UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2017 OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number 0-16914
THE E.W. SCRIPPS COMPANY
(Exact name of registrant as specified in its charter)
Ohio (State or other jurisdiction of incorporation or organization) | 31-1223339 (IRS Employer Identification Number) | |
312 Walnut Street Cincinnati, Ohio (Address of principal executive offices) | 45202 (Zip Code) | |
Registrant’s telephone number, including area code: (513) 977-3000
Title of each class Securities registered pursuant to Section 12(b) of the Act: | Name of each exchange on which registered New York Stock Exchange | |
Class A Common shares, $.01 par value | ||
Securities registered pursuant to Section 12(g) of the Act: | ||
Not applicable | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company “in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of Class A Common shares of the registrant held by non-affiliates of the registrant, based on the $17.81 per share closing price for such stock on June 30, 2017, was approximately $1,007,000,000. All Class A Common shares beneficially held by executives and directors of the registrant and descendants of Edward W. Scripps have been deemed, solely for the purpose of the foregoing calculation, to be held by affiliates of the registrant. There is no active market for our Common Voting shares.
As of January 31, 2018, there were 69,582,721 of the registrant’s Class A Common shares, $.01 par value per share, outstanding and 11,932,722 of the registrant’s Common Voting shares, $.01 par value per share, outstanding.
Certain information required for Part III of this report is incorporated herein by reference to the proxy statement for the 2018 annual meeting of shareholders.
Index to The E.W. Scripps Company Annual Report
on Form 10-K for the Year Ended December 31, 2017
Item No. | Page | |
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As used in this Annual Report on Form 10-K, the terms “Scripps,” “Company,” “we,” “our” or “us” may, depending on the context, refer to The E.W. Scripps Company, to one or more of its consolidated subsidiary companies, or to all of them taken as a whole.
Additional Information
Our Company website is http://www.scripps.com. Copies of all of our SEC filings filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on this website as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our website also includes copies of the charters for our Compensation, Nominating & Governance and Audit Committees, our Corporate Governance Principles, our Insider Trading Policy, our Ethics Policy and our Code of Ethics for the CEO and Senior Financial Officers. All of these documents are also available to shareholders in print upon request or by request via e-mail to secretary@scripps.com.
Forward-Looking Statements
Our Annual Report on Form 10-K contains certain forward-looking statements related to the company's businesses that are based on management’s current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties, including changes in advertising demand and other economic conditions that could cause actual results to differ materially from the expectations expressed in forward-looking statements. Such forward-looking statements are made as of the date of this document and should be evaluated with the understanding of their inherent uncertainty. A detailed discussion of principal risks and uncertainties that may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors.” The company undertakes no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.
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PART I
Item 1. | Business |
We are an 139-year-old media enterprise with interests in local and national media brands. Founded in 1878, our motto is "Give light and the people will find their own way." Our mission is to do well by doing good — providing value to customers, employees and owners by informing, engaging and empowering those we serve. We serve audiences and businesses in our Local Media division through a portfolio of local television stations and their associated digital media products. Our Local Media division is one of the nation’s largest independent TV station ownership groups, with 33 television stations in 24 markets and a reach of nearly one in five U.S. television households. We have affiliations with all of the “Big Four” television networks. In our National Media division, we operate national media brands including podcast industry-leader, Midroll; next-generation national news network; Newsy, and four over-the-air broadcast networks, the Katz networks. We also operate an award-winning investigative reporting newsroom in Washington, D.C., and serve as the longtime steward of one of the nation's largest, most successful and longest-running educational programs, the Scripps National Spelling Bee. For a full listing of our outlets, visit http://www.scripps.com.
On October 2, 2017, we acquired the Katz networks. Katz operates four over-the-air networks — Bounce, Escape, Grit and Laff. Each of these networks reaches about 90 percent of all U.S. households.
At the end of 2017, we began a comprehensive restructuring of our local and national media brands to position the company for improved performance and continued growth. The reorganization, effective December 31, 2017, includes merging local television and digital operations into a Local Media division and the national brands into a National Media division. In the third quarter, we began a deep analysis of our operating divisions and corporate cost structure, our non-core assets and the opportunities for our national content brands. We are committed to improving operating performance in our local media business, supporting the growth ahead with our national businesses and serving our audiences with news and information across all media platforms.
We also announced our plans at the end of 2017 to divest our radio business and have engaged a broker to assist us in the sales process.
Financial information for each of our business segments can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements of this Form 10-K.
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LOCAL MEDIA
Our Local Media segment is comprised of our local broadcast television stations and their related digital operations. We have operated broadcast television stations since 1947, when we launched Ohio’s first television station, WEWS, in Cleveland. Today, our television station group reaches approximately one in five of the nation’s television households and includes fifteen ABC affiliates, five NBC affiliates, two FOX affiliates and two CBS affiliates. We also have two MyTV affiliates, one CW affiliate, one independent station and three Azteca America Spanish-language affiliates.
We produce high-quality news, information and entertainment content that informs and engages our local communities. We distribute our content on four platforms — broadcast, Internet, smartphones and tablets. It is our objective to develop content and applications designed to enhance the user experience on each of those platforms. Our ability to cover our communities across multiple digital platforms allows us to expand our audiences beyond our traditional broadcast television boundaries.
We believe the most critical component of our product mix is compelling news content, which is an important link to the community and aids our stations' efforts to retain and expand viewership. We have trained employees in our news departments to be multi-media journalists, allowing us to pursue a “hyper-local” strategy by having more reporters covering local news for our over-the-air and digital platforms.
