributable to SNI common shareholders

     0.00        0.00   
  

 

 

   

 

 

 

Net income attributable to SNI common shareholders

   $ .73      $ .59   
  

 

 

   

 

 

 

Amounts attributable to SNI:

    

Income from continuing operations

   $ 114,903      $ 99,760   

Income (loss) from discontinued operations

       765   
  

 

 

   

 

 

 

Net income attributable to SNI

   $ 114,903      $ 100,525   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

Net income per share amounts may not foot since each is calculated independently.

 

F-3


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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

     Three months ended  
     March 31,  
     2012      2011  

Net income

   $ 156,951       $ 145,317   

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustments, net of tax—2012, ($274); 2011, ($40)

     5,268         556   

Pension liability adjustments, net of tax—2012, ($398); 2011, ($34)

     419         54   
  

 

 

    

 

 

 

Comprehensive income

     162,638         145,927   

Less: comprehensive income attributable to noncontrolling interests

     42,109         44,989   
  

 

 

    

 

 

 

Comprehensive income attributable to SNI

   $ 120,529       $ 100,938   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

     Three months ended  
     March 31,  
     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 156,951      $ 145,317   

Loss (income) from discontinued operations

       (765
  

 

 

   

 

 

 

Income from continuing operations, net of tax

     156,951        144,552   

Depreciation and amortization of intangible assets

     24,516        21,561   

Amortization of network distribution costs

     6,554        10,193   

Program amortization

     111,328        90,301   

Equity in earnings of affiliates

     (13,913     (9,658

Program payments

     (165,993     (115,384

Capitalized network distribution incentives

     (93     (3,237

Dividends received from equity investments

     9,017        5,845   

Deferred income taxes

     10,458        (3,944

Stock and deferred compensation plans

     14,042        8,741   

Changes in certain working capital accounts:

    

Accounts receivable

     42,475        37,807   

Other assets

     1,037        (2,626

Accounts payable

     (2,658     361   

Accrued employee compensation and benefits

     (19,027     (22,196

Accrued income taxes

     46,290        57,792   

Other liabilities

     (13,626     (13,724

Other, net

     811        6,166   
  

 

 

   

 

 

 

Cash provided by (used in) continuing operating activities

     208,169        212,550   

Cash provided by (used in) discontinued operating activities

       13,313   
  

 

 

   

 

 

 

Cash provided by (used in) operating activities

     208,169        225,863   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Additions to property and equipment

     (7,314     (11,189

Collections (funds advanced) on note receivable

     7,012     

Purchase of subsidiary companies, net of cash acquired

     (19,569  

Other, net

     619        20   
  

 

 

   

 

 

 

Cash provided by (used in) continuing investing activities

     (19,252     (11,169

Cash provided by (used in) discontinued investing activities

       (4,241
  

 

 

   

 

 

 

Cash provided by (used in) investing activities

     (19,252     (15,410
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Dividends paid

     (18,741     (12,633

Dividends paid to noncontrolling interest

     (47,808     (15,227

Noncontrolling interest capital contribution

       52,804   

Repurchase of Class A common stock

     (250,110  

Proceeds from stock options

     13,014        10,745   

Other, net

     566        (2,083
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

     (303,079     33,606   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (400     (292
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (114,562     243,767   

Cash and cash equivalents:

    

Beginning of year

     760,092        549,897   
  

 

 

   

 

 

 

End of period

   $ 645,530      $ 793,664   
  

 

 

   

 

 

 

Supplemental Cash Flow Disclosures:

    

Interest paid, excluding amounts capitalized

   $ 15,908      $ 15,965   

Income taxes paid

     1,311        1,293   
  

 

 

   

 

 

 

Non-Cash transactions:

    

Contingent consideration liability

   $ 8,323     
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

 

     SNI Shareholders                 Redeemable  
                       Accumulated                 Noncontrolling  
           Additional           Other                 Interests  
     Common     Paid-in     Retained     Comprehensive     Noncontrolling     Total     (Temporary  
     Stock     Capital     Earnings     Income (Loss)     Interest     Equity     Equity)  

Balance as of December 31, 2010

   $ 1,676      $ 1,371,050      $ 414,972      $ (11,525   $ 145,973      $ 1,922,146      $ 158,148   

Comprehensive income (loss)

         100,525        413        41,615        142,553        3,374   

Contribution by noncontrolling interest to Food Network Partnership

             52,804        52,804     

Effect of capital contributions to Food Network Partnership

       25,368            (25,368    

Dividend paid to noncontrolling interest

             (15,227     (15,227  

Dividends: declared and paid—$.075 per share

         (12,633         (12,633  

Stock-based compensation expense

       7,126              7,126     

Exercise of employee stock options: 314,172 shares issued

     3        10,742              10,745     

Other stock-based compensation, net: 177,620 shares issued; 75,862 shares repurchased; 2,801 shares forfeited

     2        (3,406           (3,404  

Tax benefits of compensation plans

       2,171              2,171     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011

   $ 1,681      $ 1,413,051      $ 502,864      $ (11,112   $ 199,797      $ 2,106,281      $ 161,522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 1,571      $ 1,346,429      $ 364,073      $ (33,347   $ 254,919      $ 1,933,645      $ 162,750   

Comprehensive income (loss)

         114,903        5,626        38,594        159,123        3,515   

Dividends paid to noncontrolling interest

             (47,808     (47,808  

Dividends: declared and paid—$.12 per share

         (18,741         (18,741  

Repurchase 5,492,165 Class A Common shares

     (55     (47,348     (202,707         (250,110  

Stock-based compensation expense

       11,038              11,038     

Exercise of employee stock options: 424,613 shares issued

     4        13,010              13,014     

Other stock-based compensation, net: 235,674 shares issued; 77,168 shares repurchased

     2        (1,030           (1,028  

Tax benefits of compensation plans

       2,804              2,804     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 1,522      $ 1,324,903      $ 257,528      $ (27,721   $ 245,705      $ 1,801,937      $ 166,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K.

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.

