Annual Report — Form 10-K — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize
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2: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, HTML 518K
Liquidation or Succession
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4: EX-10.37 Material Contract HTML 88K
5: EX-21.1 Subsidiaries List HTML 128K
6: EX-23.1 Consent of Experts or Counsel HTML 41K
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12: EX-99.1 Miscellaneous Exhibit HTML 208K
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9: EX-31.2 Certification -- §302 - SOA'02 HTML 46K
10: EX-32.1 Certification -- §906 - SOA'02 HTML 42K
11: EX-32.2 Certification -- §906 - SOA'02 HTML 42K
19: R1 Document and Entity Information Document HTML 71K
20: R2 Consolidated Statements of Operations HTML 151K
21: R3 Consolidated Statements of Comprehensive Income HTML 81K
(Loss)
22: R4 Consolidated Statements of Comprehensive Income HTML 53K
(Loss) Parenthetical
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26: R8 Consolidated Statements of Shareholders' Equity HTML 48K
Parenthetical
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28: R10 Basis of Presentation and Significant Accounting HTML 160K
Policies
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30: R12 Proceedings Under Chapter 11 HTML 153K
31: R13 Acquisitions HTML 169K
32: R14 Changes in Operations and Non-operating Items HTML 83K
33: R15 Real Estate Sales and Assets Held For Sale (Notes) HTML 59K
34: R16 Goodwill, Other Intangible Assets and Intangible HTML 179K
Liabilities
35: R17 Investments HTML 165K
36: R18 Debt HTML 111K
37: R19 Fair Value Measurements HTML 76K
38: R20 Contracts Payable for Broadcast Rights HTML 49K
39: R21 Commitments and Contingencies HTML 76K
40: R22 Income Taxes HTML 162K
41: R23 Pension and Other Retirement Plans HTML 339K
42: R24 Capital Stock HTML 99K
43: R25 Stock-Based Compensation HTML 242K
44: R26 Earnings Per Share HTML 116K
45: R27 Accumulated Other Comprehensive (Loss) Income HTML 68K
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47: R29 Business Segments HTML 118K
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51: R33 Basis of Presentation and Significant Accounting HTML 186K
Policies (Policies)
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Policies (Tables)
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54: R36 Acquisitions (Tables) HTML 150K
55: R37 Changes in Operations and Non-operating Items HTML 76K
(Tables)
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Liabilities (Tables)
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61: R43 Commitments and Contingencies (Tables) HTML 51K
62: R44 Income Taxes (Tables) HTML 141K
63: R45 Pension and Other Retirement Plans (Tables) HTML 327K
64: R46 Capital Stock Dividends (Tables) HTML 61K
65: R47 Stock-Based Compensation (Tables) HTML 228K
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67: R49 Accumulated Other Comprehensive (Loss) Income HTML 64K
(Tables)
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69: R51 Quarterly Financial Information (Unaudited) HTML 251K
(Tables)
70: R52 Condensed Consolidated Financial Statements HTML 1.04M
(Tables)
71: R53 Basis of Presentation and Significant Accounting HTML 91K
Policies Narrative (Details)
72: R54 Basis of Presentation and Significant Accounting HTML 65K
Policies Principles of Consolidation and VIEs
(Details)
73: R55 Basis of Presentation and Significant Accounting HTML 66K
Policies Dreamcatcher (Details)
74: R56 Basis of Presentation and Significant Accounting HTML 75K
Policies Dreamcatcher Table (Details)
75: R57 Basis of Presentation and Significant Accounting HTML 52K
Policies Accounts Receivable Allowance
Reconciliation (Details)
76: R58 Discontinued Operations Narrative (Details) HTML 119K
77: R59 Discontinued Operations Gracenote Companies HTML 94K
Statement of Operations (Details)
78: R60 Discontinued Operations Gracenote Companies HTML 53K
Statement of Operations Footnotes (Details)
79: R61 Discontinued Operations Gracenote Companies HTML 126K
Balance Sheet (Details)
80: R62 Discontinued Operations Gracenote Companies HTML 43K
Balance Sheet Footnote (Details)
81: R63 Discontinued Operations Gracenote Companies Cash HTML 62K
Flows (Details)
82: R64 Discontinued Operations - Publishing Spin-off HTML 83K
Adjustments (Details)
83: R65 Discontinued Operations Publishing Spin-off HTML 65K
Adjustment Footnote (Details)
84: R66 Proceedings Under Chapter 11 - Narrative (Details) HTML 167K
85: R67 Proceedings Under Chapter 11 - Terms of HTML 150K
Reorganization Plan (Details)
