Scripps(SSP) - 2023 Q2 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, comprehensive income (loss), cash flows, and equity, along with detailed notes explaining significant accounting policies, recent events, and financial performance Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets from $6.43 billion at December 31, 2022, to $5.70 billion at June 30, 2023, primarily due to a significant goodwill impairment, with total equity also decreasing from $2.13 billion to $1.43 billion Condensed Consolidated Balance Sheets | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Total Assets | $5,702,733 | $6,431,005 | | Goodwill | $2,234,574 | $2,920,574 | | Total Equity | $1,428,189 | $2,130,825 | | Cash and cash equivalents | $39,304 | $18,027 | | Long-term debt (less current portion) | $2,919,317 | $2,853,793 | Condensed Consolidated Statements of Operations The company reported a significant net loss for both the three and six months ended June 30, 2023, primarily driven by a $686 million goodwill impairment charge, with operating revenues decreasing and interest expense increasing substantially Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total operating revenues | $582,836 | $594,467 | $1,110,614 | $1,160,173 | | Impairment of goodwill | $686,000 | — | $686,000 | — | | Operating income (loss) | $(621,228) | $88,979 | $(604,746) | $160,256 | | Interest expense | $(52,275) | $(36,011) | $(101,113) | $(72,510) | | Net income (loss) | $(669,829) | $41,740 | $(688,369) | $64,105 | | Net income (loss) per basic share of common stock | $(8.10) | $0.34 | $(8.49) | $0.46 | Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive loss for the three and six months ended June 30, 2023, significantly widened compared to the prior year, primarily reflecting the reported net loss Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) | $(669,829) | $41,740 | $(688,369) | $64,105 | | Total comprehensive income (loss) attributable to preferred and common stockholders | $(669,804) | $42,570 | $(688,319) | $65,765 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased significantly in the first six months of 2023 compared to 2022, mainly due to lower segment profit and higher interest payments, while financing activities turned positive due to net borrowings Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $24,905 | $106,585 | | Net cash used in investing activities | $(26,685) | $(47,243) | | Net cash provided by (used in) financing activities | $23,057 | $(101,585) | | Increase (decrease) in cash, cash equivalents and restricted cash | $21,277 | $(42,243) | Condensed Consolidated Statements of Equity Total equity decreased substantially from $2.13 billion at December 31, 2022, to $1.43 billion at June 30, 2023, primarily due to the comprehensive loss incurred Condensed Consolidated Statements of Equity | Metric | As of June 30, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Total Equity | $1,428,189 | $2,130,825 | | Retained Earnings (Deficit) | $(362,807) | $350,715 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, recent acquisitions, restructuring costs, income taxes, leases, goodwill, debt, employee benefits, segment information, capital stock, and comprehensive income, highlighting a strategic restructuring, goodwill impairment, and credit agreement amendment - Restructuring costs totaled $24.5 million in the first six months of 2023, including a $13.6 million charge related to programming asset write-down, aiming for at least $40 million in annual savings[67][68][129] - A $686 million non-cash goodwill impairment charge was recognized for the Scripps Networks reporting unit in Q2 2023, attributed to softness in the national advertising marketplace and declining linear television viewership trends[84][133] - On July 31, 2023, the company amended its Credit Agreement, increasing its revolver borrowing capacity by $185 million to $585 million, and borrowed $283 million to pay off the remaining principal balance of the term loan maturing in 2024[18][167] - The Board of Directors authorized a new debt repurchase program in February 2023, allowing for a reduction of up to $500 million in outstanding principal balance of senior secured and unsecured notes, expiring March 1, 2026[102][170] - Preferred stock dividends paid were $24.0 million in both the first six months of 2023 and 2022, with the company prohibited from paying dividends on and repurchasing common shares until all preferred stock shares are redeemed[120][134][172] Segment Operating Revenues and Profit (Six Months Ended June 30) | Segment | Operating Revenues 2023 (in thousands) | Operating Revenues 2022 (in thousands) | Change (%) | Segment Profit 2023 (in thousands) | Segment Profit 2022 (in thousands) | Change (%) | | :---------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------------------------------- | :--------------------------------- | :--------- | | Local Media | $664,142 | $682,480 | (2.7)% | $126,860 | $135,135 | (6.1)% | | Scripps Networks | $447,702 | $477,997 | (6.3)% | $111,869 | $158,373 | (29.4)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key business developments, consolidated financial performance, segment-specific results, liquidity, capital resources, and critical accounting policies Executive Overview The E.W. Scripps Company, a diverse media enterprise, initiated a strategic