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

2. Shareholders’ Equity and Earnings per Share

Basic earnings per share (“EPS”) is calculated by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding, including participating securities outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential issuance of common shares. We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS.

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

 

(in thousands)    Three months ended  
     March 31,  
     2012      2011  

Weighted-average shares outstanding:

     

Basic

     156,118         168,426   

Share options

     950         1,268   
  

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     157,068         169,694   
  

 

 

    

 

 

 

Anti-dilutive share awards

     2,471         432   
  

 

 

    

 

 

 

For 2012 and 2011, we had stock options that were anti-dilutive and accordingly were not included in the computation of diluted weighted-average shares outstanding.

 

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3. Accounting Standards Updates and Recently Issued Accounting Standards Updates

Recently Issued Accounting Standards Updates

In May 2011, an update was made to the Fair Value Measurement Topic, ASC 820, which is the result of joint efforts by the Financial Accounting Standards Board and International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and on what disclosures to provide about fair value measurements. While the update is largely consistent with existing fair value measurement principles in GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments were made to eliminate unnecessary wording differences between GAAP and International Financial Reporting Standards. This update was effective for us on January 1, 2012 and did not have a material impact on our condensed consolidated financial statements.

In June 2011, an update was made to the Comprehensive Income Topic, ASC 220, which provides guidance for the manner in which entities present comprehensive income in their financial statements. The update removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The update does not change the items that must be reported in other comprehensive income nor does it require any additional disclosures. This update was effective for us on January 1, 2012. The adoption of this update only had an impact on the presentation of our condensed consolidated financial statements, not the financial results.

In September 2011, an update was made to the Goodwill and Intangible Assets Topic, ASC 350, which amends the accounting guidance on goodwill impairment testing. The amendments in this update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This update was effective for us on January 1, 2012 and did not have a material impact on our condensed consolidated financial statements.

4. Other Charges and Credits

In August 2010, we contributed the Cooking Channel to the Food Network Partnership (the “Partnership”). At the close of our 2010 fiscal year, the noncontrolling owner had not made a required pro-rata capital contribution to the Partnership and as a result its ownership interest was diluted from 31 percent to 25 percent. Accordingly, following the Cooking Channel contribution, profits from the partnership were allocated to the noncontrolling owner at its reduced ownership percentage. In February 2011, the noncontrolling owner made the pro-rata contribution to the Partnership and its ownership interest was returned to the pre-dilution percentage as if the contribution had been made as of the date of the Cooking Channel contribution. The retroactive impact of restoring the noncontrolling owner’s interest in the Partnership increased net income attributable to noncontrolling interest $8.0 million in the first quarter of 2011.

 

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5. Investments

The approximate ownership interest in each of our equity method investments and their respective investment balances were as follows:

 

(in thousands)          As of  
     Ownership     March 31,      December 31,  
     Interest     2012      2011  

UKTV (includes preferred stock: 2012—$31,979; 2011—$31,068)

     50.00   $ 418,254       $ 401,987   

HGTV Canada

     33.00     21,929         20,051   

Food Canada

     29.00     13,641         12,769   

Fox-BRV Southern Sports Holdings

     7.25     12,494         11,970   

Oyster.com

     24.01     6,472         6,963   

Food Network Magazine JV

     50.00     630         1,347   

Other

       180         180   
    

 

 

    

 

 

 

Total investments

     $ 473,600       $ 455,267   
    

 

 

    

 

 

 

Following the close of business on September 30, 2011, we acquired a 50% interest in UKTV. UKTV is one of the United Kingdom’s leading multi-channel television programming companies. Final consideration paid in the transaction consisted of approximately $395 million to purchase preferred stock and common equity interest in UKTV and approximately $137 million to acquire a note receivable due to Virgin Media, Inc. from UKTV. The note receivable, reported within “Other Non-Current Assets” in our condensed consolidated balance sheet, effectively acts as a revolving facility for UKTV. The notes accrue interest at variable rates related to either the spread over LIBOR or other identified market indices (Level 2 fair value measurements). Since the notes accrue interest at variable rates, the carrying amount of such note receivable is believed to approximate fair value. As a result of this financing arrangement and the level of equity investment at risk, we have determined that UKTV is a variable interest entity (“VIE”). SNI and its partner in the venture share equally in the profits of the entity, have equal representation on UKTV’s board of directors and share voting control in such matters as approving annual budgets, initiating financing arrangements, and changing the scope of the business. However, our partner maintains control over certain operational aspects of the business related to programming content, scheduling, and the editorial and creative development of UKTV. Additionally, certain key management personnel of UKTV are employees of our partner. Since we do not control these activities that are critical to UKTV’s operating performance, we have determined that we are not the primary beneficiary of the entity and account for the investment under the equity method of accounting. We began recognizing our proportionate share of the results from UKTV’s operations on October 1, 2011.

Our equity in earnings from the UKTV investment is reduced by amortization reflecting differences in the consideration paid for our equity interest in the entity and our 50% proportionate share of UKTV’s equity. Estimated amortization that will reduce UKTV’s equity in earnings for each of the next five years is expected to be $13.9 million for the remainder of 2012, $18.4 million in 2013, $18.4 million in 2014, $17.6 million in 2015, and $15.3 million in 2016.

We regularly review our investments to determine if there have been any other-than-temporary declines in value. These reviews require management judgments that often include estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred. We evaluate among other factors, the extent to which costs exceed fair value; the duration of the decline in fair value below cost; and the current cash position, earnings and cash forecasts and near term prospects of the investee. No impairments were recognized on any of our equity method investments in 2012 or 2011.

 

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6. Fair Value Measurement

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified in one of three categories which are described below.

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Inputs, other than quoted market prices in active markets, that are observable either directly or indirectly.

 

   

Level 3 — Unobservable inputs based on our own assumptions.