86: R68 Proceedings Under Chapter 11 - Leveraged ESOP HTML 129K
Transactions (Details)
87: R69 Acquisitions - Narrative (Details) HTML 168K
88: R70 Acquisitions - 2015 Acquisitions (Details) HTML 115K
89: R71 Acquisitions - HWW (Details) HTML 106K
90: R72 Acquisitions - Baseline (Details) HTML 102K
91: R73 Acquisitions - What's On (Details) HTML 115K
92: R74 Acquisitions - Gracenote (Details) HTML 107K
93: R75 Acquisitions - Landmark (Details) HTML 84K
94: R76 Acquisitions - Other Distributed in Spin-off HTML 58K
(Details)
95: R77 Changes in Operations and Non-operating Items HTML 52K
Severance by Business Segment (Details)
96: R78 Changes in Operations and Non-operating Items HTML 48K
Changes in Accrued Liability for Severance and
Related Expenses (Details)
97: R79 Changes in Operations and Non-operating Items HTML 58K
Non-Operating Items (Details)
98: R80 Changes in Operations and Non-operating Items HTML 87K
Narrative (Details)
99: R81 Real Estate Sales and Assets Held For Sale HTML 122K
(Details)
100: R82 Goodwill, Other Intangible Assets and Intangible HTML 101K
Liabilities - Goodwill, other Intangible Assets
and Intangible Liabilities (Details)
101: R83 Goodwill, Other Intangible Assets and Intangible HTML 85K
Liabilities - Intangible Assets (Details)
102: R84 Goodwill, Other Intangible Assets and Intangible HTML 53K
Liabilities - Intangible Liabilities Subject to
Amortization (Details)
103: R85 Goodwill, Other Intangible Assets and Intangible HTML 94K
Liabilities - Narrative (Details)
104: R86 Goodwill, Other Intangible Assets and Intangible HTML 51K
Liabilities - Intangible Liabilities (Details)
105: R87 Investments - Narrative (Details) HTML 300K
106: R88 Investments Total Investments (Details) HTML 52K
107: R89 Investments Ownership Percentages (Details) HTML 51K
108: R90 Investments Income from Equity Investments HTML 57K
(Details)
109: R91 Investments Cash Distributions from Equity Method HTML 49K
Investments (Details)
110: R92 Investments TV Food Network (Details) HTML 67K
111: R93 Investments Career Builder, Dose Media and CV HTML 80K
Summarized Financial Information (Details)
112: R94 Debt (Details) HTML 262K
113: R95 Debt Long Term Debt (Details) HTML 69K
114: R96 Debt Maturities of Long-term Debt (Details) HTML 67K
115: R97 Fair Value Measurements Narrative (Details) HTML 53K
116: R98 Fair Value Measurements (Details) HTML 61K
117: R99 Contracts Payable for Broadcast Rights (Details) HTML 52K
118: R100 Commitments and Contingencies (Details) HTML 71K
119: R101 Commitments and Contingencies - Operating Leases HTML 61K
(Details)
120: R102 Commitments and Contingencies Operating Leases HTML 62K
Footnotes (Details)
121: R103 Income Taxes - Narrative (Details) HTML 157K
122: R104 Income Taxes - Income Tax Reconciliation from HTML 79K
Continuing Operations (Details)
123: R105 Income Taxes - Components of Income Tax Expense HTML 69K
(Benefit) from Continuing Operations (Details)
124: R106 Income Taxes - Components of Net Deferred Tax HTML 90K
Assets and Liabilities (Details)
125: R107 Income Taxes - Changes in Liability for HTML 59K
Unrecognized Tax Benefits (Details)
126: R108 Pension and Other Retirement Plans - Narrative HTML 99K
(Details)
127: R109 Pension and Other Retirement Plans - Multiemployer HTML 51K
Pension Plans (Details)
128: R110 Pension and Other Retirement Plans - Defined HTML 88K
Benefit Pension Plans and Other Post Retirement
Plans Summarized Info (Details)
129: R111 Pension and Other Retirement Plans - Amounts HTML 62K
Recognized in Consolidated Balance Sheets
(Details)
130: R112 Pension and Other Retirement Plans - Components of HTML 64K
Net Periodic Benefit Cost (Details)
131: R113 Pension and Other Retirement Plans - Amounts of HTML 51K
Net Periodic Benefit Cost for Other Post
Retirement Plans Applicable to Continuing and
Discontinued Operations (Details)
132: R114 Pension and Other Retirement Plans - Amounts HTML 57K
Included in Accumulated Other Comprehensive Income
(Loss) (Details)
133: R115 Pension and Other Retirement Plans - Weighted HTML 59K
Average Assumptions (Details)
134: R116 Pension and Other Retirement Plans - Effect of HTML 53K
One-Percentage Point Change in Assumed Health Care
Cost Trend Rates (Details)
135: R117 Pension and Other Retirement Plans - Actual HTML 57K
Allocations and Target Allocations by Asset Class
(Details)
136: R118 Pension and Other Retirement Plans - Pension Plan HTML 127K
Assets by Asset Category (Details)
137: R119 Pension and Other Retirement Plans - Benefit Plans HTML 60K
Expected to be Paid (Details)
138: R120 Capital Stock (Details) HTML 184K
139: R121 Capital Stock Quarterly Dividend (Details) HTML 51K
