The E.W. Scripps Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Scripps operates television, radio and digital media businesses. Newspaper operations were spun off in April 2015, affecting year-over-year comparability.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $227.8 million | $198.1 million | $437.3 million | $321.2 million |
| Operating income (loss) | $23.3 million | $(15.7) million | $32.2 million | $(25.3) million |
| Net income (loss) | $11.5 million | $(31.4) million | $16.4 million | $(36.5) million |
| Diluted EPS | $0.13 | $(0.37) | $0.19 | $(0.52) |
Q2 revenue rose 15%; six-month revenue rose 36%. Q2 operating margin was approximately 10.2%. Growth reflected higher retransmission fees, political advertising and digital revenue, along with acquired operations. Comparisons are affected by the April 2015 Journal broadcast acquisition and subsequent digital acquisitions. Q2 2015 included substantial acquisition and integration costs and a discontinued-operations loss; the latter included a $30 million noncash newspaper-disposal impairment.
- Revenue mix: Q2 television revenue was $191.7 million, up 14.5%; retransmission revenue was $53.4 million, up 46.4%. Radio revenue was $18.2 million, down 6.3%. Digital revenue was $15.2 million, up 76.8%, while the digital segment remained loss-making at $4.7 million.
- Segment profit: Television generated $53.3 million in Q2, up 19.5%; radio generated $3.9 million, down 20.5%. Digital and syndication and other reported losses of $4.7 million and $1.0 million, respectively. Segment profit is a company-defined measure and excludes various costs, including interest, depreciation and amortization, and pension expense.
- Cash flow: Six-month operating cash flow was $37.4 million, compared with cash used of $63.0 million a year earlier. Investing activities used $57.5 million, including $43.5 million for acquisitions; financing activities used $21.5 million. Cash and cash equivalents fell $41.6 million from year-end to $66.5 million.
- Liquidity and debt: Current assets were $277.6 million and current liabilities $104.9 million. Debt carrying value was $397.5 million, including $6.7 million current; debt fair value was $399.2 million. The $392.5 million term loan bears 3.50% interest at June 30 and matures in November 2020, with $378.5 million scheduled for 2020. No revolving-credit borrowings were outstanding. The company reported compliance with credit covenants.
Material changes, outlook and risks
- Q2 acquisitions expanded digital operations: Cracked was acquired for $39 million cash and Stitcher for $4.5 million. Cracked contributed $1.2 million of revenue from acquisition through quarter-end; the filing reports $4.9 million of revenue from Cracked and Midroll combined for Q2.
- Management said a new retransmission agreement effective January 1, 2016 covered approximately 3 million households. Political advertising demand is typically higher in the third and fourth quarters of even-numbered years; the company focused on local-news investment to improve ratings and capitalize on the election cycle.
- Management expected cash, operating cash flow and available borrowing capacity to cover operating and capital needs over the next 12 months. It expected $6 million to $8 million of pension and SERP contributions for the remainder of 2016. No specific earnings or revenue guidance was provided.
- Risks cited include advertising demand and economic conditions, consumer tastes, programming costs, labor relations, technology, competition, interest rates, regulation and reliance on third-party vendors. Management reported no material change to the risk factors in its 2015 Form 10-K. Ordinary-course litigation and broadcast-license proceedings were not expected to result in material loss.
- The company repurchased 538,000 Class A shares for $8.6 million during Q2; $65.1 million remained under its $100 million authorization, which ran through December 2016. It paid no dividends in the first half of 2016.
- Early adoption of share-based compensation guidance increased deferred tax assets and opening retained earnings by $14.7 million. Management noted that weaker economic conditions or lower taxable income could affect realization of federal deferred tax assets.
Investor items to verify
- How much of revenue and profit growth reflects recurring retransmission, advertising and digital performance versus acquisitions and political advertising?
- Whether radio weakness and continuing digital-segment losses improve, and how acquired digital businesses contribute to margins and cash flow.
- Cash generation, acquisition spending, share repurchases and liquidity relative to debt maturities, covenants and the large 2020 term-loan payment.
- Assumptions supporting deferred-tax-asset realization, acquisition valuations and goodwill, and pension funding requirements.