E.W. SCRIPPS Co quarterly report, Q3 FY2014

E.W. Scripps Company — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Scripps operated television, newspaper, and syndication/digital businesses during the period.

Financial performance and liquidity

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Operating revenue	$207.6 million	$189.5 million	$623.3 million	$596.0 million
Operating income (loss)	$2.7 million	$(8.2) million	$1.6 million	$(3.7) million
Net loss attributable to Scripps shareholders	$(1.3) million	$(8.9) million	$(5.2) million	$(8.3) million
Loss per diluted share	$(0.02)	$(0.16)	$(0.09)	$(0.15)

Operating margin was approximately 1.3% in Q3 2014, versus negative 4.3% in Q3 2013; nine-month margin was approximately 0.3%, versus negative 0.6%.
Revenue growth reflected television, including political advertising and retransmission fees, partly offset by continued newspaper weakness. Q3 television revenue rose 21.9%; newspaper revenue fell 4.4%.
Television segment profit was $29.8 million in Q3, up 57.6%; newspaper segment profit fell 74.8% to $0.8 million. Segment profit is a company-defined measure, not GAAP operating income.
Cash from operating activities was $71.0 million for the first nine months, compared with $25.9 million a year earlier. The improvement was primarily attributed to working-capital timing, including receivable collections and accrued compensation.
Cash and cash equivalents were $124.4 million at September 30, down from $221.3 million at year-end 2013. Long-term debt was $198.5 million, including current maturities; the term-loan rate was 3.25%. Scripps reported no revolver borrowings and compliance with its financial covenants. Working capital was approximately $153.2 million.
Investing cash outflow was $156.5 million, including $149.3 million for acquisitions. Capital expenditures were $13.4 million. Financing cash outflow was $11.5 million, including $21.2 million of share repurchases, partly offset by employee option proceeds.

Changes versus the prior comparable periods

Revenue increased 9.5% in Q3 and 4.6% year to date. The Granite television stations, acquired in June, contribute to reported comparisons; same-station television revenue also increased, led by political advertising and retransmission revenue.
Retransmission revenue rose approximately 45% on a same-station basis in Q3 and 28% year to date. National television advertising was weaker, and political advertising varied by market.
Newspaper advertising and marketing revenue declined more than 6% in both reported periods, while subscription revenue grew 2.0% in Q3 and 4.6% year to date. Scripps cited secular pressure on print advertising and moderating growth as bundled subscriptions became established.
Interest expense declined from the prior year following the 2013 debt refinancing. Q3 results also included a $3.0 million gain on sale of excess newspaper land.
Acquisition and integration costs were $5.0 million in Q3 and $9.4 million year to date, including Granite-related and proposed Journal transaction costs. Q3 2013 included $1.3 million of separation and restructuring costs.

Outlook, transactions, and risks

No specific consolidated earnings guidance was provided. Management expected cash, operating cash flow, and available borrowing capacity to cover operating and capital needs over the next 12 months.
Scripps expected retransmission revenue to grow substantially in 2015 as higher-rate agreements take effect. Some 2014 renewals remained pending at the filing date; renewal economics could be affected by competition, regulation, and cable-industry consolidation.
Scripps and Journal Communications agreed to combine their broadcast operations and spin off their newspapers, with closing expected in the first half of 2015, subject to regulatory and shareholder approvals. Scripps shareholders were to receive a $60 million special cash dividend. Scripps estimated $25–$30 million of transaction costs, with $6.7 million incurred to date, and expected to refinance $131 million of Journal debt. Share repurchases were barred before closing.
The agreement also entails assumption of Journal liabilities, including employee-benefit obligations reported at $66 million as of December 31, 2013. A breach by Scripps could trigger liquidated damages of $15.8 million plus expenses, subject to a $23.5 million cap.
A shareholder class action challenging the Journal transaction remained pending. The outcome was uncertain; an adverse monetary judgment could materially affect operations or liquidity, and injunctive relief could delay or prevent closing. Defendants sought dismissal.
Scripps added cybersecurity as a risk, citing potential operational disruption, disclosure of confidential information, reputational damage, legal exposure, and financial loss. Other disclosed business risks include advertising demand, consumer preferences, programming costs, labor, technology, competition, interest rates, regulation, and third-party vendors.
Acquisitions completed during 2014 included Newsy for approximately $35 million, two Granite stations for $110 million, and WeatherSphere for $4.1 million plus a potential earnout of up to $2.5 million.

Important facts for investors to verify

Progress, approvals, final terms, costs, and closing timing for the Journal transaction, including the special dividend, debt refinancing, and newspaper separation.
Results of pending retransmission negotiations and the realized revenue impact of higher contractual rates, including exposure to cable-company consolidation.
Whether operating cash flow remains strong when working-capital timing normalizes, given the sharp decline in cash after acquisitions and repurchases.
Performance and integration of the Granite stations and digital acquisitions, and whether television growth offsets ongoing newspaper advertising declines.
Outcome and potential financial or transaction impact of the Journal shareholder lawsuit, and the final GCIU pension withdrawal liability and payment terms.