140: R122 Stock-Based Compensation (Details) HTML 114K
141: R123 Stock-Based Compensation - Weighted-average HTML 52K
Assumptions (Details)
142: R124 Stock-Based Compensation - NSOs (Details) HTML 114K
143: R125 Stock-Based Compensation - RSUs (Details) HTML 97K
144: R126 Stock-Based Compensation - Restricted and HTML 68K
Unrestricted Stock Awards (Details)
145: R127 Stock-Based Compensation - PSUs (Details) HTML 82K
146: R128 Stock-Based Compensation - Unrecognized HTML 46K
Compensation Cost (Details)
147: R129 Earnings Per Share - Narrative (Details) HTML 50K
148: R130 Earnings Per Share (Details) HTML 107K
149: R131 Accumulated Other Comprehensive (Loss) Income HTML 70K
(Details)
150: R132 Related Party Transactions (Details) HTML 60K
151: R133 Business Segments (Details) HTML 62K
152: R134 Business Segments - Operating Segments (Details) HTML 97K
153: R135 Quarterly Financial Information (Unaudited) HTML 139K
(Details)
154: R136 Condensed Consolidated Financial Statements - HTML 219K
Statements of Operations and Comprehensive (Loss)
Income (Details)
155: R137 Condensed Consolidated Financial Statements - HTML 306K
Balance Sheets (Details)
156: R138 Condensed Consolidated Financial Statements - HTML 225K
Statement of Cash Flows (Details)
157: R139 Subsequent Events (Details) HTML 205K
159: XML IDEA XML File -- Filing Summary XML 295K
158: EXCEL IDEA Workbook of Financial Reports XLSX 281K
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
2
Consolidated
Statements of Income and Comprehensive Income
3
Consolidated Statements of Cash Flows
4
Consolidated Statements of Partners' Equity
5
Notes to Consolidated Financial Statements
6-16
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management of
Television Food Network, G.P.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Television Food Network, G.P. (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, partners’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes, examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 7 to the consolidated financial statements, the accompanying financial statements include portions of certain revenue and expense transactions with affiliated companies, including allocations made from corporate functions, and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company.
As used in the Notes to Consolidated Financial Statements, the terms “we,”“our,”“us” or “Food Network” may, depending on the context, refer to the Television Food Network, G.P., or to its consolidated subsidiary company.
Management and Ownership Structure - Food Network is operated and organized under the terms of a general partnership (the “Partnership”). During 2016, the Partnership agreement was extended and specifies a dissolution date of December 31, 2020. If the term of the
Partnership is not extended prior to that date, the agreement would permit Scripps Networks Interactive, Inc. (“SNI" or "Scripps Networks”), as the beneficial holder of approximately 80% of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests. The managing general partner has a 10% “residual” interest in Food Network, that is, except for cash distributions intended to offset the tax liabilities associated with any allocated taxable income, it is entitled to cash distributions only after all loans from partners have been repaid and Class A partners have recovered their capital contributions.
In addition
to the managing general partner, there are five Class A partnership units with a 60% residual interest and two Class B partners with a 30% undilutable residual interest. Each Class A partnership unit entitles the holder to one vote on the five-member management committee of Food Network. The managing general partner and the Class B partners are nonvoting partners except that in certain circumstances the managing general partner is allowed a vote in the case of a management committee deadlock. SNI, through its wholly-owned subsidiaries, owns four class A partnership units thereby controlling Food Network.
Class B partnership interests were allocated based upon the level of partners’ commitments to distribute Food Network programming. Each one-million-subscriber commitment translated into an approximate 1.86% residual interest.
For
income tax purposes, Partnership profits are allocated first to offset previously allocated losses and then to the partners in proportion to their relative Partnership interests. Partnership losses are allocated first to offset previously allocated profits; second, to the extent of cumulative capital contributions; and finally, to Class A partners in proportion to their residual interests.
