E.W. Scripps Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Scripps is a media company operating television, radio and digital businesses. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $231.8 | $227.8 | $442.8 | $437.3 |
| Operating income | $20.9 | $26.8 | $22.4 | $39.1 |
| Net income | $8.5 | $11.5 | $6.6 | $16.4 |
| Diluted EPS | $0.10 | $0.13 | $0.08 | $0.19 |
| Operating margin | 9.0% | 11.7% | 5.1% | 8.9% |
Revenue rose 1.8% in Q2 and 1.3% year to date. Retransmission revenue increased 23.6% in both periods reported, while advertising softness and reduced political revenue weighed on results. Expenses grew faster than revenue: Q2 employee costs rose 3.3% and programming costs 10.0%; for the first half, they rose 5.2% and 12.1%, respectively. Interest expense increased, including a $2.4 million write-off of fees on the refinanced term loan.
Segment trends were mixed. Q2 television revenue increased 0.8%, but segment profit fell 6.6% to $49.8 million. Radio revenue declined 5.2% and segment profit fell 25.5% to $2.9 million. Digital revenue increased 27.2% to $19.3 million, but the segment reported a $4.2 million loss. Digital revenue growth excluding Cracked was 20%; Cracked was acquired in April 2016, affecting year-over-year comparability.
Cash flow, liquidity and debt
- First-half operating cash flow was $29.0 million, down from $37.4 million. Management attributed the decline to lower segment profit, higher pension contributions and working-capital changes; cash flow also included $6 million of advance production payments for a new lifestyle show.
- First-half investing cash outflow was $6.5 million versus $58.6 million in 2016, which included the Cracked and Stitcher acquisitions. Capital expenditures were $9.3 million. Financing cash outflow was $7.2 million.
- Cash and cash equivalents were $149.6 million at June 30, 2017, versus $134.4 million at year-end. Current assets were $380.1 million and current liabilities $99.0 million.
- Debt principal totaled $405.3 million: $400 million of 5.125% senior unsecured notes due May 2025 and $5.3 million of subordinated notes. The notes issuance repaid the term loan. Net carrying value of debt was $395.6 million.
- The revolving credit facility was expanded to $125 million and extended to April 2022; there were no borrowings at quarter-end, and $0.8 million of letters of credit were outstanding. The company reported compliance with facility covenants.
- Management said cash, operating cash flow and available borrowing capacity should meet operating and capital needs for the next 12 months. It anticipated about $11 million of pension and SERP contributions in the remainder of 2017.
Material changes, outlook and risks
- Q2 miscellaneous income included a $3.0 million gain on the sale of the newspaper syndication business and a $2.5 million reduction in the Midroll earn-out provision. The six-month effective tax rate was 9%, compared with 27% in 2016; excess share-based compensation tax benefits contributed $2.4 million to the 2017 period’s tax provision calculation.
- On July 31, 2017, after quarter-end, Scripps agreed to buy Katz Broadcasting’s four networks for $292 million net of its existing 5% interest. Closing was expected October 2, subject to regulatory clearance and customary conditions; expected funding included cash and $250 million of new debt. Purchase accounting had not been completed.
- Seventeen stations were assigned new channels in the FCC spectrum repacking process. Scripps expected related capital expenditures in the second half of 2017 and said reimbursement from the FCC fund was uncertain.
- No formal financial guidance was provided. Management cited lower local and national television advertising, weakness in radio markets, higher network affiliation fees, and continued spending to expand digital brands. The company said no material changes had occurred to previously disclosed risk factors.
- Ordinary-course litigation and broadcast-license proceedings were reported; none was expected to result in a material loss. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether retransmission revenue growth can offset continued weakness in local, national and radio advertising, and higher programming costs.
- Katz acquisition closing, final purchase accounting, and the effect of the planned $250 million borrowing on leverage, interest expense and covenant headroom.
- Actual FCC repacking costs and the amount and timing of reimbursements.
- Sustainability of reported earnings given unusual gains, earn-out adjustments, refinancing costs and share-based compensation tax benefits.
- Progress in digital growth and the segment’s path toward profitability, alongside planned pension contributions and share repurchases.