The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2012:

 

(in thousands)                            
     Total      Level 1      Level 2      Level 3  

Assets:

           

Cash equivalents

   $ 374,701       $ 374,701         
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liability

   $ 5,505          $ 5,505      
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity:

           

Redeemable noncontrolling interest

   $ 166,265             $ 166,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011:

 

(in thousands)                            
     Total      Level 1      Level 2      Level 3  

Assets:

           

Cash equivalents

   $ 587,617       $ 587,617         

Derivative asset

     5,820          $ 5,820      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 593,437       $ 587,617       $ 5,820      
  

 

 

    

 

 

    

 

 

    

 

 

 

Temporary equity:

           

Redeemable noncontrolling interest

   $ 162,750             $ 162,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives include freestanding derivative forward contracts which are marked to market at each reporting period. We classify our foreign currency forward contracts within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

We determine the fair value of the redeemable noncontrolling interest using a combination of a discounted cash flow valuation model and a market approach that applies revenues and EBITDA estimates against the calculated multiples of comparable companies. Operating revenues and EBITDA are key assumptions utilized in both the discounted cash flow valuation model and the market approach. The selected discount rate of approximately 12% is also a key assumption in our discounted cash flow valuation model (Refer to Note 11—Redeemable Noncontrolling Interest and Noncontrolling Interest for additional information).

 

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

 

(in thousands)    Redeemable Noncontrolling Interests  
     Three months ended  
     March 31,  
     2012      2011  

Beginning period balance

   $ 162,750       $ 158,148   

Net income (loss)

     3,515         3,291   

Noncontrolling interest's share of foreign currency translation

        83   
  

 

 

    

 

 

 

End period balance

   $ 166,265       $ 161,522   
  

 

 

    

 

 

 

The net income (loss) amounts reflected in the table above are reported within the “net income attributable to noncontrolling interests” line in our condensed consolidated statements of operations.

 

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7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consisted of the following:

 

(in thousands)    As of  
     March 31,     December 31,  
     2012     2011  

Goodwill

   $ 532,035      $ 510,484   
  

 

 

   

 

 

 

Other intangible assets:

    

Amortizable intangible assets:

    

Carrying amount:

    

Acquired network distribution

     514,951        514,944   

Customer lists

     87,107        87,107   

Copyrights and other trade names

     59,350        59,350   

Other

     8,008        8,008   
  

 

 

   

 

 

 

Total carrying amount

     669,416        669,409   
  

 

 

   

 

 

 

Accumulated amortization:

    

Acquired network distribution

     (76,682     (70,082

Customer lists

     (32,203     (28,981

Copyrights and other trade names

     (9,601     (8,800

Other

     (5,566     (5,451
  

 

 

   

 

 

 

Total accumulated amortization

     (124,052     (113,314
  

 

 

   

 

 

 

Total other intangible assets, net

     545,364        556,095   
  

 

 

   

 

 

 

Total goodwill and other intangible assets, net

   $ 1,077,399      $ 1,066,579   
  

 

 

   

 

 

 

Activity related to goodwill and amortizable intangible assets by business segment was as follows:

 

(in thousands)    Lifestyle              
     Media     Corporate     Total  

Goodwill:

      

Balance as of December 31, 2011

   $ 510,484        $ 510,484   

Business acquisitions

     $ 21,551        21,551   
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 510,484      $ 21,551      $ 532,035   
  

 

 

   

 

 

   

 

 

 

Amortizable intangible assets:

      

Balance as of December 31, 2011

   $ 556,029      $ 66      $ 556,095   

Amortization

     (10,711     (20     (10,731
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 545,318      $ 46      $ 545,364   
  

 

 

   

 

 

   

 

 

 

On January 30, 2012 we acquired RealGravity, Inc. RealGravity is a California-based company that specializes in online video publishing technologies. The purchase price, which comprised both cash of $20 million and contingent consideration, has been allocated to the assets and liabilities of Real Gravity based upon preliminary estimates and are therefore subject to change. As of March 31, 2012, we have allocated $21.6 million of the purchase price to goodwill. The Company estimated the fair value of the acquisition-related contingent consideration payable of $8.3 million using probability-weighted discounted cash flow models.

Estimated amortization expense of intangible assets for each of the next five years is as follows: $31.8 million for the remainder of 2012, $41.9 million in 2013, $41.5 million in 2014, $33.4 million in 2015, $33.3 million in 2016 and $363.5 million in later years.

 

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8. Long-Term Debt

Long-term debt consisted of the following:

 

(in thousands)    As of  
     March 31,      December 31,  
     2012      2011  

3.55% senior notes due in 2015

   $ 884,582       $ 884,545   

2.70% senior notes due in 2016

     499,431         499,400   
  

 

 

    

 

 

 

Total long-term debt

   $ 1,384,013       $ 1,383,945   
  

 

 

    

 

 

 

Fair value of long-term debt*

   $ 1,444,102       $ 1,428,653   
  

 

 

    

 

 

 

 

* The fair value of the long-term senior notes were estimated using level 2 inputs comprised of quoted prices in active markets, market indices and interest rate measurements for debt of the same remaining maturity.

On December 1, 2011, SNI completed the sale of $500 million of aggregate principal amount Senior Notes. The Senior Notes mature on December 15, 2016 bearing interest at 2.70%. Beginning on June 15, 2012, interest will be paid on the notes on June 15th and December 15th of each year.

On December 15, 2009, a majority-owned subsidiary of SNI issued a total of $885 million of aggregate principal amount Senior Notes through a private placement. The Senior Notes mature on January 15, 2015 bearing interest at 3.55%. Interest is paid on the Senior Notes on January 15th and July 15th of each year. The Senior Notes are guaranteed by SNI. Cox TMI, Inc., a wholly-owned subsidiary of Cox Communications, Inc. and 35% owner in the Travel Channel has agreed to indemnify SNI for all payments made in respect of SNI’s guarantee.

We have a Competitive Advance and Revolving Credit Facility (the “ Facility”) that permits $550 million in aggregate borrowings and expires in June 2014. The Facility bears interest based on the Company’s credit ratings, with drawn amounts bearing interest at Libor plus 90 basis points and undrawn portions bearing interest at 10 basis points as of March 31, 2012.