Nature of Operations - We operate two 24-hour television networks, Food Network and Cooking Channel, offering quality television, video, Internet and mobile entertainment and information focusing on food and entertaining. Our business is organized as a single reportable business segment. Programming for our networks is distributed by cable and satellite television systems. We earn revenue primarily from the sale of advertising time on national television networks
and interactive platforms and from affiliate fees paid by providers that distribute our content.
Concentration Risks - Approximately 67.6% of our operating revenues are derived from advertising. Operating results can be affected by changes in the demand for such services both nationally and in individual markets.
The four largest distributors in the United States provide service to approximately 78.6% of homes receiving our networks. Combined, the eight largest distributors in the United States provide service to more than 98.7% of homes receiving our networks. The loss of distribution of our networks by any of these cable or satellite television systems could adversely affect our business.
6
Principles
of Consolidation - The consolidated financial statements include the accounts of Food Network and its wholly-owned subsidiary limited liability company after elimination of intercompany accounts and transactions. Investments in 20%-to-50%-owned companies and partnerships or companies and partnerships in which we exercise significant influence over the operating and financial policies are accounted for using the equity method. The results of companies acquired or disposed of are included in the consolidated financial statements from the effective date of acquisition or up to the date of disposal.
Use of Estimates - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions that affect reported amounts
and the related disclosures, including the selection of appropriate accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.
Our consolidated financial statements include estimates, judgment, and assumptions used in accounting for asset impairments, equity method investments, revenue recognition, program assets, depreciation and amortization, pension plans, share-based compensation, income taxes, fair value measurements and contingencies.
While we re-evaluate our estimates and assumptions on an ongoing basis,
actual results could differ from those estimated at the time consolidated financial statements were prepared.
Foreign Currency Translation - Food Network Canada (“Food Canada”), in which we hold a 29% interest, uses their local currency as the functional currency. Assets and liabilities of such international subsidiaries are translated using end-of-period exchange rates while results of operations are translated based on the average exchange rates throughout the year. The effects of translating the financial position and results of operations of local functional currency operations into U.S. dollars are included as accumulated comprehensive income (loss) in Partners’ equity.
Monetary
assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency using end-of-period exchange rates. Gains or losses resulting from such remeasurement are recorded in income. Foreign exchange gains and losses are included within miscellaneous, net in the consolidated statements of income and comprehensive income.
Revenue Recognition
Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. Revenue is reported net of our remittance of sales taxes, value added taxes and other taxes collected from our customers.
Our
primary sources of revenue are from:
•
The sale of television, internet and mobile advertising.
•
Fees for programming services (“network affiliate fees”).
Revenue recognition policies for each source of revenue are described below.
Advertising - Advertising revenue is recognized, net of agency commissions, when advertisements are displayed. Internet and
mobile advertising includes (i) fixed duration campaigns whereby a banner, text or other advertisement appears for a specified period of time for a fee; (ii) impression-based campaigns where the fee is based upon the number of times an advertisement appears in web pages viewed by a user; and (iii) click-through based campaigns where the fee is based upon the number of users who click on an advertisement and are directed to the advertiser’s website. Advertising revenue from fixed duration campaigns are recognized over the period in which the advertising appears. Internet and mobile advertising revenue that is based upon the number of impressions delivered or the number of click-throughs achieved is recognized as impressions are delivered or click-throughs occur.
7
Advertising
contracts may guarantee the advertiser a minimum audience for the programs in which their advertisements are broadcast. We provide the advertiser with additional advertising time if we do not deliver the guaranteed audience size. If we determine we have not delivered the guaranteed audience, an accrual for “make-good” advertisements is recorded as a reduction of revenue. The estimated make-good accrual is adjusted throughout the term of the advertising contracts.
Network Affiliate Fees - Cable and satellite television operators and telecommunication service providers generally pay a per-subscriber fee (“network affiliate fees”) for the right to distribute our programming under the terms of multi-year distribution
contracts. Network affiliate fees are reported net of volume discounts earned by the distributors and incentive costs offered to system operators in exchange for initial multi-year distribution contracts. We recognize network affiliate fees as revenue over the term of the contracts, including any free periods. Network launch incentives are capitalized as assets upon launch of our programming on the cable or satellite television system and amortized against network affiliate fees based upon the ratio of each period’s revenue to expected total revenue over the term of the contracts.
Network
affiliate fees due to us, net of applicable discounts, are reported to us by cable and satellite television operators. Such information is generally not received until after the close of the reporting period. Therefore, reported network affiliate fee revenues are based upon our estimates of the number of subscribers receiving our programming and the amount of volume-based discounts each cable and satellite television provider and telecommunication provider is entitled to receive. We subsequently adjust these estimated amounts based upon the actual amounts of network affiliate fees received. Such adjustments have not been significant.
