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MSO > SEC Filings for MSO > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for MARTHA STEWART LIVING OMNIMEDIA INC

Form 10-Q for MARTHA STEWART LIVING OMNIMEDIA INC


5-Nov-2012

Quarterly Report


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

Forward-looking Statements and Risk Factors

Unless otherwise noted, "we," "us," "our" or the "Company" refers to Martha Stewart Living Omnimedia, Inc. and its subsidiaries.

Except for historical information contained in this Quarterly Report on Form 10-Q (this "Quarterly Report"), the statements in this Quarterly Report are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent only our current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These statements often can be identified by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include the following, among others:

adverse reactions to publicity relating to Martha Stewart or Emeril Lagasse by consumers, advertisers and business partners;

loss of the services of Ms. Stewart or Mr. Lagasse;

loss of the services of other key personnel;

failure to realize the anticipated benefits from transitioning certain of our media brands from print publication to digital distribution;

inability to successfully capitalize on digital, mobile and video initiatives;

softening of or increased competition in the domestic advertising market;

failure by the economy to sustain any meaningful recovery, including particularly the housing market, and other developments that limit consumers' discretionary spending or affect the value of our assets or access to credit or other funds;

inability to expand merchandising and licensing programs or the loss or failure of existing programs, including as a result of litigation or disputes with Merchandising segment partners;

inability to maintain or grow our online presence;

failure in acquiring or developing new brands or realizing the benefits of acquisition;

failure to successfully implement our cost savings initiatives;

failure to protect our intellectual property;

changes in media consumption behavior;

increases in paper, postage, freight or printing costs;

weakening in circulation;

operational or financial problems at any of our business partners;

our inability to successfully and profitably develop or introduce new products;

failure to predict, respond to and influence trends in consumer taste and/or shifts in business strategies; and

changes in government regulations affecting the Company's industries.

These and other factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the "2011 Form 10-K") under the heading "Part I, Item 1A. Risk Factors."

We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.


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EXECUTIVE SUMMARY

We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and high-quality, licensed products that we design. We are organized into three business segments: Publishing and Broadcasting representing our media platforms; and Merchandising. Summarized below are our operating results for the three and nine months ended September 30, 2012 and 2011.

                                        Three Months       Three Months       Nine Months        Nine Months
                                       Ended Sept 30,     Ended Sept 30,     Ended Sept 30,     Ended Sept 30,
(in thousands)                              2012               2011               2012               2011
Total Revenues                         $43,549            $52,204            $141,264           $159,738
Total Operating Costs and Expenses     (94,238)*          (61,498)           (199,020)*         (178,295)

Total Operating Loss                   $(50,689)          $(9,294)           $(57,756)          $(18,557)

* Publishing segment operating costs and expenses included a non-cash goodwill impairment charge of $44.3 million.

We generate revenue from various sources such as advertising customers and licensing partners. Publishing is our largest business segment, accounting for 62% of our total revenues for the nine months ended September 30, 2012. The primary source of Publishing segment revenue is advertising from our magazines, which currently includes Martha Stewart Living, Martha Stewart Weddings, Everyday Food and Whole Living. Magazine subscriptions, advertising revenue generated from our digital properties, primarily from marthastewart.com, and newsstand sales, along with royalties from our book business, account for most of the balance of Publishing segment revenue. Broadcasting segment revenue for the nine months ended September 30, 2012 was derived primarily from television advertising and license fees from our agreement with the Hallmark Channel, as well as satellite radio license fees from our agreement with Sirius XM Radio. Our agreement with the Hallmark Channel to televise The Martha Stewart Show concluded with the completion of season 7 in September 2012. While the Hallmark Channel retains certain rights to some of our programming other than The Martha Stewart Show ("companion programming") through September 2013, we completed the delivery of all of our companion programming to the Hallmark Channel by December 31, 2011 and therefore will not recognize any additional revenues from this source. Between early May 2012 and June 30, 2012, we produced two seasons of a new weekly series, Martha Stewart's Cooking School. The show debuted on PBS in October and was produced in our studio prior to the end of our studio lease on June 30, 2012. Merchandising segment revenues are generated from the licensing of our trademarks and designs for a variety of products sold at multiple price points through a wide range of distribution channels. Our retail partnerships include our Martha Stewart Living program at The Home Depot and our Martha Stewart Collection at Macy's. Pursuant to our commercial agreement with J.C. Penney, we began to provide product design services in January 2012 for which we earn a fee. Our manufacturing partnerships include Avery for our Martha Stewart Home Office line (currently sold at Staples), Wilton Properties Inc. for our Martha Stewart Crafts program (currently sold at Michael's and other crafts stores) and Age Group for our Martha Stewart Pets line (currently sold at Petsmart), as well as with a variety of manufacturing partnerships to produce products under the Emeril brand.

