UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
FORM 10-Q |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018 | Commission file number 1-5128 |
MEREDITH CORPORATION | ||
(Exact name of registrant as specified in its charter) | ||
Iowa | 42-0410230 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1716 Locust Street, Des Moines, Iowa | 50309-3023 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (515) 284-3000 | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares of stock outstanding at January 31, 2019 | ||
Common shares | 39,978,973 | |
Class B shares | 5,098,576 | |
Total common and Class B shares | 45,077,549 | |
(This page has been left blank intentionally.)
TABLE OF CONTENTS | |||
Page | |||
Part I - Financial Information | |||
Item 1. | Financial Statements (Unaudited) | ||
Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018 | |||
Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2018 and 2017 | |||
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2018 and 2017 | |||
Condensed Consolidated Statements of Shareholders' Equity for the Three and Six Months Ended December 31, 2018 and 2017 | |||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2018 and 2017 | |||
Notes to Condensed Consolidated Financial Statements | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||
Item 4. | Controls and Procedures | ||
Part II - Other Information | |||
Item 1A. | Risk Factors | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 6. | Exhibits | ||
Signature | |||
Meredith Corporation and its consolidated subsidiaries are referred to in this Quarterly Report on Form 10-Q (Form 10-Q) as Meredith, the Company, we, our, and us. | |||
PART I | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
Assets | December 31, 2018 | June 30, 2018 | ||||||
(In millions) | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 77.1 | $ | 437.6 | ||||
Accounts receivable, net | 628.7 | 542.0 | ||||||
Inventories | 59.6 | 44.2 | ||||||
Current portion of subscription acquisition costs | 185.4 | 118.1 | ||||||
Current portion of broadcast rights | 14.4 | 9.8 | ||||||
Assets held-for-sale | 325.9 | 713.1 | ||||||
Other current assets | 85.6 | 114.3 | ||||||
Total current assets | 1,376.7 | 1,979.1 | ||||||
Property, plant, and equipment | 872.5 | 861.4 | ||||||
Less accumulated depreciation | (423.1 | ) | (377.6 | ) | ||||
Net property, plant, and equipment | 449.4 | 483.8 | ||||||
Subscription acquisition costs | 134.6 | 61.1 | ||||||
Broadcast rights | 8.3 | 18.9 | ||||||
Other assets | 267.9 | 263.3 | ||||||
Intangible assets, net | 1,927.4 | 2,005.2 | ||||||
Goodwill | 1,955.6 | 1,915.8 | ||||||
Total assets | $ | 6,119.9 | $ | 6,727.2 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1
Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity | December 31, 2018 | June 30, 2018 | ||||||
(In millions except per share data) | ||||||||
Current liabilities | ||||||||
Current portion of long-term debt | $ | — | $ | 17.7 | ||||
Current portion of long-term broadcast rights payable | 13.9 | 8.9 | ||||||
Accounts payable | 186.2 | 194.7 | ||||||
Accrued expenses and other liabilities | 338.1 | 410.2 | ||||||
Current portion of unearned revenues | 409.0 | 360.4 | ||||||
Liabilities associated with assets held-for-sale | 155.9 | 198.4 | ||||||
Total current liabilities | 1,103.1 | 1,190.3 | ||||||
Long-term debt | 2,507.4 | 3,117.9 | ||||||
Long-term broadcast rights payable | 10.5 | 20.8 | ||||||
Unearned revenues | 189.3 | 124.1 | ||||||
Deferred income taxes | 511.2 | 437.0 | ||||||
Other noncurrent liabilities | 211.4 | 217.0 | ||||||
Total liabilities | 4,532.9 | 5,107.1 | ||||||
Redeemable, convertible Series A preferred stock, par value $1 per share, $1,000 per share liquidation preference | 531.3 | 522.6 | ||||||
Shareholders' equity | ||||||||
Series preferred stock, par value $1 per share | — | — | ||||||
Common stock, par value $1 per share | 40.0 | 39.8 | ||||||
Class B stock, par value $1 per share | 5.1 | 5.1 | ||||||
Additional paid-in capital | 212.7 | 199.5 | ||||||
Retained earnings | 839.1 | 889.8 | ||||||
Accumulated other comprehensive loss | (41.2 | ) | (36.7 | ) | ||||
Total shareholders' equity | 1,055.7 | 1,097.5 | ||||||
Total liabilities, redeemable convertible preferred stock, and shareholders' equity | $ | 6,119.9 | $ | 6,727.2 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
Three Months | Six Months | |||||||||||||||
Periods ended December 31, | 2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions except per share data) | ||||||||||||||||
Revenues | ||||||||||||||||
Advertising related | $ | 488.9 | $ | 231.8 | $ | 911.6 | $ | 441.0 | ||||||||
Consumer related | 336.8 | 151.7 | 638.0 | 301.3 | ||||||||||||
Other | 27.8 | 34.2 | 60.6 | 68.2 | ||||||||||||
Total revenues | 853.5 | 417.7 | 1,610.2 | 810.5 | ||||||||||||
Operating expenses | ||||||||||||||||
Production, distribution, and editorial | 302.9 | 159.5 | 589.0 | 316.1 | ||||||||||||
Selling, general, and administrative | 325.9 | 174.4 | 662.0 | 345.1 | ||||||||||||
Acquisition, disposition, and restructuring related activities | 27.7 | 14.9 | 44.8 | 11.6 | ||||||||||||
Depreciation and amortization | 65.1 | 12.4 | 128.8 | 25.0 | ||||||||||||
Impairment of long-lived assets | — | 19.8 | — | 19.8 | ||||||||||||
Total operating expenses | 721.6 | 381.0 | 1,424.6 | 717.6 | ||||||||||||
Income from operations | 131.9 | 36.7 | 185.6 | 92.9 | ||||||||||||
Non-operating income, net | 5.9 | 0.7 | 13.2 | 1.3 | ||||||||||||
Interest expense, net | (50.6 | ) | (5.2 | ) | (92.0 | ) | (10.3 | ) | ||||||||
Earnings from continuing operations before income taxes | 87.2 | 32.2 | 106.8 | 83.9 | ||||||||||||
Income tax benefit (expense) | (0.2 | ) | 127.2 | (3.8 | ) | 108.9 | ||||||||||
Earnings from continuing operations | 87.0 | 159.4 | 103.0 | 192.8 | ||||||||||||
Loss from discontinued operations, net of income taxes | (68.4 | ) | — | (67.4 | ) | — | ||||||||||
Net earnings | $ | 18.6 | $ | 159.4 | $ | 35.6 | $ | 192.8 | ||||||||
Earnings (loss) attributable to common shareholders | $ | (1.6 | ) | $ | 159.4 | $ | (4.2 | ) | $ | 192.8 | ||||||
Basic earnings (loss) per share attributable to common shareholders | ||||||||||||||||
Continuing operations | $ | 1.48 | $ | 3.55 | $ | 1.40 | $ | 4.30 | ||||||||
Discontinued operations | (1.51 | ) | — | (1.49 | ) | — | ||||||||||
Basic earnings (loss) per common share | $ | (0.03 | ) | $ | 3.55 | $ | (0.09 | ) | $ | 4.30 | ||||||
Basic average common shares outstanding | 45.3 | 44.9 | 45.2 | 44.8 | ||||||||||||
Diluted earnings (loss) per share attributable to common shareholders | ||||||||||||||||
Continuing operations | $ | 1.43 | $ | 3.49 | $ | 1.38 | $ | 4.23 | ||||||||
Discontinued operations | (1.44 | ) | — | (1.43 | ) | — | ||||||||||
Diluted earnings (loss) per common share | $ | (0.01 | ) | $ | 3.49 | $ | (0.05 | ) | $ | 4.23 | ||||||
Diluted average common shares outstanding | 47.3 | 45.6 | 47.3 | 45.6 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months | Six Months | |||||||||||||||
Periods ended December 31, | 2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | ||||||||||||||||
Net earnings | $ | 18.6 | $ | 159.4 | $ | 35.6 | $ | 192.8 | ||||||||
Other comprehensive income (loss), net of income taxes | ||||||||||||||||
Pension and other postretirement benefit plans activity | 0.4 | 0.3 | 0.8 | 0.7 | ||||||||||||
Unrealized foreign currency translation loss | (3.0 | ) | — | (5.3 | ) | — | ||||||||||
Unrealized gain on interest rate swaps | — | 0.7 | — | 0.9 | ||||||||||||
Other comprehensive income (loss), net of income taxes | (2.6 | ) | 1.0 | (4.5 | ) | 1.6 | ||||||||||
Comprehensive income | $ | 16.0 | $ | 160.4 | $ | 31.1 | $ | 194.4 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited)
(In millions except per share data) | Common Stock - $1 par value | Class B Stock - $1 par value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||
Balance at June 30, 2018 | $ | 39.8 | $ | 5.1 | $ | 199.5 | $ | 889.8 | $ | (36.7 | ) | $ | 1,097.5 | |||||||
Net earnings | — | — | — | 17.0 | — | 17.0 | ||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (1.9 | ) | (1.9 | ) | ||||||||||||
Shares issued under incentive plans, net of forfeitures | 0.2 | — | 0.9 | — | — | 1.1 | ||||||||||||||
Purchases of Company stock | (0.1 | ) | — | (3.1 | ) | — | — | (3.2 | ) | |||||||||||
Share-based compensation | — | — | 10.2 | — | — | 10.2 | ||||||||||||||