restructuring in January 2023 targeting $40 million in annual savings, launched Scripps Sports, and secured new broadcasting agreements, despite a $686 million goodwill impairment due to national advertising market softness - Strategic restructuring announced in January 2023 aims for at least $40 million in annual savings, with $20 million expected by the end of 2023[129] - Scripps Sports launched in December 2022 to pursue partnerships with sports leagues, conferences, and teams, leveraging local market depth and national broadcast reach[128] - Multi-year agreements secured to televise regular season Friday night WNBA games on ION (April 2023) and Vegas Golden Knights NHL games on KMCC (May 2023)[131][132] - A $686 million non-cash goodwill impairment charge was recorded for the Scripps Networks reporting unit in Q2 2023 due to softness in the national advertising marketplace and declining linear television viewership trends[133] Consolidated Results of Operations Consolidated operating revenues decreased by 2.0% for Q2 2023 and 4.3% for the first six months, driven by declines in Local Media and Scripps Networks, while a $686 million goodwill impairment and increased interest expense led to a substantial net loss Consolidated Operating Revenues | Period | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Q2 | $582,836 | $594,467 | (2.0)% | | YTD | $1,110,614 | $1,160,173 | (4.3)% | - Cost of revenues increased by 2.7% in Q2 2023 and 3.1% for the first six months of 2023, mainly due to higher network affiliation fees at Scripps Networks[138] - Selling, general and administrative expenses remained flat in Q2 2023 and decreased 1.9% for the first six months of 2023, driven by lower ratings costs and advertising/promotion, partially offset by higher payroll and stock compensation[139] - Interest expense increased $16.3 million in Q2 2023 and $28.6 million for the first six months of 2023 due to higher year-over-year interest rates on variable debt borrowings[142] Consolidated Net Income (Loss) | Period | 2023 (in thousands) | 2022 (in thousands) | | :----- | :------------------ | :------------------ | | Q2 | $(669,829) | $41,740 | | YTD | $(688,369) | $64,105 | Business Segment Results The Local Media segment saw a slight revenue decrease due to lower advertising, partially offset by increased distribution, while Scripps Networks experienced a more significant decline in revenues and profit due to national advertising market softness and declining linear TV viewership Local Media Local Media revenues decreased slightly by 1.0% in Q2 and 2.7% YTD due to core and political advertising declines, partially offset by a 14.1% increase in Q2 and 8.5% YTD in distribution revenues, with segment profit stable in Q2 but down YTD Local Media Operating Revenues | Revenue Type | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Change (%) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Change (%) | | :----------------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Core advertising | $149,449 | $157,671 | (5.2)% | $290,762 | $315,008 | (7.7)% | | Political | $3,846 | $24,009 | (84.0)% | $7,371 | $29,777 | (75.2)% | | Distribution | $195,266 | $171,126 | 14.1% | $358,707 | $330,708 | 8.5% | | Total operating revenues | $352,219 | $355,819 | (1.0)% | $664,142 | $682,480 | (2.7)% | Local Media Segment Profit | Period | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Q2 | $81,017 | $80,742 | 0.3% | | YTD | $126,860 | $135,135 | (6.1)% | Scripps Networks Scripps Networks revenues, primarily advertising, decreased by 3.2% in Q2 and 6.3% YTD due to national advertising market softness and declining linear TV viewership, leading to a significant segment profit decrease of 17.7% in Q2 and 29.4% YTD Scripps Networks Operating Revenues | Period | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Q2 | $231,229 | $238,929 | (3.2)% | | YTD | $447,702 | $477,997 | (6.3)% | - Revenue decline driven by softness in the national advertising marketplace, macroeconomic challenges, and declining linear television viewership, partially offset by expanded distribution on Connected TV platforms[158] Scripps Networks Segment Profit | Period | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Q2 | $60,343 | $73,297 | (17.7)% | | YTD | $111,869 | $158,373 | (29.4)% | - Programming expense increased by 3.3% in Q2 and 4.9% YTD due to higher affiliate fees and increased distribution across the networks[160] Liquidity and Capital Resources The company's liquidity is supported by $39.3 million cash and $323 million available under its revolver as of June 30, 2023, with post-period revolver capacity increased to $585 million and $283 million borrowed to pay off a 2024 term loan, expecting compliance with debt covenants and a new $500 million debt repurchase authorization - As of June 30, 2023, the company had $39.3 million of cash on hand and $323 million of additional borrowing capacity under its revolving credit facility[162] - On July 31, 2023, the Revolving Credit Facility's borrowing capacity was increased to $585 million, and $283 million was borrowed to pay off the remaining principal balance of the term loan maturing in October 2024[167] - The company expects to be in compliance with its maximum first lien net leverage ratio covenant (5.0x through December 31, 2024, then stepping down)[169] - A new debt repurchase