We incur expenses primarily consisting of compensation and related charges across all segments. In addition, we incur expenses related to the physical costs associated with producing magazines (including related direct mail and other marketing expenses), the editorial costs associated with creating content across our media platforms, the technology costs associated with our digital properties and the costs associated with producing our television programming. We also incur general overhead costs, including facilities and related expenses.

In 2012, we announced significant restructurings first of our Broadcasting business and more recently of our Publishing business. Specifically on November 1, 2012, we announced that we will transition our Everyday Food publication from a stand-alone magazine to a periodic supplement in Martha Stewart Living. In addition, we announced we are entering into discussions regarding the potential sale of Whole Living. As a results, we expect that our workforce will be reduced by approximately 70 employees by December 31, 2012. In connection with this workforce reduction, we expect to incur additional restructuring charges of up to $2 million for the three months ending December 31, 2012. We expect approximately $45 million to $47 million in annual cost savings from these Broadcasting and Publishing segment restructurings.


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Our results for the three months ended September 30, 2012 include a non-cash goodwill impairment charge of $44.3 million as a result of the Publishing segment experiencing slower than anticipated growth in advertising.

Detailed segment operating results for the three months and nine months ended September 30, 2012 and 2011 are summarized below:

                                     Three Months            Three Months            Nine Months             Nine Months
                                    Ended Sept 30,          Ended Sept 30,          Ended Sept 30,          Ended Sept 30,
(in thousands)                           2012                    2011                    2012                    2011
Segment Revenues:

Publishing                         $         27,572        $         33,242        $         87,208        $        102,059
Broadcasting                                  2,744                   6,626                  12,701                  22,195
Merchandising                                13,233                  12,336                  41,355                  35,484

TOTAL REVENUES                     $         43,549        $         52,204        $        141,264        $        159,738

Segment Operating Costs and
Expenses:

Publishing *                       $        (78,836 )      $        (36,827 )      $       (146,894 )      $       (109,408 )
Broadcasting                                 (2,463 )                (7,946 )               (13,300 )               (25,811 )
Merchandising                                (4,708 )                (5,157 )               (13,208 )               (14,288 )

TOTAL OPERATING COSTS AND
EXPENSES BEFORE CORPORATE
EXPENSES                           $        (86,007 )      $        (49,930 )      $       (173,402 )      $       (149,507 )

Operating Income / (Loss):

Publishing                         $        (51,264 )      $         (3,585 )      $        (59,686 )      $         (7,349 )
Broadcasting                                    281                  (1,320 )                  (599 )                (3,616 )
Merchandising                                 8,525                   7,179                  28,147                  21,196

Total Segment Operating Income
/ (Loss) Before Corporate
Expenses                           $        (42,458 )      $          2,274        $        (32,138 )      $         10,231

Corporate Expenses **                        (8,231 )               (11,568 )               (25,618 )               (28,788 )

TOTAL OPERATING LOSS               $        (50,689 )      $         (9,294 )      $        (57,756 )      $        (18,557 )

* Publishing segment operating costs and expenses for the three and nine months ended September 30, 2012 included a non-cash goodwill impairment charge of $44.3 million.

** Corporate expenses include unallocated costs of items such as compensation and related costs for certain departments, such as executive, finance, legal, human resources, office services and information technology, as well as allocated portions of rent and related expenses for these departments that reflect current utilization of office space. Unallocated Corporate expenses are directed and controlled by central management and not by our segment management, and therefore are not included as part of our segment operating performance.


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Three months ended September 30, 2012 Operating Results Compared to Three Months ended September 30, 2011 Operating Results

For the three months ended September 30, 2012, total revenues decreased 17%, compared to the three months ended September 30, 2011, due to a decline in print, television and digital advertising revenue and the inclusion in the three months ended September 30, 2011 of revenue associated with the delivery of certain television companion programming to the Hallmark Channel, which delivery concluded in December 2011. In addition, our circulation revenue declined due to lower newsstand revenue. These declines in revenues were partially offset by an increase in Merchandising segment revenues from new relationships.

For the three months ended September 30, 2012, our operating costs and expenses before Corporate expenses included a non-cash goodwill impairment charge of $44.3 million in our Publishing segment as a result of the Publishing segment experiencing slower than anticipated growth in advertising. Excluding the impairment charge, our operating costs and expenses before Corporate expenses decreased $8.2 million or 16% from the prior-year period largely because we were no longer incurring television production costs associated with the Hallmark Channel companion programming. In addition, production, distribution and editorial costs in our Publishing segment were lower during the three months ended September 30, 2012 as compared to the prior-year period.