Dividends paid | ||||||||||||||||||||
Common stock ($0.545 dividend per share) | — | — | — | (23.0 | ) | — | (23.0 | ) | ||||||||||||
Class B stock ($0.545 dividend per share) | — | — | — | (2.8 | ) | — | (2.8 | ) | ||||||||||||
Series A preferred stock ($21.49 dividend per share) | — | — | — | (14.0 | ) | — | (14.0 | ) | ||||||||||||
Accretion of Series A preferred stock | — | — | — | (4.3 | ) | — | (4.3 | ) | ||||||||||||
Cumulative effect adjustment for adoption of Accounting Standards Update 2014-09 | — | — | — | 2.4 | — | 2.4 | ||||||||||||||
Balance at September 30, 2018 | 39.9 | 5.1 | 207.5 | 865.1 | (38.6 | ) | 1,079.0 | |||||||||||||
Net earnings | — | — | — | 18.6 | — | 18.6 | ||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (2.6 | ) | (2.6 | ) | ||||||||||||
Shares issued under incentive plans, net of forfeitures | 0.1 | — | 1.3 | — | — | 1.4 | ||||||||||||||
Purchases of Company stock | — | (1.8 | ) | — | — | (1.8 | ) | |||||||||||||
Share-based compensation | — | — | 5.7 | — | — | 5.7 | ||||||||||||||
Dividends paid | ||||||||||||||||||||
Common stock ($0.545 dividend per share) | — | — | — | (23.1 | ) | — | (23.1 | ) | ||||||||||||
Class B stock ($0.545 dividend per share) | — | — | — | (2.8 | ) | — | (2.8 | ) | ||||||||||||
Series A preferred stock ($22.19 dividend per share) | — | — | — | (14.4 | ) | — | (14.4 | ) | ||||||||||||
Accretion of Series A preferred stock | — | — | — | (4.3 | ) | — | (4.3 | ) | ||||||||||||
Balance at December 31, 2018 | $ | 40.0 | $ | 5.1 | $ | 212.7 | $ | 839.1 | $ | (41.2 | ) | $ | 1,055.7 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity (Continued)
(Unaudited)
(In millions except per share data) | Common Stock - $1 par value | Class B Stock - $1 par value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||
Balance at June 30, 2017 | $ | 39.4 | $ | 5.1 | $ | 54.8 | $ | 915.7 | $ | (19.0 | ) | $ | 996.0 | |||||||
Net earnings | — | — | — | 33.4 | — | 33.4 | ||||||||||||||
Other comprehensive income, net of income taxes | — | — | — | — | 0.6 | 0.6 | ||||||||||||||
Stock issued under various incentive plans, net of forfeitures | 0.5 | — | 11.5 | — | — | 12.0 | ||||||||||||||
Purchases of Company stock | (0.3 | ) | — | (17.4 | ) | — | — | (17.7 | ) | |||||||||||
Share-based compensation | — | — | 6.7 | — | — | 6.7 | ||||||||||||||
Dividends paid | ||||||||||||||||||||
Common stock ($0.520 dividend per share) | — | — | — | (20.9 | ) | — | (20.9 | ) | ||||||||||||
Class B stock ($0.520 dividend per share) | — | — | — | (2.7 | ) | — | (2.7 | ) | ||||||||||||
Cumulative effect adjustment for adoption of Accounting Standards Update 2016-09 | — | — | 1.0 | (0.6 | ) | — | 0.4 | |||||||||||||
Balance at September 30, 2017 | 39.6 | 5.1 | 56.6 | 924.9 | (18.4 | ) | 1,007.8 | |||||||||||||
Net earnings | — | — | — | 159.4 | — | 159.4 | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 1.0 | 1.0 | ||||||||||||||
Stock issued under various incentive plans, net of forfeitures | 0.1 | — | 5.7 | — | — | 5.8 | ||||||||||||||
Purchases of Company stock | (0.1 | ) | — | (6.8 | ) | — | — | (6.9 | ) | |||||||||||
Share-based compensation | — | — | 3.4 | — | — | 3.4 | ||||||||||||||
Dividends paid | ||||||||||||||||||||
Common stock ($0.520 dividend per share) | — | — | — | (21.1 | ) | — | (21.1 | ) | ||||||||||||
Class B stock ($0.520 dividend per share) | — | — | — | (2.6 | ) | — | (2.6 | ) | ||||||||||||
Balance at December 31, 2017 | $ | 39.6 | $ | 5.1 | $ | 58.9 | $ | 1,060.6 | $ | (17.4 | ) | $ | 1,146.8 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended December 31, | 2018 | 2017 | |||||
(In millions) | |||||||
Cash flows from operating activities | |||||||
Net earnings | $ | 35.6 | $ | 192.8 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities | |||||||
Depreciation | 51.2 | 15.8 | |||||
Amortization | 77.6 | 9.2 | |||||
Share-based compensation | 15.9 | 10.1 | |||||
Deferred income taxes | 68.5 | (122.1 | ) | ||||
Amortization of original issue discount and debt issuance costs | 4.4 | — | |||||
Amortization of broadcast rights | 10.2 | 9.6 | |||||
Payments for broadcast rights | (9.6 | ) | (10.6 | ) | |||
Gain on sale of assets | (12.3 | ) | (3.3 | ) | |||
Loss on extinguishment of debt | 15.1 | — | |||||
Write-down of impaired assets | — | 19.8 | |||||
Other operating activities, net | (0.1 | ) | (2.1 | ) | |||
Changes in assets and liabilities | (197.1 | ) | (19.0 | ) | |||
Net cash provided by operating activities | 59.4 | 100.2 | |||||
Cash flows from investing activities | |||||||
Acquisitions of and investments in businesses, net of cash acquired | (1.7 | ) | (3.0 | ) | |||
Proceeds from disposition of assets, net of cash sold | 347.8 | 2.2 | |||||
Additions to property, plant, and equipment | (17.0 | ) | (28.8 | ) | |||
Other | — | 0.7 | |||||
Net cash provided by (used in) investing activities | 329.1 | (28.9 | ) | ||||
Cash flows from financing activities | |||||||
Proceeds from issuance of long-term debt | — | 60.0 | |||||
Repayments of long-term debt | (646.9 | ) | (61.3 | ) | |||
Dividends paid | (80.1 | ) | (47.3 | ) | |||
Purchases of Company stock | (5.0 | ) | (24.6 | ) | |||
Proceeds from common stock issued | 2.5 | 17.8 | |||||
Payment of acquisition-related contingent consideration | (19.3 | ) | (3.2 | ) | |||
Net cash used in financing activities | (748.8 | ) | (58.6 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (0.6 | ) | — | ||||
Change in cash in assets held-for-sale | 0.4 | — | |||||
Net increase (decrease) in cash and cash equivalents | (360.5 | ) | 12.7 | ||||
Cash and cash equivalents at beginning of period | 437.6 | 22.3 | |||||
Cash and cash equivalents at end of period | $ | 77.1 | $ | 35.0 | |||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
Meredith Corporation and Subsidiaries | |
Notes to Condensed Consolidated Financial Statements | |
(Unaudited) | |
1. Summary of Significant Accounting Policies
Basis of Presentation—The condensed consolidated financial statements include the accounts of Meredith Corporation and its wholly-owned and majority-owned subsidiaries (Meredith or the Company), after eliminating all significant intercompany balances and transactions. Meredith does not have any off-balance sheet arrangements.
The financial position and operating results of the Company's foreign operations are consolidated using primarily the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Translation gains or losses on assets and liabilities are included as a component of accumulated other comprehensive loss.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements, which are included in Meredith's Annual Report on Form 10-K (Form 10-K) for the year ended June 30, 2018, filed with the SEC.
The condensed consolidated financial statements as of December 31, 2018, and for the three and six months ended December 31, 2018 and 2017, are unaudited but, in management's opinion, include all adjustments necessary for a fair presentation of the results of interim periods. All such adjustments are of a normal recurring nature. The year-end condensed consolidated balance sheet as of June 30, 2018, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.
Reclassification—Certain prior year amounts have been reclassified to conform to the fiscal 2019 presentation.
Adopted Accounting Pronouncements—
ASU 2014-09—In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606) that updated and replaced existing revenue recognition guidance. The guidance includes a five-step framework to determine the timing and amount of revenue to recognize related to contracts with customers. Additionally, the guidance requires new and significantly enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts as well as judgments made by a company when following the framework.
The Company adopted the standard, including all updates made to the standard since original issuance, on July 1, 2018, using the modified retrospective method. The standard was applied to all contracts open as of July 1, 2018. The cumulative prior period effect of applying ASC 606 was $2.4 million, which resulted in an increase to retained earnings upon adoption.
The standard does not change the timing or pattern of revenue recognition for most of the Company's revenue contracts with the exception of contracts with value-added items or those that require combination under the standard. Refer to Note 11 for further discussion on the impacts of the adoption of this accounting standard.