The Facility and Senior Notes agreements include certain affirmative and negative covenants, including the incurrence of additional indebtedness and maintenance of a maximum leverage ratio.

As of March 31, 2012, we had outstanding letters of credit totaling $1.1 million.

9. Other Liabilities

Other liabilities consisted of the following:

 

(in thousands)    As of  
     March 31,      December 31,  
     2012      2011  

Liability for pension and post employment benefits

   $ 79,308       $ 78,282   

Deferred compensation

     23,702         20,698   

Liability for uncertain tax positions

     53,920         48,038   

Other

     9,555         1,411   
  

 

 

    

 

 

 

Other liabilities (less current portion)

   $ 166,485       $ 148,429   
  

 

 

    

 

 

 

 

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10. Foreign Exchange Risk Management

In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, we may enter into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, and probable commitments. All of our forward contracts are designated as freestanding derivatives and are designed to minimize foreign currency exposures between the U.S. Dollar and British Pound. We do not enter into currency exchange rate derivative instruments for speculative purposes.

The freestanding derivative forward contracts are used to offset our exposure to the change in value of specific foreign currency denominated assets and liabilities. These derivatives are not designated as hedges, and therefore, changes in the value of these forward contracts are recognized currently in earnings, thereby offsetting the current earnings effect of the related change in U.S. dollar value of foreign currency denominated assets and liabilities. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts outstanding were $234 million at March 31, 2012 and $239 million at December 31, 2011. We held no foreign currency derivative financial instruments at March 31, 2011.

We recognized $7.8 million of losses in 2012 from these forward contracts which are reported in the miscellaneous, net caption in the consolidated statements of operations.

11. Redeemable Noncontrolling Interest and Noncontrolling Interest

Redeemable Noncontrolling Interest

A noncontrolling interest holds a 35% residual interest in the Travel Channel. The noncontrolling interest has the right to require us to repurchase their interest and we have an option to acquire their interest. The noncontrolling interest will receive the fair value for their interest at the time their option is exercised. The put option on the noncontrolling interest in the Travel Channel becomes exercisable in 2014. The call option becomes exercisable in 2015.

Our condensed consolidated balance sheets include a redeemable noncontrolling interest balance of $166 million at March 31, 2012 and $163 million at December 31, 2011.

Noncontrolling Interest

A noncontrolling interest holds a 31% residual interest in the Food Network partnership, which is comprised of the Food Network and the Cooking Channel. The Food Network partnership agreement specifies a dissolution date of December 31, 2012. If the term of the partnership is not extended prior to that date, the agreement permits the Company, as the holder of approximately 80% of the applicable votes, to reconstitute the partnership and continue its business. There are also other options for continuing the business of the partnership, including offering to purchase the noncontrolling interest, that the Company is considering. If the partnership is not continued, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.

12. Stock Based Compensation and Share Repurchase Program

We have a Long-Term Incentive Plan (the “Plan”) which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2011. The Plan provides for long-term performance compensation for key employees. A variety of discretionary awards for employees are authorized under the plan, including incentive or non-qualified stock options, stock appreciation rights, restricted or nonrestricted stock awards and performance awards.

For the first quarter of 2012, the Company granted 0.5 million stock options and 0.3 million restricted share awards, including performance share awards. The number of shares ultimately issued for the performance share awards depends upon the specified performance conditions attained. Share based compensation costs totaled $11.0 million for the first quarter of 2012 and $6.8 million for the first quarter of 2011. Compensation costs of share options are estimated on the date of grant using a lattice-based binomial model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

 

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As of March 31, 2012, $8.3 million of total unrecognized stock-based compensation costs related to stock options is expected to be recognized over a weighted-average period of 2.2 years. In addition, $23.4 million of total unrecognized stock-based compensation cost related to restricted stock awards, including performance awards, is expected to be recognized over a weighted-average period of 2.1 years.

Share Repurchase Program

In June 2011, our Board of Directors authorized a share repurchase program allowing the Company to repurchase up to $1 billion of its outstanding Class A common shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program. All shares repurchased under the program are constructively retired and returned to unissued shares. During the first quarter of 2012 we repurchased 5.5 million shares for approximately $250 million. As of March 31, 2012, our remaining authorization to repurchase is $250 million of Class A common shares.

13. Employee Benefit Plans

The Company offers various postretirement benefits to its employees.

The components of benefit plan expense consisted of the following:

 

(in thousands)    Three months ended  
     March 31,  
     2012     2011  

Interest cost

   $ 800      $ 885   

Expected return on plan assets, net of expenses

     (850     (741

Actuarial (gain)/loss

     525        16   
  

 

 

   

 

 

 

Total for defined benefit plans

     475        160   

Supplemental executive retirement plan (“SERP”)

     900        488   

Defined contribution plans

     5,358        4,745   
  

 

 

   

 

 

 

Total

   $ 6,733      $ 5,393   
  

 

 

   

 

 

 

We contributed $0.1 million to fund current benefit payments for our nonqualified supplemental executive retirement plan (“SERP”) during the first quarter of 2012. We anticipate contributing $4.5 million to fund the SERP’s benefit payments during the remainder of fiscal 2012. We made contributions totaling $9.2 million to our SNI Pension Plan in the second quarter 2012.

 

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14. Segment Information

The Company determines its business segments based upon our management and internal reporting structure. We manage our operations through one reportable operating segment, Lifestyle Media.

Lifestyle Media includes our national television networks, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and GAC. Lifestyle Media also includes websites that are associated with the aforementioned television brands and other Internet-based businesses serving food, home and travel related categories. The Food Network and Cooking Channel are included in the Food Network partnership of which we own approximately 69%. We also own 65% of Travel Channel. Each of our networks is distributed by cable and satellite distributors and telecommunication service providers. Lifestyle Media earns revenue primarily from the sale of advertising time and from affiliate fees paid by cable and satellite television systems.

The results of businesses not separately identified as reportable segments are included within our corporate caption. Corporate includes the results of the lifestyle-oriented channels we operate in Europe, the Middle East, Africa and Asia, operating results from the international licensing of our national networks’ programming, and other interactive and digital business initiatives that are not associated with our Lifestyle Media or international businesses.