authorization permits a reduction of up to $500 million in outstanding principal balance of senior secured and unsecured notes, expiring March 1, 2026[170] - The company is prohibited from paying dividends on and repurchasing common shares until all preferred stock shares are redeemed[172] Critical Accounting Policies and Estimates The company identifies acquisitions, goodwill and indefinite-lived intangible assets, and pension plans as its most critical accounting policies and estimates, requiring significant judgment and assumptions - The most critical accounting policies and estimates are related to acquisitions, goodwill and indefinite-lived intangible assets, and pension plans[176] - These policies require significant judgment and assumptions about matters that are highly uncertain, and different estimates could materially change the financial statements[175][176] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from variable-rate credit agreement borrowings, where a 100 basis point increase in SOFR would increase annual interest expense by approximately $15.7 million, and does not use derivative instruments for speculative trading - The company is subject to interest rate risk associated with its credit agreement, as borrowings bear interest at SOFR plus respective fixed margin spreads or spreads determined relative to the Company's leverage ratio[182] - A 100 basis point increase in SOFR would increase annual interest expense on variable rate borrowings by approximately $15.7 million[182] - The company does not use derivative instruments for speculative trading purposes[181] Fair Value of Long-Term Debt (June 30, 2023) | Debt Type | Cost Basis (in thousands) | Fair Value (in thousands) | | :-------------------------- | :------------------------ | :------------------------ | | Revolving credit facility | $70,000 | $70,000 | | Senior secured notes, 2029 | $523,356 | $423,264 | | Senior unsecured notes, 2027 | $425,667 | $346,919 | | Senior unsecured notes, 2031 | $392,071 | $276,900 | | Term loan, 2024 | $282,750 | $282,220 | | Term loan, 2026 | $732,631 | $721,641 | | Term loan, 2028 | $555,000 | $540,431 | | Total Long-term debt | $2,981,475 | $2,661,375 | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls over financial reporting during the period - The Chief Executive Officer and Chief Financial Officer concluded that the design and operation of disclosure controls and procedures were effective as of June 30, 2023[186] - There were no changes to the company's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[187] PART II - Other Information Item 1. Legal Proceedings The company is involved in ordinary course litigation and regulatory proceedings, including defamation actions and broadcast license renewals, none of which is expected to result in material loss - The company is involved in ordinary course litigation and regulatory proceedings, including defamation actions and broadcast license renewals[13] - None of the legal proceedings are expected to result in material loss[13] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in the company's 2022 Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the 2022 Annual Report on Form 10-K[14] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of unregistered equity securities during the quarter ended June 30, 2023 - No sales of unregistered equity securities occurred during the quarter ended June 30, 2023[15] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the quarter ended June 30, 2023 - No defaults upon senior securities occurred during the quarter ended June 30, 2023[16] Item 4. Mine Safety Disclosures This item is not applicable to the company - The company has no mine safety disclosures[17] Item 5. Other Information On July 31, 2023, the company amended its credit agreement, increasing its revolver borrowing capacity by $185 million to $585 million and borrowing $283 million to pay off a term loan, with no directors or officers adopting, modifying, or terminating Rule 10b5-1 trading arrangements during the quarter - On July 31, 2023, the company entered into the Eighth Amendment to the Third Amended Restated Credit Agreement, increasing its revolver borrowing capacity by $185 million to $585 million. The company borrowed $283 million on the revolver to pay off the remaining principal balance of its term loan maturing in 2024[18] - None of the company's directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023[19] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including Section 302 and 906 Certifications, the Eighth Amendment to the Third Amended and Restated Credit Agreement, and the unaudited Condensed Consolidated Financial Statements in iXBRL format - Key exhibits filed include Section 302 Certifications (31(a), 31(b)), Section 906 Certifications (32(a), 32(b)), the Eighth Amendment to the Third Amended and Restated Credit Agreement (10.1), and the company's unaudited Condensed Consolidated Financial Statements in iXBRL format (101)[20] Signatures Signatures The report was duly signed on behalf of The E.W. Scripps Company by Daniel W. Perschke, Vice President, Controller (Principal Accounting Officer), on August 4, 2023 - The report was signed by Daniel W. Perschke, Vice President, Controller (Principal Accounting Officer) of The E.W. Scripps Company[22] - The report was dated August 4, 2023[22]