The Company utilized various practical expedients offered by the guidance in our implementation. For the Company's contracts that have an original duration of twelve months or less, the Company does not impute interest
8
to account for a financing element. For all contracts with an original term of twelve months or less and for performance obligations tied to sales-based or usage-based royalties, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. Finally, consistent with historical practice, the Company excludes amounts collected from customers for sales taxes from its transaction prices.
ASU 2016-01—In January 2016, the FASB issued guidance to improve and simplify accounting for financial instruments. The updated guidance includes several provisions that are not applicable to the Company’s consolidated financial statements with the exception of changes to fair value disclosures. Under the new guidance, public entities are no longer required to disclose the methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost on the balance sheet. It also requires public entities to use the exit price when measuring the fair value of financial instruments for disclosure purposes. The guidance was adopted in the first quarter of fiscal 2019. The adoption of this guidance required a change in the Company's disclosures only and did not have an impact on the Company's financial position, results of operations, or cash flows.
ASU 2016-15—In August 2016, the FASB issued an accounting standards update clarifying the classification of certain cash receipts and payments in the statement of cash flows. The update is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. The update was effective beginning in the first quarter of fiscal 2019 and was adopted retrospectively as required by the ASU.
As a result of the update, the Company reclassified a cash outflow of $0.8 million from financing activities to operating activities related to contingent considerations paid in excess of that recognized as a liability on the date of acquisition and reclassified a cash inflow of $0.7 million from operating activities to investing activities related to cash proceeds from corporate owned life insurance in the six months ended December 31, 2017. The update will not have a material impact on the classification of future cash flows.
ASU 2017-01—In January 2017, the FASB issued an accounting standards update that clarifies the definition of a business and adds guidance to assist entities in the determination of whether an acquisition (or disposal) represents assets or a business. The update provides a test to determine whether or not an acquisition is a business. If substantially all of the fair value of the assets acquired is concentrated in a single asset or a group of similar identifiable assets, the acquired assets do not represent a business. If this test is not met, the update provides further guidance to evaluate if the acquisition represents a business. The Company prospectively adopted the guidance in the first quarter of fiscal 2019. The adoption did not have an impact to the Company’s condensed consolidated financial statements.
ASU 2017-07—In March 2017, the FASB issued an accounting standards update on the presentation of net periodic pension and postretirement benefit costs. This guidance revises how employers that sponsor defined benefit pension and other postretirement plans present the net periodic benefit costs in their income statement and requires that the service cost component of net periodic benefit costs be presented in the same line items as other employee compensation costs. The other components of net periodic benefit costs must be presented separately from the line items that include the service cost and outside of the income from operations subtotal.
As required by the standard, the Company adopted the update on July 1, 2018, retrospectively to July 1, 2016, which resulted in an increase in production, distribution, and editorial expenses of $0.8 million and $1.6 million and a decrease in selling, general, and administrative expenses of $0.2 million and $0.4 million, for the three and six months ended December 31, 2017, respectively. For the three and six months ended December 31, 2017, non-operating income, net was increased by $0.6 million and $1.2 million, respectively. The Company elected the practical expedient allowed by the update and utilized previously disclosed components of net periodic benefit costs from the pension and other postretirement benefit plan note in the June 30, 2018, Form 10-K. For the three and six months ended December 31, 2018, the implementation of this guidance resulted in an increase in selling, general, and administrative expenses and an increase in non-operating income, net of $3.9 million and $7.8 million, respectively, compared to that which would have been reported under previous guidance.
9
ASU 2017-09—In May 2017, the FASB issued additional guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under this guidance, an entity does not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions, and classification as an equity or liability instrument are the same immediately before and after the change. This guidance was adopted in the first quarter of fiscal 2019. The adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements.
ASU 2018-15—In August 2018, the FASB issued guidance on accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The guidance is effective for the Company beginning in the first quarter of fiscal 2021 with early adoption permitted. The amendments in the update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance prospectively, effective July 1, 2018. The adoption did not have a material impact on the Company's condensed consolidated financial statements.
In August 2018, the SEC issued a final rule that amends certain of its disclosure requirements. Specifically, the final rule modifies or eliminates disclosures that are redundant, duplicative, overlapping, outdated, or superseded in light of other SEC or U.S. GAAP disclosure requirements or changes in the information environment. Several aspects of the final rule are applicable to the Company but do not have a material impact on the Company's consolidated financial statements. The amendments were effective November 5, 2018, and were implemented in the first quarter of fiscal 2019.
Pending Accounting Pronouncements—
ASU 2016-02—In February 2016, the FASB issued an accounting standards update that replaces existing lease accounting standards. The new standard requires lessees to recognize on the balance sheet a right-of use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. Treatment of lease payments in the statement of earnings and statement of cash flows is relatively unchanged from previous guidance. This standard is required to be applied using a modified retrospective approach, which gives the option of applying the new guidance as of the effective date with enhanced disclosure requirements for comparative periods presented under prior lease guidance, or applying the new standard at the beginning of the earliest comparative period presented. The FASB continues to issue amendments to further clarify provisions of this guidance. The standard, including the amendments made since initial issuance, is effective for the Company beginning July 1, 2019, with early adoption permitted. The Company is currently in the process of evaluating our existing lease portfolios, including accumulating all of the necessary information required to properly account for the leases under the new standard. As such, the Company is currently evaluating the effect the guidance will have on the Company's consolidated financial statements.
ASU 2018-13—In August 2018, the FASB issued an accounting standards update which changes the fair value measurement disclosure requirements. The update removes, modifies, and adds certain additional disclosures. The effective date is the first quarter of fiscal 2021, with early adoption permitted for any eliminated or modified disclosures. The adoption of this guidance requires a change in disclosures only and is not expected to have an impact on the Company's consolidated financial statements.
ASU 2018-14—In August 2018, the FASB issued an accounting standards update which adds, removes, and modifies disclosure requirements related to defined benefit pension and other postretirement plans. The update amends only annual disclosure requirements. Retrospective adoption of the update is required in fiscal 2022 with early adoption permitted. The adoption of this guidance requires a change in disclosures only and is not expected to have an impact on the Company's consolidated financial statements.
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2. Acquisition
On January 31, 2018, Meredith completed the acquisition of all the outstanding shares of Time Inc. (Time). The fair values of the assets acquired and liabilities assumed were based on management’s preliminary estimates of the fair values of Time’s net assets. The estimated fair values of net assets and resulting goodwill are subject to the Company finalizing its analysis of the fair value of Time’s assets and liabilities as of the acquisition date, and are subject to change pending the final valuation of these assets and liabilities. In addition, information unknown at the time of the Time acquisition could result in adjustments to the respective fair values and resulting goodwill. Differences between the preliminary and final estimated fair values could be material. As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company will refine its estimates of fair value and reallocate the purchase price.
In the first six months of fiscal 2019, the Company recorded purchase price allocation adjustments relating to the Time acquisition that increased goodwill by $38.9 million, reduced assets held-for-sale by $32.6 million and increased deferred income tax liabilities by $6.3 million. These adjustments resulted from new information about facts and circumstances that existed at the time of the acquisition. Estimated fair values of assets held-for-sale are preliminary and are expected to be finalized upon completion of the sales, which are expected to occur within fiscal 2019. See additional information for assets held-for-sale in Note 4.
3. Inventories
Major components of inventories are summarized below.
(In millions) | December 31, 2018 | June 30, 2018 | ||||||
Raw materials | $ | 39.7 | $ | 32.1 | ||||
Work in process | 17.5 | 9.6 | ||||||
Finished goods | 2.4 | 2.5 | ||||||
Inventories | $ | 59.6 | $ | 44.2 | ||||
4. Assets Held for Sale, Discontinued Operations, and Dispositions
Assets Held-for-Sale and Discontinued Operations
The Company announced after the acquisition of Time that it was exploring the sale of the TIME, Sports Illustrated, Fortune, and Money and affiliated brands and its investment in Viant Technology LLC (Viant). The TIME and Fortune brands were sold during the second quarter of fiscal 2019. Management expects sales of the remaining brands and Viant to close during fiscal 2019.
In accordance with accounting guidance, a business that, on acquisition, or within a short period following the acquisition (usually within three months), meets the criteria to be classified as held-for-sale is considered a discontinued operation. As all of the required criteria for held-for-sale classification were met, the assets and liabilities related to these operations were included as assets held-for-sale and liabilities associated with assets held-for-sale in the Condensed Consolidated Balance Sheets as of June 30, 2018. As the sale of the TIME and Fortune brands closed during the second quarter of fiscal 2019, only the assets and liabilities of Sports Illustrated and affiliated brands, Money, and Viant were included in assets held-for-sale and liabilities associated with assets held-for-sale as of December 31, 2018. The assets and liabilities that are deemed held-for-sale are classified as current based on the anticipated disposal date. The revenue and expenses of those brands and Viant for the periods held for sale were included in the loss from discontinued operations, net of income taxes line on the Condensed Consolidated Statements of Earnings. All discontinued operations relate to the national media segment.
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The following table presents the major components which are included in assets held-for-sale and liabilities associated with assets held-for-sale.