Corporate expenses decreased 29% in the three months ended September 30, 2012 as compared to the prior-year period, primarily due to the inclusion in Corporate of $3.1 million of restructuring charges during the three months ended September 30, 2011. In addition, Corporate expenses decreased due to lower cash compensation and non-cash equity compensation costs related to executive management, partially offset by higher legal fees.

Nine months ended September 30, 2012 Operating Results Compared to Nine Months ended September 30, 2011 Operating Results

For the nine months ended September 30, 2012, total revenues decreased 12%, compared to the nine months ended September 30, 2011 due to a decline in print, television and digital advertising revenue and the inclusion in the nine months ended September 30, 2012 of revenue associated with the delivery of certain television companion programming to the Hallmark Channel. In addition, our circulation revenue declined due to lower subscription and newsstand revenues. These declines in revenues were partially offset by an increase in Merchandising segment revenues from new relationships.

For the nine months ended September 30, 2012, our operating costs and expenses before Corporate expenses included a non-cash goodwill impairment charge of $44.3 million in our Publishing segment. Excluding the impairment charge, our operating costs and expenses before Corporate expenses decreased $20.4 million or 14% from the prior-year period since we were no longer incurring television production costs associated with the Hallmark Channel companion programming, as well as lower production, distribution and editorial costs in our Publishing segment.

Corporate expenses decreased 11% in the nine months ended September 30, 2012 as compared to the prior-year period, primarily due to the inclusion in Corporate of $3.1 million of restructuring charges during the nine months ended September 30, 2011, compared to only $0.1 million of restructuring charges in the current-year period. In addition, Corporate expenses decreased due to lower cash compensation and non-cash equity compensation costs related to executive management, partially offset by higher legal fees.

Liquidity

During the first nine months of 2012, our overall cash, cash equivalents and short-term investments increased $2.1 million from December 31, 2011, despite our operating loss, primarily due to the collection of receivables from advertising and television license fees. Cash, cash equivalents and short-term investments were $51.6 million and $49.5 million at September 30, 2012 and December 31, 2011, respectively. We had no borrowings against our current or predecessor lines of credit as of September 30, 2012 or December 31, 2011.


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Comparison of Three Months Ended September 30, 2012 to Three Months Ended
September 30, 2011

PUBLISHING SEGMENT



                                                  Three Months Ended Sept 30,
                                                  2012                  2011             Better /
(in thousands)                                 (unaudited)           (unaudited)          (Worse)
Publishing Segment Revenues
Print advertising                             $      13,287         $      16,206        $  (2,919 )
Digital advertising                                   3,711                 5,004           (1,293 )
Circulation                                          10,068                11,555           (1,487 )
Books                                                   222                    54              168
Other                                                   284                   423             (139 )

Total Publishing Segment Revenues                    27,572                33,242           (5,670 )

Publishing Segment Operating Costs and
Expenses
Production, distribution and editorial              (19,320 )             (21,043 )          1,723
Selling and promotion                               (12,469 )             (13,206 )            737
General and administrative                           (2,112 )              (2,034 )            (78 )
Depreciation and amortization                          (187 )                (194 )              7
Restructuring charges                                  (491 )                (350 )           (141 )
Goodwill impairment                                 (44,257 )                  -           (44,257 )

Total Publishing Segment Operating Costs
and Expenses                                        (78,836 )             (36,827 )        (42,009 )

Operating Loss                                $     (51,264 )       $      (3,585 )      $ (47,679 )

Publishing segment revenues decreased 17% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Print advertising revenue decreased $2.9 million due to fewer advertising pages in Martha Stewart Living, along with slightly lower rates. The decline in Martha Stewart Living advertising revenue was partially offset by an increase in advertising pages in each of Martha Stewart Weddings, Whole Living and Everyday Food. Digital advertising revenue decreased $1.3 million due to fewer advertising units sold, partially offset by higher rates. Circulation revenue decreased $1.5 million primarily due to lower newsstand unit sales across all titles and the inclusion of newsstand revenue of a special issue of Everyday Food for the three months ended September 30, 2011, with no comparable issue in the current-year period. Circulation revenue for the three months ended September 30, 2012 was also impacted by lower subscription revenue per copy of Martha Stewart Living.

