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MSO > SEC Filings for MSO > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for MARTHA STEWART LIVING OMNIMEDIA INC

Form 10-Q for MARTHA STEWART LIVING OMNIMEDIA INC


30-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-looking Statements and Risk Factors This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "intend," "believe," "continue," "potential" or similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, each of which is described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2013 under the heading "Part I, Item IA. Risk Factors":
         the continued success of our brands and the reputation and popularity
          of Martha Stewart and Emeril Lagasse;


         adverse reactions to publicity relating to Ms. Stewart or Mr. Lagasse
          by consumers, advertisers and business partners;

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

continued management turnover;

our ability to successfully implement our growth strategies;

         our ability to develop new or expand existing merchandising and
          licensing programs or the loss or failure of existing programs,
          including as a result of financial instability of or disputes with our
          partners;

failure to predict, respond to and influence trends in consumer taste;

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


         softening of, or increased competition for, advertising revenues,
          including increased competitive pressure on digital display advertising
          rates as a result of programmatic buying of advertising inventory;


         inability to successfully capitalize on digital, mobile and video
          initiatives, including establishing relationships with additional
          distribution partners;


         our ability to drive and retain visitors to our digital platforms and
          to effectively monetize our digital platforms;


         disruption in the industries in which our publishing and digital
          third-party vendors operate;

continued weak and uncertain worldwide economic conditions;

increases in paper, postage, freight or printing costs;

weakening in circulation, particularly in newsstand sales;

failure to protect our intellectual property; and

failure to realize expected efficiencies and benefits from our restructuring activities.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.


Table of Contents

EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with
inspiring lifestyle content and well-designed, high-quality products. We are
organized into three business segments: Publishing; Merchandising; and
Broadcasting.
Our strategy to generate growth and profitability includes the following
imperatives:
            Grow our merchandising business by leveraging our brand equity to
             diversify into new categories and distribution channels, and
             negotiate new partnerships that fully reward us for the value of our
             brands and our active role in product development and design, both
             domestically and internationally; and


            Strengthen our media business by using our content across existing
             and new distribution channels, including international
             opportunities, and focusing on digital opportunities.

Summarized below are our operating results for the three and six months ended June 30, 2014 and 2013.

                                  Three months ended June 30,            Six months ended June 30,
                                    2014               2013               2014               2013
(in thousands)                  (unaudited)         (unaudited)        (unaudited)       (unaudited)
Total Revenues                $      37,620       $      42,198      $     70,888       $     79,422
Total Operating Costs and
Expenses                            (35,376 )           (42,869 )         (70,834 )          (85,827 )
Gain on Sale of Subscriber
List, net                                 -                  35                 -              2,724
Total Operating Income /
(Loss)                        $       2,244       $        (636 )    $         54       $     (3,681 )

We generate revenue from various sources such as advertising customers, magazine circulation and licensing partners. Publishing is our largest business segment, accounting for 59% of our total revenues for the six months ended June 30, 2014. Publishing segment revenues are comprised of advertising sales, magazine subscriptions and newsstand sales of Martha Stewart Living, Martha Stewart Weddings and special weddings issues, as well as royalties from our book business. Publishing segment revenue also includes advertising revenue generated from our digital properties, primarily marthastewart.com, as well as revenue derived from the digital distribution of our video content. 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 programs at The Home Depot, Macy's, J.C. Penney and PetSmart. Our wholesale partnerships include Avery, through December 2014, for our Martha Stewart Home Office line (currently sold at Staples) and Wilton Properties, Plaid Enterprises and Orchard Yarn and Thread, Inc. (d/b/a Lion Brand Yarn) for our Martha Stewart Crafts program (currently sold at Michaels and other crafts stores), as well as with a variety of wholesale partnerships to produce products under the Emeril brand. Merchandising segment revenues are also derived from the licensing of talent services for television programming produced by or on behalf of third parties. Broadcasting segment revenues include our limited television production operations, television content library licensing and satellite radio operations. 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 and distributing magazines, the editorial costs associated with creating content across our media platforms, the selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts, the technology costs associated with our digital properties and the costs associated with producing and distributing our video programming. We also incur general overhead costs, including facilities and related expenses.


