Business context and reporting period
The E.W. Scripps Company is a media enterprise with television, radio, digital and syndication businesses. This unaudited Form 10-Q covers the three months ended March 31, 2017; comparisons are with the first quarter of 2016. The April 28, 2017 financing transactions occurred after quarter-end.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $211.0 million | $209.5 million |
| Operating income | $1.5 million | $12.3 million |
| Net income (loss) | $(1.9) million | $4.9 million |
| Diluted EPS | $(0.02) | $0.06 |
| Operating cash flow | $9.5 million | $6.3 million |
| Investing cash flow | $(4.6) million | $(7.9) million |
| Financing cash flow | $(7.0) million | $(11.4) million |
Operating margin was approximately 0.7%, versus 5.9% a year earlier; net margin was approximately (0.9)%, versus 2.3%. Cash and cash equivalents were $132.3 million at March 31, down from $134.4 million at year-end 2016. Current assets were $341.8 million and current liabilities $90.9 million. Long-term debt, including its current portion, had a $392.4 million carrying amount; debt principal was approximately $394.9 million. No revolver borrowings were outstanding at quarter-end.
Material changes versus prior period
- Revenue increased 0.7%. Retransmission revenue rose $12.6 million, reflecting renewed agreements and contractual rate increases; lower political revenue in a non-election year and weaker local and national television advertising partly offset the increase.
- Operating income fell to $1.5 million from $12.3 million. Employee compensation rose 7.0%, and programming expense rose 14.3%, primarily reflecting higher network affiliation fees. The company also reported $3.5 million of defined-benefit pension expense below operating income.
- Segment profit declined in television ($34.7 million, down 16.7%) and radio ($1.6 million, down 25.0%). Digital revenue grew 24.6% to $15.4 million, but its segment loss widened to $6.2 million from $3.1 million. Cracked, acquired in April 2016, affects comparability; excluding Cracked, digital revenue rose 16% and expenses rose 25%.
- Operating cash flow improved by $3.1 million, primarily from working-capital changes, despite an $11 million year-over-year decline in segment profit. Working capital changes reduced cash by $8.0 million in Q1 2017.
Outlook, financing, risks and other notable items
- Management said cash, operating cash flow and available borrowing capacity should be sufficient for operating and capital needs over the next 12 months. It expected approximately $18 million of pension and SERP contributions during the remainder of 2017.
- On April 28, 2017, Scripps issued $400 million of notes bearing 5.125% interest and maturing May 15, 2025, using proceeds to repay its term loan B, pay issuance costs and for general corporate purposes. It also amended its revolver, increasing capacity from $100 million to $125 million and extending maturity to April 2022. The company expected to expense approximately $3.6 million of old financing costs in Q2.
- The company reported compliance with its existing credit agreement covenants at March 31. Risks include substantial debt, ability to incur additional debt, covenant restrictions, variable-rate borrowing exposure, and possible inability to refinance or meet debt obligations. Senior-note risks include subordination to secured debt and non-guarantor subsidiary creditors, potential fraudulent-transfer challenges to guarantees, change-of-control repurchase obligations and uncertain trading-market liquidity.
- The filing describes ordinary-course litigation and broadcast-license proceedings, none expected to result in material loss. No material changes were reported to previously disclosed risk factors other than those related to the new notes and amended credit agreement.
- Q1 share repurchases totaled 81,091 Class A shares for $1.8 million; $98.7 million remained under the repurchase authorization. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s inconsistent descriptions of the Senior Notes’ collateral: the risk discussion calls them unsecured and says they are not secured by company assets, while the New Financing note also says they are secured by substantially all company and subsidiary assets.
- Review the post-quarter refinancing documents and covenant terms, including the notes’ ranking, guarantees, collateral status, and the amended revolver’s borrowing conditions.
- Assess whether retransmission revenue growth can offset weaker advertising and rising compensation and programming costs, and whether digital losses narrow as those businesses scale.
- Monitor cash generation, pension funding needs, debt service and covenant headroom; management’s 12-month liquidity statement is an expectation, not a guarantee.