E.W. Scripps Company — Q1 2016 Form 10-Q
Business context and period. Covers the three months ended March 31, 2016. Scripps operates television, radio, digital and syndication businesses. Results are not directly comparable with Q1 2015: the Journal broadcast acquisition closed April 1, 2015, and the newspaper business was spun off the same day. Q1 2016 includes the acquired broadcast operations and Midroll Media; the 2015 comparison includes newspaper results as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $209.5 million | $123.0 million |
| Operating income (loss) | $8.9 million | $(9.7) million |
| Net income (loss) | $4.9 million; $0.06 per diluted share | $(5.1) million; $(0.09) per diluted share |
| Continuing-operations income (loss) | $4.9 million | $(8.1) million |
| Cash from continuing operating activities | $6.3 million | $(8.3) million |
- Revenue increased 70.3%; $67.7 million came from acquired operations. At stations owned in both periods, political advertising rose $6.1 million and retransmission revenue rose $11.3 million. A new retransmission agreement covering about 3 million households took effect January 1, 2016.
- Operating margin was approximately 4.2%, versus approximately negative 7.8% a year earlier. Higher revenue and the absence of the prior-year loss contributed to the improvement, but acquired operations materially affect comparability.
- Television revenue was $179.9 million and segment profit $41.7 million, up 57.5% and 89.0%, respectively. Digital revenue rose 97.7% to $12.3 million, while its segment loss narrowed to $3.1 million from $4.7 million. Radio, newly included after the Journal acquisition, generated $14.6 million revenue and $2.1 million segment profit.
- Costs also increased with the enlarged business: employee compensation rose 40%, programming and program-license expense 92%, and depreciation and amortization to $14.4 million from $8.3 million. Interest expense increased to $4.6 million from $2.1 million.
- Cash and cash equivalents were $96.3 million at March 31, down from $108.1 million at year-end. Current assets were $290.6 million and current liabilities $97.2 million. Cash from continuing operations was partly offset by $21.2 million of working-capital outflows, including $14.9 million related to payroll and incentive compensation timing.
- Total debt, including current maturities, was $398.3 million; cash less debt was approximately $302.1 million. The $100 million revolving facility had no borrowings. The term loan rate was 3.50%; Scripps reported compliance with financing covenants and no required excess-cash-flow repayment at quarter-end.
- Investing activities used $6.8 million, including $6.3 million of capital expenditures. Financing activities used $11.4 million, including $10.1 million for repurchases of 570,000 Class A shares. $73.6 million remained under the $100 million repurchase authorization through December 2016.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said cash, operating cash flows and available borrowing capacity should be sufficient for operating and capital needs over the next 12 months.
- Management’s 2016 television strategy is to invest in local news and improve ratings, with the aim of maximizing results during the election cycle. Political advertising demand is typically higher in the third and fourth quarters of even-numbered years.
- Expected 2016 pension contributions were $6 million to $11 million for the remainder of the year, including SERPs; the filing separately estimates $5 million to $10 million for qualified defined-benefit plans and $1.1 million for SERP payments.
- On April 12, 2016, after quarter-end, Scripps acquired digital humor and satire brand Cracked for $39 million cash. Purchase accounting was incomplete at filing date.
- Early adoption of share-based compensation accounting guidance resulted in a $14.7 million increase to opening retained earnings and deferred tax assets. The Q1 tax benefit also included $1.9 million of excess tax benefits on share-based awards; the reported effective tax rate was negative 19%.
- Interest-rate exposure includes a $75 million swap expiring in December 2016. Stated risks include advertising demand and economic conditions, programming costs, labor relations, technology, competition, interest rates, regulation and reliance on third-party vendors.
- Scripps reported ordinary-course litigation and broadcast-license proceedings, none expected to result in material loss. It reported no material changes to 2015 annual-report risk factors, no defaults on senior securities, and effective disclosure controls.
Important facts for investors to verify
- How much of revenue and profit growth reflects the Journal and Midroll acquisitions versus organic performance, particularly in comparable television and digital operations.
- Whether retransmission gains and election-cycle political advertising persist, and how higher network fees and programming costs affect margins.
- Cash conversion and working-capital trends after the significant Q1 payroll and incentive-compensation outflow.
- Debt repayment capacity, covenant headroom, floating-rate exposure and the availability of the revolving credit facility.
- The Cracked acquisition’s final purchase-price allocation, subsequent operating contribution and effect on liquidity.