In addition to news programming, our television stations run network programming, syndicated programming and original programming. Our strategy is to rely less on expensive syndicated programming and to replace it with original programming which we control. We believe this strategy improves our Local Media division's financial performance. We currently air four original shows we produce ourselves or in partnership with others:
• | Pickler & Ben is a daily daytime lifestyle and entertainment show starring Kellie Pickler and Ben Aaron. For the 2017-2018 season, Pickler & Ben was available in 39 markets with a national reach of 23 percent of the country. |
• | The List, an Emmy award winning infotainment show, was available in 46 markets reaching viewers in approximately 32 percent of the country. |
• | The Now is a news show designed to take the audience into a deeper dive of the day's events and is available in more than 10 of our markets. |
• | RightThisMinute is daily news and entertainment program featuring viral videos. RightThisMinute reaches nearly 95 percent of the nation's television households. |
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Information concerning our full-power television stations, their network affiliations and the markets in which they operate is as follows:
Station | Market | Network Affiliation/ DTV Channel | Affiliation Agreement Expires in | FCC License Expires in | Market Rank (1) | Stations in Market (2) | Percentage of U.S. Television Households in Mkt (3) | Average Audience Share (4) | ||||||||
KNXV-TV | Phoenix, Ch. 15 | ABC/15 | 2019 | 2022 | 11 | 13 | 1.7% | 5 | ||||||||
WFTS-TV | Tampa, Ch. 28 | ABC/29 | 2019 | 2021 | 13 | 12 | 1.7% | 7 | ||||||||
WXYZ-TV | Detroit, Ch. 7 | ABC/41 | 2019 | 2021 | 14 | 8 | 1.6% | 8 | ||||||||
WMYD-TV | Detroit, Ch. 20 | MY/21 | 2018 | 2021 | 14 | 8 | 1.6% | 2 | ||||||||
KMGH-TV | Denver, Ch. 7 | ABC/7 | 2019 | 2022 | 17 | 11 | 1.4% | 5 | ||||||||
WEWS-TV | Cleveland, Ch. 5 | ABC/15 | 2019 | 2021 | 19 | 8 | 1.3% | 7 | ||||||||
WMAR-TV | Baltimore, Ch. 2 | ABC/38 | 2019 | 2020 | 26 | 6 | 1.0% | 3 | ||||||||
WTVF-TV | Nashville, Ch. 5 | CBS/25 | 2018 | 2021 | 27 | 11 | 0.9% | 14 | ||||||||
WRTV-TV | Indianapolis, Ch. 6 | ABC/25 | 2019 | 2021 | 28 | 9 | 0.9% | 5 | ||||||||
KGTV-TV | San Diego, Ch. 10 | ABC/10 | 2019 | 2022 | 29 | 11 | 0.9% | 6 | ||||||||
KSHB-TV | Kansas City, Ch. 41 | NBC/42 | 2018 | 2022 | 33 | 8 | 0.8% | 9 | ||||||||
KMCI-TV | Lawrence, Ch. 38 | Ind./41 | N/A | 2022 | 33 | 8 | 0.8% | 2 | ||||||||
WCPO-TV | Cincinnati, Ch. 9 | ABC/22 | 2019 | 2021 | 35 | 6 | 0.8% | 8 | ||||||||
WTMJ-TV | Milwaukee, Ch. 4 | NBC/28 | 2018 | 2021 | 36 | 16 | 0.8% | 7 | ||||||||
WPTV-TV | W. Palm Beach, Ch. 5 | NBC/12 | 2018 | 2021 | 37 | 7 | 0.7% | 9 | ||||||||
KTNV-TV | Las Vegas, Ch. 13 | ABC/13 | * | 2022 | 40 | 18 | 0.7% | 6 | ||||||||
WKBW-TV | Buffalo, Ch. 7 | ABC/38 | 2018 | 2023 | 53 | 8 | 0.5% | 6 | ||||||||
WFTX-TV | Fort Myers/Naples, Ch. 4 | FOX/35 | 2019 | 2021 | 56 | 10 | 0.5% | 5 | ||||||||
KJRH-TV | Tulsa, Ch. 2 | NBC/8 | 2018 | 2022 | 62 | 10 | 0.5% | 6 | ||||||||
KGUN-TV | Tucson, Ch. 9 | ABC/9 | * | 2022 | 65 | 15 | 0.4% | 6 | ||||||||
KWBA-TV | Tucson, Ch. 58 | CW/44 | 2021 | 2022 | 65 | 15 | 0.4% | 1 | ||||||||
WGBA-TV | Green Bay/Appleton, Ch. 26 | NBC/41 | 2018 | 2021 | 69 | 8 | 0.4% | 6 | ||||||||
WACY-TV | Green Bay/Appleton, Ch. 32 | MY/27 | 2018 | 2021 | 69 | 8 | 0.4% | 1 | ||||||||
KMTV-TV | Omaha, Ch. 3 | CBS/45 | 2020 | 2022 | 74 | 11 | 0.4% | 10 | ||||||||
KIVI-TV | Boise, Ch. 6 | ABC/24 | * | 2022 | 104 | 13 | 0.2% | 8 | ||||||||
WSYM-TV | Lansing, Ch. 47 | FOX/38 | 2019 | 2021 | 115 | 7 | 0.2% | 9 | ||||||||
KERO-TV | Bakersfield, Ch. 23 | ABC/10 | 2019 | 2022 | 126 | 4 | 0.2% | 6 | ||||||||
* Agreements expired at the end of 2017 and are currently being operated under short-term extensions during the negotiation process.
All market and audience data is based on the November 2017 Nielsen survey, live viewing plus 7 days of viewing on DVR.
(1) | Market rank represents the relative size of the television market in the United States. |
(2) | Stations in Market represents stations within the Designated Market Area per the Nielsen survey excluding public broadcasting stations, satellite stations, and low-power stations. |
(3) | Percentage of U.S. Television Households in Market represents the number of U.S. television households in Designated Market Area as a percentage of total U.S. television households. |
(4) | Average Audience Share represents the number of television households tuned to a specific station from 6 a.m. to 2 a.m. Monday-Sunday, as a percentage of total viewing households in the Designated Market Area. |
Historically, we have been successful in renewing our FCC licenses.
We operate three low-power stations affiliated with the Azteca America network, a Hispanic network producing Spanish-language programming. The stations are clustered around our Bakersfield and Denver stations. We also operate a low-power station affiliated with ABC in Twin Falls, ID.
