The E.W. Scripps Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Scripps operates television, radio, digital media and syndication businesses; its newspaper operations were spun off in April 2015, affecting year-over-year comparability.
Financial performance
| Metric ($ millions, except per-share data) | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | 233.0 | 189.7 | 670.4 | 510.8 |
| Operating income (loss) | 27.3 | (25.4) | 59.5 | (50.7) |
| Net income (loss) | 12.5 | (24.4) | 28.9 | (60.9) |
| Diluted EPS | $0.15 | $(0.29) | $0.34 | $(0.82) |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | 81.0 | (14.8) |
Revenue rose 22.9% in Q3 and 31.2% year to date. Operating margin, calculated from reported figures, was approximately 11.7% for Q3 and 8.9% for the nine-month period; both periods were loss-making in 2015. Q3 2015 included a $24.6 million non-cash goodwill and intangible impairment. Nine-month 2015 results also included $37.0 million of acquisition and integration costs in continuing operations and a $15.4 million loss from discontinued operations.
- Revenue drivers: Q3 growth reflected $22.6 million more television political advertising and $16.8 million more retransmission revenue, alongside digital growth. Political advertising is seasonal and typically higher in the third and fourth quarters of even-numbered years. A retransmission agreement covering about 3 million households began January 1, 2016.
- Costs and segments: Q3 expenses included higher programming and program-license costs, up 26.2%, and other expenses, up 18.1%. Television segment profit increased to $58.3 million from $31.7 million; radio segment profit fell to $2.5 million from $4.1 million. Digital revenue increased 45.1%, but the segment loss widened to $5.6 million from $3.6 million.
- Cash flow and investment: Nine-month operating cash flow was $81.0 million, versus cash used of $14.8 million in the 2015 comparison. Investing used $65.5 million, including $43.5 million for acquisitions and $21.6 million for property and equipment. Financing used $35.2 million, including $29.7 million for share repurchases.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $88.4 million; restricted cash was $5.5 million. Current assets were $292.2 million and current liabilities $106.9 million.
- Long-term debt, including its current portion, was $396.7 million, down from $399.1 million at year-end 2015. The term loan carried a 3.50% rate; $387.3 million was reported as long-term debt net of the current portion. The $100 million revolving facility had no borrowings. Term loan maturity is November 2020, with $378.5 million scheduled for 2020.
- The company reported compliance with financing covenants and no required excess-cash-flow principal payment as of September 30. Management said cash, operating cash flow and available borrowing capacity should be sufficient for operating and capital needs over the next 12 months.
- Other notable obligations include $221.1 million of pension benefit liabilities. Management expected $1 million to $3 million of pension and SERP contributions in the remainder of 2016.
Changes, acquisitions and capital allocation
- Television retransmission revenue and political advertising were major Q3 growth contributors. Radio advertising weakened in the quarter, particularly in larger markets and Milwaukee; flood-cleanup costs also affected Wichita operations.
- Cracked was acquired in April 2016 for $39 million cash and Stitcher in June for $4.5 million cash. Cracked contributed $2.4 million in revenue from acquisition through September 30. These transactions expanded digital and podcast operations; digital segment losses continued.
- Class A share repurchases totaled $29.7 million in the first nine months. The company repurchased 661,824 shares for $11.0 million during Q3, at an average $16.60 per share. The authorization had $54.1 million remaining and ran through December 2016.
- Early adoption of share-based compensation accounting guidance increased opening deferred tax assets and retained earnings by $14.7 million. The nine-month effective tax rate was 35%, versus 26% in 2015; 2016 included $1.9 million of excess share-based compensation tax benefits.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management highlighted advertising demand and economic conditions, consumer tastes, programming costs, labor relations, technology, competition, interest rates, regulation and reliance on third-party vendors as factors that could cause actual results to differ from expectations. It also noted that potential FCC spectrum-auction proceeds, if Scripps participates and its bid is accepted, would not necessarily be required to repay the term loan up to a stipulated amount.
Management said ordinary-course litigation, including defamation actions and broadcast-license proceedings, was not expected to result in material loss. The company reported no material changes to the risk factors in its 2015 Form 10-K, no defaults on senior securities, and effective disclosure controls. Federal deferred tax assets were considered more likely than not to be realized, though management cautioned that weaker economic conditions and lower taxable income could require future valuation allowances.
Key facts for investors to verify
- How much of revenue growth is recurring retransmission and digital growth versus election-cycle political advertising, and whether retransmission rates and renewals remain favorable.
- Whether television programming and network affiliation fee increases can be offset by revenue growth, and whether radio weakness persists.
- Progress toward improving digital profitability following the Cracked, Stitcher and Midroll acquisitions.
- Debt repayment capacity and covenant headroom, particularly given the large scheduled term-loan payment in 2020 and floating-rate exposure.
- Remaining share-repurchase authorization and the effect of repurchases on liquidity and share count.
- Potential changes in pension funding needs, goodwill and intangible-asset valuations, and realization of deferred tax assets.