The E.W. Scripps Company — Q2 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2018. Scripps operates Local Media and National Media businesses; its 34-station radio business is classified as held for sale and reported as discontinued operations. The October 2017 Katz acquisition materially affects comparisons with 2017.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Operating revenue | $283.4 million | $216.2 million | $537.6 million | $414.7 million |
| Operating income | $22.5 million | $18.4 million | $21.8 million | $18.5 million |
| Operating margin | 7.9% | 8.5% | 4.1% | 4.5% |
| Continuing-operations income, net | $8.7 million | $6.9 million | $0.1 million | $4.1 million |
| Net income (loss) attributable to Scripps shareholders | $5.7 million | $8.5 million | $(20.7) million | $6.6 million |
| Diluted EPS | $0.06 | $0.10 | $(0.25) | $0.08 |
Revenue and segment trends. Q2 revenue rose 31.1%; first-half revenue rose 29.6%. Katz contributed $47.0 million of Q2 and $89.6 million of first-half revenue. Local Media revenue increased 5.9% in Q2 and 4.3% in the first half, led by retransmission fees and political advertising; core advertising declined 6.1% and 3.1%, respectively. National Media reported segment profit of $2.0 million in Q2 and $4.1 million in the first half, versus losses in the comparable 2017 periods. Local Media segment profit increased 9.5% in Q2 and 4.8% year to date.
Costs and margins. Programming expense increased 71.7% in Q2 and 71.4% in the first half, reflecting Katz, higher network affiliation fees and original programming. Employee compensation and other expenses also increased, partly due to Katz and national-brand growth. Restructuring charges were $2.3 million in Q2 and $6.1 million year to date. Despite higher revenue and operating income, operating margin was lower in both comparison periods.
Cash flow and investment. First-half operating cash flow was $22.6 million, down from $29.0 million in 2017; continuing-operations operating cash flow was $17.6 million versus $23.0 million. Investing activities used $29.9 million, including $26.0 million of property and equipment additions. Financing activities used $15.7 million, including $8.2 million in dividends and $4.4 million in share repurchases. Cash and cash equivalents were $125.7 million at June 30, including $5.1 million held as restricted cash.
Debt and liquidity. Debt principal totaled $700.4 million ($692.3 million net carrying value), compared with $701.9 million principal at year-end 2017. The balance included $400 million of 5.125% senior notes due 2025 and a $297.8 million Term Loan B due 2024. The $125 million revolving facility had no borrowings; Scripps reported compliance with financial covenants and no excess-cash-flow repayment requirement. Management said cash, operating cash flow and borrowing capacity should meet operating and capital needs for the next 12 months.
Material changes, outlook and risks
- Radio divestiture and impairment: First-half discontinued-operations loss was $21.4 million, including a $20 million non-cash goodwill impairment in Q1 and a $5.9 million Q2 charge to adjust radio assets to expected sale values. Scripps agreed to sell five Tulsa stations for $12.5 million and two Milwaukee stations for $16 million; the transactions were subject to FCC approval and other closing conditions, with Q4 2018 closings expected. Management expected to finalize agreements for the remaining 27 stations in Q3.
- Taxes: The first-half effective tax rate was 92%, compared with (23)% in 2017, reflecting low pretax income and other tax items. The Tax Cuts and Jobs Act reduced the federal statutory rate to 21% from 35%.
- Capital returns: Scripps initiated a quarterly dividend in 2018 and paid $0.05 per share in each of Q1 and Q2. Management expected dividends to continue, subject to earnings, financial condition and capital needs. The share-repurchase authorization had $78.2 million remaining through March 1, 2020; no shares were purchased during Q2.
- Management commentary and risks: Restructuring begun in late 2017 is intended to improve local-media performance and support national-media growth. Management cited continued industry increases in network affiliation fees and noted local advertising sensitivity to economic conditions and political-ad demand. It expected FCC repack reimbursements to cover anticipated costs, while noting potential exposure to disputes over reimbursement. Ordinary-course litigation was not expected to result in material loss; Scripps reported no material changes to its previously disclosed risk factors.
- Other notable items: Interest expense increased year over year, primarily due to debt used to finance Katz. Scripps expected to contribute a further $15.6 million to pension and SERP plans in the remainder of 2018. It expected the new lease-accounting standard to significantly increase reported assets and liabilities. Disclosure controls were deemed effective; Katz was excluded from management’s internal-control assessment under SEC guidance.
Important facts for investors to verify
- Progress, final terms, approvals and closing proceeds for the radio-station divestiture, including agreements for the remaining stations.
- Whether Local Media’s core-advertising decline and rising affiliation fees continue, and how political advertising affects later 2018 results.
- Katz and other National Media businesses’ contribution to sustainable segment profit after acquisition-related costs.
- Cash generation, capital spending, pension contributions and debt-service capacity alongside dividends and repurchases.
- The assumptions behind radio asset sale values and impairment charges, and the eventual FCC repack reimbursements.