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Revenue cycles and sources
Core Advertising
Our core advertising is comprised of sales to local and national customers. The advertising includes a combination of broadcast air spots, as well as digital advertising. Our core advertising revenues account for 63% of our Local Media segment’s revenues in 2017. Pricing of broadcast spot advertising is based on audience size and share, the demographics of our audiences and the demand for our limited inventory of commercial time. Our stations compete for advertising revenues with other sources of local media, including competitors’ television stations in the same markets, radio stations, cable television systems, newspapers, digital platforms and direct mail.
Local advertising time is sold by each station’s local sales staff who call upon advertising agencies and local businesses, which typically include advertisers such as car dealerships, retail stores and restaurants. We seek to attract new advertisers to our television stations and to increase the amount of advertising sold to existing local advertisers by relying on experienced local sales forces with strong community ties, producing news and other programming with local advertising appeal and sponsoring or promoting local events and activities.
National advertising time is generally sold through national sales representative firms that call upon advertising agencies, whose clients typically include automobile manufacturers and dealer groups, telecommunications companies and national retailers.
Digital revenues are primarily generated from the sale of advertising to local and national customers on our local television websites, smartphone apps, tablet apps and other platforms.
Cyclical factors influence revenues from our core advertising categories. Some of the cycles are periodic and known well in advance, such as election campaign seasons and special programming events (e.g. the Olympics or the Super Bowl). For example, our NBC affiliates benefit from incremental advertising demand from the coverage of the Olympics. Economic cycles are less predictable and beyond our control.
Due to increased demand in the spring and holiday seasons, the second and fourth quarters normally have higher advertising revenues than the first and third quarters.
Political Advertising
Political advertising is generally sold through our Washington D.C. sales office. Advertising is sold to presidential, gubernatorial, Senate and House of Representative candidates, as well as for state and local issues. It is also sold to political action groups (PACs) or other advocacy groups.
Political advertising revenues increase significantly during even-numbered years when local, state and federal elections occur. In addition, every four years, political spending is typically elevated further due to the advertising for the presidential election. Because of the cyclical nature of the political election cycle, there has been a significant difference in our operating results when comparing the performance of even-numbered years to odd numbered years. Additionally, our operating results are impacted by the number, importance and competitiveness of individual political races and issues discussed in our local markets.
Retransmission Revenues
We earn revenues from retransmission consent agreements with multi-channel video programming distributors ("MVPDs") in our markets. Retransmission revenues were 33% of our Local Media segment's revenues in 2017. The MVPDs are cable operators and satellite carriers who pay us to offer our programming to their customers. The fees we receive are typically based on the number of subscribers the MVPD has in our local market and the contracted rate per subscriber.
We also receive fees from over-the-top (virtual MVPDs) such as YouTubeTV, DirectTV Now and Sony Vue. The fees we receive are typically based on the number of subscribers in our local market and the contracted rate per subscriber.
Expenses
Employee costs accounted for 46% of the Local Media segment costs and expenses in 2017.
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We centralize certain functions, such as master control, traffic, graphics and political advertising, at company-owned hubs that do not require a presence in the local markets. This approach enables each of our stations to focus local resources on the creation of content and revenue-producing activities. We expect to continue to look for opportunities to centralize functions that do not require a local market presence.
Programming costs, which include network affiliation fees, syndicated programming and shows produced for us or in partnership with others, were 30% of total segment costs and expenses in 2017.
Our network-affiliated stations broadcast programming that is supplied to us by the networks in various dayparts. Under each affiliation agreement, the station broadcasts all of the programs transmitted by the network. In exchange, we pay affiliation fees to the network and the network sells a substantial majority of the advertising time during these broadcasts. We expect our network affiliation agreements to be renewed upon expiration.
Federal Regulation of Broadcasting — Broadcast television is subject to the jurisdiction of the FCC pursuant to the Communications Act of 1934, as amended (“Communications Act”). The Communications Act prohibits the operation of broadcast stations except in accordance with a license issued by the FCC and empowers the FCC to revoke, modify and renew broadcast licenses, approve the transfer of control of any entity holding such a license, determine the location of stations, regulate the equipment used by stations and adopt and enforce necessary regulations. As part of its obligation to ensure that broadcast licensees serve the public interest, the FCC exercises limited authority over broadcast programming by, among other things, requiring certain children's television programming and limiting commercial content therein, requiring the identification of program sponsors, regulating the sale of political advertising and the distribution of emergency information, and restricting indecent programming. The FCC also requires television broadcasters to close caption their programming for the benefit of persons with hearing impairment and to ensure that any of their programming that is later transmitted via the Internet is captioned. Network-affiliated television broadcasters in larger markets must also offer audio narration of certain programming for the benefit of persons with visual impairments. Reference should be made to the Communications Act, the FCC’s rules and regulations, and the FCC’s public notices and published decisions for a fuller description of the FCC’s extensive regulation of broadcasting.
Broadcast licenses are granted for a term of up to eight years and are renewable upon request, subject to FCC review of the licensee's performance. All the Company’s applications for license renewal during the current renewal cycle have been granted for full terms. While there can be no assurance regarding the renewal of our broadcast licenses, we have never had a license revoked, have never been denied a renewal, and all previous renewals have been for the maximum term.
FCC regulations govern the ownership of television stations, and the agency is required by statute to periodically review these rules. In November 2017, the FCC reconsidered an earlier agency decision to leave the rules generally intact and adopted significant changes to its local television ownership rules. In particular, the FCC voted to relax the television “duopoly rule” that generally restricted an applicant from owning or controlling more than one television station (or in some markets under certain conditions, more than two television stations) in the same market. The reconsideration order eliminated that rule’s requirement that eight independent local television station “voices” should remain after any merger, and it relaxed the prohibition against common ownership of two of the four most-viewed stations in a market, stating that proposed mergers of such “top-four” stations will instead be evaluated on a case-by-case basis. The Company enjoys a waiver of this television duopoly rule in the Green Bay, Wisconsin market. The order further reversed an earlier FCC decision to treat those stations participating in joint advertising sales agreements as if they were under common ownership. Station WSYM-TV, Lansing, Michigan, is a party to such a joint advertising agreement with a local station, but it enjoyed a permitted “grandfathered” status while the rule was in effect.