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Detailed segment operating results for the three and six months ended June 30, 2014 and 2013 are summarized below:

                                          Three months ended June 30,            Six months ended June 30,
                                            2014               2013               2014               2013
(in thousands)                          (unaudited)         (unaudited)        (unaudited)       (unaudited)
Segment Revenues:
Publishing                            $      22,229       $      24,190      $     41,735       $     48,672
Merchandising                                14,719              16,116            27,803             27,623
Broadcasting                                    672               1,892             1,350              3,127
TOTAL REVENUES                               37,620              42,198            70,888             79,422
Segment Operating Costs and Expenses:
Publishing                                  (23,979 )           (29,969 )         (46,235 )          (58,130 )
Merchandising                                (3,724 )            (4,409 )          (7,508 )          (10,230 )
Broadcasting                                   (803 )              (827 )          (1,288 )           (1,101 )
TOTAL OPERATING COSTS AND EXPENSES
Before Corporate Expenses and Gain on
Sale of Subscriber List, Net                (28,506 )           (35,205 )         (55,031 )          (69,461 )
Publishing - Gain on sale of
subscriber list, net                              -                  35                 -              2,724
Segment Operating Income / (Loss):
Publishing                                   (1,750 )            (5,744 )          (4,500 )           (6,734 )
Merchandising                                10,995              11,707            20,295             17,393
Broadcasting                                   (131 )             1,065                62              2,026
Total Segment Operating Income Before
Corporate Expenses                            9,114               7,028            15,857             12,685
Corporate Expenses *                         (6,870 )            (7,664 )         (15,803 )          (16,366 )
TOTAL OPERATING INCOME / (LOSS)       $       2,244       $        (636 )    $         54       $     (3,681 )

* Corporate expenses include unallocated costs of items such as compensation and related costs for certain departments, such as executive (including Martha Stewart, our Founder and Chief Creative Officer), finance, legal, human resources, corporate communications, 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 June 30, 2014 Operating Results Compared to Three Months ended June 30, 2013 Operating Results
For the three months ended June 30, 2014, total revenues decreased 11%, compared to the three months ended June 30, 2013, due to lower print advertising revenue, lower Merchandising segment royalty revenue and lower television sponsorship revenue. These revenue declines were partially offset by higher digital advertising revenue and a non-recurring benefit from our books business. Our operating costs and expenses before Corporate expenses for three months ended June 30, 2014 decreased $6.7 million or 19% from the prior-year period. This decrease was primarily due to lower production, distribution and editorial costs in our Publishing segment, which included lower physical costs associated with producing and distributing Martha Stewart Living, as well as savings from lower editorial headcount as a result of 2013 restructuring activities. Publishing segment costs also decreased from lower selling and promotion expenses. Total operating costs and expenses before Corporate expenses were also lower from decreased Merchandising expenses, primarily from lower compensation related costs.
Corporate expenses decreased 10% for the three months ended June 30, 2014, as compared to the prior-year period, due to lower legal fees and general cost savings.
Six months ended June 30, 2014 Operating Results Compared to Six Months ended June 30, 2013 Operating Results
For the six months ended June 30, 2014, total revenues decreased 11%, compared to the six months ended June 30, 2013, primarily due to lower print and digital advertising revenues, as well as lower circulation revenues. A portion of the decrease in print advertising and circulation revenues was attributable to revenues earned during the six months ended June 30, 2013 from the special interest publication, Cakes and Cupcakes, the final issue of Whole Living and several Everyday Food supplements, with no comparable revenue in the current-year period. In addition, total revenues decreased due to lower Broadcasting segment revenues.
Our operating costs and expenses before Corporate expenses for the six months ended June 30, 2014 decreased $14.4 million or 21% from the prior-year period. This decrease was primarily due to lower production, distribution and editorial costs in our Publishing segment, which included savings from the three print publications (Cakes and Cupcakes, Whole Living and Everyday Food) that were not produced during the six months ended June 30, 2014. Additionally, there were savings from lower editorial headcount as a result of 2013 restructuring activities, as well as lower physical costs associated with producing and distributing Martha Stewart Living. Publishing segment costs also decreased from lower selling and promotion expenses. Total operating costs and expenses before Corporate expenses were also lower from decreased Merchandising expenses, primarily from lower compensation related costs.
The six months ended June 30, 2013 included the net gain on the sale of the Whole Living subscriber list of $2.7 million, with no comparable gain in the current-year period.
Corporate expenses decreased 3% for the six months ended June 30, 2014, as compared to the prior-year period, due to lower legal fees and general cost savings, partially offset by an increase of $2.0 million in depreciation and amortization expense. The increase in depreciation and amortization was the result of the non-recurring accelerated amortization of leasehold improvements related to vacating 21% of our primary office space during February 2014. The company-wide decrease in rent expense attributable to this office consolidation was allocated to our business segments based on current utilization of office space.
Liquidity
During the six months ended June 30, 2014, our overall cash, cash equivalents and short-term investments increased $15.5 million from December 31, 2013. The increase was primarily due to the collection of receivables from royalties and advertising. Cash, cash equivalents and short-term investments were $61.7 million and $46.2 million as of June 30, 2014 and December 31, 2013, respectively.