Revenues associated with digital distribution arrangements are recognized when we transfer control and the rights to distribute the content to a customer.
Accounts Receivable - We extend credit to customers based upon our assessment
of the customer’s financial condition. Collateral is generally not required from customers. Allowances for credit losses are generally based upon trends, economic conditions, review of aging categories and historical experience, and specific identification of customers at risk of default. Allowance for doubtful accounts receivable is as follows:
(in thousands)
Balance
Beginning
of
Period
Additions for
Bad Debt
Expense
Deductions
for Amounts
Charged Off
Balance
End of
Period
Allowances for Doubtful Accounts Receivable
Year
Ended December 31:
2016
$
4,761
$
8,452
$
5,994
$
7,219
2015
1,143
4,343
725
4,761
2014
2,429
1,054
2,340
1,143
Investments
- We have investments that are accounted for using the equity method of accounting. We use the equity method to account for our investments in equity securities if our investment gives us the ability to exercise significant influence over operating and financial policies of the investee. Under the equity method of accounting, investments are initially recorded at cost and subsequently increased or decreased to reflect our proportionate share of net earnings or losses of the equity method investees. Cash payments to equity method investees, such as additional investments, loans, advances and expenses incurred on behalf of investees, as well as dividends from equity method investees, are recorded as adjustments to the investment balances. The entire equity method investment is tested for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
We
regularly review our investments to determine if there has been any other-than-temporary decline in values. These reviews require management judgments that often include estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred. We evaluate, among other factors, the extent to which the investments carrying value exceeds fair value, the duration of the decline in fair value below carrying value and the current cash position, earnings and cash forecasts and near term prospects of the investee.
8
The carrying value of an investment is adjusted when a decline in fair value below cost is determined to be other-than-temporary.
Goodwill
- Goodwill represents the cost of acquiring partnership interests from Class B partners in excess of the net book value of the Class B partnership interests.
Goodwill is not amortized, but is reviewed for impairment at least annually. We perform our annual impairment review during the fourth quarter of each year. No impairment charges have been recorded on our goodwill balances.
Programs and Program Licenses - Programming is either produced by us or for us by independent production companies or licensed under agreements with independent producers.
Costs of programs produced include capitalizable direct costs, production overhead, development costs
and acquired production costs. Production costs for programs produced are capitalized. Costs to produce live programming that are not expected to be rebroadcast are expensed as incurred. Program licenses generally have fixed terms, limit the number of times we can air the programs and require payments over the terms of the licenses. Licensed program assets and liabilities are recorded when programs become available for broadcast. Program licenses are not discounted for imputed interest. Program assets are amortized over the estimated useful lives of the programs based upon future cash flows and are included within cost of services in the consolidated statements of income and comprehensive income. The amortization of program assets generally results in an accelerated method over the estimated useful lives.
Estimated future cash flows can change based upon market acceptance, advertising
and network affiliate fee rates, the number of subscribers receiving our networks and program usage. Accordingly, we periodically review revenue estimates and planned usage and revise our assumptions if necessary. If actual demand or market conditions are less favorable than projected, a write-down to net realizable value may be required. Development costs for programs that we have determined will not be produced are written off.
Deposits and the portion of the unamortized balance expected to be amortized within one year is classified as a current asset within programs and program licenses on the consolidated balance sheets.
Program rights liabilities payable within the next twelve months are classified as a current liability within program rights payable on the consolidated balance
sheets. Non-current program rights liabilities are included in other non-current liabilities on the consolidated balance sheets. The carrying value of our program rights liabilities approximates fair value.
Impairment of Long-Lived Assets - Long-lived assets, primarily network distribution incentives and finite-lived intangible assets, are reviewed for impairment whenever events or circumstances indicate the carrying amounts of the assets may not be recoverable. Recoverability for long-lived assets is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the undiscounted cash flows are less than the carrying amount of the assets, then we write down the carrying value of the assets to estimated fair values, which are primarily based upon forecasted discounted cash
flows. Fair value of long-lived assets is determined based on a combination of discounted cash flows and market multiples.
Marketing and Advertising Costs - Marketing and advertising costs, which totaled $61,567 thousand in 2016, $50,548 thousand in 2015 and $53,035 thousand in 2014 and are reported within selling, general and administrative in the consolidated statements of income and comprehensive income, include costs incurred to promote our businesses and to attract traffic to our websites. Advertising production costs are deferred and expensed the first time the advertisement is shown. Other marketing and advertising costs are expensed as incurred.
