Business context and reporting period
The E.W. Scripps Company’s Form 10-K covers the fiscal year ended December 31, 2019. Scripps operates Local Media, a portfolio of 60 television stations in 42 markets, and National Media businesses including Katz networks, Stitcher, Newsy and Triton. The annual filing also reports fourth-quarter results.
In 2019, Scripps acquired 27 television stations through Raycom, Cordillera and Nexstar-Tribune transactions, and acquired podcasting software company Omny Studio. The company said its focus had shifted to integrating the acquired stations.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $1,423.8 million | $1,208.4 million |
| Operating income | $65.5 million | $130.0 million |
| Continuing operations, net | $(18.4) million | $56.1 million |
| Net income (loss) attributable to Scripps shareholders | $(18.4) million | $20.4 million |
| Cash from continuing operating activities | $(27.5) million | $130.2 million |
| Cash and cash equivalents, year-end | $33.0 million | $107.1 million |
| Long-term debt principal, including current portion | $1,952.5 million | $696.3 million |
Revenue rose 17.8%, while operating income fell about 50%. Calculated operating margin declined to approximately 4.6% from 10.8%. The 2019 net loss from continuing operations reflected higher interest and acquisition-related costs, among other items. Fourth-quarter revenue was $444.4 million and net income attributable to shareholders was $10.7 million, versus $368.1 million and $22.0 million, respectively, in fourth-quarter 2018.
Local Media revenue increased 11.5% to $1,022.8 million, but segment profit fell 13.2% to $217.9 million. National Media revenue increased 38.4% to $396.1 million and segment profit rose 72.3% to $24.0 million. Excluding acquired operations, consolidated revenue declined 2.6%; management attributed the decrease mainly to lower political revenue in a non-election year.
Cash used in investing activities was $1,264.5 million, including $1,190.4 million for acquisitions; capital expenditures were $61.0 million. Financing activities provided $1,217.8 million, principally from new debt issuance. The $210 million revolving credit facility was undrawn at year-end; Scripps reported compliance with its financial covenants. It expected cash and operating cash flows to cover operating and capital needs over the following 12 months.
Scripps paid $16.4 million in dividends during 2019, equal to $0.20 per share. Its outstanding notes and term loans included $900 million of senior notes and approximately $1.053 billion of term-loan principal. Variable-rate debt creates interest-rate exposure; the company estimated that a 100-basis-point LIBOR increase would raise annual interest payments by about $10.5 million.
Material changes versus the prior comparable period
- Acquisition-driven growth materially increased revenue, assets and debt. Total assets rose to $3.56 billion from $2.13 billion; debt principal increased to $1.95 billion from $696.3 million.
- Interest expense rose to $80.6 million from $36.2 million, following the 2019 term loan and senior notes issued to finance acquisitions.
- Operating cash flow from continuing operations swung to a $27.5 million use from $130.2 million provided. Management cited lower segment profit, working-capital changes and $28 million of higher cash interest payments; accounts-receivable timing reduced year-over-year cash by $83 million.
- Political revenue was $23.3 million, down from $139.6 million in the 2018 election year. Local Media retransmission revenue increased 27.0% as reported, while core advertising increased 28.9%, both affected by acquired stations.
Outlook, risks and unusual items
No specific consolidated revenue or earnings guidance is provided. Management expected regular quarterly dividends to continue, subject to Board review, and anticipated about $33 million of defined-benefit pension and supplemental-plan contributions in 2020. It expected approximately $20 million of additional FCC spectrum-repacking expenditures through the end of 2020. The company expected to renew MVPD contracts covering 41% of its subscriber base in 2020 and a further 18% by the end of 2021.
- Key business risks include advertising cyclicality and economic downturns; audience fragmentation and streaming competition; declining traditional MVPD subscribers; and the renewal terms or loss of network affiliation, carriage and retransmission agreements.
- Debt service, variable interest rates, restrictive covenants and the need to integrate large acquisitions could constrain financial flexibility. Management identified acquisition integration, expected synergies and revenue growth as risks.
- Broadcasting risks include FCC regulation and license renewals, spectrum-repacking deadlines and costs, and uncertainty around adoption of ATSC 3.0. Cybersecurity incidents and content costs are also identified risks.
- Acquisition and integration costs were $26.3 million, versus $4.1 million in 2018. The year included $80.6 million of interest expense. No goodwill or intangible-asset impairment was recorded in 2019; 2018 included an $8.9 million noncash impairment of the Pickler & Ben programming asset.
- Auditors issued unqualified opinions on the financial statements and internal controls. The acquired Cordillera and Nexstar-Tribune operations, representing 37% of year-end assets and 13% of annual revenue, were excluded from management’s and the auditor’s internal-control assessments.
- Ordinary-course litigation, including defamation and broadcast-license matters, was not expected to result in material loss. A new share repurchase authorization of up to $100 million was approved in February 2020.
Important facts for investors to verify
- Whether acquired stations deliver the anticipated integration benefits and improve Local Media profitability, given the reported decline in Local Media segment profit.
- How Scripps will manage debt service and refinancing needs, particularly with low year-end cash, negative 2019 operating cash flow and significant variable-rate borrowings.
- Whether retransmission fee increases offset MVPD subscriber losses, and the outcome and economics of upcoming carriage renewals.
- Whether National Media revenue and profit growth can continue as the company invests in Katz, Stitcher, Newsy and Triton.
- The assumptions behind acquisition valuations and goodwill, and the control and reporting integration of acquired operations excluded from the 2019 internal-control assessment.