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Comparison of the three months ended June 30, 2014 to the three months ended June 30, 2013

PUBLISHING SEGMENT
                                           Three months ended June 30,
                                             2014               2013          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
Publishing Segment Revenues
Print advertising                      $       9,259       $      12,182     $ (2,923 )
Digital advertising                            5,879               5,379          500
Circulation                                    6,336               6,437         (101 )
Books                                            416                  16          400
Other                                            339                 176          163
Total Publishing Segment Revenues             22,229              24,190       (1,961 )

Production, distribution and editorial       (12,863 )           (16,034 )      3,171
Selling and promotion                         (9,621 )           (11,771 )      2,150
General and administrative                    (1,342 )            (1,750 )        408
Depreciation and amortization                   (153 )              (274 )        121
Restructuring charges                              -                (140 )        140
Gain on sale of subscriber list, net               -                  35          (35 )
Publishing Segment Operating Loss      $      (1,750 )     $      (5,744 )   $  3,994

Publishing segment revenues decreased 8% for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to a decrease in print advertising revenue of $2.9 million from fewer advertising pages sold at lower rates for both Martha Stewart Living and Martha Stewart Weddings. In addition, the three months ended June 30, 2013 included $0.3 million of advertising revenue from an Everyday Food supplement, with no comparable revenue in the current-year period. Digital advertising revenue increased $0.5 million due to higher display advertising units sold partially offset by lower display advertising rates. Circulation revenue was essentially equal to the prior-year period with moderate increases in newsstand revenue offset by slight declines in subscription revenue. Revenue from Emeril Lagasse branded books included a non-recurring benefit of $0.4 million during the three months ended June 30, 2014 from the early termination of our agreement with HarperCollins Publishers, which arrangement has been replaced with Time Home Entertainment.
Production, distribution and editorial expenses decreased $3.2 million primarily due to lower physical costs associated with producing and distributing Martha Stewart Living from fewer advertising and editorial pages. In addition, editorial expenses decreased as a result of lower editorial headcount from 2013 restructuring activities. Selling and promotion expenses decreased $2.2 million primarily due to lower advertising sales and marketing headcount and lower commissions on decreased advertising revenues. In addition, the prior-year period included expenses associated with the advertising and marketing event, American Made by Martha Stewart, with no comparable expenses during the three months ended June 30, 2014. Selling and promotion expenses also decreased from lower circulation expenses associated with subscription fulfillment of Martha Stewart Living. These decreases in selling and promotion expenses were partially offset by higher costs associated with the increase in digital revenues. General and administrative expenses decreased $0.4 million primarily due to lower allocated rent expense of $0.3 million, which was offset by an increase in our Corporate rent allocation to reflect current utilization of office space.


Table of Contents

MERCHANDISING SEGMENT
                                           Three months ended June 30,
                                             2014               2013          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
Merchandising Segment Revenues
Royalty and other                      $      14,719       $      16,116     $ (1,397 )
Total Merchandising Segment Revenues          14,719              16,116       (1,397 )

Production, distribution and editorial        (1,721 )            (2,322 )        601
Selling and promotion                           (466 )              (507 )         41
General and administrative                    (1,527 )            (1,568 )         41
Depreciation and amortization                    (10 )               (12 )          2
Merchandising Segment Operating Income $      10,995       $      11,707     $   (712 )