Income Taxes - Food Network is organized as a general partnership. Accordingly,
the Company is not subject to federal and state income taxes as the respective partners are responsible for income taxes applicable to their share of the taxable income of Food Network. However, the Company is subject to a 4.0% New York City unincorporated business tax (“UBT”).
9
We account for UBT using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their
respective tax basis by applying statutory tax rates. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not, that some or all of the deferred tax asset will not be realized.
Financial Instruments and Risk Management Contracts - Financial instruments consist of cash, accounts receivable, accounts payable, must-carry rights payable and program rights liabilities. The carrying amounts of these financial instruments approximate their fair value. We held no derivative financial instruments in 2016, 2015 and 2014.
Recently Issued Accounting Standards Update - In November
2015, the FASB issued new accounting guidance related to the classification of deferred taxes, Balance Sheet Classification of Deferred Taxes, which requires that an entity classify deferred tax liabilities and assets as non-current amounts. The guidance requires that entities within a particular tax jurisdiction offset all deferred tax liabilities and assets, as well as any related valuation allowances, and present the amounts as a single non-current amount. We adopted this guidance in 2016 and retrospectively for all periods presented. The adoption did not have a material effect on our consolidated financial statements.
In January 2016, the FASB issued new accounting guidance related to financial assets and liabilities, Recognition and Measurement of Financial Assets and Financial Liabilities, which
requires equity investments not accounted for under the equity method to be measured at fair value with changes recognized in net income. Additionally, the guidance simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairments, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requiring an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when an entity has elected to measure the liability at fair value, requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset either on the balance sheet or in the accompanying notes and clarifying that an entity should evaluate the need
for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance will reduce diversity in current practice. The guidance is effective January 1, 2018, and early adoption is not permitted. We have evaluated the guidance and do not expect it to have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued new accounting guidance related to leases, Leases, which requires the recognition of an asset and liability arising from leasing arrangements for leases extending beyond an initial period of twelve months. The guidance will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective January 1, 2019, and early adoption is permitted. We have partially competed our evaluation of the new guidance to determine the impact it will have on our consolidated financial statements and related disclosures. We expect this assessment to be completed by mid-2017.
In March 2016, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations within the new revenue recognition
guidance by clarifying the indicators. This guidance updates the revenue recognition guidance issued in May 2014, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance related to revenue recognition, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in GAAP. The guidance is effective January 1, 2018, and early adoption is permitted. We have partially completed our assessment of the new guidance to determine
the impact it will have on our consolidated financial statements and related disclosures. As a result of our assessment, we are tentatively planning on applying the modified retrospective method of adoption for this guidance. We expect the remainder of our assessment to be completed by mid-2017.
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In March 2016, the FASB issued new accounting guidance related to investments, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting, which simplifies the accounting for a transition to equity method investment of accounting as a result of an increase in level of ownership or degree of influence and eliminates the requirement to retroactively adjust the investment for all periods
the investment was held. The amendments in the update require that an entity that has an available-for-sale equity security becomes qualified for the equity method of accounting if they recognize earnings through the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment qualifies for equity method treatment. The guidance is effective January 1, 2017, and we early adopted this guidance in 2016. This implementation did not have a material effect on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued new accounting guidance related to statements of cash flows, Classification of Certain Cash Receipts and Cash Payments, which is intended to clarify existing guidance on classification issues and reduce potential diversity in practice. The guidance
identifies cash flow situations whereby there has been diversity in application and provides specific guidance as to the treatment. The guidance is effective January 1, 2018, and we early adopted this guidance in 2016. This implementation did not have a material effect on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued new accounting guidance related to intangibles - goodwill and other, Simplifying the Test for Goodwill Impairment, which eliminates Step Two from the goodwill impairment test and requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The guidance also eliminates the requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment. The guidance is effective January 1, 2020, and early adoption is permitted for testing dates after January 1, 2017. We adopted this guidance effective January 1, 2017 and will apply the guidance to all tests subsequent to that date. We do not expect the new guidance to have a material impact on our consolidated financial statements and related disclosures.
Reclassification - In connection with the adoption of the FASB guidance on Balance Sheet Classification of Deferred Taxes, we reclassified $328 thousand from other non-current assets to deferred income taxes for 2015.
Going
Concern - The Partnership is set to expire on December 31, 2020. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits SNI, as holder of 80.0 percent of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued, activities will be limited to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.
Subsequent Events - No material subsequent events have occurred since December 31, 2016 that should be recorded or disclosed in the consolidated financial statements.