Each of our segments may provide advertising, programming or other services to our other segments. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits, and other shared services, are allocated to our business segments. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the business segment.

Our chief operating decision maker evaluates the operating performance of our business segments and makes decisions about the allocation of resources to the business segments using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

Information regarding our business segments is as follows:

 

(in thousands)    Three months ended  
     March 31,  
     2012     2011  

Segment operating revenues:

    

Lifestyle Media

   $ 528,583      $ 473,553   

Corporate/intersegment eliminations

     6,762        7,278   
  

 

 

   

 

 

 

Total operating revenues

   $ 535,345      $ 480,831   
  

 

 

   

 

 

 

Segment profit (loss):

    

Lifestyle Media

   $ 264,637      $ 244,605   

Corporate

     (25,402     (17,355
  

 

 

   

 

 

 

Total segment profit

     239,235        227,250   

Depreciation and amortization of intangible assets

     (24,516     (21,561

Gains (losses) on disposal of property and equipment

     (59     (16

Interest expense

     (12,180     (8,615

Equity in earnings of affiliates

     13,913        9,658   

Miscellaneous, net

     7,154        47   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 223,547      $ 206,763   
  

 

 

   

 

 

 

 

(in thousands)    As of  
     March 31,      December 31,  
     2012      2011  

Assets:

     

Lifestyle Media

   $ 2,786,698       $ 2,794,040   

Corporate

     1,062,184         1,167,630   
  

 

 

    

 

 

 

Total assets

   $ 3,848,882       $ 3,961,670   
  

 

 

    

 

 

 

No single customer provides more than 10% of our total operating revenues.

 

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15. Subsequent Event

In the second quarter of 2012, we completed our acquisition of Travel Channel International (“TCI”) for consideration of approximately $103 million. TCI is an independent company headquartered in the United Kingdom that provides and commissions original travel programming for distribution in 91 countries.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and the notes to the condensed consolidated financial statements. You should read this discussion and analysis in conjunction with those financial statements.

FORWARD-LOOKING STATEMENTS

This discussion and the information contained in the notes to the condensed consolidated financial statements contain certain forward-looking statements that are based on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty. We undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.

OVERVIEW

Scripps Networks Interactive is one of the leading developers of lifestyle-oriented content for television and the Internet with respected, high-profile television and interactive brands. Our businesses engage audiences and efficiently serve advertisers by delivering entertaining and useful content that focuses on specifically defined topics of interest.

We manage our operations through our reportable operating segment, Lifestyle Media. Lifestyle Media includes our national television networks, Home and Garden Television (“HGTV”), Food Network, Travel Channel, DIY Network (“DIY”), Cooking Channel and Great American Country (“GAC”). Lifestyle Media also includes websites that are associated with the aforementioned television brands and other Internet-based businesses serving food, home and travel related categories. Our Lifestyle Media branded websites consistently rank at or near the top in their respective lifestyle categories on a unique visitor basis.

We also have established lifestyle media brands internationally. Food based channels are available in the United Kingdom, other European markets, the Middle East, Africa and Asia. Our international offerings also include Fine Living Network, a full-spectrum lifestyle television channel and interactive brand that is available across more than 60 countries.

The growth of our international business both organically and through acquisitions and joint ventures continues to be a strategic priority of the Company. In the second quarter of 2012, we completed our acquisition of Travel Channel International (“TCI”) for consideration of approximately $103 million. TCI is an independent company headquartered in the United Kingdom that provides and commissions original travel programming for distribution in 91 countries. At the end of the third quarter of 2011, we acquired a 50 percent interest in UKTV. UKTV is one of the United Kingdom’s leading multi-channel television programming companies. Consideration paid in the transaction consisted of approximately $395 million to purchase preferred stock and common equity interest in UKTV and approximately $137 million to acquire debt due to Virgin Media, Inc. from UKTV. We began recognizing our proportionate share of the results from UKTV’s operations on October 1, 2011.

During the second quarter of 2011, our Board of Directors approved the sale of our Shopzilla business and its related online comparison shopping brands. We received consideration totaling $160 million upon finalizing the sale of the business on May, 31, 2011. The Shopzilla businesses’ assets, liabilities and results of operations have been presented as discontinued operations within our condensed consolidated financial statements for all periods.

Our businesses earn revenues principally from advertising sales, affiliate fees and ancillary sales, including the sale and licensing of consumer products. Programming expenses, employee costs, and sales and marketing expenses are the primary operating costs.

 

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Operating revenues from our continuing operations in the first quarter of 2012 increased 11 percent to $535 million compared with the same period a year ago, while segment profit for the period was $239 million compared with $227 million a year earlier, a 5.3 percent increase.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.

Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used could materially change the financial statements. We believe the accounting for Programs and Program Licenses, Revenue Recognition, Acquisitions, Goodwill, Finite-Lived Intangible Assets, and Income Taxes to be our most critical accounting policies and estimates. A detailed description of these accounting policies is included in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes in those accounting policies.

 

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RESULTS OF OPERATIONS

The competitive landscape in our business is affected by multiple media platforms competing for consumers and advertising dollars. We strive to create popular programming that resonates with viewers across a variety of demographic groups, develop brands and create new media platforms through which we can capitalize on the audiences we aggregate.