Merchandising segment revenues decreased 9% for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to the timing of recognition of royalty revenue from our commercial agreement with J.C. Penney. During the three months ended June 30, 2013, we recognized revenue from J.C. Penney that included royalty revenue pertaining to February and March 2013, which revenue had not been recorded previously due to the uncertainty related to litigation in the prior-year period with Macy's. For the current-year period, we recorded three months of lower royalty revenue from J.C. Penney reflecting fewer licensed categories sold at J.C. Penney. In addition, royalty and other revenue declined due to lower royalties from our expiring home office product line with Avery, lower sales at The Home Depot, and the impact of certain expired partnerships. These revenue declines were partially offset by the pro rata recognition of non-cash revenue that resulted from the return of 11 million shares of our Class A Common Stock from J.C. Penney, with no comparable revenue during the three months ended June 30, 2013. The return of those shares was the result of the October 21, 2013 amendment with J.C. Penney, which resulted in an initial increase to deferred revenue of approximately $25 million that will be recognized ratably as non-cash revenue through June 30, 2017. In addition, the current-year period included higher revenues related to television talent services provided by Martha Stewart and Emeril Lagasse.
Production, distribution and editorial expenses decreased $0.6 million primarily due to a decrease in compensation related costs from the reduction of headcount. The decrease in general and administrative expenses included $0.1 million from lower allocated rent expense that was offset by an increase in our Corporate rent allocation to reflect current utilization of office space.


Table of Contents

BROADCASTING SEGMENT
                                                   Three months ended June 30,
                                                     2014               2013            Better /
(in thousands)                                   (unaudited)         (unaudited)        (Worse)
Broadcasting Segment Revenues
Advertising                                    $         547       $       1,689     $     (1,142 )
Licensing and other                                      125                 203              (78 )
Total Broadcasting Segment Revenues                      672               1,892           (1,220 )

Production, distribution and editorial                  (712 )              (783 )             71
Selling and promotion                                    (78 )               (18 )            (60 )
General and administrative                               (12 )               (25 )             13
Depreciation and amortization                             (1 )                (1 )              -
Broadcasting Segment Operating (Loss) / Income $        (131 )     $       1,065     $     (1,196 )

Broadcasting segment revenues decreased $1.2 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due to a decrease in advertising revenue of $1.1 million from lower sponsorship revenue related to our programming on PBS. The current-year period included the third season of Martha Bakes, as compared to the second seasons of Martha Stewart's Cooking School and Martha Bakes on PBS during the prior-year period. Broadcasting segment expenses during the three months ended June 30, 2014 were essentially equal to the prior-year period.


Table of Contents

CORPORATE
                                           Three months ended June 30,
                                             2014               2013          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
General and administrative             $      (6,205 )     $      (6,813 )   $     608
Depreciation and amortization                   (665 )              (839 )         174
Restructuring charges                              -                 (12 )          12
Corporate Operating Costs and Expenses $      (6,870 )     $      (7,664 )   $     794

Corporate operating costs and expenses decreased 10% for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due to a decrease in general and administrative expenses of $0.6 million from lower legal and related fees and general cost savings. The prior-year period included costs incurred related to the then ongoing litigation with Macy's. In addition, total rent expense decreased due to savings from vacating approximately 21% of our primary office space in February 2014. For Corporate, total company-wide rent savings were offset by $0.4 million in higher allocated rent expense to Corporate from the reallocation of rent charged to reflect current utilization of office space. The increase in rent allocated to Corporate was offset by a decrease in our Publishing and Merchandising segment rent allocation, as discussed above.

OTHER ITEMS
Net Income / (Loss). Net income was $1.8 million for the three months ended June 30, 2014, compared to net loss of $(1.2) million for the three months ended June 30, 2013, as a result of the factors described above.


Table of Contents

Comparison of the six months ended June 30, 2014 to the six months ended June 30, 2013

PUBLISHING SEGMENT
                                           Six months ended June 30,
                                            2014               2013         Better /
(in thousands)                           (unaudited)       (unaudited)      (Worse)
Publishing Segment Revenues
Print advertising                      $     18,944       $     22,877     $ (3,933 )
Digital advertising                           9,093             10,168       (1,075 )
Circulation                                  12,604             14,355       (1,751 )
Books                                           579                831         (252 )
Other                                           515                441           74
Total Publishing Segment Revenues            41,735             48,672       (6,937 )

Production, distribution and editorial      (26,012 )          (33,223 )      7,211
Selling and promotion                       (17,268 )          (20,835 )      3,567
General and administrative                   (2,632 )           (3,403 )        771
Depreciation and amortization                  (323 )             (529 )        206
Restructuring charges                             -               (140 )        140
Gain on sale of subscriber list, net              -              2,724       (2,724 )
Publishing Segment Operating Loss      $     (4,500 )     $     (6,734 )   $  2,234

Publishing segment revenues decreased 14% for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to a decrease in print advertising revenue of $3.9 million from fewer advertising . . .

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