Investments accounted for using the equity method include the Company’s investments in Food Canada (29% owned) and Food Network Magazine JV (50% owned). 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 the investment’s carrying value exceed fair value, the duration of the decline in fair value below carrying value, and the current cash position, earnings and cash forecasts and near term prospects of the investee. No impairments were recognized on any of our equity method investments in 2016, 2015 or 2014.
3. PROGRAMS AND PROGRAM LICENSES
Programs and program licenses consisted of the following:
Progress payments on programs not yet available for broadcast
62,936
60,612
Total
programs and program licenses
$
315,402
$
324,514
In addition to the programs owned or licensed by us included in the table above, we have commitments to license certain programming that is not yet available for broadcast. These contracts may require progress payments or deposits prior to the program becoming available for broadcast. Remaining obligations under
contracts to purchase or license programs not yet available for broadcast totaled approximately $77,602 thousand at December 31, 2016. If the programs are not produced, our commitment to license would generally expire without obligation.
Programs and program license expense, which consist of program amortization and program impairments, is included within costs of services in our consolidated statements of income and comprehensive income. Program impairments totaled $58,041 thousand in 2016, $21,132 thousand in 2015 and $20,371 thousand in 2014.
Estimated amortization of recorded program assets and program commitments for each of the next five
years is as follows:
(in thousands)
Programs
Available for
Broadcast
Programs Not
Yet Available
for Broadcast
Total
2017
$
140,790
$
72,720
$
213,510
2018
65,091
34,398
99,489
2019
35,043
16,949
51,992
2020
11,542
13,434
24,976
2021
—
3,037
3,037
Total
$
252,466
$
140,538
$
393,004
Actual
amortization in each of the next five years will exceed the amounts presented above as we will continue to produce or license additional programs.
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4. OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following:
In 2015, the New York City Department of Finance completed an audit of our Unincorporated Business Tax Returns for the years 2006 through 2011 and we reached agreement
on adjustments that increased the amount of Unincorporated Business Taxable Income ("UBTI") apportioned to operations in New York City. Accordingly, our UBT expense amount in 2015 reflects approximately $423 thousand of additional taxes for the tax years 2006-2011.
In 2016, the New York City Department of Finance initiated an audit of our Unincorporated Business Tax Returns for the years 2012 through 2013. The audit is ongoing as of December 31, 2016.
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The approximate effect of the temporary differences giving rise to deferred tax liabilities (assets) were as follows:
As of December 31, 2016 and 2015, we do not believe we have any uncertain tax positions that would require either recognition or disclosure in the accompanying consolidated financial statements.
6. COMMITMENTS AND CONTINGENCIES
We
are involved in litigation arising in the ordinary course of business, none of which is expected to result in material loss.
In the ordinary course of business, Food Network enters into long-term contracts to lease office space and equipment, to secure on-air talent, to obtain satellite transmission of network programming, and to purchase other goods and services. Minimum payments for such non-cancellable services as of December 31, 2016, are expected to be as follows:
Rental
expense for cancelable and non-cancelable leases was $7,538 thousand in 2016, $8,386 thousand in 2015 and $8,631 thousand in 2014.
We also share leased facilities and other services with other SNI cable and satellite television programming services. Our share of the costs for such services is included in the allocated charge from SNI (See Note 7).
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7. RELATED PARTY TRANSACTIONS
SNI manages our daily flow of cash. We also participate in SNI’s controlled disbursement system. The bank sends SNI daily notifications of checks presented for payment, and SNI transfers funds from other sources
to cover the checks. Our cash balance held by SNI is reduced as checks are issued. We receive interest income on positive cash balances, and are charged interest expense on negative cash balances. In determining whether we are to receive interest or to be charged interest, the balance is reduced by our share of the net book value of shared property and equipment.
Positive cash account balances due from SNI are reported as receivable due from related party in our consolidated balance sheets. The receivable due from SNI was $356,310 thousand at December 31, 2016 and $285,490 thousand at December 31, 2015, which earns interest at money market rates.
Food Network is also subject to the
terms and conditions of variable rate credit agreements with each partner. Our variable rate credit agreement with SNI permits aggregate borrowings up to $150,000 thousand and our variable rate credit agreement with Tribune Media Company permits aggregate borrowings up to $12,500 thousand. Interest on each agreement is charged at the prime rate plus two percent. There were no outstanding borrowings under these agreements at December 31, 2016 and 2015.
Net interest income from positive cash balances was $1,611 thousand in 2016, $182 thousand in 2015 and $151 thousand in 2014.