Consolidated results of operations were as follows:

 

(in thousands)    Three months ended        
     March 31,        
     2012     2011     Change  

Operating revenues

   $ 535,345      $ 480,831        11.3

Costs and expenses

     (296,110     (253,581     16.8

Depreciation and amortization of intangible assets

     (24,516     (21,561     13.7

Gains (losses) on disposal of property and equipment

     (59     (16  
  

 

 

   

 

 

   

 

 

 

Operating income

     214,660        205,673        4.4

Interest expense

     (12,180     (8,615     41.4

Equity in earnings of affiliates

     13,913        9,658        44.1

Miscellaneous, net

     7,154        47     
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     223,547        206,763        8.1

Provision for income taxes

     (66,596     (62,211     7.0
  

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     156,951        144,552        8.6

Income (loss) from discontinued operations, net of tax

       765     
  

 

 

   

 

 

   

 

 

 

Net income

     156,951        145,317        8.0

Net income attributable to noncontrolling interests

     (42,048     (44,792     (6.1 )% 
  

 

 

   

 

 

   

 

 

 

Net income attributable to SNI

   $ 114,903      $ 100,525        14.3
  

 

 

   

 

 

   

 

 

 

The increase in operating revenues for the first quarter of 2012 was due primarily to solid growth in advertising sales and affiliate fee revenue from our national television networks. Advertising revenues from our national networks increased $33.6 million or 10 percent for the first quarter of 2012 compared with the first quarter of 2011. The increase in advertising revenues reflects strong pricing and sales in the upfront market for advertising inventory. Affiliate fee revenues at our national television networks increased $22.3 million or 16 percent in the first quarter of 2012 compared with the first quarter of 2011. The increase in affiliate fee revenues is primarily due to contractual rate increases achieved on contracts renewed in 2012 as well as scheduled rate increases on existing contracts at our networks.

Costs and expenses in the first quarter of 2012 increased 17 percent compared with the first quarter of 2011. Approximately half of the increase was attributed to our continued investment in the improved quality and variety of programming at our networks. The hiring of additional employees to support the growth of our businesses and the costs associated with both international expansion initiatives and other interactive and digital business initiatives also contributed to the increase in costs and expenses.

Interest expense increased in 2012 primarily due to higher debt levels. In December of 2011, we issued $500 million aggregate principal amount of 2.70% Senior Notes. We expect interest expense will be $45 million to $50 million in 2012.

Equity in earnings of affiliates represents the proportionate share of net income or loss from each of our equity method investments. In 2011, we acquired a 50% interest in UKTV and began to recognize our proportionate share of the results from UKTV’s operations on October 1, 2011. Our equity in earnings from the UKTV investment is reduced by amortization reflecting differences in the consideration paid for our equity interest in the entity and our 50% proportionate share of UKTV’s equity. Accordingly, equity in earnings of affiliates in the first quarter of 2012 includes both our $8.8 million proportionate share of UKTV’s results reduced by amortization on the UKTV investment of $4.5 million.

We recognized $5.6 million of foreign exchange gains during the first quarter of 2012. These gains, reported within the “Miscellaneous” caption in our condensed consolidated statements of operations, relate to realized and unrealized foreign exchange on the Company’s foreign denominated asset and liability balances.

 

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Our first quarter of 2012 effective income tax rate was 29.8% compared with 30.1% for the first quarter of 2011.

In August 2010, we contributed the Cooking Channel to the Food Network Partnership (the “Partnership”). At the close of our 2010 fiscal year, the noncontrolling owner had not made a required pro-rata capital contribution to the Partnership and as a result its ownership interest was diluted from 31 percent to 25 percent. Accordingly, for the four months following the Cooking Channel contribution, profits from the Partnership were allocated to the noncontrolling owner at its reduced ownership percentage. During the first quarter of 2011, the noncontrolling interest made the pro-rata contribution to the Partnership and its ownership interest was restored to 31 percent as if the contribution had been made as of the date of the Cooking Channel contribution. The retroactive impact of restoring the noncontrolling owner’s interest in the Partnership increased net income attributable to noncontrolling interest $8.0 million in the first quarter of 2011. Excluding the impact of restoring the noncontrolling owner’s interest in the Partnership, net income attributable to noncontrolling interests increased 14% in the first quarter of 2012 compared with the first quarter of 2011 reflecting the growing profitability of the Food Network partnership.

Business Segment Results—As discussed in Note 14—Segment Information to the condensed consolidated financial statements, our chief operating decision maker evaluates the operating performance of our business segments and makes decisions about the allocation of resources to the business segments using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from our business segment performance measure enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.

 

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Information regarding the operating performance of our business segments and a reconciliation of such information to the condensed consolidated financial statements is as follows:

 

(in thousands)    Three months ended        
     March 31,        
     2012     2011     Change  

Segment operating revenues:

      

Lifestyle Media

   $ 528,583      $ 473,553        11.6

Corporate/intersegment eliminations

     6,762        7,278        (7.1 )% 
  

 

 

   

 

 

   

 

 

 

Total operating revenues

   $ 535,345      $ 480,831        11.3
  

 

 

   

 

 

   

 

 

 

Segment profit (loss):

      

Lifestyle Media

   $ 264,637      $ 244,605        8.2

Corporate

     (25,402     (17,355     46.4
  

 

 

   

 

 

   

 

 

 

Total segment profit

     239,235        227,250        5.3

Depreciation and amortization of intangible assets

     (24,516     (21,561     13.7

Gains (losses) on disposal of property and equipment

     (59     (16  

Interest expense

     (12,180     (8,615     41.4

Equity in earnings of affiliates

     13,913        9,658        44.1

Miscellaneous, net

     7,154        47     
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 223,547      $ 206,763        8.1
  

 

 

   

 

 

   

 

 

 

Corporate includes the results of the lifestyle-oriented channels we operate in Europe, the Middle East, Africa and Asia, operating results from the international licensing of our national networks’ programming, and the costs associated with both international expansion initiatives and other interactive and digital business initiatives. Operating results from these initiatives increased the segment loss at corporate by $4.4 million in the first quarter of 2012 compared with $1.9 million in the first quarter of 2011.

A reconciliation of segment profit to operating income determined in accordance with accounting principles generally accepted in the United States of America is as follows:

 

(in thousands)    Three months ended  
     March 31,  
     2012      2011  

Operating income

   $ 214,660       $ 205,673   

Depreciation and amortization of intangible assets:

     

Lifestyle Media

     23,129         21,049   

Corporate

     1,387         512   

Losses (gains) on disposal of property and equipment:

     

Lifestyle Media

     59         16   
  

 

 

    

 

 

 

Total segment profit

   $ 239,235       $ 227,250   
  

 

 

    

 

 

 

 

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Lifestyle Media—Lifestyle Media includes six national television networks and a collection of Internet businesses.