This 2017 reconsideration order left in place the long-standing requirement that any television station that provides more than 15% of another in-market television station’s weekly programming is deemed to have an attributable interest in that station that subjects the stations to the FCC’s ownership limits. It also confirmed the earlier review order’s direction that any local stations that share facilities or services such as program production on a continuing basis must start disclosing these agreements in their public files. Stations WPTV-TV, West Palm Beach, Florida, and KIVI-TV, Nampa (Boise), Idaho, are parties to such shared services agreements, but this disclosure requirement will not take effect until it is approved by the Office of Management and Budget.
With respect to national television ownership, the FCC voted in December 2017 to consider whether and how it might revisit its rule preventing applicants from obtaining an ownership interest in television stations whose total national audience reach would exceed 39% of all television households. Earlier in the year, the FCC reinstated the 50% discount applied to the number of households deemed covered by UHF television stations, and the new notice expressly addresses whether to retain this distinction for UHF.
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We cannot predict the outcome of the expected court review of these television ownership rule changes or the effect of the FCC’s rule revisions on our stations' operations or our business.
The restrictions imposed by the FCC’s ownership rules may apply to a corporate licensee due to the ownership interests of its officers, directors or significant shareholders. If such parties meet the FCC’s criteria for holding an attributable interest in the licensee, they are likewise expected to comply with the ownership limits, as well as other licensee requirements such as compliance with certain criminal, antitrust, and antidiscrimination laws.
In order to provide additional spectrum for mobile broadband and other services, the FCC in 2017 conducted an incentive spectrum auction in which some television broadcasters agreed to voluntarily give up spectrum in return for a share of the auction proceeds. No Scripps station will be going off-air or relinquishing a current UHF-band allocation for a VHF-band allocation as a result of the auction, but 17 Scripps stations will be relocating to new channels in the reduced broadcast spectrum band. Broadcasters are concerned that the FCC’s approach to the post-auction “repacking” of the remaining television stations into this reduced broadcast spectrum may not adequately protect stations’ over-the-air service. Broadcasters also are concerned that the FCC’s post-auction plans may not provide sufficient time to complete the repacking before the sold spectrum will be authorized for wireless use and that there may not be adequate compensation for those stations that are required to change facilities. Implementing the post-auction changes will be complicated and costly, and stations located near the Canadian and Mexican borders may be at particular risk of service loss due to the need to coordinate international frequency use. Despite warnings about potential difficulties, such as a lack of available qualified tower crews for the significant number of moves that may be required, the FCC has expressed confidence that adequate time will be available to complete the repacking, and it has imposed a “hard” deadline that could require a station to cease broadcasting on its existing frequency even though an alternative facility is not yet ready to provide its over-the-air service.
The FCC has voted to allow broadcasters to voluntarily use a new digital television standard, ATSC 3.0. This Internet-protocol based transmission system will permit television stations to offer enhanced and innovative services coupled with much improved broadcast signal reception, particularly by mobile devices. The new standard, however, is incompatible with both existing television receivers and with a station’s ability to continue offering its service via the current ATSC 1.0 digital standard. To avoid loss of service to those viewers who lack a new receiver, stations switching to ATSC 3.0 will be required to arrange for a local station that continues to use the current 1.0 standard to air (on a subchannel) programming “substantially similar” to that offered by the switching station on its 3.0 channel. In return, the 3.0 station could host the 3.0 signal of its 1.0 “host” station. This “simulcasting” requirement will sunset in five years, unless extended by the FCC.
The FCC remains committed to permitting non-broadcast spectrum use in the “white spaces” between television stations' protected service areas despite broadcasters’ concerns about the possibility of harmful interference to their existing service and to the potential for innovative uses of their broadcast spectrum in the future. In connection with the auction process, the FCC may further reduce the spectrum available for television broadcasting by reserving a 6 MHz channel in each market for non-broadcast, unlicensed services (including wireless microphones). The repacking of television broadcast spectrum and the reservation of spectrum in the “broadcast” band for interference-protected non-broadcast services could have a particularly adverse effect on the ability of low-power and translator television stations to offer service since these stations may not be able to find space to operate in the reduced band and they enjoy only “secondary” status that offers no protection from interference caused by a full-power station. We cannot predict the effect of these proceedings on our offering of digital television service or our business.
Broadcast television stations generally enjoy “must-carry” rights on any cable television system defined as “local” with respect to the station. Stations may waive their must-carry rights and instead negotiate retransmission consent agreements with local cable companies. Similarly, satellite carriers, upon request, are required to carry the signal of those television stations that request carriage and that are located in markets in which the satellite carrier chooses to retransmit at least one local station, and satellite carriers cannot carry a broadcast station without its consent. The Company has elected to negotiate retransmission consent agreements with cable operators and satellite carriers for both our network-affiliated stations and our independent stations.
Former FCC Chairman Wheeler announced in 2016 that the Commission would not actively proceed with its rulemaking to reexamine the retransmission consent negotiation process and particularly the standards that may trigger the agency’s intervention to enforce the obligation of the parties to negotiate these agreements in “good faith.” Nevertheless, a related agency proceeding remains open that looks toward the possible elimination of the “network nonduplication” and “syndicated exclusivity” rules that permit broadcasters to enforce certain contractual programming exclusivity rights through the FCC's processes rather than by judicial proceedings. We cannot predict the outcome of these proceedings or their possible impact on the Company.
