The E.W. Scripps Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; amounts below are in U.S. dollars. Scripps operates local television stations and national television networks.
Business context and reporting period
Scripps completed its $2.65 billion acquisition of ION Media Networks on January 7, 2021. ION’s results are included from that date, materially affecting comparisons with 2020. The acquisition expanded Scripps Networks; the company also launched Defy TV and TrueReal in July. Scripps began transitioning Newsy from cable and satellite distribution to a free over-the-air news network, which launched in October 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $555.2 million | $493.3 million | $1,661.2 million | $1,266.4 million |
| Operating income | $115.6 million | $107.2 million | $277.1 million | $129.7 million |
| Operating margin | 20.8% | 21.7% | 16.7% | 10.2% |
| Net income | $58.7 million | $58.5 million | $69.9 million | $24.7 million |
| Net income attributable to Scripps shareholders | $46.1 million | $58.5 million | $33.1 million | $24.7 million |
| Basic EPS | $0.54 | $0.70 | $0.39 | $0.29 |
| Cash provided by operating activities | Not stated separately | Not stated separately | $156.6 million | $159.8 million |
Q3 revenue increased 12.6%; nine-month revenue increased 31.2%. Excluding ION and the WPIX station sold in 2020, revenue decreased 11% in Q3 and increased 4% year to date. The reported revenue growth includes acquired ION revenue and compares against pandemic-affected 2020 results.
Advertising revenue was $394.7 million in Q3, up from $320.0 million, while retransmission and carriage revenue was $151.8 million, versus $153.9 million. Q3 political advertising declined $89.3 million year over year amid the non-election-year comparison. Same-station core advertising increased $26.1 million in Q3 and $81.5 million year to date.
Q3 Local Media segment profit fell 55.8% to $65.4 million, reflecting much lower political revenue and the WPIX disposition. Scripps Networks segment profit was $83.3 million versus $3.5 million, with the comparison substantially affected by ION’s acquisition and growth in legacy networks. Segment profit is a company-defined measure, not GAAP operating income.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $72.2 million, restricted cash was $34.3 million, and total current assets were $660.2 million against current liabilities of $459.8 million.
- Scripps reported $393 million of additional revolving-credit capacity and no revolver borrowings. Management said operating cash flow should provide sufficient liquidity for operating needs over the next 12 months.
- Debt principal outstanding was $3.278 billion; net carrying value, including current debt, was approximately $3.211 billion. The earliest term-loan or unsecured-note maturity was in Q4 2024. The company reported compliance with financial covenants.
- Interest expense was $41.0 million in Q3 and $126.9 million for nine months, compared with $21.4 million and $70.2 million, respectively. A 100-basis-point LIBOR increase was estimated to add about $7.7 million to annual interest expense on variable-rate borrowings.
- Berkshire Hathaway invested $600 million for perpetual Series A preferred stock carrying an 8% annual dividend rate when paid in cash. Preferred dividends totaled $33.1 million through September. The preferred shares are generally redeemable by Scripps beginning in 2026 at 105% of face value plus accrued dividends; common dividends and share repurchases are prohibited while the preferred shares remain outstanding.
Material changes and unusual items
- ION contributed $394 million of revenue from its acquisition date through September 30. The transaction was funded with cash, debt and Berkshire Hathaway preferred equity. Scripps recorded $1.81 billion of acquisition goodwill, allocated to Scripps Networks.
- Nine-month operating cash flow from continuing operations declined to $150.5 million from $178.3 million. The filing cites higher interest and tax payments, acquisition costs, programming investment and working-capital timing.
- Investing activities used $2.45 billion net, principally reflecting the $2.68 billion net cash cost of ION; Triton sale proceeds were $225 million.
- Unusual nine-month items included an $81.8 million pre-tax gain on the Triton sale, a $32.6 million gain on the KMGH Denver building sale, a $99.1 million non-cash warrant loss, a $13.8 million loss on redeeming 2025 notes, $35.6 million of acquisition and integration costs, and $9.4 million of Newsy restructuring costs.
- The nine-month effective tax rate was 44%, versus 31% in 2020; the filing attributes part of the difference to non-deductible warrant-related costs and losses. The warrant’s fair value was reclassified to equity following a May 2021 amendment, ending subsequent mark-to-market accounting.
Outlook, risks and contingencies
No quantified revenue, earnings or cash-flow guidance is provided in the filing. Management expected to meet operating liquidity needs for the next 12 months and expected covenant compliance. The company identified advertising demand, economic conditions, COVID-19 impacts, political-advertising variability, MVPD subscriber declines and interest-rate changes as factors that could affect results. Scripps said there were no material changes to the risk factors in its 2020 Form 10-K. Ordinary-course litigation and regulatory matters, including defamation and broadcast-license proceedings, were not expected to result in material loss.
The filing reports effective disclosure controls and no material changes to internal control over financial reporting during the quarter. ION, representing approximately 52% of total assets and 24% of nine-month revenue, was excluded from management’s internal-control assessment as permitted by SEC guidance.
Important facts for investors to verify
- How much post-acquisition growth and segment profitability is attributable to ION, versus legacy network performance and comparisons with pandemic-affected 2020.
- Underlying Local Media advertising and retransmission trends, particularly after separating political-advertising cyclicality and the WPIX sale.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the ongoing cost and terms of Berkshire Hathaway’s preferred stock.
- Cash-flow conversion and working-capital trends, given nine-month operating cash flow declined despite higher reported operating income.
- Progress and costs associated with Newsy’s distribution transition, new network launches and integration of ION.