Our Lifestyle Media division earns revenue primarily from the sale of advertising time on our national networks, affiliate fees paid by cable and satellite television operators that carry our network programming, the licensing of its content to third parties, the licensing of its brands for consumer products and from the sale of advertising on our Lifestyle Media affiliated websites. Employee costs and programming costs are Lifestyle Media’s primary expenses. The demand for national television advertising is the primary economic factor that impacts the operating performance of our networks.

Operating results for Lifestyle Media were as follows:

 

(in thousands)    Three months ended         
     March 31,         
     2012      2011      Change  

Segment operating revenues:

        

Advertising

   $ 355,341       $ 321,759         10.4

Network affiliate fees, net

     166,401         144,088         15.5

Other

     6,841         7,706         (11.2 )% 
  

 

 

    

 

 

    

 

 

 

Total segment operating revenues

     528,583         473,553         11.6
  

 

 

    

 

 

    

 

 

 

Segment costs and expenses:

        

Employee compensation and benefits

     67,415         59,558         13.2

Program amortization

     110,526         89,568         23.4

Other segment costs and expenses

     86,005         79,822         7.7
  

 

 

    

 

 

    

 

 

 

Total segment costs and expenses

     263,946         228,948         15.3
  

 

 

    

 

 

    

 

 

 

Segment profit

   $ 264,637       $ 244,605         8.2
  

 

 

    

 

 

    

 

 

 

Supplemental Information:

        

Billed network affiliate fees

   $ 172,955       $ 153,964      

Program payments

     165,255         114,405      

Depreciation and amortization

     23,129         21,049      

Capital expenditures

     5,777         9,668      

Strong pricing and sales in the upfront advertising market resulted in advertising growth in 2012 compared with the same period in 2011.

Distribution agreements with cable and satellite television systems require that the distributor pay SNI affiliate fees over the terms of the agreements in exchange for our programming. The increase in network affiliate fees was attributed to both contractual rate increases achieved on contracts renewed in 2012 as well as scheduled rate increases on existing contracts at our networks.

The increase in employee compensation and benefits primarily reflects the hiring of additional employees to support the growth of Lifestyle Media.

The increase in program amortization in 2012 compared with 2011 reflects our continued investment in the improved quality and variety of programming at our networks. Program amortization is expected to increase 13% to 15% for the full year of 2012 compared with 2011.

The increase in other costs and expenses in 2012 compared with 2011 reflects higher building rent and facility costs and an increase in marketing and promotion costs at our television networks.

 

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Supplemental financial information for Lifestyle Media is as follows:

 

(in thousands)    Three months ended        
     March 31,        
     2012     2011     Change  

Operating revenues by brand:

      

Food Network

   $ 198,823      $ 174,045        14.2

HGTV

     185,735        171,364        8.4

Travel Channel

     66,590        61,999        7.4

DIY

     27,624        23,345        18.3

Cooking Channel

     19,812        15,267        29.8

GAC

     4,994        6,464        (22.7 )% 

Digital Businesses

     22,395        19,381        15.6

Other

     2,647        2,223        19.1

Intrasegment eliminations

     (37     (535  
  

 

 

   

 

 

   

 

 

 

Total segment operating revenue

   $ 528,583      $ 473,553        11.6
  

 

 

   

 

 

   

 

 

 

Subscribers (1):

      

Food Network

     99,700        100,400        (0.7 )% 

HGTV

     98,900        99,800        (0.9 )% 

Travel Channel

     94,800        96,000        (1.3 )% 

DIY

     56,800        54,000        5.2

Cooking Channel

     58,400        57,500        1.6

GAC

     62,100        59,800        3.8

 

(1) Subscriber counts are according to the Nielsen Homevideo Index of homes that receive cable networks.

 

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LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity is cash and cash equivalents on hand, cash flows from operations, available borrowing capacity under our revolving credit facility, and access to capital markets. Advertising provides approximately 70 percent of total operating revenues, so cash flow from operating activities can be adversely affected during recessionary periods. Information about our sources and uses of cash flow is presented in the following table:

 

(in thousands)    Three months ended  
     March 31,  
     2012     2011  

Cash provided by operating activities

   $ 208,169      $ 212,550   

Net cash provided by (used in) discontinued operations

       9,072   

Dividends paid, including to noncontrolling interest

     (66,549     (27,860

Stock option proceeds

     13,014        10,745   

Noncontrolling interest capital contribution

       52,804   

Other, net

     166        (2,375
  

 

 

   

 

 

 

Cash flow amounts available for acquisitions, investments, share repurchases, and debt repayment

   $ 154,800      $ 254,936   

Sources and uses of available cash flow:

    

Collections (funds advanced) on note receivable

     7,012     

Business acquisitions and net investment activity

     (18,950     20   

Capital expenditures

     (7,314     (11,189

Repurchase of Class A common stock

     (250,110  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ (114,562   $ 243,767   
  

 

 

   

 

 

 

Our cash flow has been used primarily to fund acquisitions and investments, develop new businesses, acquire common stock under our share repurchase programs and repay debt. We expect cash flow from operating activities in 2012 will provide sufficient liquidity to continue the development of brands and to fund the capital expenditures necessary to support our business.

In September 2011, we acquired a 50 percent interest in UKTV. Consideration paid in the transaction consisted of approximately $395 million to purchase preferred stock and common equity interest in UKTV and approximately $137 million to acquire debt due to Virgin Media, Inc. from UKTV. The debt acquired, reported within “Other non-current assets” in our condensed consolidated balance sheet, effectively acts as a revolving facility for UKTV. The investment in UKTV was financed through cash on hand and borrowings on our existing revolving credit facility.

On December 1, 2011, SNI completed the sale of $500 million of aggregate principal amount Senior Notes. The Senior Notes mature on December 15, 2016 bearing interest at 2.70%. Interest will be paid on the notes on June 15th and December 15th of each year.

