The E.W. Scripps Company — Q3 2015 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2015. Scripps operates television, radio and digital media businesses. On April 1, 2015, it spun off its newspaper operations and acquired Journal Communications’ broadcast group, adding 12 television and 34 radio stations. Comparisons with 2014 are therefore materially affected by acquisitions and the newspaper spin-off. Scripps acquired podcast company Midroll Media in July 2015.
Financial performance and liquidity
- Revenue: Q3 revenue was $189.7 million, up 54.1%; nine-month revenue was $510.8 million, up 46.7%. Acquired operations contributed $68 million of Q3 growth and $146 million year to date. Q3 political advertising fell $15 million at stations owned throughout both periods, while retransmission revenue rose $11 million.
- Profitability: Q3 operating loss was $25.4 million versus operating income of $5.7 million a year earlier; net loss was $24.4 million versus $1.3 million. Nine-month operating loss was $50.7 million versus $0.7 million, and net loss was $60.9 million versus $5.2 million. Diluted loss per share was $0.29 for Q3 and $0.82 year to date. Q3 results included a $24.6 million non-cash goodwill and intangible impairment charge.
- Segments: Q3 television revenue was $157.4 million and segment profit $31.7 million; radio revenue was $20.4 million and segment profit $4.1 million. Digital revenue was $10.9 million, with a $3.6 million segment loss. Digital’s loss narrowed from $6.2 million in Q3 2014.
- Cash flow: Continuing operating activities used $21.6 million in the first nine months, versus providing $41.1 million in 2014. Total operating activities used $14.8 million, versus providing $71.0 million. Capital expenditures were $15.2 million. Cash and cash equivalents were $81.3 million at September 30, down from $158.5 million at year-end 2014.
- Debt and liquidity: Total debt was $403.6 million, compared with $198.0 million at year-end 2014; cash less total debt was approximately $322.3 million net debt. Current assets were $294.3 million and current liabilities $111.5 million. The company had a $100 million revolving credit facility with no borrowings reported, was in compliance with financial covenants, and said cash, operating cash flow and available borrowing capacity should cover operating and capital needs for the next 12 months.
- Capital allocation: The company paid a $60 million special dividend in connection with the transactions and paid $59.5 million of dividends in the first nine months. It repurchased $10.9 million of shares year to date; $89.1 million remained under its $100 million repurchase authorization.
Material changes, outlook and risks
- Journal-related acquisitions drove much of the reported revenue and expense growth. Retransmission revenue benefited from renewed distribution agreements; lower political advertising in the off-election year weighed on results. Higher network fees and acquisition-related costs also increased expenses.
- The Newsy business faced slower development of its original revenue model and required further investment amid changes in video distribution. Scripps recorded a preliminary $21 million goodwill impairment for Newsy, $2.9 million of intangible impairment, and a $1.5 million goodwill impairment for another small business. The Newsy impairment analysis was not complete at filing; additional impairment could be recorded in Q4.
- Management expected an approximately $45 million non-cash pension settlement charge in Q4 following a lump-sum election offer to eligible former employees. Payments were expected to come from pension plan assets, and management expected the plan’s funded status to remain materially unchanged.
- No specific revenue or earnings guidance was provided. Management cited opportunities to expand Newsy through over-the-top platforms and to develop digital brands using the expanded broadcast footprint; these efforts require investment. Risks noted include advertising demand and economic conditions, consumer preferences, programming costs, labor relations, technology, competition, interest rates, regulation and third-party vendors.
- The credit agreement has leverage-related restrictions and security interests in substantially all personal property and certain real estate. A $75 million interest-rate swap expires in December 2016. The filing states ordinary-course litigation and broadcast-license proceedings are not expected to result in material loss; no material risk-factor changes were reported.
Important facts for investors to verify
- Final Q4 Newsy goodwill impairment amount and assumptions, including projected revenues, cash flows and discount rates.
- Actual pension lump-sum election rate and the resulting settlement charge.
- Whether operating cash flow improves as transaction costs and working-capital effects change, and the pace of debt repayment.
- Organic performance of the acquired television and radio stations, including retransmission renewals, political-advertising comparisons and network-programming costs.
- Execution and monetization of Newsy’s OTT distribution strategy and Midroll’s podcast network, alongside required investment.
- Post-period developments in the FCC spectrum auction and any related proceeds or capital-allocation decisions.