(in millions) | December 31, 2018 | June 30, 2018 | ||||
Current assets | ||||||
Cash and cash equivalents | $ | 2.7 | $ | 2.3 | ||
Accounts receivable, net | 72.6 | 94.6 | ||||
Inventories | 0.4 | 1.1 | ||||
Other current assets | 33.7 | 9.4 | ||||
Total current assets | 109.4 | 107.4 | ||||
Net property, plant, and equipment | 12.3 | 14.1 | ||||
Other assets | 15.3 | 1.0 | ||||
Intangible assets, net | 46.1 | 113.1 | ||||
Goodwill | 142.8 | 477.5 | ||||
Total assets held-for-sale | $ | 325.9 | $ | 713.1 | ||
Current liabilities | ||||||
Accounts payable | $ | 36.9 | $ | 45.2 | ||
Accrued expenses and other liabilities | 11.3 | 15.1 | ||||
Current portion of unearned revenues | 71.5 | 109.4 | ||||
Total current liabilities | 119.7 | 169.7 | ||||
Unearned revenues | 35.7 | 28.0 | ||||
Other noncurrent liabilities | 0.5 | 0.7 | ||||
Total liabilities associated with assets held-for-sale | $ | 155.9 | $ | 198.4 | ||
The Company does not allocate interest to discontinued operations unless the interest is directly attributable to the discontinued operations or is interest on debt that is required to be repaid as a result of the disposal transaction. Interest expense included in discontinued operations reflects an estimate of interest expense and extinguishment loss related to the debt that was repaid with the proceeds from the sales of the TIME and Fortune brands and interest expense on debt that will be repaid with the proceeds from the sales of the Sports Illustrated and affiliated brands, Money, and the investment in Viant.
Amounts applicable to discontinued operations in the Condensed Consolidated Statements of Earnings are as follows:
Periods ended December 31, 2018, | Three Months | Six Months | |||||
(In millions except per share data) | |||||||
Revenues | $ | 132.8 | $ | 258.3 | |||
Costs and expenses | (112.5 | ) | (230.1 | ) | |||
Interest expense | (9.5 | ) | (16.1 | ) | |||
Earnings before income taxes | 10.8 | 12.1 | |||||
Income taxes | (79.2 | ) | (79.5 | ) | |||
Loss from discontinued operations, net of income taxes | $ | (68.4 | ) | $ | (67.4 | ) | |
Loss per share from discontinued operations | |||||||
Basic | $ | (1.51 | ) | $ | (1.49 | ) | |
Diluted | (1.44 | ) | (1.43 | ) | |||
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The discontinued operations did not have depreciation, amortization, or significant non-cash investing items for the six months ended December 31, 2018. Share-based compensation expense related to discontinued operations of $1.4 million is included in the calculation of net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2018.
Dispositions
On October 31, 2018, Meredith closed on the sale of the TIME brand to an unrelated third party for $190.0 million in cash. On December 21, 2018, Meredith closed on the sale of the Fortune brand to an unrelated third party for $150.0 million in cash. As the assets and liabilities disposed of were classified as held for sale and recorded at a fair value equal to the selling price, there were no pre-tax gains or losses recognized on the sales. Meredith will continue to provide accounting, finance, human resources, information technology, and other similar support services for a short period of time under Transition Services Agreements (TSA) with each buyer. In addition, Meredith will continue to provide consumer marketing, subscription fulfillment, paper purchasing, printing, and other services under Outsourcing Agreements (OA) with each buyer. The services to be performed under the OAs have varying terms ranging from 1 to 5 years. Income of $1.0 million, earned from performing services under the OAs, is recorded in the other revenue line while income of $2.5 million earned from performing services under the TSAs is recorded as a reduction of selling, general, and administrative expenses line in the Condensed Consolidated Statements of Earnings for the three months ended December 31, 2018.
On July 1, 2017, Meredith's national media segment sold a 70 percent interest in Charleston Tennis LLC, which operates the Family Circle Tennis Center, to an unrelated third party. In return, Meredith received $0.6 million in cash and a note receivable for $8.5 million. The note receivable was due in annual installments over a period of 8 years. At June 30, 2018, there was $3.2 million in unamortized discount and an allowance of $3.0 million recorded against the note. This transaction generated a gain of $3.3 million, which was recorded in the acquisition, disposition, and restructuring related activities line of the Condensed Consolidated Statements of Earnings. Of this gain, $1.0 million related to the remeasurement of the retained investment. As Meredith retained a 30 percent interest, had a seat on the board, and had approval rights over certain limited matters, Meredith accounted for this investment under the equity method of accounting.
In September 2018, Meredith sold its remaining 30 percent interest in Charleston Tennis LLC to an unrelated third party. In return, Meredith received cash of $13.3 million, of which $5.1 million was for the Company's remaining 30 percent interest and $8.2 million was repayment of the principal and interest accrued on the note receivable recorded upon the Company's sale of a 70 percent interest in July 2017. The Company recognized a gain on the sale of $10.4 million, of which $4.1 million represented a gain on the Company's 30 percent interest and is recorded in the non-operating income, net line of the Condensed Consolidated Statements of Earnings, while the remainder is recorded in the acquisition, disposition, and restructuring related activities line of the Condensed Consolidated Statements of Earnings, as such represents recovery of a previously impaired note receivable.
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5. Intangible Assets and Goodwill
Intangible assets consisted of the following:
December 31, 2018 | June 30, 2018 | |||||||||||||||||||||||
(In millions) | Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
Intangible assets | ||||||||||||||||||||||||
subject to amortization | ||||||||||||||||||||||||
National media | ||||||||||||||||||||||||
Advertiser relationships | $ | 213.4 | $ | (66.8 | ) | $ | 146.6 | $ | 212.3 | $ | (41.1 | ) | $ | 171.2 | ||||||||||
Publisher relationships | 125.0 | (16.4 | ) | 108.6 | 125.0 | (7.4 | ) | 117.6 | ||||||||||||||||
Partner relationships | 95.0 | (14.6 | ) | 80.4 | 95.0 | (6.6 | ) | 88.4 | ||||||||||||||||
Customer relationships | 67.5 | (30.2 | ) | 37.3 | 67.5 | (14.0 | ) | 53.5 | ||||||||||||||||
Other | 22.0 | (13.5 | ) | 8.5 | 22.0 | (11.9 | ) | 10.1 | ||||||||||||||||
Local media | ||||||||||||||||||||||||
Network affiliation agreements | 229.3 | (151.9 | ) | 77.4 | 229.3 | (148.6 | ) | 80.7 | ||||||||||||||||
Advertiser relationships | 12.5 | (3.8 | ) | 8.7 | 25.0 | (3.5 | ) | 21.5 | ||||||||||||||||
Retransmission agreements | 27.9 | (17.0 | ) | 10.9 | 27.9 | (14.9 | ) | 13.0 | ||||||||||||||||
Other | 1.7 | (1.0 | ) | 0.7 | 1.7 | (0.8 | ) | 0.9 | ||||||||||||||||
Total | $ | 794.3 | $ | (315.2 | ) | 479.1 | $ | 805.7 | $ | (248.8 | ) | 556.9 | ||||||||||||
Intangible assets not | ||||||||||||||||||||||||
subject to amortization | ||||||||||||||||||||||||
National media | ||||||||||||||||||||||||
Trademarks | 765.3 | 765.3 | ||||||||||||||||||||||
Internet domain names | 7.8 | 7.8 | ||||||||||||||||||||||
Local media | ||||||||||||||||||||||||
FCC licenses | 675.2 | 675.2 | ||||||||||||||||||||||
Total | 1,448.3 | 1,448.3 | ||||||||||||||||||||||
Intangible assets, net | $ | 1,927.4 | $ | 2,005.2 | ||||||||||||||||||||
Amortization expense was $77.6 million and $9.2 million for the six months ended December 31, 2018, and 2017, respectively. Annual amortization expense for intangible assets is expected to be as follows: $155.0 million in fiscal 2019, $140.3 million in fiscal 2020, $86.9 million in fiscal 2021, $41.0 million in fiscal 2022, and $39.0 million in fiscal 2023.
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Changes in the carrying amount of goodwill were as follows:
Six months ended December 31, | 2018 | 2017 | ||||||||||||||||||||||
(In millions) | National Media | Local Media | Total | National Media | Local Media | Total | ||||||||||||||||||
Balance at beginning of period | ||||||||||||||||||||||||
Goodwill | $ | 1,800.0 | $ | 115.8 | $ | 1,915.8 | $ | 943.8 | $ | 80.6 | $ | 1,024.4 | ||||||||||||
Accumulated impairment losses | — | — | — | (116.9 | ) | — | (116.9 | ) | ||||||||||||||||
Total goodwill | 1,800.0 | 115.8 | 1,915.8 | 826.9 | 80.6 | 907.5 | ||||||||||||||||||
Activity during the period | ||||||||||||||||||||||||
Acquisition adjustments | 38.9 | 0.9 | 39.8 | 0.1 | — | 0.1 | ||||||||||||||||||
Balance at end of period | ||||||||||||||||||||||||
Goodwill | 1,838.9 | 116.7 | 1,955.6 | 943.9 | 80.6 | 1,024.5 | ||||||||||||||||||
Accumulated impairment losses | — | — | — | (116.9 | ) | — | (116.9 | ) | ||||||||||||||||
Total goodwill | $ | 1,838.9 | $ | 116.7 | $ | 1,955.6 | $ | 827.0 | $ | 80.6 | $ | 907.6 | ||||||||||||
6. Restructuring Accrual
During fiscal 2018 and the six months of 2019, management committed to and continued to execute upon several performance improvement plans, including those related to the integration of Time as well as other smaller restructurings.