On December 15, 2009, a majority-owned subsidiary of SNI issued a total of $885 million of aggregate principal amount Senior Notes through a private placement. The Senior Notes mature on January 15, 2015 bearing interest at 3.55%. Interest is paid on the Senior Notes on January 15th and July 15th of each year. The Senior Notes are guaranteed by SNI. Cox TMI, Inc., a wholly-owned subsidiary of Cox Communications, Inc. and 35% owner in the Travel Channel has agreed to indemnify SNI for all payments made in respect of SNI’s guarantee.

We have a Competitive Advance and Revolving Credit Facility (the “Facility”) that permits $550 million in aggregate borrowings and expires in June 2014. There were no borrowings under the Facility at March 31, 2012.

In February 2011, the noncontrolling owner in the Food Network partnership made a $52.8 million cash contribution to the partnership. Pursuant to the terms of the Food Network general partnership agreement, the partnership is required to distribute available cash to the general partners. After providing distributions to the partners for respective tax liabilities, available cash is then applied against any capital contributions made by the partners prior to distribution based upon each partners’ ownership interest in the partnership. During the first quarter of 2012, remaining outstanding capital contributions had been returned to the

 

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respective partners. Cash distributions to Food Network’s noncontrolling interest were $47.8 million in the first quarter 2012 and $15.2 million in the first quarter 2011. In the second quarter of 2012, we began making distributions to Travel Channel’s noncontrolling interest. We expect cash distributions to noncontrolling interests will approximate $170 million in 2012.

We have paid quarterly dividends since our inception as a public company on July 1, 2008. During the first quarter of 2012, the Board of Directors approved an increase in the quarterly dividend rate to $.12 per share. Total dividend payments to shareholders of our common stock were $18.7 million in the first quarter of 2012 and $12.6 million in the first quarter of 2011. We currently expect that quarterly cash dividends will continue to be paid in the future. Future dividends are, however, subject to our earnings, financial condition and capital requirements.

Under a share repurchase program approved by the Board of Directors in June 2011, we were authorized to repurchase $1 billion of Class A Common shares. During the first quarter of 2012 we repurchased 5.5 million shares for approximately $250 million. As of March 31, 2012, our remaining authorization to repurchase is $250 million of Class A common shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to interest rates and foreign currency exchange rates. We use or expect to use derivative financial instruments to modify exposure to risks from fluctuations in interest rates and foreign currency exchange rates. In accordance with our policy, we do not use derivative instruments unless there is an underlying exposure, and we do not hold or enter into financial instruments for speculative trading purposes.

Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows, and to reduce overall borrowing costs.

We are subject to interest rate risk associated with our credit facility as borrowings bear interest at Libor plus a spread that is determined relative to our Company’s debt rating. Accordingly, the interest we pay on our borrowings is dependent on interest rate conditions and the timing of our financing needs. The Company issued $500 million of Senior Notes in December 2011 and a majority-owned subsidiary of SNI issued $885 million of Senior Notes in conjunction with our acquisition of a controlling interest in the Travel Channel in December 2009. A 100 basis point increase or decrease in the level of interest rates, respectively, would decrease or increase the fair value of the Senior Notes by approximately $47.8 million and $46.9 million.

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

 

(in thousands)    As of March 31, 2012      As of December 31, 2011  
     Cost      Fair      Cost      Fair  
     Basis      Value      Basis      Value  

Financial instruments subject to interest rate risk:

           

3.55% notes due in 2015

   $ 884,582       $ 930,631       $ 884,545       $ 924,356   

2.70% notes due in 2016

     499,431         513,471         499,400         504,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 1,384,013       $ 1,444,102       $ 1,383,945       $ 1,428,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

We are also subject to interest rate risk associated with the notes receivable acquired in the UKTV transaction. The notes, totaling $133 million at March 31, 2012, effectively act as a revolving credit facility for UKTV. The notes accrue interest at variable rates, related to either the spread over LIBOR or other identified market indices. Because the notes receivable are variable rate, the carrying amount of such notes receivable is believed to approximate fair value.

 

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Table of Contents

We conduct business in various countries outside the United States, resulting in exposure to movements in foreign exchange rates when translating from the foreign local currency to the U.S. Dollar. Our primary exposure to foreign currencies is the exchange rates between the U.S. dollar and the Canadian dollar, the British pound and the Euro. Reported earnings and assets may be reduced in periods in which the U.S. dollar increases in value relative to those currencies.

Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign currency options. The change in fair value of non-designated contracts is included in current period earnings within our Miscellaneous, net caption. The gross notional value of foreign exchange rate derivative contracts were $234 million at March 31, 2012 and $239 million at December 31, 2011. A sensitivity analysis of changes in the fair value of all foreign exchange rate derivative contracts at March 31, 2012 indicates that if the U.S. dollar strengthened/weakened by 10 percent against the British pound, the fair value of these contracts would increase/decrease by approximately $24.0 million, respectively. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying assets being hedged. These offsetting gains and losses are not reflected in the above analysis.

 

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CONTROLS AND PROCEDURES

SNI’s management is responsible for establishing and maintaining adequate internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The company’s internal control over financial reporting includes those policies and procedures that:

 

  1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

 

  2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and

 

  3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the company’s internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

 

 

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SCRIPPS NETWORKS INTERACTIVE, INC.

Index to Exhibits

 

Exhibit No.

  

Item

31(a)

   Section 302 Certifications (filed herewith)

31(b)

   Section 302 Certifications (filed herewith)

32(a)

   Section 906 Certifications *

32(b)

   Section 906 Certifications *

101.INS

   XBRL Instance Document*

101.SCH

   XBRL Taxonomy Extension Schema Document*

101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

   XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

   XBRL Taxonomy Extension Definition Label Linkbase Document*

101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document*

 

* This exhibit is furnished herewith but will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

 

E-1

XNYS:SNI Scripps Networks Interactive Inc Quarterly Report 10-Q Filling

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XNYS:SNI Scripps Networks Interactive Inc Quarterly Report 10-Q Filing - 3/31/2012
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