The E.W. Scripps Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. Scripps operates television, radio and digital media businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $216.5 million | $233.0 million | $659.3 million | $670.4 million |
| Operating income (loss) | $(37.0) million | $30.9 million | $(14.6) million | $70.0 million |
| Net income (loss) | $(26.7) million | $12.5 million | $(20.1) million | $28.9 million |
| Diluted EPS | $(0.32) | $0.15 | $(0.24) | $0.34 |
| Operating margin | (17.1)% | 13.3% | (2.2)% | 10.4% |
| Operating cash flow | Not separately provided | Not separately provided | $32.8 million | $81.0 million |
At September 30, cash and cash equivalents were $126.5 million; current assets were $354.9 million and current liabilities $108.7 million. Long-term debt had a net carrying value of $393.2 million, plus $2.7 million current debt. Shareholders’ equity was $926.8 million. Nine-month investing cash outflow was $23.5 million and financing cash outflow was $17.2 million.
Changes and operating drivers
- Q3 revenue fell 7.1%; nine-month revenue fell 1.7%. Television revenue decreased 8.8% in Q3 and 2.8% year to date; radio revenue fell 7.4% and 5.7%, respectively. Digital revenue grew 13.3% in Q3 and 21.4% year to date, but the segment remained loss-making.
- Lower political advertising in a non-election year and weakness in local and national television advertising outweighed higher retransmission revenue. Retransmission revenue rose about $11 million in Q3, largely from contractual rate increases, but Scripps reported emerging subscriber declines and more than $1 million of prior-period revenue adjustments.
- Q3 results included a $35.7 million non-cash impairment charge: $29 million against Cracked goodwill and $6.3 million against intangible assets. Scripps cited slower development of Cracked’s original revenue model and a revised operating model implying a smaller business.
- Nine-month operating cash flow decreased $48 million year over year. Management attributed the decline mainly to a $47 million reduction in segment profit, $11 million of additional pension contributions, working-capital changes and $6 million of advance production payments for a new lifestyle show.
Debt, liquidity, outlook and risks
- In April, Scripps issued $400 million of 5.125% senior unsecured notes due May 2025, using proceeds primarily to repay its term loan B. Its revolving credit facility was increased to $125 million and extended to April 2022; there were no revolver borrowings at quarter-end, and the company reported compliance with its covenants.
- After quarter-end, on October 2, Scripps acquired Katz Broadcasting for $292 million, net of its 5% minority interest, financing the purchase with a $300 million term loan B due 2024. The acquired networks’ results are included from the closing date; purchase accounting was not complete when the filing was prepared.
- Management expected cash, operating cash flow and available borrowing capacity to cover operating and capital needs for the next 12 months. It anticipated about $1.6 million of additional pension contributions in the remainder of 2017. No specific revenue or earnings guidance was provided.
- Management announced a reorganization effective January 1, 2018, combining local television and digital operations in a Local Media division and national content brands in a National Media division; further changes were expected. A review of operating and corporate costs, non-core assets and national brands was underway.
- Risks and uncertainties include advertising-market weakness, political-advertising variability, retransmission subscriber declines, execution and valuation assumptions for digital businesses, and uncertainty over whether federal funds will cover all costs of the FCC channel-repacking process affecting 17 stations. Scripps said ordinary-course litigation was not expected to result in material loss and reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Verify the causes and persistence of television and radio advertising weakness and the pace of retransmission subscriber losses and contract renewals.
- Review assumptions behind the Cracked impairment and whether digital revenue growth can translate into improved segment profitability.
- Assess the Katz acquisition’s final purchase-price allocation, integration, financing costs and effect on leverage and liquidity.
- Track operating cash generation, pension funding needs, and the cost and reimbursement of station repacking.
- Note that Scripps repurchased 298,560 Class A shares for $5.4 million during Q3; $88.8 million remained under its authorization at September 30, 2017.