As part of the Company's plan to realize cost synergies from the Time acquisition, management committed to a performance improvement plan to reduce headcount, which is anticipated to be substantially complete by January 2019. In addition to the Time acquisition related plan under which restructuring costs continue to be incurred in fiscal 2019, additional performance improvement plans were made and executed upon in the first quarter of fiscal 2019 related to the strategic decisions to merge Cooking Light magazine with EatingWell, transition Coastal Living from a subscription magazine to a special interest publication, to consolidate much of the local media's digital advertising functions with MNI Targeted Media, and to outsource newsstand sales and marketing operations. During the second quarter of fiscal 2019, the Company completed the closure of Time Customer Service (TCS) and substantially completed consolidating New York office space. The fiscal 2019 performance improvement plans affected approximately 250 people, approximately 175 in the national media segment, approximately 25 in the local media segment, and the remainder in unallocated corporate. In connection with these plans, in the second quarter and first six months of fiscal 2019, the Company recorded pre-tax restructuring charges of $22.8 million and $35.3 million, respectively, for severance and related benefit costs related to the involuntary termination of employees and $7.6 million and $17.7 million, respectively, in other accruals related primarily to the closure of TCS and the consolidation of office space. These costs are recorded in the acquisition, disposition, and restructuring related activities line of the Condensed Consolidated Statements of Earnings.
Details of the severance and related benefit costs by segment for this performance improvement plan are as follows:
Three Months | Six Months | |||||||||||
Periods ended December 31, 2018, | Amount Accrued in the Period | Amount Accrued in the Period | Total Amount Expected to be Incurred | |||||||||
(in millions) | ||||||||||||
National media | $ | 17.3 | $ | 23.3 | $ | 23.9 | ||||||
Local media | 0.2 | 1.7 | 2.2 | |||||||||
Unallocated Corporate | 5.3 | 10.3 | 10.3 | |||||||||
$ | 22.8 | $ | 35.3 | $ | 36.4 | |||||||
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During the second quarter of fiscal 2018, management committed to a performance improvement plan including the strategic decision to no longer publish Fit Pregnancy and Baby magazine as a standalone title, rather including it as a feature within Parents magazine and other restructurings. These actions resulted in selected workforce reductions primarily in the national media group. In connection with this plan, the Company recorded pre-tax restructuring charges totaling $3.1 million including $3.0 million for severance and related benefit costs related to the involuntary termination of employees and other write-downs of $0.1 million. The majority of severance costs were paid out by December 31, 2018. The plan affected approximately 90 employees. These costs are recorded in the acquisition, disposition, and restructuring related activities line of the Condensed Consolidated Statements of Earnings.
Details of changes in the Company's restructuring accrual are as follows:
Employee Terminations | Other Exit Costs | Total | Employee Terminations | |||||||||||||
Six months ended December 31, | 2018 | 2018 | 2018 | 2017 | ||||||||||||
(In millions) | ||||||||||||||||
Balance at beginning of period | $ | 101.3 | $ | 6.3 | $ | 107.6 | $ | 8.7 | ||||||||
Accruals | 35.3 | 17.7 | 53.0 | 3.0 | ||||||||||||
Cash payments | (51.3 | ) | (11.0 | ) | (62.3 | ) | (5.0 | ) | ||||||||
Other accruals | (1.5 | ) | — | (1.5 | ) | — | ||||||||||
Reversal of excess accrual | (4.1 | ) | (1.5 | ) | (5.6 | ) | (0.3 | ) | ||||||||
Balance at end of period | $ | 79.7 | $ | 11.5 | $ | 91.2 | $ | 6.4 | ||||||||
As of December 31, 2018, of the $91.2 million liability, $81.6 million was classified as current liabilities on the Condensed Consolidated Balance Sheet, with the remaining $9.6 million classified as noncurrent liabilities. Amounts classified as noncurrent liabilities are expected to be paid through 2020 and relate primarily to severance costs.
7. Long-term Debt
Long-term debt consisted of the following:
December 31, 2018 | June 30, 2018 | |||||||||||||||||
(In millions) | Principal Balance | Unamortized Discount and Debt Issuance Costs | Carrying Value | Principal Balance | Unamortized Discount and Debt Issuance Costs | Carrying Value | ||||||||||||
Variable-rate credit facility | ||||||||||||||||||
Senior credit facility term loan, due 1/31/2025 | $ | 1,277.5 | $ | (20.3 | ) | $ | 1,257.2 | $ | 1,795.5 | $ | (33.4 | ) | $ | 1,762.1 | ||||
Revolving credit facility of $350 million, due 1/31/2023 | — | — | — | — | — | — | ||||||||||||
Senior Unsecured Notes | ||||||||||||||||||
6.875% senior notes, due 2/1/2026 | 1,272.9 | (22.7 | ) | 1,250.2 | 1,400.0 | (26.5 | ) | 1,373.5 | ||||||||||
Total long-term debt | 2,550.4 | (43.0 | ) | 2,507.4 | 3,195.5 | (59.9 | ) | 3,135.6 | ||||||||||
Current portion of long-term debt | — | — | — | (18.0 | ) | 0.3 | (17.7 | ) | ||||||||||
Long-term debt | $ | 2,550.4 | $ | (43.0 | ) | $ | 2,507.4 | $ | 3,177.5 | $ | (59.6 | ) | $ | 3,117.9 | ||||
The variable-rate senior credit facility term loan (Term Loan B) matures in 2025 and was originally scheduled to amortize at 1.0 percent per annum in equal quarterly installments until the final maturity date, at which time the
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remaining principal and interest are due and payable. However, as $200.0 million was paid on the Term Loan B in the first quarter of fiscal 2019, there are no future amortization requirements under the credit agreement.
Additional payments totaling $318.0 million were made on the Term Loan B in the second quarter of fiscal 2019. In addition to the Term Loan B repayments that occurred in the first half of fiscal 2019, the Company also repurchased $127.1 million of its senior unsecured notes maturing in 2026 (2026 Senior Notes). These payments were all made in advance of scheduled maturities and thus were considered extinguishments of the debt. Therefore, as a result of these prepayments, an extinguishment loss of $13.0 million was recognized in the second quarter of fiscal 2019. This extinguishment loss included a premium paid on the repurchase of the 2026 Senior Notes of $1.8 million.
The original interest rate under the Term Loan B was based on the London Interbank Offered Rate (LIBOR) plus a spread of 3.0 percent. The Company repriced the Term Loan B effective October 26, 2018. The new interest rate under the Term Loan B is based on LIBOR plus a spread of 2.75 percent as of the repricing date until maturity or when the Company's leverage ratio drops below 2.25 to 1, at which time the spread will decrease to 2.5 percent.
The accounting for the repricing of the Term Loan B was evaluated on a creditor-by-creditor basis to determine whether the transaction should be accounted for as a modification or extinguishment. Certain creditors chose not to participate in the repricing and ceased being creditors of the Company. As a result of these extinguishments, the Company recorded a debt extinguishment loss of $2.1 million in the second quarter of fiscal 2019 to write off the pro-rata amount of unamortized debt discount and deferred issuance costs related to these creditors. For the remainder of the creditors, this transaction was accounted for as a modification because on a creditor-by-creditor basis, the difference between the present value of the cash flows to those creditors before and after the repricing was less than 10 percent.
Of the total debt extinguishment loss of $15.1 million, $9.3 million is recorded in the interest expense, net line on the Condensed Consolidated Statements of Earnings. The remaining $5.8 million is recorded in the loss from discontinued operations, net of income taxes line on the Condensed Consolidated Statements of Earnings as this portion of the extinguishment loss related to debt repaid with the proceeds from the sale of assets held-for-sale. Refer to Note 4 for further discussion.
8. Income Taxes
For the second quarter and first six months of fiscal 2019, Meredith recorded tax expense on earnings from continuing operations of $0.2 million and $3.8 million, respectively. This compares to a tax benefit recorded by the Company of $127.2 million and $108.9 million for the second quarter and first six months of fiscal 2018, respectively.
During the second quarter of fiscal 2019, the Company engaged in a restructuring of its international operations for United States (U.S.) tax purposes, triggering deductions that resulted in a $23.5 million permanent U.S. tax benefit, which decreased income tax expense in the second quarter and first six months of fiscal 2019. In addition, the effective tax rate for the six months ended December 31, 2018, was lower than the prior-year period primarily due to reduction in the statutory federal tax rate resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform Act).
Also as a result of the Tax Reform Act, Meredith remeasured its deferred tax assets, deferred tax liabilities, and tax reserves during second quarter of fiscal 2018, which resulted in a net tax benefit being recorded in the prior-year periods.
In December 2017, the SEC staff issued Staff Accounting Bulletin (SAB) No. 118, which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared, or analyzed sufficiently to complete its accounting for the effect of the changes in the Tax Reform Act. The Company accounted for the effects of the Tax Reform Act in its fiscal 2018 second quarter. During the six
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months ended December 31, 2018, the Company did not make any adjustments to the provisional estimates previously recorded as a result of the Tax Reform Act. The measurement period allowed by SAB 118 is now closed.
9. Commitments and Contingencies
Lease Guarantee
In March 2018, the Company sold Time Inc. (UK) Ltd. (TIUK), a United Kingdom (U.K.) multi-platform publisher. In connection with the sale of TIUK, the Company recognized a liability in other noncurrent liabilities in connection with a lease of office space in the U.K. through December 31, 2025, which is guaranteed by the Company. The lease guarantee liability is being amortized into earnings over the life of the lease. The carrying value of the lease guarantee was $8.3 million at December 31, 2018. The Company is only obligated to pay for the lease guarantee in the event that TIUK fails to perform under the lease agreement. If TIUK fails to perform under the lease agreement, the maximum lease guarantee obligation for which the Company would be liable is approximately $71.0 million as of December 31, 2018. The Company has assessed that it is unlikely that TIUK will not perform its obligations under the lease.
The Company guarantees two other leases of entities previously sold, one through January 2023 and another through November 2030. The carrying value of those leases, which is recorded in other noncurrent liabilities on the Condensed Consolidated Balance Sheets, was $2.9 million at December 31, 2018, and the maximum obligation for which the Company would be liable if the primary obligors fail to perform under the lease agreements is $16.2 million. The Company has assessed that it is unlikely that the primary obligors will not perform their obligations under the leases.
Legal Proceedings
In the ordinary course of business, the Company is a defendant in or party to various legal claims, actions, and proceedings. These claims, actions, and proceedings are at varying stages of investigation, arbitration, or adjudication, and involve a variety of areas of law. Time, which is now a wholly-owned subsidiary, previously reported on, and the Company updates below, the following legal proceedings.
On October 26, 2010, the Canadian Minister of National Revenue denied the claims by Time Inc. Retail (formerly Time/Warner Retail Sales & Marketing, Inc.) (TIR) for input tax credits in respect of goods and services tax that TIR had paid on magazines it imported into and had displayed at retail locations in Canada during the years 2006 to 2008, on the basis that TIR did not own those magazines and issued Notices of Reassessment in the amount of approximately C$52.0 million. On January 21, 2011, TIR filed an objection to the Notices of Reassessment with the Chief of Appeals of the Canada Revenue Agency (CRA), arguing that TIR claimed input tax credits only in respect of goods and services tax it actually paid and, regardless of whether its payment of the goods and services tax was appropriate or in error, it is entitled to a rebate for such payments. On September 13, 2013, TIR received Notices of Reassessment in the amount of C$26.9 million relating to the disallowance of input tax credits claimed by TIR for goods and services tax that TIR had paid on magazines it imported into and had displayed at retail locations in Canada during the years 2009 to 2010. On October 22, 2013, TIR filed an objection to the Notices of Reassessment received on September 13, 2013 with the Chief of Appeals of the CRA, asserting the same arguments made in the objection TIR filed on January 21, 2011. Beginning in 2015, the collections department of the CRA requested payment of both assessments plus accrued interest or the posting of sufficient security. In each instance, TIR responded by stating that collection should remain stayed pending resolution of the issues raised by TIR’s objection. On February 8, 2016, the Company filed an application for a remission order with the International Trade Policy Division of Finance Canada to seek relief from the assessments and the CRA’s collection efforts. The matter is currently subject to a proceeding in the Tax Court of Canada to resolve the issue of whether TIR or the publishers are entitled to the input tax credits. On March 31, 2017, the Company and the CRA jointly proposed a timetable for the completion of certain pre-trial steps related to this matter, which was approved by the Tax Court. In accordance with the timetable, on April 28, 2017, TIR filed an Amended Notice of Appeal of the assessments. In June 2017, the CRA filed a Reply to TIR's Amended Notice of Appeal and the Company filed an answer to the CRA reply in July
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2017. The parties are currently engaged in discovery. The Company denies liability and intends to vigorously defend itself and pursue all defenses available to eliminate or mitigate liability.
In July 2017 and November 2017, Time received subpoenas from the Enforcement Division of the staff of the SEC requiring Time to provide documents relating to its accounting for goodwill and asset impairments, restructuring and severance costs, and its analysis and reporting of Time's segments. The Company is cooperating with the SEC in the investigation. Management cannot at this time predict the eventual scope or outcome of this matter.
The Company establishes an accrued liability for specific matters, such as a legal claim, when the Company determines that both a loss is probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. In view of the inherent difficulty of predicting the outcome of litigation, claims, and other matters, the Company often cannot predict what the eventual outcome of a pending matter will be, or what the timing or results of the ultimate resolution of a matter will be. Accordingly, for the matters described above, the Company is unable to predict the outcome or reasonably estimate a range of possible loss.
10. Fair Value Measurements
The Company estimates the fair value of financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts the Company would realize upon disposition.
The fair value hierarchy consists of three broad levels of inputs that may be used to measure fair value, which are described below:
• | Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; | ||
• | Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | ||
• | Level 3 | Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. | ||
The following table sets forth the carrying value and the estimated fair value of the Company's financial instruments not measured at fair value on a recurring basis:
December 31, 2018 | June 30, 2018 | |||||||||||||||
(In millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Broadcast rights payable | $ | 24.4 | $ | 22.3 | $ | 29.7 | $ | 27.4 | ||||||||
Total long-term debt | 2,507.4 | 2,486.7 | 3,135.6 | 3,179.8 | ||||||||||||
The fair value of broadcast rights payable was determined utilizing Level 3 inputs. The fair value of total long-term debt is based on information obtained from a non-active market, therefore is included as a Level 2 measurement.
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The following table sets forth the assets and liabilities measured at fair value on a recurring basis:
(In millions) | December 31, 2018 | June 30, 2018 | ||||||
Accrued expenses and other liabilities | ||||||||
Contingent consideration | $ | 5.1 | $ | 24.6 | ||||
Deferred compensation plans | 4.5 | 8.4 | ||||||
Other noncurrent liabilities | ||||||||
Contingent consideration | 0.9 | 0.8 | ||||||
Deferred compensation plans | 18.7 | 21.0 | ||||||
The fair value of deferred compensation plans is derived from quotes from observable market information, and thus represents a Level 2 measurement. The fair value of contingent consideration is based on significant inputs not observable in the market and thus represent a Level 3 measurement.
Details of changes in the Level 3 fair value of contingent consideration, corporate airplanes that were held-for-sale, and certain trademarks are as follows:
Six months ended December 31, | 2018 | 2017 | |||||
(in millions) | |||||||
Contingent consideration | |||||||
Balance at beginning of period | $ | 25.4 | $ | 34.2 | |||
Payments | (19.3 | ) | (4.0 | ) | |||
Fair value adjustment of contingent consideration | (0.1 | ) | (1.3 | ) | |||
Balance at end of period | $ | 6.0 | $ | 28.9 | |||
Corporate airplanes, held-for-sale | |||||||
Balance at beginning of period | $ | — | $ | 1.9 | |||
Sale of corporate airplanes | — | (1.9 | ) | ||||
Balance at end of period | $ | — | $ | — | |||
Trademarks 1 | |||||||
Balance at beginning of period | $ | — | $ | 55.7 | |||
Impairment | — | (19.8 | ) | ||||
Balance at end of period | $ | — | $ | 35.9 | |||
1 Represents the fair value of certain national media trademarks as of December 31, 2017, which were partially impaired during the second quarter of fiscal 2018. These trademarks are not considered to be measured at fair market value as of December 31, 2018. | |||||||
The fair value adjustment of contingent consideration is the change in the estimated earn out payments based on projections of performance and the amortization of the present value discount. The fair value adjustment of contingent consideration is included in the selling, general, and administrative line on the Condensed Consolidated Statements of Earnings.
The Company had two corporate airplanes which were marked to fair value in fiscal 2016 when the Company committed to a plan to sell them. The final sale took place in the first quarter of fiscal 2018.
During the second quarter of fiscal 2018, Meredith made the strategic decision to no longer publish Fit Pregnancy and Baby magazine as a standalone title, rather including it as a feature within Parents magazine. This decision was
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determined to be a triggering event requiring Meredith to evaluate the trademarks within the Parents Network for impairment. The fair value of the trademarks is determined based on significant inputs not observable in the market. The reduction in advertising revenue caused by the change to Fit Pregnancy and Baby magazine, as well as updated revenue projections for the Parents Network resulted in an impairment to the trademarks. As such, during the second quarter of fiscal 2018, the national media segment recorded a non-cash impairment charge of $19.8 million to partially impair the trademarks within the Parents Network. This impairment charge is recorded in the impairment of long-lived assets line in the Condensed Consolidated Statements of Earnings.
11. Revenue Recognition
Meredith disaggregates revenue from contracts with customers by types of goods and services. A reconciliation of disaggregated revenue to segment revenue (as provided in Note 15) is as follows.
