The E.W. Scripps Company — Q1 2019 Form 10-Q
Business context and period. Scripps is a media company with Local Media television stations and National Media businesses including Katz, Stitcher, Newsy and Triton. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. Results include Triton, acquired in November 2018, and the Raycom stations acquired effective January 1, 2019, limiting comparability.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $292.2 million | $254.2 million |
| Operating income (loss) | $0.1 million | $(0.6) million |
| Loss from continuing operations | $(6.8) million | $(8.6) million |
| Net loss attributable to Scripps shareholders | $(6.8) million | $(26.4) million |
| Basic and diluted loss per share | $(0.08) | $(0.33) |
| Cash from continuing operating activities | $(13.2) million | $1.3 million |
| Capital expenditures | $13.4 million | $11.4 million |
Revenue increased 14.9%. Operating margin was approximately 0.05% (operating income divided by revenue). The effective tax rate was 39%, versus 19%; the company reported a $4.3 million income tax benefit despite its pretax loss.
- Revenue mix: Advertising was $174.2 million, retransmission and carriage $87.3 million, and other revenue $30.6 million. Core advertising rose modestly overall, but Local Media core advertising fell 2.2%; retransmission revenue increased 20.6%.
- Segments: Local Media revenue was $203.4 million and segment profit $34.2 million, up 5.9% and 8.1%, respectively. National Media revenue was $87.3 million and segment profit $4.9 million, versus $60.7 million and $2.0 million; Triton contributed $10.5 million of National Media revenue.
- Balance sheet at March 31: Cash was $14.4 million, down from $107.1 million at year-end. Total assets were $2.174 billion and equity $917.4 million. Long-term debt carrying value was $685.3 million; outstanding principal was $695.5 million. The company had no revolving-credit borrowings and a $150 million revolving facility, with $6.0 million of letters of credit outstanding.
- Cash movement: Cash decreased $92.7 million during the quarter. Investing activities used $67.6 million, including $55.2 million net cash for the Raycom acquisition; financing activities used $11.9 million, including dividends of $4.0 million. Operating cash use reflected a $25.8 million working-capital outflow, principally payment timing and higher annual incentive payments.
Material changes versus the prior period
- Revenue rose 14.9%, or 8.6% excluding acquired operations. Retransmission growth and National Media expansion offset weaker Local Media core advertising and lower political revenue in a non-election year.
- Costs increased alongside growth: employee compensation rose 11.9%, programming expense 17.6%, and other expenses 15.9%. Higher network-affiliation fees and continued investment in Katz, Stitcher and other national brands contributed to expense growth.
- Operating results were near break-even in both quarters. Q1 2018 net loss was larger primarily because it included an $18.5 million after-tax loss from discontinued radio operations, including a $20 million noncash impairment.
- Cash from continuing operations shifted from a $1.3 million source to a $13.2 million use, driven largely by the working-capital outflow.
Outlook, risks and unusual items
- Scripps said cash, operating cash flow and available borrowing capacity should be sufficient for operating and capital needs over the next 12 months. It gave no quantified operating or earnings guidance in the supplied filing text.
- The Cordillera acquisition of 15 stations for $521 million closed May 1, 2019, after quarter-end. It was financed with a $765 million term loan B; $240 million was set aside to fund part of the proposed Nexstar-Tribune station purchase. The separate $580 million purchase of eight stations remained subject to approvals and was expected to close with the Nexstar-Tribune merger; Scripps anticipated additional unsecured debt financing.
- Management expected quarterly dividends to continue, subject to Board discretion and the company’s results, financial position and cash flow. Q1 dividend was $0.05 per share. The repurchase authorization had $49.7 million remaining and expired March 1, 2020.
- Management cited advertising demand and economic conditions as risks. Local Media is sensitive to local economic conditions, particularly automotive and services advertising; political advertising is concentrated in the third and fourth quarters of even-numbered years. Network-affiliation fees may continue to increase.
- The FCC repack was expected to cost approximately $55 million through 2020; $26.8 million had been spent and $3.0 million reimbursed by March 31, 2019. Management expected the FCC fund to cover anticipated costs but noted potential reimbursement disputes.
- Q1 included $3.5 million of acquisition and integration costs and $0.9 million of restructuring costs. Scripps adopted lease accounting on January 1, 2019, recognizing $46.6 million of right-of-use assets and $50.3 million of lease liabilities, with no material impact on earnings.
- Ordinary-course litigation, including defamation and broadcast-license matters, was not expected to result in material loss. The filing reported no material changes to previously disclosed risk factors, no defaults on senior securities, and effective disclosure controls.
Important facts for investors to verify
- Progress, closing conditions and final financing for the pending Nexstar-Tribune station acquisition, including the resulting leverage and interest burden.
- Post-acquisition results and integration costs for Triton, Raycom and Cordillera, and whether National Media growth translates into sustained segment profit.
- Whether retransmission growth can offset core advertising weakness and rising programming and network-affiliation costs.
- Cash generation, working-capital trends, pension funding needs (approximately $17.9 million of additional 2019 contributions expected), and capacity under credit-facility covenants.
- FCC repack spending and reimbursements, and the Board’s future decisions on dividends and share repurchases.