We are party to an agreement with Corus Entertainment Inc. that provides us a 29% ownership interest in Food Canada. Pursuant to the terms of the agreement,
we grant Food Canada an exclusive right to use the Food Network trademark and provide Food Canada with Food Network programming. Revenue recognized from the licensing of the Food Network trademark was $1,049 thousand in 2016, $1,218 thousand in 2015 and $693 thousand in 2014. Revenues from program sales to Food Canada were $4,782 thousand in 2016, $5,645 thousand in 2015 and $2,284 thousand in 2014.
We may provide Food Network programming to other Scripps Networks cable networks or companies controlled by SNI. Revenue recognized from the programming provided to other Scripps Networks cable networks or SNI controlled entities totaled $10,413 thousand in 2016, $11,659 thousand in 2015 and $6,808 thousand in 2014.
We also may generate revenue from the sale of broadcast and internet advertising to companies controlled by SNI. Advertising revenues generated from SNI’s controlled
entities totaled $9,026 thousand in 2016, $136 thousand in 2015 and $1,114 thousand in 2014.
We may purchase advertising units from the other cable networks controlled by Scripps Networks and use the additional spots to satisfy “make good” audience deficiency accruals we have recorded in our consolidated financial statements. Consideration paid to Scripps Networks affiliated entities for these advertising spots totaled approximately $320 thousand in 2016, $0 in 2015 and $5 thousand in 2014.
Marketing and promotion costs incurred with businesses controlled by Scripps Networks totaled approximately $14,268 thousand in 2016, $3,549 thousand in 2015 and $3,616 thousand in 2014.
Scripps Networks provides services covering affiliates sales,
advertising sales, transmission and quality control, information technology functions, and other corporate functions related to executive management, corporate finance and accounting, legal, tax and human resources. Services provided by Scripps Networks for affiliate sales includes marketing, such as advertising campaigns, programming promotion, targeted sales presentations and managing tradeshow strategies and talent appearances; negotiating agreements with existing and new affiliates; billing and collection services; and providing channel affiliate reports. For advertising sales, Scripps Networks provides services that include selling television and internet advertising spots, advertising sales planning and marketing, rate card management services, sales positioning data, research support, related billing and collections and any necessary software and data services.
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The
total amount charged for these services is calculated by applying a Consumer Price Index escalator to the previous year’s allocated amount. These costs totaling $146,831 thousand in 2016, $146,538 thousand in 2015, and $144,089 thousand in 2014 are recorded within the selling, general and administrative caption in our consolidated statements of income and comprehensive income.
Scripps Networks may also negotiate affiliate agreements with cable and satellite television systems and telecommunication service providers on behalf of more than one, or all, of its networks in the aggregate, including our networks. The value of aggregate rights acquired from these providers are allocated to each network benefited based upon their relative fair values.
Members of the Scripps family who are
parties to the Scripps Family Agreement hold a controlling interest in the Scripps Company ("EWS"), therefore, EWS is a related party of the company. The Scripps Family Agreement governs the transfer and voting of all Common Voting Shares held by certain descendants of Robert P. Scripps, descendants of John P. Scripps, certain trusts of which descendants of John P. Scripps or Robert P. Scripps are trustees or beneficiaries and an estate of a descendant of Robert P. Scripps, who are signatories to such agreement. SNI made payments to EWS totaling $2,222 thousand, $3,525 thousand and $8,684 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. These payments were made pursuant to a 2008 agreement for certain
rights granted by a subsidiary of EWS with varying durations. These amounts are included in selling, general and administrative in the consolidated statements of income and comprehensive income.
Scripps Networks may incur costs that are attributable to one or all of their networks. Scripps Networks incurs the license fee costs on the contracts providing music rights for our programming. These costs are allocated to us using a percentage of revenues factor. While Food Network does not issue stock compensation to its employees, certain employees of Food Network participated in the SNI Amended Long-Term Incentive Plan. The cost of awards to Food Network employees are charged directly to Food Network. Substantially all Food Network employees received health, retirement and other benefits
during 2016, 2015 and 2014 that were provided under SNI sponsored plans, including a defined benefit pension plan and a defined contribution plan. Health and life insurance costs are allocated based upon employee coverage elections and historical claims experience. Pension costs are allocated based upon past funding and an actuarial study of the covered employee groups. Benefits are based on the employees’ compensation and years of service. The funding of the plan is based on the requirements of the plan and applicable federal laws. Related to the defined contribution plan, a portion of the employees’ voluntary contributions were matched by SNI. The costs of the defined contribution plan are charged to us based upon those employee contributions.
Additional information related to costs charged to us from Scripps Networks is as follows:
