IAC InterActive (IAC) 8-KConsolidated Financial Statements

Dotdash Meredith is one of the largest digital and print publishers in America. From mobile to magazines, nearly 200 million people trust Dotdash Meredith to help them make decisions, take action and find inspiration. Dotdash Meredith's over 40 iconic brands include PEOPLE, Better Homes & Gardens, Verywell, FOOD & WINE, The Spruce, Allrecipes, Byrdie, REAL SIMPLE, Investopedia and Southern Living. Dotdash Meredith is a wholly-owned subsidiary of IAC Inc. ("IAC").

As used herein, the "Company," "we," "our" or "us" and similar terms refer to Dotdash Meredith and its subsidiaries (unless the context requires otherwise).

The Company has two operating segments: (i) Digital, which includes its digital, mobile and licensing operations; and (ii) Print, which includes its magazine subscription and newsstand operations.

The Company prepares its consolidated financial statements (collectively referred to herein as "financial statements") in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP"). All intercompany transactions and balances between and among the entities comprising the Company have been eliminated.

For the purpose of the financial statements, income taxes have been computed for the Company on an as if standalone, separate tax return basis and payments to and refunds from IAC for the Company's share of IAC's consolidated federal and state tax return liabilities/receivables have been reflected within cash flows from operating activities in the statement of cash flows.

The unaudited interim financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. In the opinion of management, the unaudited interim financial statements include all normal recurring adjustments considered necessary for a fair presentation. Interim results are not necessarily indicative of the results that may be expected for the full year. The unaudited interim financial statements should be read in conjunction with the annual audited financial statements of the Company and notes thereto for the year ended December 31, 2022.

Management of the Company is required to make certain estimates, judgments and assumptions during the preparation of its financial statements in accordance with GAAP. These estimates, judgments and assumptions impact the reported amounts of assets, liabilities, revenue and expenses and the related disclosure of assets and liabilities. Actual results could differ from these estimates.

On an ongoing basis, the Company evaluates its estimates, judgments and assumptions, including those related to: the fair value of cash equivalents; the carrying value of accounts receivable, including the determination of the allowance for credit losses; the recoverability of right-of-use assets ("ROU assets"); the useful lives and recoverability of leasehold improvements, equipment, capitalized software and buildings and definite-lived intangible assets; the recoverability of goodwill and indefinite-lived intangible assets; the fair value of interest rate swaps; contingencies; unrecognized tax benefits; the valuation allowance for deferred income tax assets; pension and postretirement benefit expenses, including actuarial assumptions regarding discount rates, expected returns on plan assets, inflation and healthcare costs; and the fair value of and forfeiture rates for stock-based awards, among others. The Company bases its estimates, judgments and assumptions on historical experience, its forecasts and budgets and other factors that the Company considers relevant.

Revenue is recognized when control of the promised services or goods is transferred to the Company's customers and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.

Deferred revenue consists of payments that are received or are contractually due in advance of the Company's performance obligation. The Company’s deferred revenue is reported on a contract-by-contract basis at the end of each reporting period. The Company classifies deferred revenue as current when the expected completion of its performance obligation is one year or less. The deferred revenue balances were $28.6 million at March 31, 2023 and $26.7 million at December 31, 2022 and was all current, except for less than $0.1 million in both periods that was non-current. During the three months ended March 31, 2023, the Company recognized $23.4 million of revenue that was included in the deferred revenue balance at December 31, 2022. During the three months ended March 31, 2022, the Company recognized $10.4 million of revenue that was included in the deferred revenue balance at December 31, 2021. The current and non-current deferred revenue balances were $23.4 million and $0.1 million, respectively, at December 31, 2021. Non-current deferred revenue is included in "Other long-term liabilities" in the balance sheet.

The Company uses third-party agents to obtain certain subscribers. The agents are paid a commission, which can be as much as the subscription price charged to the subscriber. The Company's subscriptions do not have substantive termination penalties; therefore, the contract term is determined on an issue-by-issue basis. Accordingly, these commissions do not qualify for capitalization because there is no contract with a customer until a copy is served to a customer; therefore, these costs are expensed when the publication is sent to the customer. The Company recognizes a liability to the extent the commission is refundable to the third-party agent. The Company expenses additional amounts paid to agents (such as per subscriber bounties) to acquire subscribers as incurred. Expenses related to third-party agent sales of magazine subscriptions are included in "Selling and marketing expense" in the statement of operations.

The Company categorizes its financial instruments measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:

The following tables present the Company’s financial instruments that are measured at fair value on a recurring basis:

The Company's non-financial assets, such as goodwill, intangible assets, ROU assets, leasehold improvements, equipment, capitalized software and buildings, are adjusted to fair value only when an impairment is recognized. Such fair value measurements are based predominantly on Level 3 inputs.

During the first quarter of 2023, the Company recorded impairment charges related to unoccupied leased office space due to the continued decline in the commercial real estate market; a $44.7 million impairment of an ROU asset and a $25.3 million impairment of leasehold improvements, furniture and equipment, which are included in "General and administrative expense" and "Depreciation," respectively, in the consolidated statement of operations. The impairment charges represent the amount by which the carrying value of the asset group exceeded its estimated fair value, calculated using a discounted cash flow approach using sublease market assumptions of the expected cash flows and discount rate. The impairment charges were allocated between the ROU assets and related leasehold improvements, furniture and equipment of the asset group based on their relative carrying values.

The excess of fair value over carrying value for a $126.0 million Digital indefinite-lived intangible asset is less than 20%, based upon the most recent estimate.

The following table presents the carrying value and the fair value of financial instruments measured at fair value only for disclosure purposes:

At March 31, 2023 and December 31, 2022, the fair value of long-term debt, including the current portion, is estimated using observable market prices or indices for similar liabilities, which are Level 2 inputs.

Long-term debt consists of:

On December 1, 2021, the Company entered into a credit agreement ("Credit Agreement"), which provides for (i) the five-year $350 million Term Loan A, (ii) the seven-year $1.25 billion Term Loan B (and together with Term Loan A, the "Term Loans") and (iii) a five-year $150 million revolving credit facility ("Revolving Facility"). The Term Loan A bears interest at an adjusted term secured overnight financing rate ("Adjusted Term SOFR") as defined in the Credit Agreement plus an applicable margin depending on the Company's most recently reported consolidated net leverage ratio, as defined in the Credit Agreement. The adjustment to the secured overnight financing rate is fixed at 0.10% for the Term Loan A. The Term Loan B has a varying adjustment of 0.10%, 0.15% or 0.25% based upon the duration of the borrowing period. At March 31, 2023 and December 31, 2022, the Term Loan A bore interest at Adjusted Term SOFR plus 2.25%, or 6.94% and 5.91%, respectively, and the Term Loan B bore interest at Adjusted Term SOFR, subject to a minimum of 0.50%, plus 4.00%, or 8.77% and 8.22%, respectively. Interest payments are due at least quarterly through the terms of the Term Loans.

The Term Loan A requires quarterly principal payments of approximately $4.4 million through December 31, 2024, $8.8 million through December 31, 2025 and approximately $13.1 million thereafter through maturity. The Term Loan B requires quarterly payments of $3.1 million through maturity. The Term Loan B may require additional annual principal payments as part of an excess cash flow sweep provision, the amount of which, in part, is governed by the applicable net leverage ratio. No such payment was required related to the period ended December 31, 2022.

In March 2023, the Company entered into interest rate swaps on the Term Loan B for a total notional amount of $350 million with a maturity date of April 1, 2027. The interest rate swaps synthetically convert $350 million of the Term Loan B for the duration of the interest rate swaps to a fixed rate of approximately 7.92% ((i) the weighted average fixed interest rate of approximately 3.82% on the interest rate swaps plus (ii) the adjustment to the secured overnight financing rate of 0.10% plus (iii) the base rate of 4.00%), beginning April 2023.

The interest rate swaps are expected to be highly effective. For the three months ended March 31, 2023, the unrealized loss recognized in "Accumulated other comprehensive loss" was $2.3 million, net of income tax benefit, and the related liability of $3.0 million is included in "Other non-current liabilities" in the balance sheet at March 31, 2023. There were no realized gains or losses reclassified into "Interest expense" in the three months ended March 31, 2023. At March 31, 2023, $3.0 million is expected to be reclassified into interest expense within the next twelve months as a realized gain.

There were no outstanding borrowings under the Revolving Facility at March 31, 2023 and December 31, 2022. The annual commitment fee on undrawn funds is based on the Company's consolidated net leverage ratio, as defined in the Credit Agreement, most recently reported and was 40 basis points at both March 31, 2023 and December 31, 2022. Any borrowings under the Revolving Facility would bear interest, at the Company's option, at either a base rate or Adjusted Term SOFR, plus an applicable margin, which is based on the Company's consolidated net leverage ratio.

As of the last day of any calendar quarter, if either (i) $1.00 or more of loans under the Revolving Facility or Term Loan A are outstanding, or (ii) the outstanding face amount of undrawn letters of credit, other than cash collateralized letters of credit at 102% of face value, exceeds $25 million, subject to certain increases for qualifying material acquisitions, then the Company will not permit the consolidated net leverage ratio, which permits netting of up to $250 million in cash and cash equivalents, as of the last day of such quarter to exceed 5.5 to 1.0. The Credit Agreement also contains covenants that would limit the Company’s ability to pay dividends, incur incremental secured indebtedness, or make distributions or certain investments in the event a default has occurred or if the Company’s consolidated net leverage ratio exceeds 4.0 to 1.0, subject to certain available amounts as defined in the Credit Agreement. This ratio was exceeded for both test periods ended March 31, 2023 and December 31, 2022. The Credit Agreement also permits IAC to, among other things, contribute cash to the Company, which will provide additional liquidity to ensure that the Company does not exceed certain consolidated net leverage ratios for any test period, as further defined in the Credit Agreement. In connection with these capital contributions, the Company may make distributions to IAC in amounts not more than any such capital contributions, provided that no default has occurred and is continuing. Such capital contributions and subsequent distributions impact the consolidated net leverage ratios of the Company. In March 2023, IAC contributed $135.0 million to the Company, which the Company subsequently distributed back to IAC in April 2023.

The obligations under the Credit Agreement are guaranteed by certain of the Company's wholly-owned subsidiaries and are secured by substantially all of the assets of the Company and certain of its subsidiaries.

The following tables present the components of accumulated other comprehensive loss:

At March 31, 2023, there was $0.7 million of income tax benefit related to unrealized losses on interest rate swaps. At March 31, 2022, there was no income tax benefit or provision on the accumulated other comprehensive loss.

The overall concept that the Company employs in determining its operating segments is to present the financial information in a manner consistent with the chief operating decision maker's view of the businesses. In addition, we consider how the businesses are organized as to segment management and the focus of the businesses with regards to the types of services or products offered or the target market.

The following table presents revenue by reportable segment:

The following table presents the revenue of the Company's segments disaggregated by type of service:

Revenue by geography is based on where the customer is located. Geographic information about revenue and long-lived assets is presented below:

The following tables present operating loss and Adjusted EBITDA by reportable segment:

The following tables reconcile operating loss for the Company's reportable segments and net loss to Adjusted EBITDA:

The following table presents the components of net periodic benefit cost for the pension and postretirement benefit plans:

Settlements during the three months ended March 31, 2023 triggered a remeasurement of the pension plans in the U.S. The actuarial loss of $0.2 million was the result of an adjustment in plan demographics, partially offset by gains on investment performance.

Settlements during the three months ended March 31, 2022 triggered a remeasurement of the funded pension plans in the United Kingdom ("U.K.") and U.S. The U.K. actuarial loss of $25.0 million primarily relates to the decline in the fair value of the U.K. pension plan's assets exceeding the decline in the plan liabilities, in each case due to higher interest rates. The U.S. actuarial loss of $12.5 million was primarily due to the decline in the fair value of plan assets.

The following table summarizes the weighted average expected return on plan assets used to determine the net periodic benefit costs at March 31, 2023, following the remeasurement, and December 31, 2022, respectively:

The components of net periodic benefit costs, other than the service cost component, are included in "Other income (expense), net" in the statement of operations.

At the end of each interim period, the Company estimates the annual expected effective income tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which they occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or unrecognized tax benefits is recognized in the interim period in which the change occurs.

The computation of the annual expected effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences and the likelihood of the realization of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the Company's tax environment changes. To the extent that the expected annual effective income tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax provision or benefit in the quarter in which the change occurs.

For the three months ended March 31, 2023, the Company recorded an income tax benefit of $35.7 million, which represents an effective income tax rate of 25%, which is higher than the statutory rate of 21% due primarily to state taxes and research credits. For the three months ended March 31, 2022, the Company recorded an income tax benefit of $25.5 million, which represents an effective income tax rate of 23%, which is higher than the statutory rate of 21% due primarily to state taxes, partially offset by research credits.

The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in the income tax provision. Accruals for interest and penalties are not material.

The Company's income taxes are routinely under audit by federal, state, local and foreign authorities as a result of previously filed separate company and consolidated income tax returns with IAC. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service ("IRS") has substantially completed its audit of IAC’s federal income tax returns for the years ended December 31, 2013 through 2019, which include the operations of the Company. The settlement of these tax years has been submitted to the Joint Committee of Taxation for approval. The statute of limitations for the years 2013 through 2019 has been extended to December 31, 2023. Returns filed in various other jurisdictions are open to examination for tax years beginning with 2014. Income taxes payable include unrecognized tax benefits considered sufficient to pay assessments that may result from the examination of prior year tax returns. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may not accurately anticipate actual outcomes and, therefore, may require periodic adjustment. Although management currently believes changes in unrecognized tax benefits from period to period and differences between amounts paid, if any, upon resolution of issues raised in audits and amounts previously provided will not have a material impact on the liquidity, results of operations or financial condition of the Company, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

At March 31, 2023 and December 31, 2022, unrecognized tax benefits, including interest and penalties, are $3.6 million and $3.5 million, respectively. Unrecognized tax benefits, including interest and penalties, at March 31, 2023 increased by $0.1 million due primarily to state audits and research credits, offset by settlements. If unrecognized tax benefits at March 31, 2023 are subsequently recognized, $3.4 million, net of related deferred tax assets and interest, would reduce income tax expense. The comparable amount at December 31, 2022 was $3.3 million. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by $0.5 million by December 31, 2023 due to expected settlements of which $0.4 million would reduce the income tax provision.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheet to the total amounts shown in the statement of cash flows:

Restricted cash included in "Other non-current assets" and "Other current assets" in the balance sheet primarily consists of cash held in escrow related to the funded pension plan in the U.K.

The following table presents the changes in the allowance for credit losses for the three months ended March 31, 2023 and 2022, respectively:

The following table provides the accumulated amortization and depreciation within the balance sheet:

The Company is allocated expenses from IAC for its participation in IAC's health and wellness plan in addition to obtaining certain support services through contracts that are held in IAC's name. The total charges for the three months ended March 31, 2023 and 2022 were $10.7 million and $3.8 million, respectively. The increase is principally due to Meredith's participation in IAC's health and wellness plan beginning January 1, 2023.

Additionally, the Company was allocated expenses from IAC for flight crew payroll and travel expenses based on usage of company owned aircraft. The charges for the three months ended March 31, 2023 and 2022 were $0.5 million and $0.3 million, respectively.

The Company recognized revenue of $2.2 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively, related to advertising and audience targeted advertising sold to other IAC owned businesses. At March 31, 2023 there were outstanding receivables of $1.7 million related to the revenue earned.

At March 31, 2023, the Company had an outstanding payable due to IAC of $8.6 million included in "Accrued expenses and other current liabilities" in the balance sheet related primarily to payments made by IAC on behalf of the Company, that was subsequently paid in April 2023. At December 31, 2022, there was $1.5 million due to IAC that was subsequently paid in January 2023.

At March 31, 2023 and December 31, 2022, the Company had an outstanding payable of $25.1 million due to IAC pursuant to the tax sharing agreement, which is included in "Accrued expenses and other current liabilities" in the balance sheet and was paid to IAC in April 2023.

Pursuant to the terms of the Company’s stock-based awards granted under its equity incentive plan, until the common shares of the Company (or its successor(s)) trade on a national securities exchange, shares of IAC common stock are issued to employees in settlement of the exercise of the Company’s vested awards after deduction for required tax withholdings, which are remitted on the employees’ behalf. The Company reimburses IAC in the form of cash and/or Dotdash Meredith common shares at IAC’s election.