Three months ended December 31, 2018 | National Media | Local Media | Intersegment Elimination | Total | ||||||||
(In millions) | ||||||||||||
Advertising related | ||||||||||||
Print | $ | 164.9 | $ | — | $ | — | $ | 164.9 | ||||
Non-political spot | — | 87.6 | — | 87.6 | ||||||||
Political spot | — | 65.8 | — | 65.8 | ||||||||
Digital | 122.0 | 4.0 | — | 126.0 | ||||||||
Third party sales | 16.1 | 28.7 | (0.2 | ) | 44.6 | |||||||
Total advertising related | 303.0 | 186.1 | (0.2 | ) | 488.9 | |||||||
Consumer related | ||||||||||||
Subscription | 162.9 | — | — | 162.9 | ||||||||
Retransmission | — | 74.1 | — | 74.1 | ||||||||
Newsstand | 43.3 | — | — | 43.3 | ||||||||
Affinity marketing | 22.7 | — | — | 22.7 | ||||||||
Licensing | 23.0 | — | — | 23.0 | ||||||||
Digital consumer driven | 10.8 | — | — | 10.8 | ||||||||
Total consumer related | 262.7 | 74.1 | — | 336.8 | ||||||||
Other | ||||||||||||
Projects based | 13.5 | — | — | 13.5 | ||||||||
Other | 12.1 | 2.2 | — | 14.3 | ||||||||
Total other | 25.6 | 2.2 | — | 27.8 | ||||||||
Total revenues | $ | 591.3 | $ | 262.4 | $ | (0.2 | ) | $ | 853.5 | |||
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Six months ended December 31, 2018 | National Media | Local Media | Intersegment Elimination | Total | ||||||||
(In millions) | ||||||||||||
Advertising related | ||||||||||||
Print | $ | 347.6 | $ | — | $ | — | $ | 347.6 | ||||
Non-political spot | — | 162.5 | — | 162.5 | ||||||||
Political spot | — | 101.9 | — | 101.9 | ||||||||
Digital | 206.6 | 7.9 | — | 214.5 | ||||||||
Third party sales | 33.2 | 52.7 | (0.8 | ) | 85.1 | |||||||
Total advertising related | 587.4 | 325.0 | (0.8 | ) | 911.6 | |||||||
Consumer related | ||||||||||||
Subscription | 298.8 | — | — | 298.8 | ||||||||
Retransmission | — | 147.4 | — | 147.4 | ||||||||
Newsstand | 82.3 | — | — | 82.3 | ||||||||
Affinity marketing | 46.0 | — | — | 46.0 | ||||||||
Licensing | 46.7 | — | — | 46.7 | ||||||||
Digital consumer driven | 16.8 | — | — | 16.8 | ||||||||
Total consumer related | 490.6 | 147.4 | — | 638.0 | ||||||||
Other | ||||||||||||
Projects based | 22.9 | — | — | 22.9 | ||||||||
Other | 33.3 | 4.4 | — | 37.7 | ||||||||
Total other | 56.2 | 4.4 | — | 60.6 | ||||||||
Total revenues | $ | 1,134.2 | $ | 476.8 | $ | (0.8 | ) | $ | 1,610.2 | |||
As a result of the adoption of ASC 606, the Company determined that certain barter revenue and expense will no longer be recognized. As a result, $1.9 million of the current portion of broadcast rights and the current portion of broadcast rights payable and $8.2 million of the noncurrent portion of broadcast rights and the noncurrent portion of broadcast rights payable were written off in the first quarter of fiscal 2019. Other impacts from the adoption of ASC 606 on the condensed consolidated financial statements were immaterial.
CONTRACT BALANCES
The timing of Meredith’s performance under its various contracts often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. A contract asset is recognized when a good or service is transferred to a customer and the Company does not have the contractual right to bill for the related performance obligations. A contract liability is recognized when consideration is received from the customer prior to the transfer of goods or services. Current portion of contract liabilities were $360.9 million at July 1, 2018 and $409.0 million at December 31, 2018, and are presented as current portion of unearned revenues on the Condensed Consolidated Balance Sheets. Noncurrent contract liabilities were $124.1 million and $189.3 million at July 1, 2018 and December 31, 2018, respectively, and are reflected as unearned revenues on the Condensed Consolidated Balance Sheets. Subscription revenue of $217.2 million recognized in the six months ended December 31, 2018, was in contract liabilities at the beginning of the period. An additional $1.9 million of revenue recognized in the first half of fiscal 2019 was related to the liability balance as of the beginning of the period.
NATURE OF PERFORMANCE OBLIGATIONS
At contract inception, Meredith assesses the obligations promised in its contracts with customers and identifies a performance obligation for each promise to transfer a good or service or bundle that is distinct. To identify the performance obligations, the Company considers all the promises in the contract, whether explicitly stated or implied based on customary business practices. For a contract that has more than one performance obligation, the
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Company allocates the total contract consideration to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when, or as, the performance obligations are satisfied and control is transferred to the customer.
Print Advertising—The Company provides advertisement placements in print media directly to advertisers or through advertising agencies. The Company’s performance obligations related to print advertising are satisfied when the magazine in which an advertisement appears is published, which is defined as an issue’s on-sale date. The customer is invoiced the agreed-upon price when the advertisements are published under normal industry trade terms. The agreed upon price is adjusted for estimated provisions for rebates, rate adjustments, and discounts. As part of the Company’s customary business practices, print advertising contracts include guaranteed circulation levels of magazines, referred to as rate base, and a number of sales incentives to its customers including volume discounts, rebates, bonus pages, etc. For all such contracts that include these types of variable consideration, the Company estimates such when determining the transaction price.
Non-political and Political Spot Advertising—The Company sells commercial time directly to political and non-political advertisers or through advertising agencies. The Company’s performance obligations related to spot advertising are satisfied when the advertisement is aired by the broadcasting station. Rates for spot advertising are influenced primarily by the market size, number and type of competitors, audience share, and audience demographics. The customer is invoiced the agreed-upon price at the end of the month in which the advertisements were aired under normal trade terms. Political spot advertisements require payment in advance of airing. The agreed upon price may be adjusted for estimated provisions for rebates, rate adjustments, and discounts. As part of the Company’s customary business practices, broadcast television advertising contracts may include gross rating points goals and/or sales incentives to its customers. For all such contracts that include these types of variable consideration, the Company estimates the variable consideration and factors in such an estimate when determining the transaction price.
Digital Advertising—The Company sells digital advertising inventory on its websites directly to advertisers or through advertising agencies. The Company’s performance obligations related to digital advertising are generally satisfied when the advertisement is run on owned or operated websites. The price for digital advertising is determined by an agreed-upon pricing model such as CPC (cost per click), CPM (cost per 1,000 impressions), or flat fees. Revenue from the sale of digital advertising space is recognized when the advertisements are delivered based on the respective pricing model or ratably over the contract period for flat fee advertisements. The customer is invoiced the agreed-upon price in the month following the month that the advertisements are delivered with normal trade terms. The agreed upon price is adjusted for estimated provisions for rebates, rate adjustments, and discounts. As part of the Company’s customary business practices, digital advertising contracts may include a guaranteed number of impressions and sales incentives to its customers including volume discounts, rebates, value added impressions, etc. For all such contracts that include these types of variable consideration, the Company estimates the variable consideration and factors in such an estimate when determining the transaction price.
Third-Party Sales—The Company sells a variety of advertising products to our advertising customers that are placed on third-party platforms. The Company’s performance obligations related to these sales are generally satisfied, and revenue is recognized, when the advertisement is run by the third parties, or a print product is placed on-sale, due to the Company's obligation to reach a targeted audience demographic. The transaction price represents the cost of the purchased media plus a mark-up. The customer is invoiced the agreed-upon price shortly after the advertisements appear under normal trade terms. The agreed upon price is adjusted for estimated provisions for rebates, rate adjustments, and discounts. As part of the Company’s customary business practices, contracts may include guaranteed audience targets and a number of sales incentives to its customers including volume discounts, rebates, value added impressions, etc. For all such contracts that include these types of variable consideration, the Company estimates the variable consideration in determining the transaction price.
Subscription—Meredith sells magazines, books, and online memberships to consumers through subscriptions. Each copy of a magazine and book is determined to be a distinct performance obligation that is satisfied when the publication is sent to the customer. Each online membership is determined to be a distinct performance obligation
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that is satisfied over the membership period, not exceeding twelve months. The majority of the Company’s subscription sales are prepaid at the time of order. Subscriptions may be canceled at any time for a refund of the price paid for remaining issues. As the contract may be canceled at any time for a full refund of the unserved copies or remaining membership period, the contract term is determined to be on an issue-to-issue basis, for magazines and books, and month-by-month for online memberships, as these contracts do not have substantive termination penalties. Revenues from subscriptions are deferred and recognized proportionately as subscribers are served. Some magazine subscription offers contain more than one magazine title in a bundle. Meredith allocates the total contract consideration to each distinct performance obligation, or magazine title, based on a standalone-selling price basis.
Retransmission—Meredith's local media segment has entered into agreements with cable, satellite, and telecommunications service providers for licenses to access Meredith’s television station signals for retransmission. These licenses are functional licenses under which revenue is recognized at a point-in-time when access to the completed content is granted to the service provider. The transaction price for retransmission agreements generally are on a per subscriber basis. The recognition pattern for retransmission contracts mirrors over-time revenue recognition as Meredith delivers the signal to the service provider, which represents completed content, on an on-going basis during the license period.
