The E.W. Scripps Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Scripps operates Local Media and National Media businesses; its radio operations are classified as discontinued operations and held for sale.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $302.7 million | $200.5 million | $840.3 million | $615.2 million |
| Operating income (loss) | $40.3 million | $(38.3) million | $62.2 million | $(19.8) million |
| Continuing-operations income (loss), net of tax | $20.0 million | $(27.6) million | $20.1 million | $(23.5) million |
| Net income (loss) attributable to Scripps shareholders | $19.1 million | $(26.7) million | $(1.6) million | $(20.1) million |
| Operating cash flow, continuing operations | Not presented for the quarter | Not presented for the quarter | $64.9 million | $27.6 million |
Q3 operating margin was approximately 13.3%, compared with negative 19.1% a year earlier; the prior-year period included a $35.7 million noncash impairment charge. Nine-month operating margin was approximately 7.4%, compared with negative 3.2%. Revenue growth reflected Katz, acquired in October 2017, higher retransmission fees, and political advertising. The new revenue-recognition standard also changed certain revenue and expense presentation; comparative 2017 results were retrospectively adjusted.
- Revenue mix: Q3 advertising revenue was $205.6 million, retransmission and carriage revenue $79.7 million, and other revenue $17.4 million. Political advertising was $40.0 million in Q3 versus $1.7 million a year earlier. Local Media core advertising declined 7.5% in Q3 and 4.5% year to date, partly reflecting political-ad displacement. Retransmission revenue increased 23.6% in Q3.
- Segments: Q3 Local Media revenue was $230.7 million and segment profit $67.4 million, up 23.1% and 122.0%, respectively. National Media revenue was $71.8 million and segment profit $2.8 million, versus a $4.4 million loss; Katz contributed $46.5 million of Q3 revenue.
- Cash and liquidity: Cash and equivalents were $129.7 million at September 30, 2018, down from $148.7 million at year-end 2017. Current assets were $560.9 million and current liabilities $210.2 million. Management said cash, operating cash flow and available borrowing capacity should meet operating and capital needs over the next 12 months.
- Debt: Total debt principal was $697.0 million, versus $701.9 million at December 31, 2017; net carrying value was $686.2 million. The $125 million revolving facility was undrawn. The company reported compliance with its financial covenants. Q3 interest expense was $9.0 million; nine-month interest expense was $27.0 million.
- Cash uses and equity: Nine-month investing cash outflow was $44.4 million, including $39.3 million of property and equipment additions. Financing cash outflow was $48.4 million, including $30.3 million of Class A share repurchases and $12.4 million of dividends. The quarterly dividend was $0.05 per share.
Material changes and unusual items
- Q3 operating expenses increased with Katz, higher network affiliation fees, Katz programming, and production of Pickler & Ben. Programming expense rose 74.2% year over year; management cited contractual affiliation-rate increases that may continue over the next several years.
- Nine-month discontinued operations recorded a $22.4 million loss, including a $25.9 million noncash write-down of radio goodwill. Radio station sales closed for six stations in October and November for $75.5 million; sales of the remaining eight stations were expected to close in December for $8 million.
- Restructuring charges were $0.9 million in Q3 and $7.0 million for the first nine months. Since Q3 2017, the company had incurred $11.4 million of restructuring charges and said it had nearly completed efforts toward $30 million in annualized cost reductions.
- In Q3, Scripps initially received 1.35 million shares under a $25 million accelerated share repurchase agreement; final shares were to be determined at settlement. At September 30, $52.3 million remained under the $100 million repurchase authorization.
- A $2.0 million SERP settlement charge was recorded in Q3. Following pension plan transactions in November 2018, the company expected a one-time noncash settlement charge of $10 million to $12 million in Q4.
Outlook, risks and contingencies
- No specific financial earnings or revenue guidance is provided. Management expects quarterly dividends to continue, subject to Board discretion and financial conditions.
- Pending acquisitions included two television stations for $55 million and Triton Digital for $150 million, both expected to close in Q4 2018 and funded with cash on hand. A $521 million acquisition of 15 Cordillera television stations was anticipated to close in Q1 2019; financing underwriting was obtained for incremental term-loan borrowings. These transactions remained subject to approvals and customary conditions.
- The company expected approximately $55 million of FCC repack spending through 2020, with $6 million expected in Q4 2018. It had submitted $8.5 million in reimbursement claims and received $0.9 million by September 30; management expected the remaining submitted reimbursement in Q4. Reimbursement timing and disputes over eligible costs remain relevant uncertainties.
- Risks cited include advertising demand and broader economic conditions, political-advertising variability, rising network affiliation fees, and interest-rate changes. The filing reported no material change to 2017 Form 10-K risk factors. Ordinary-course litigation, including defamation and broadcast-license matters, was not expected to result in material loss.
Most important facts for investors to verify
- How much reported growth and segment improvement is attributable to Katz and election-cycle political advertising, versus underlying organic trends—especially Local Media core-advertising declines.
- Completion, final consideration and any remaining obligations from radio divestitures, and the effect of discontinued operations on comparability.
- Closing, funding and regulatory status of the announced acquisitions, including the Cordillera transaction and its additional debt financing.
- Actual FCC repack costs and reimbursement timing, as well as the expected pension settlement charge and restructuring savings.
- Debt, covenant headroom, cash availability and capital-allocation capacity after acquisitions, dividends and share repurchases.