The E.W. Scripps Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. Scripps operates Local Media and National Media businesses; its radio business was classified as held for sale and reported as discontinued operations. Comparisons reflect the retrospective adoption of the new revenue recognition standard and are affected by the October 2017 Katz acquisition.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $254.2 million | $198.5 million |
| Operating income (loss) | $(0.6) million | $0.2 million |
| Continuing-operations net loss | $(8.6) million | $(2.7) million |
| Net loss attributable to Scripps shareholders | $(26.4) million; $(0.33) per share | $(1.9) million; $(0.02) per share |
| Cash from continuing operating activities | $1.3 million | $5.3 million |
| Total cash from operating activities, including discontinued operations | $5.0 million | $9.5 million |
Revenue rose 28.1%. Advertising revenue was $169.1 million, retransmission and carriage revenue $71.1 million, and other revenue $14.0 million. Operating expenses increased faster in several categories, including programming, which rose 71.1%; the operating margin was approximately negative 0.2% versus approximately positive 0.1% a year earlier. The first-quarter tax rates were 19% in 2018 and 67% in 2017; the 2017 Tax Cuts and Jobs Act reduced the federal statutory rate to 21% for 2018 from 35%.
At March 31, cash and cash equivalents were $130.4 million, down from $148.7 million at year-end. Current assets were $561.0 million and current liabilities $194.2 million. Debt principal outstanding was $701.2 million; its net carrying value was $687.1 million. The $125 million revolving credit facility had no borrowings, and the company reported compliance with financial covenants. Capital expenditures were $11.4 million, compared with $3.9 million in Q1 2017.
Material changes and drivers
- National Media revenue increased to $60.7 million from $9.7 million, including $42.7 million from Katz, acquired in October 2017. National Media segment profit was $2.0 million, versus a $4.0 million loss.
- Local Media revenue increased 2.7% to $192.1 million, while segment profit declined 2.3% to $31.6 million. Retransmission revenue increased 6.9%, primarily from contractual rate increases; core advertising was nearly flat.
- Consolidated programming expense increased to $83.4 million, reflecting Katz costs and higher network affiliation fees. Management said industry-wide affiliation fee increases may continue over the next several years.
- Interest expense increased to $8.8 million from $4.2 million, primarily due to debt issued to finance Katz and the higher-rate senior notes.
- Discontinued radio operations recorded an $18.5 million net loss, including a $20 million noncash goodwill impairment. Radio revenue was $13.3 million, down from $14.4 million.
- Restructuring costs were $3.8 million, mainly severance and outside consulting fees. Management also reported $1.4 million of proxy-contest costs within corporate expenses.
Outlook, risks and other notable items
- Management expects cash, operating cash flow and available borrowing capacity to be sufficient for operating and capital needs over the next 12 months. No specific earnings or revenue guidance was provided.
- The company expected approximately $21 million of additional pension and SERP contributions during the remainder of 2018.
- Scripps expected approximately $55 million of FCC channel-repacking spending through 2020, including about $12 million during the remainder of 2018. It expects FCC reimbursements to cover expected costs, but notes potential risk from disputes over reimbursement.
- The board initiated a quarterly dividend; $0.05 per share was paid in Q1. Management expected future quarterly dividends but said each remains subject to board discretion, earnings, financial condition and capital requirements. Scripps repurchased 285,201 Class A shares for $4.4 million; $78.2 million remained under its authorization.
- The $300 million term loan B was amended on April 4, 2018, after quarter-end, reducing its interest-rate margin by 25 basis points. Its rate became LIBOR plus 2.00%, potentially 1.75% below a specified leverage threshold.
- Key exposures include advertising demand and broader economic conditions, variable interest rates, rising programming affiliation costs, and political-advertising seasonality. The filing reported no material changes to previously disclosed risk factors; ordinary-course litigation was not expected to result in material loss.
Important facts for investors to verify
- How much of revenue growth and National Media performance reflects Katz, and how the acquired business performs on a comparable basis.
- Whether Local Media advertising and retransmission trends can offset rising programming and affiliation costs.
- The progress, timing and proceeds of the radio divestiture, including the effect of the goodwill impairment.
- Debt repayment capacity, floating-rate exposure, covenant headroom and the effect of the post-quarter term-loan amendment.
- Actual FCC repacking costs and reimbursements, pension contributions, and the sustainability of dividends and share repurchases.