Newsstand—Meredith sells single copy magazines, or bundles of single copy magazines, to wholesalers for ultimate resale on newsstands primarily at major retailers and grocery/drug stores, and in digital form on tablets and other electronic devices. Publications sold to magazine wholesalers are sold with the right to receive credit from the Company for magazines returned to the wholesaler by retailers. Revenue is recognized on the issue's on-sale date as the date aligns most closely with the date that control is transferred to the customer. The Company bases its estimates for returns on historical experience and current marketplace conditions.
Affinity Marketing—Meredith partners with third parties to market and place magazine subscriptions for both Meredith titles and third-party publisher magazine titles. Meredith acts as an agent in sales of third-party magazine subscriptions and recognizes revenue in the net amount of consideration retained after paying the third-party publishers. Meredith assumes credit risk related to refunds on these sales, for which a reserve is established. The reserve is based on historical statistics at the time the cash is collected, which is after a risk-free trial period is over. Revenue from the acquisition of a subscriber is recognized when the subscriber name has been provided to the publisher and after any risk-free trial period has expired, if applicable.
Licensing—Meredith has entered into various licensing agreements that provide third-party partners the right to utilize the Company’s intellectual property. Licensing agreements include both symbolic and functional licenses. Symbolic licenses include direct-to-retail partnerships that create branded products based on the national media brands, a branded real estate program, and international magazine partnerships. Functional licenses in national media consist of content licensing. Revenues from symbolic licenses are in the form of a royalty based on the sale or usage of the branded product, which is recognized over time when the sale or use occurs under the sales or usage-based royalty exception. Revenues from functional licenses are recognized at a point-in-time when access to the completed content is granted to the partner.
Digital Consumer Driven—Various digital consumer products utilize Meredith brands to drive responses from individual customers resulting in the generation of revenue. Digital consumer driven revenue is primarily commission-based. It is earned as consumer responses are generated through various programs and delivered to the program's third-party sponsor. Revenue is recognized at the point-in-time Meredith has fully satisfied the obligations to the third-party sponsor.
Projects Based—Meredith’s national media segment contains several business lines that are business-to-business and project based. Such revenue may relate to any one or combination of the following activities; custom publishing, content strategy and development, email marketing, social media, database marketing, and search engine optimization. Revenue earned under the OA with the purchasers of the TIME and Fortune brands is also considered to be projects based. The products and services delivered under these contracts are customized to each client and therefore, do not have alternative uses to Meredith or other clients. As a result, revenue under such
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contracts are generally recognized over time based on project milestones until the delivery of the final product to the customer.
Other—Other revenue primarily includes revenues derived from third-party magazine fulfillment and third-party newsstand sales and marketing support, both of these services are expected to cease by the end of the fiscal year. The remaining revenues within this category are management fees and revenues from other small programs, which are generally recognized at a point-in-time as the performance obligations are transferred to the customer.
SIGNIFICANT JUDGMENTS - TIMING OF SATISFACTION OF PERFORMANCE OBLIGATIONS
Point-in-Time Performance Obligations—For performance obligations related to sales of print, political and non-political spot, and certain digital advertising space, the Company determines that the customer can direct the use of and obtain substantially all the benefits from the advertising products on the issue’s on-sale date, when aired by the broadcasting station, or as the digital impressions are served. For performance obligations related to sales of magazines through subscriptions, the customer obtains control when each magazine issue is mailed to the customer on or before the issue’s on-sale date. For sales of single copy magazines on newsstands, revenue is recognized on the issue’s on-sale date as the date aligns most closely with the date that control is transferred to the customer. Exclusive content licensing is a functional license under which revenue is recognized at a point-in-time when the access is granted to the customer as that is the point at which the customer gains access to completed content. Retransmission agreements also represent a functional license and are recognized at a point-in-time. However, as the content licensed is continuously added, the revenue recognition pattern mimics an over-time recognition.
Finally, revenue from acquisition of subscribers to non-Meredith magazine titles by the Company's affinity marketers is recognized at a point-in-time, once the subscriber name has been provided to the third-party publisher. Similarly, revenue from commission-based digital consumer generated sources is recognized at a point-in-time once Meredith has fulfilled its obligation to connect a consumer to a third-party product or service.
Determining when control transfers requires management to make judgments that affect the timing of revenue recognized. The Company has determined that recognition of revenue at a point-in-time for these products and services provides a faithful depiction of the transfer of control to the customer.
Over-Time Performance Obligations—For performance obligations related to sales of project based and certain digital advertising space, the Company transfers control and recognizes revenue over time by measuring progress towards complete satisfaction using the most appropriate method, i.e. either the "Input Method" or the "Output Method."
For performance obligations related to digital advertising, the Company satisfies its performance obligations on some flat-fee digital advertising placements over time using a time-elapsed output method.
Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. The Company has determined that the above method provides a faithful depiction of the transfer of goods or services to the customer. For performance obligations recognized using a time-elapsed output method, the Company’s efforts are expended evenly throughout the period.
The Company made various judgments that affect the amount and timing of revenue from contracts with customers. Judgments exercised in determining the transaction price and satisfaction of performance obligations are discussed within this note.
Determining the Transaction Price—Certain advertising contracts contain variable components of the transaction price, such as volume discounts and rebates. Meredith has sufficient historical data and has established processes to reliably estimate these variable components of the transaction price.
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Certain spot advertising contracts contain a guarantee of ratings performance that requires Meredith to compensate the advertiser with additional advertising if the guaranteed ratings are not met. Meredith has established a reserve based on the rating points due advertisers at the end of each fiscal quarter valued at the average station cost per point.
The Company typically does not offer any type of variable consideration in standard magazine subscription contracts. For these contracts, the transaction price is fixed upon establishment of the contract that contains the final terms of the sale including description, quantity and price of each subscription purchased. Therefore, the Company does not estimate variable consideration or perform a constraint analysis for these contracts.
A right of return exists for newsstand contracts. Meredith has sufficient historical data to estimate the final amount of returns and reduces the transaction price at contract inception for the expected return reserve.
Revenue from symbolic licenses is based on a percentage of revenue generated through the sale of the branded products representing a sales-or-usage-based royalty. Therefore, revenue is recorded based on actual results when the sale or usage occurs rather than estimated at contract inception. Revenue under contracts that contain minimum guarantees to be paid by the retailer to Meredith is recognized straight line each month until the royalty exceeds the guarantee at which time the excess is recognized. There is no variable consideration related to functional licenses.
Variable consideration related to project based revenue is limited to discounts for overages and reimbursement of out of pocket costs that are not separable from the performance obligation. Both are evaluated or estimated at contract inception and throughout the contract, based on similar projects and historical experience and are considered in the transaction price.
Meredith’s contracts for affinity marketing, and digital consumer generated revenue do not contain variable consideration.
Meredith’s contracts do not have significant financing components.
Estimating Standalone-Selling Prices—For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation on a relative standalone-selling price basis. The standalone-selling price is the price at which the Company would sell a promised good or service separately to the customer. In situations in which an obligation is bundled with other obligations and the total amount of consideration does not reflect the sum of individual observable prices, the Company allocates the discount to (1) a single obligation if the discount is attributable to that obligation or (2) prorates across all obligations if the discount relates to the bundle. When standalone-selling price is not directly observable, the Company estimates and considers all the information that is reasonably available to the Company, including market conditions, entity-specific factors, customer information, etc. The Company maximizes the use of observable inputs and applies estimation methods consistently in similar circumstances.
Measuring Obligations for Returns and Refunds—The Company accepts product returns in some cases. The Company establishes provisions for estimated returns concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors and the impact of any new product releases and projected economic conditions.
CONTRACT COSTS
Assets Recognized from Contract Costs—The Company recognizes an asset for the incremental costs of obtaining a contract with a customer, paid to external parties, if it expects to recover those costs. The Company has determined that sales commissions paid on all third party agent sales of subscriptions are direct and incremental and therefore meet the capitalization criteria. These capitalized costs are amortized as revenue is recognized or over the term of the agreement. Direct mail costs meet the requirements to be capitalized as assets if they are proven to be
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recoverable. As of December 31, 2018, the balances recognized from the costs incurred to obtain contracts with customers was $320.0 million, $185.4 million of which was recorded in current portion of subscription acquisition costs and $134.6 million was recorded in subscription acquisition costs on the Condensed Consolidated Balance Sheets. The amount of amortization that the Company recognized for the three and six-month periods ended December 31, 2018, was $78.1 million and $123.0 million, respectively. There were no impairments of contract assets recognized in the six-month period ended December 31, 2018.
12. Pension and Postretirement Benefit Plans
The following table presents the components of net periodic benefit costs for Meredith's pension and postretirement benefit plans:
Three Months | Six Months | |||||||||||||||
Periods ended December 31, | 2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | ||||||||||||||||
Domestic Pensions Benefits | ||||||||||||||||
Service cost | $ | 2.9 | $ | 3.2 | $ | 5.8 | $ | 6.5 | ||||||||
Interest cost | ||||||||||||||||