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Other proceedings before the FCC and the courts have reexamined the policies that protect television stations' rights to control the distribution of their programming within their local service areas. For example, the FCC has initiated a rulemaking proceeding on the degree to which an entity relying upon the Internet to deliver video programming should be subject to the regulations that apply to multi-channel video programming distributors (“MVPDs”), such as cable operators and satellite systems. This proceeding raises a variety of issues, including whether some Internet-based distributors might be able to take advantage of MVPDs' statutory copyright licensing rights. We cannot predict the outcome of such proceedings that address the use of new technologies to challenge traditional means of redistributing television broadcast programming or their possible impact on the Company.
During recent years, the FCC has significantly increased the penalties it imposes for violations of its rules and policies. For example, a recent settlement of an investigation involving a single radio station’s failure to broadcast proper sponsorship identification announcements in a series of ads required the licensee to make a payment of over $500,000. Uncertainty continues regarding the scope of the FCC's authority to regulate indecent programming, but the agency has increased its enforcement efforts regarding other programming issues such as sponsorship identification, broadcasting proper emergency alerts, and extending service to persons with disabilities. We cannot predict the effect of the FCC’s expanded enforcement efforts on the Company.
NATIONAL MEDIA
Our National Media segment represents our collection of national media brands including Katz, Midroll, and Newsy. Our national brands compete on emerging platforms and marketplaces where there is significant growth in both audience and revenue, such as over-the-top (OTT) or over-the-air (OTA) audio and video. OTT refers to the delivery of media over the internet. Consumers can access OTT content through apps on internet-connected devices such as computers, gaming consoles (such as PlayStation or Xbox), set-top boxes (such as Roku or Apple TV), smartphones, smart TVs and tablets. These marketplaces allow us to expand our national audience reach, enabling us to attract a variety of different advertisers.
Katz
Katz operates four over-the-air networks — Bounce, Escape, Grit and Laff. Katz was founded in 2011 by Jonathan Katz, a former Turner Broadcasting programming executive, with the launch of Bounce. The networks are primarily broadcast over-the-air on local broadcasters' digital sub-channels. They are also carried on some cable and satellite services. Each of the networks is a fast-growing, audience-targeted national broadcast network. Bounce is aimed at African-Americans; Grit airs action and adventure movies targeted at men; Escape runs true crime and documentaries targeting women; and Laff airs classic, well-loved comedies. Each of these Nielson rated networks reaches about 90 percent of all U.S. households as reported by Nielsen.
The primary source of revenue for Katz is through the sale of advertising to national customers. The advertising revenue generated depends on viewership ratings and the rate paid by customers for certain viewer demographics. Katz sells its advertising in the upfront and scatter markets. In the upfront market, advertisers buy advertising time for upcoming seasons and, by committing to purchase in advance, lock in the advertising rates they will pay for the upcoming year. In the scatter market, advertisers buy their spots closer to the time when the spots will run. The mix of upfront and scatter market advertising time sold is based upon the economic conditions at the time the upfront sales take place, impacting the sell-out levels management is willing or able to obtain. The demand in the scatter market then impacts the pricing achieved for our remaining advertising inventory. Scatter market pricing can vary from upfront pricing and can be volatile. In some cases, advertising sales are subject to ratings guarantees that require us to provide additional advertising time if the guaranteed audience levels are not achieved.
Due to increased demand in the spring and holiday seasons, the second and fourth quarters normally have higher advertising revenues than the first and third quarters.
Katz has carriage agreements with local television broadcasters to carry one or more of the Katz networks. These carriage agreements are generally for a five year term. Under these agreements, Katz either pays a fixed fee or a portion of revenues for the carriage rights.
For programming, Katz enters into agreements to license existing programming and movies, as well as producing several original shows.
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Midroll
Midroll creates original podcasts and operates a network that generates revenue for more than 300 shows. A podcast is a digital audio recording, usually part of a themed series, which is downloaded most often to mobile devices. In 2017, more than 67 million Americans listened to a podcast at least monthly. Midroll’s listening platform, Stitcher, is a mobile app where consumers can stream the latest in news, sports, talk, and entertainment on demand. We expect continued investment at Midroll for our Stitcher app, creating a best-in-class user experience for both the podcast, listener and advertiser.
Midroll earns revenue from the sale of advertising on its original podcasts, which it creates and distributes through platforms such as its Stitcher app and the iPhone podcast app. Midroll also is expanding into branded content, in which Midroll partners with content creators and pairs them with brand advertisers to create podcasts targeted to their consumers, through the Midroll Brand Studio.
Other revenue sources include podcast agency services. Midroll acts as a sales and marketing representative by working with advertisers to connect them to a specific podcast based on the advertiser's desired target audience.
Midroll earns subscription revenue from the Stitcher Premium subscription service where users pay a standard monthly or annual fee for access to premium content and ad-free archived podcast episodes.
Newsy
Newsy is our national news network focused on bringing perspective and analysis to reporting on world and national news, including politics, entertainment, science and technology. It is targeted toward a younger audience. In 2017, we expanded Newsy's distribution to include cable, and by the end of the year, we reached agreements with cable and satellite operators to carry Newsy into 26 million households. We expect continued investment in Newsy as we look to increase distribution and enhance our products.
Newsy also is distributed widely on platforms providing over-the-top television service, including Hulu, Roku, Amazon Fire TV, Apple TV, Sling TV and Chromecast.
Newsy earns revenue from the sale of advertising on the platforms on which it is distributed. It also receives carriage fees from cable and satellite providers who pay us to offer our programming to their customers. The revenue we receive is typically based on the number of subscribers who receive the programming.
Newsy's programming strategy is to provide in-depth coverage of U.S. and world news targeted at 18-34 year-olds. As part of its cable launch, Newsy has created a programming lineup that includes shows such as the evening newsmagazine “The Why,” the morning show “The Day Ahead,” and the newsmaker spotlight program “30 Minutes With.” Newsy also produces investigative reports and documentaries.
Employees
As of December 31, 2017, we had approximately 4,100 full-time equivalent employees, of whom approximately 3,500 were with Local Media and 400 with National Media. Various labor unions represent approximately 400 employees, the majority of which are in Local Media. We have not experienced any work stoppages at our current operations since 1985. We consider our relationships with our employees to be satisfactory.
