E.W. SCRIPPS Co quarterly report, Q3 FY2020

The E.W. Scripps Company — Q3 2020 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2020. Scripps operates local television stations and national media businesses. Comparisons are affected by the 2019 acquisitions of Cordillera and Nexstar-Tribune stations, election-year political advertising, COVID-19 impacts, and Stitcher’s classification as discontinued operations.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Operating revenue	$493.3 million	$330.9 million	$1,266.4 million	$928.3 million
Operating income	$107.2 million	$5.6 million	$129.7 million	$39.5 million
Income (loss) from continuing operations, net	$64.0 million	$(17.3) million	$39.3 million	$(14.9) million
Net income (loss) attributable to Scripps shareholders	$58.5 million	$(21.9) million	$24.7 million	$(29.1) million
Net income (loss) per diluted share	$0.69	$(0.27)	$0.29	$(0.36)

Q3 operating margin was approximately 21.7%, compared with 1.7% a year earlier; nine-month operating margin was approximately 10.2%, compared with 4.3%. These are calculated as operating income divided by operating revenue.
Q3 revenue rose 49.1%; excluding acquired stations, it increased 35%. Nine-month revenue rose 36.4%; excluding acquired stations, it increased 12%.
Q3 advertising revenue was $320.0 million, including $98.3 million of political advertising versus $5.0 million in Q3 2019. Core advertising was $221.7 million. Retransmission and carriage revenue increased to $153.9 million from $97.1 million.
Q3 Local Media segment profit was $144.6 million versus $49.7 million; National Media segment profit was $12.1 million versus $9.7 million. Segment profit is a non-GAAP operating measure defined by the company.
Nine-month cash provided by operating activities from continuing operations was $178.3 million, versus $28.2 million; cash from continuing and discontinued operations combined was $159.8 million versus $11.0 million. Capital expenditures were $38.1 million.

Balance sheet, debt and liquidity

At September 30, cash and cash equivalents were $128.5 million, total assets $3.586 billion, and total equity $923.1 million.
Debt principal outstanding was $1.945 billion, comprising $900 million of senior notes and approximately $1.045 billion of term loans; net carrying value was $1.901 billion. There were no revolver borrowings. The $210 million revolving facility had $204 million of available capacity after letters of credit.
Management said it expected available cash, operating cash flow, cost reductions and government relief measures to provide sufficient liquidity for the next 12 months. The company was in compliance with financial covenants; its term loans and unsecured notes have no maintenance covenants.
Cash increased from $33.0 million at year-end 2019. Nine-month financing cash use was $44.5 million, including $12.4 million of dividends. No shares were repurchased in the first nine months.

Material changes and management outlook

Revenue growth reflected acquired stations, higher retransmission fees and election-year political advertising, which more than offset pandemic-related weakness in core advertising. Core advertising excluding acquired stations declined 13% in Q3 and 18% year to date.
Advertising improved sequentially from the April downturn. Management expected continued recovery but local-market spending to remain below 2019 levels through the rest of 2020 and into early 2021. It expected National Media revenue growth to remain below the pre-pandemic year-over-year pace of 30%.
Cost-saving actions—including reduced capital spending, hiring and pay measures, and lower travel, entertainment and marketing expenses—were expected to generate $75 million of full-year cash savings, with approximately $21 million in Q4.
On September 23, Scripps agreed to acquire ION Media for $2.65 billion. Planned financing included cash, $1.85 billion of secured and unsecured debt, and Berkshire Hathaway’s $600 million preferred investment. Berkshire Hathaway also receives a warrant for up to 23.1 million Class A shares at $13 per share. Preferred terms prohibit common dividends and repurchases until the preferred shares are redeemed.
The ION deal requires regulatory approvals and divestiture of up to 26 stations. The filing warns of financing, approval, divestiture and closing risks; certain termination circumstances could require a $35 million fee. The acquisition agreement requires closing even if anticipated financing for Scripps or the station buyer is unavailable.
Stitcher was classified as discontinued operations and sold on October 16, 2020, for $325 million: $265 million upfront and up to $60 million in earnouts. Stitcher reported a nine-month net loss of $14.6 million.
WPIX was classified as held for sale after Mission Broadcasting exercised an option to buy it for $75 million plus accrued interest; closing remained subject to customary conditions and regulatory approval.

Risks, contingencies and unusual items

COVID-19 and economic weakness may continue to pressure advertising demand. Management cited uncertainty about the pandemic’s duration and its effects on operations and financial condition.
Acquisition and integration costs were $10.9 million in Q3 and $16.1 million year to date, including costs related to the pending ION transaction. Q3 also included a $2.0 million net gain on disposal of property and equipment.
Goodwill was $1.202 billion, including $904 million in Local Media. The company recorded no impairment in the period, but its 2020 discounted cash flow values were below those in the 2019 annual impairment test; valuation depends on uncertain cash-flow and discount-rate assumptions.
The company had $158.8 million of pension-benefit liabilities and had contributed $29.7 million to its defined benefit pension plan in the first nine months. It did not defer 2020 pension contributions under the CARES Act and still expected to contribute $2.9 million for 2020 funding requirements.
Ordinary-course litigation and regulatory proceedings were not expected to result in material loss. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Investor verification priorities

Verify the ION acquisition’s financing, regulatory approvals, required station divestitures, final purchase terms and implications for leverage and common dividends.
Track local core advertising recovery, political-advertising comparisons, retransmission subscriber trends and network-affiliation fee increases.
Reconcile cash-flow improvement with working-capital timing, including advance political-advertising receipts and slower vendor payments.
Confirm WPIX sale approval and proceeds, and monitor Stitcher earnouts against its 2020 and 2021 results.
Assess covenant headroom, debt repayment plans and the effect of the November 2020 debt-repurchase authorization, which was announced after the reporting date.
Monitor goodwill and FCC-license valuation assumptions, particularly for Local Media, if market or operating conditions weaken.