Production, distribution and editorial expenses decreased $1.7 million primarily due to a decline in paper, printing and distribution expenses from fewer magazine pages produced in Martha Stewart Living and one fewer special interest publication produced during the three months ended September 30, 2012 as compared to the prior-year period. Additionally, production, distribution and editorial expenses decreased due to lower prices for paper, printing and distribution. Selling and promotion expenses decreased $0.7 million predominantly due to lower subscriber acquisition and renewal costs, as well as lower newsstand marketing costs. Partially offsetting these decreases were higher compensation costs related to the investment in our advertising sales and marketing efforts. Restructuring charges for the three months ended September 30, 2012 represented employee severance costs as compared to the restructuring charges for the three months ended September 30, 2011, which included certain consulting costs. For the three months ending December 31, 2012, we expect to incur additional restructuring charges of up to $2 million as the result of the workforce reduction announced on November 1, 2012 related to the changes in our magazine operations. During the three months ended September 30, 2012, we performed an interim review of goodwill for impairment and determined that the goodwill associated with the Publishing segment was impaired as of September 30, 2012. The non-cash goodwill impairment charge of $44.3 million was the result of the Publishing segment experiencing slower than anticipated growth in advertising. For further details on our goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, specifically "Note 4, Goodwill."


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BROADCASTING SEGMENT



                                                   Three Months Ended Sept 30,
                                                   2012                   2011             Better /
(in thousands)                                  (unaudited)            (unaudited)          (Worse)
Broadcasting Segment Revenues
Advertising                                    $         943          $       2,228        $  (1,285 )
Licensing and other                                    1,801                  4,398           (2,597 )

Total Broadcasting Segment Revenues                    2,744                  6,626           (3,882 )

Broadcasting Segment Operating Costs and
Expenses
Production, distribution and editorial                (2,067 )               (6,612 )          4,545
Selling and promotion                                    (67 )                 (311 )            244
General and administrative                              (242 )                 (541 )            299
Depreciation and amortization                            (87 )                 (128 )             41
Restructuring charges                                     -                    (354 )            354

Total Broadcasting Segment Operating Costs
and Expenses                                          (2,463 )               (7,946 )          5,483

Operating Income / (Loss)                      $         281          $      (1,320 )      $   1,601

Broadcasting segment revenues decreased 59% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. For the three months ended September 30, 2012, The Martha Stewart Show aired over 11 weeks as compared to 13 weeks for the prior-year period. This reduction in advertising inventory was the primary factor for the decrease in advertising revenue of $1.3 million. In addition, advertising revenue was impacted by lower rates and fewer television integrations in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Television licensing and other revenue decreased $2.6 million largely due to the inclusion of revenues associated with delivery of certain television companion programming to the Hallmark Channel in the three months ended September 30, 2011, which delivery concluded in December 2011. Licensing revenue was also impacted by the reduced radio fees from our amended agreement with Sirius XM.

Production, distribution and editorial expenses decreased $4.5 million since we were no longer incurring television production costs associated with the Hallmark Channel companion programming such as were included in the three months ended September 30, 2011. Additionally, television production costs for season 7 of The Martha Stewart Show on the Hallmark Channel were lower than television production costs for season 6, including the ongoing savings from vacating our television studio facilities on June 30, 2012. Radio production and editorial costs were also lower, as the amount of original radio programming on the Martha Stewart Living Radio channel was lower in the three months ended September 30, 2012 than in the three months ended September 30, 2011. Selling and promotion expenses decreased $0.2 million primarily due to lower compensation costs related to a reduction in the television advertising sales staff. General and administrative expenses decreased $0.3 million due to lower compensation costs from a reduction in headcount. The restructuring charges in the three months ended September 30, 2011 of $0.4 million included employee severance as well as certain other non-recurring costs.


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MERCHANDISING SEGMENT



                                                   Three Months Ended Sept 30,
                                                   2012                   2011              Better /
(in thousands)                                  (unaudited)            (unaudited)          (Worse)
Merchandising Segment Revenues
Royalty and other                              $      13,233          $      12,336        $      897

Total Merchandising Segment Revenues                  13,233                 12,336               897

Merchandising Segment Operating Costs and
Expenses
Production, distribution and editorial                (3,100 )               (2,389 )            (711 )
Selling and promotion                                   (492 )               (1,556 )           1,064
General and administrative                            (1,102 )               (1,204 )             102
Depreciation and amortization                            (14 )                   (8 )              (6 )

Total Merchandising Segment Operating
Costs and Expenses                                    (4,708 )               (5,157 )             449

Operating Income                               $       8,525          $       7,179        $    1,346

Merchandising segment revenues increased 7% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, due to the recognition of design fees from our commercial agreement with J.C. Penney and royalties from our new merchandising relationship with Avery. Partially offsetting these increases was a decline in sales of our soft flooring line of products at The Home Depot.

Production, distribution and editorial expenses increased $0.7 million due to an increase in headcount to support our new merchandising partners. Selling and promotion expenses and related other revenue both declined approximately $1.1 million as a result of a decrease in reimbursable services that we provided to our partners for creative services projects.


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CORPORATE



                                                     Three Months Ended Sept 30,
                                                     2012                  2011              Better /
(in thousands)                                   (unaudited)           (unaudited)           (Worse)
Corporate Operating Costs and Expenses
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