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Item 1A. | Risk Factors |
For an enterprise as large and complex as ours, a wide range of factors could materially affect future developments and performance. The most significant factors affecting our operations include the following:
Risks Related to Our Businesses
We expect to derive the majority of our revenues from marketing and advertising spending, which is affected by numerous factors. Declines in advertising revenues will adversely affect the profitability of our business.
The demand for advertising is sensitive to a number of factors, both locally and nationally, including the following:
• | The advertising and marketing spending by customers can be subject to seasonal and cyclical variations and are likely to be adversely affected during economic downturns. |
• | Audiences continue to fragment in recent years as the broad distribution of cable and satellite television and the growth in over-the-top streaming services have greatly increased the options available to the public for accessing audio and video programming, including live sports. Continued fragmentation of audiences, and the growth of internet programming and streaming services, could adversely impact advertising rates, which will reflect the size and demographics of the audience reached by advertisers through our media businesses. |
• | Television advertising revenues in even-numbered years benefit from political advertising, which is affected by campaign finance laws, as well as the competitiveness of specific political races in the markets where our television stations operate. |
• | Continued consolidation and contraction of local advertisers in our local markets could adversely impact our operating results, given that we expect the majority of our advertising to be sold to local businesses in our markets. |
• | Television stations have significant exposure to advertising in the automotive, retail and services industries. If advertising within these industries declines and we are unable to secure replacement advertisers, advertising revenues could decline and affect our profitability. |
If we are unable to respond to any or all of these factors, our advertising revenues could decline and affect our profitability.
Programmatic advertising models that allow advertisers to buy audiences at scale or through automated processes may begin to play a more significant role in the advertising marketplace, and may cause downward pricing pressure, resulting in a loss of revenue that could materially adversely affect our local and national businesses.
Several national advertising agencies are employing an automated process known as “programmatic buying” to gain efficiencies and reduce costs related to buying advertising. Growth in advertising revenues will rely in part on the ability to maintain and expand relationships with existing and future advertisers. The implementation of a programmatic model, where automation replaces existing pricing and allocation methods, could turn advertising inventory into a price-driven commodity, reducing the value of these relationships and related revenues. We cannot predict the pace at which programmatic buying will be adopted or utilized. Widespread adoption causing downward pricing pressure could result in a loss of revenue and materially adversely affect future operations.
Our media businesses operate in a changing and increasingly competitive environment. We will have to continually invest in new business initiatives and modify strategies to maintain our competitive position. Investment in new business strategies and initiatives could disrupt our ongoing business and present risks not originally contemplated.
The profile of video and audio audiences has shifted dramatically in recent years as viewers access news and other content online or through mobile devices and as they spend more discretionary time with social media. While slow and steady declines in audiences have been somewhat offset by growing viewership on digital platforms, digital advertising rates are typically much lower than broadcast advertising rates on a cost-per-thousand basis. This audience shift results in lower profit margins. To remain competitive, we believe we must adjust business strategies and invest in new business initiatives, particularly within digital media. Development of new products and services may require significant costs. The success of these
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initiatives depends on a number of factors, including timely development and market acceptance. Investments we make in new strategies and initiatives may not perform as expected.
We have made significant investments in our National Media business and expect to continue to make significant investments in those businesses in the coming years. The growth of these businesses depends upon our ability to attract and retain audiences and monetize those audiences through increased advertising and subscription revenues.
In recent years, we have acquired the Katz networks, Midroll and Newsy for an aggregate purchase price of almost $400 million. Our National Media businesses are not mature businesses and will require additional capital to gain distribution and build audiences. The markets for these businesses may not develop as we expect, or we may face greater competition than we anticipate. The success of these investments depends on a number of factors, including timely development and market acceptance of our programming and consumer preferences. Investments we make in our National Media business may not perform as expected.
The growth of direct content-to-consumer delivery channels may fragment our television audiences. This fragmentation could adversely impact advertising rates as well as cause a reduction in the revenues we receive from retransmission consent agreements, resulting in a loss of revenue that could materially adversely affect our broadcast operations.
We deliver our television programming to our audiences over-the-air and through cable and satellite service providers. Our television audience is being fragmented by the digital delivery of content directly to the consumer audience. Content providers, such as the "Big 4" broadcast networks, cable networks such as HBO and Showtime, and new content developers, distributors and syndicators such as Amazon, Hulu and Netflix, are now able to deliver their programming directly to consumers, over-the-top (“OTT”). The delivery of content directly to a consumer allows them to bypass the programming we deliver, which may impact our audience size. Fragmentation of our audiences could impact the rates we receive from our advertisers. In addition, fewer subscribers of cable and satellite service providers would also impact the revenue we receive from retransmission consent agreements.
Widespread adoption of OTT by our audiences could result in a reduction of our advertising and retransmission revenues and affect our profitability.
The loss of affiliation agreements could adversely affect our Local Media operating results.
Fifteen of our stations have affiliations with the ABC television network, five with the NBC television network, two with each of the FOX, CBS and MyNetwork television networks and one with The CW television network. These television networks produce and distribute programming which our stations commit to air at specified times. Networks sell commercial advertising time during their programming, and the "Big 4" networks, ABC, NBC, CBS and FOX, also require stations to pay fees for the right to carry their programming. These fees may be a percentage of retransmission revenues that the stations receive (see below) or may be fixed amounts. There is no assurance that we will be able to reach agreements in the future with networks about the amount of these fees.
The non-renewal or termination of our network affiliation agreements would prevent us from being able to carry programming of the respective network. Loss of network affiliation would require us to obtain replacement programming and may not be as attractive to target audiences, resulting in lower advertising revenues. In addition, loss of any of the "Big 4" network affiliations would result in materially lower retransmission revenue.
Our retransmission consent revenue may be adversely affected by renewals of retransmission consent agreements and network affiliation agreements, by consolidation of cable or satellite television systems, by new technologies for the distribution of broadcast programming, or by revised government regulations.
