The E. W. Scripps Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; it is not a standalone quarterly filing. Scripps operates television and radio stations and local and national digital media businesses. The 2015 comparison is affected by the Journal broadcast acquisition and newspaper spin-off, and the 2016 comparison by the Cracked and Stitcher acquisitions.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $943.0 million | $715.7 million |
| Operating income (loss) | $126.7 million | $(82.9) million |
| Net income (loss) | $67.2 million | $(82.5) million |
| Diluted earnings (loss) per share | $0.79 | $(1.06) |
| Cash from continuing operating activities | $146.5 million | $8.8 million |
Revenue increased 31.8%. Operating margin was approximately 13.4%, versus a negative 11.6% in 2015, calculated from reported operating income and revenue. Fourth-quarter revenue was $272.7 million and net income was $38.3 million, compared with $204.8 million of revenue and a $21.5 million net loss in fourth-quarter 2015.
- Revenue mix: Television revenue was $802.1 million, radio $70.9 million, digital $62.1 million, and syndication and other $8.0 million. Advertising revenue was $680.8 million; retransmission revenue was $220.7 million.
- Drivers: Television political advertising rose nearly $92 million year over year in the presidential-election year. Television retransmission revenue increased about $84 million overall, including nearly $70 million excluding acquired stations, reflecting renewed agreements and contractual rate increases.
- Segment results: Television segment profit was $249.3 million, up 78.3%; radio segment profit was $12.8 million, roughly flat; digital recorded a $16.4 million segment loss, improved from a $17.1 million loss.
- Cash, liquidity and capital spending: Year-end cash and cash equivalents were $134.4 million, up from $114.6 million. Current assets were $345.9 million and current liabilities $104.1 million. Investing activities used $73.4 million, including $43.5 million for acquisitions and $27.9 million for property and equipment.
- Debt: Long-term debt, including current maturities, was approximately $393.2 million net of debt issuance costs; contractual principal was $395.8 million. The term loan B matures in November 2020 and bore 3.27% interest at year-end. The $100 million revolving facility matured in November 2018 and had no borrowings. Scripps reported compliance with financial covenants.
Material changes and unusual items
- The 2016 revenue increase reflects election-year political advertising, higher retransmission fees, acquired Journal stations and acquired digital operations. Acquisitions contributed $65 million of revenue from the acquired stations and $18 million from acquired digital operations, according to management.
- Cracked was acquired for $39 million cash in April 2016; Stitcher was acquired for $4.5 million cash in June 2016. Their results are included only after acquisition dates.
- The 2015 loss included $38.0 million of acquisition and integration costs, a $24.6 million noncash goodwill and intangible impairment charge, and substantial noncash pension settlement and curtailment charges. These items make the year-over-year earnings turnaround less comparable to underlying operating trends.
- 2016 employee compensation and benefits were $373.6 million; program and program-license costs were $174.6 million. Network affiliation fees rose $47 million year over year, and management said they may continue increasing over the next several years.
- Scripps repurchased $44.4 million of Class A shares in 2016 and authorized a new $100 million repurchase program through December 31, 2018; no shares had been purchased under the new authorization by year-end. No cash dividends were paid in 2016.
Outlook, risks and contingencies
- Management said cash and operating cash flows should be sufficient for operating and capital needs over the next 12 months. It expected approximately $19 million of pension contributions in 2017.
- Management expected retransmission agreements to be renewed upon expiration. Agreements covering approximately 1 million subscribers expire in 2017, 6 million in 2018, 7 million in 2019 and 3 million in 2020. Renewal rates and outcomes remain uncertain.
- Key risks include advertising cyclicality and economic weakness; audience fragmentation and OTT competition; possible pressure on advertising rates and retransmission revenue; rising network fees; FCC regulation and spectrum repacking; and cybersecurity threats.
- The qualified defined-benefit pension plan was underfunded by approximately $213.1 million at year-end; the SERPs had a separate $21.3 million obligation. Pension contributions may vary with asset returns, discount rates and funding rules.
- Goodwill was $616.8 million. The radio reporting unit’s fair value exceeded carrying value by only slightly more than 5%; management noted that a 0.5% increase in the discount rate or lower forecast cash flows could result in impairment. Cracked’s fair value equaled carrying value due to its recent acquisition, making it more sensitive to adverse changes.
- Ordinary-course litigation and broadcast-license proceedings were not expected to result in material loss. Potential indemnification obligations relating to the Journal transactions could be significant, but the amount, if any, was not determinable.
Investor verification priorities
- Separate organic growth from acquisition-related revenue and evaluate the contribution of election-year political advertising and retransmission rate increases.
- Review the sustainability of television profitability against rising network affiliation costs and the upcoming retransmission agreement renewals.
- Assess whether digital growth can reduce the segment’s continuing losses, including the performance and impairment sensitivity of Cracked, Midroll and Newsy.
- Verify debt repayment capacity, variable-rate exposure, covenant headroom and planned pension funding against cash-flow needs and the share-repurchase authorization.
- Examine pension assumptions and funding sensitivity, goodwill valuation headroom, and any developments in Journal-related indemnities or FCC proceedings.