As our retransmission consent agreements expire, there can be no assurance that we will be able to renew them at comparable or better rates. As a result, retransmission revenues could decrease and retransmission revenue growth could decline over time. If a multichannel video programming distributor (an “MVPD”) in our markets acquires additional distribution systems, our retransmission revenue could be adversely affected if our retransmission agreement with the acquiring MVPD has lower rates or a longer term than our retransmission agreement with the MVPD whose systems are being sold.
The use of new technologies to redistribute broadcast programming, such as those that rely upon the Internet to deliver video programming or those that receive and record broadcast signals over the air via an antenna and then retransmit that information digitally to customers’ television sets, specialty set-top boxes, or computer or mobile devices, could adversely
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affect our retransmission revenue if such technologies are not found to be subject to copyright or other legal restrictions or to regulations that apply to MVPDs such as cable operators or satellite carriers.
Changes in the Communications Act of 1934, as amended (the “Communications Act”) or the FCC’s rules with respect to the negotiation of retransmission consent agreements between broadcasters and MVPDs could also adversely impact our ability to negotiate acceptable retransmission consent agreements. In addition, continued consolidation among cable television operators could adversely impact our ability to negotiate acceptable retransmission consent agreements.
There are proceedings before the FCC and legislation has been proposed in Congress reexamining policies that now protect television stations' rights to control the distribution of their programming within their local service areas. For example, the FCC is considering the degree to which an entity relying upon the Internet to deliver video programming should be subject to the regulations that apply to MVPDs. Should the FCC determine that Internet-based distributors may avoid its MVPD rules, broadcasters' ability to rely on the protection of the MVPD retransmission consent requirements and other regulations could be jeopardized. We cannot predict the outcome of these and other proceedings that address the use of new technologies to challenge traditional means of redistributing broadcast programming or their possible impact on our operations.
Our television stations will continue to be subject to government regulations which, if revised, could adversely affect our operating results.
• | Pursuant to FCC rules, local television stations must elect every three years to either (1) require cable operators and/or direct broadcast satellite carriers to carry the stations’ over-the-air signals or (2) enter into retransmission consent negotiations for carriage. At present, all of our stations have retransmission consent agreements with cable operators and satellite carriers. If our retransmission consent agreements are terminated or not renewed, or if our broadcast signals are distributed on less-favorable terms, our ability to compete effectively may be adversely affected. |
• | If we cannot renew our FCC broadcast licenses, our broadcast operations will be impaired. Our business depends upon maintaining our broadcast licenses from the FCC, which has the authority to revoke licenses, not renew them, or renew them only with significant qualifications, including renewals for less than a full term. We cannot assure that future renewal applications will be approved, or that the renewals will not include conditions or qualifications that could adversely affect operations. If the FCC fails to renew any of these licenses, it could prevent us from operating the affected stations. If the FCC renews a license with substantial conditions or modifications (including renewing the license for a term of fewer than eight years), it could have a material adverse effect on the affected station’s revenue potential. |
• | As discussed under Federal Regulation of Broadcasting, the FCC in 2017 completed an auction in which some television licensees voluntarily auctioned away their spectrum rights and 84 MHz of broadcast spectrum was reallocated to other uses. As a result, many television stations, including 17 Company-owned stations, must change their operating frequencies, and the FCC is setting tight deadlines for the completion of these facility changes in order to make the reallocated spectrum promptly available to the wireless service buyers. Depending on factors such as the availability of specialized technical assistance and custom-made equipment, weather issues, and, for stations near international borders, the cooperation of foreign governments, some stations could confront substantial costs and difficulty in completing these relocations within the allotted time, adversely affecting these stations’ over-the-air service. Scripps has timely applied for and received construction permits to complete the required changes for its stations and is expeditiously pursuing the steps necessary to complete this process, but we cannot predict whether unforeseen circumstances might delay implementation and have a material adverse effect on one or more station’s revenue potential. |
• | As also discussed under Federal Regulation of Broadcasting, the FCC has adopted broadcasters’ proposal to permit the voluntary use of a new digital television transmission standard, ATSC 3.0, that is incompatible with the existing standard. Much uncertainty exists concerning the costs, benefits, and public acceptance of the services expected to become possible under this new standard, and television stations could be adversely affected by moving either too quickly or too slowly towards its adoption. |
• | The FCC and other government agencies are continually considering proposals intended to promote consumer interests. New government regulations affecting the television industry could raise programming costs, restrict broadcasters’ operating flexibility, reduce advertising revenues, raise the costs of delivering broadcast signals, or otherwise affect operating results. We cannot predict the nature or scope of future government regulation or its impact on our operations. |
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Sustained increases in costs of employee health and welfare plans and funding requirements of our pension obligations may reduce the cash available for our business.
Employee compensation and benefits account for a significant portion of our total operating expenses. In recent years, we have experienced significant increases in employee benefit costs. Various factors may continue to put upward pressure on the cost of providing medical benefits. Although we actively seek to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.
At December 31, 2017, the projected benefit obligations of our defined benefit pension plans exceeded plan assets by $190 million. Accrual of service credits are frozen under our defined benefit pension plans, including our supplemental executive retirement plans. These pension plans invest in a variety of equity and debt securities, many of which were affected by the disruption in the credit and capital markets in 2008 and 2009. Future volatility and disruption in the stock and bond markets could cause declines in the asset values of these plans. In addition, a decrease in the discount rate used to determine minimum funding requirements could result in increased future contributions. If either occurs, we may need to make additional pension contributions above what is currently estimated, which could reduce the cash available for our businesses.
We may be unable to effectively integrate any new business we acquire.
We may make future acquisitions and could face integration challenges and acquired businesses could significantly under-perform relative to our expectations. If acquisitions are not successfully integrated, our revenues and profitability could be adversely affected, and impairment charges may result if acquired businesses significantly under perform relative to our expectations.
We will continue to face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of operations, damage to our brands and reputation, legal exposure and financial losses.
Security breaches, malware or other “cyber attacks” could harm our business by disrupting delivery of services, jeopardizing our confidential information and that of our vendors and clients, and damaging our reputation. Our operations are routinely involved in receiving, storing, processing and transmitting sensitive information. Although we monitor security measures regularly, any unauthorized intrusion, malicious software infiltration, theft of data, network disruption, denial of service, or similar act by any party could disrupt the integrity, continuity, and security of our systems or the systems of our clients or vendors. These events, or our failure to employ new technologies, revise processes and invest in people to sustain our ability to defend against cyber threats, could create financial liability, regulatory sanction, or a loss of confidence in our ability to protect information, and adversely affect our revenue by causing the loss of current or potential clients.
We may be required to satisfy certain indemnification obligations to Journal Media Group or may not be able to collect on indemnification rights from Journal Media Group.
Under the terms of the master agreement governing the Scripps/Journal transaction, we (as successor to Journal) will indemnify Journal Media Group, and Journal Media Group will indemnify us (as successor to Journal), for all damages, liabilities and expenses resulting from a breach by the applicable party of the covenants contained in the master agreement that continued in effect after the April 1, 2015 closing. We (as successor to Journal) will indemnify Journal Media Group for all damages, liabilities and expenses incurred by it relating to the entities, assets and liabilities retained by Scripps or Journal, and Journal Media Group will indemnify us (as successor to Journal) for all damages, liabilities and expenses incurred by it relating to Journal Media Group’s entities, assets and liabilities.
In addition, we will indemnify Journal Media Group, and Journal Media Group will indemnify us, for all damages, liabilities and expenses resulting from a breach by the other of any of the representations, warranties or covenants contained in the tax matters agreements. Journal Media Group will also indemnify us for all damages, liabilities and expenses arising out of any tax imposed with respect to the Scripps newspaper spin-off if such tax is attributable to any act, any failure to act or any omission by Journal Media Group or any of its subsidiaries. We will indemnify Journal Media Group for all damages, liabilities and expenses relating to pre-closing taxes or taxes imposed on Journal Media Group or its subsidiaries because Scripps spin entity or Journal spin entity was part of the consolidated return of Scripps or Journal, and Journal Media Group will indemnify us for all damages, liabilities and expenses relating to post-closing taxes of Journal Media Group or its subsidiaries.
The indemnification obligations described above could be significant and we cannot presently determine the amount, if any, of indemnification obligations for which we will be liable or for which we will seek payment from Journal Media Group. Journal Media Group’s ability to satisfy these indemnities will depend upon future financial performance. Similarly, our ability to satisfy any such obligations to Journal Media Group will depend on our future financial performance. We cannot assure that
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we will have the ability to satisfy any substantial obligations to Journal Media Group or that Journal Media Group will have the ability to satisfy any substantial indemnity obligations to us.
Journal Media Group is a party to a merger agreement pursuant to which it became a wholly owned subsidiary of Gannett Co., Inc. in the first quarter of 2016. The completion of this merger did not change the indemnification obligations of Scripps or Journal Media Group described above nor did it result in Gannett Co., Inc. itself bearing any responsibility to fulfill Journal Media Group's obligations to us.
Risks Related to the Ownership of Scripps Class A Common Shares
Certain descendants of Edward W. Scripps own approximately 93% of Scripps Common Voting shares and are signatories to the Scripps Family Agreement, which governs the transfer and voting of Common Voting shares held by them.
As a result of the foregoing, these descendants have the ability to elect two-thirds of the Board of Directors and to direct the outcome of any matter on which the Ohio Revised Code (“ORC”) does not require a vote of our Class A Common shares. Under our articles of incorporation, holders of Class A Common shares vote only for the election of one-third of the Board of Directors and are not entitled to vote on any matter other than a limited number of matters expressly set forth in the ORC as requiring a separate vote of both classes of stock. Because this concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction, the market price of our Class A Common shares could be adversely affected.
We have the ability to issue preferred stock, which could affect the rights of holders of our Class A Common shares.
Our articles of incorporation allow the Board of Directors to issue and set the terms of 25 million shares of preferred stock. The terms of any such preferred stock, if issued, may adversely affect the dividend, liquidation and other rights of holders of our Class A Common shares.
The public price and trading volume of our Class A Common shares may be volatile.
The price and trading volume of our Class A Common shares may be volatile and subject to fluctuation. Some of the factors that could cause fluctuation in the stock price or trading volume of Class A Common shares include:
• | general market and economic conditions and market trends, including in the television broadcast industry, the national media marketplace and the financial markets generally; |
• | the political, economic and social situation in the United States; |
• | variations in quarterly operating results; |
• | inability to meet revenue forecasts; |
• | announcements by us or competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or other business developments; |
• | adoption of new accounting standards affecting the media industry; |
• | operations of competitors and the performance of competitors’ common stock; |
• | litigation and governmental action involving or affecting us or our subsidiaries; |
• | changes in financial estimates and recommendations by securities analysts; |
• | recruitment of key personnel; |
• | purchases or sales of blocks of our Class A Common shares; |
• | operating and stock performance of companies that investors may consider to be comparable to us; and |
• | changes in the regulatory environment, including rulemaking or other actions by the FCC. |
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There can be no assurance that the price of our Class A Common shares will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies and that could adversely affect the price of our Class A Common shares, regardless of the company’s operating performance. Stock price volatility might be higher if the trading volume of our Class A Common shares is low. Furthermore, shareholders may initiate securities class action lawsuits if the market price of our Class A Common shares declines significantly, which may cause us to incur substantial costs and divert the time and attention of our management.
Risks Related to our Senior Notes
The Senior Notes are effectively subordinated to our and our subsidiary guarantors’ indebtedness under our Credit Agreement and any other secured indebtedness to the extent of the value of the property securing that indebtedness.
The Senior Notes are not secured by any of our or our subsidiary guarantors’ assets. As a result, the Senior Notes are with respect to our Revolving Credit Facility, effectively subordinated to our and the guarantors’ indebtedness under such senior credit facility with respect to the assets that secure such indebtedness. The indenture governing the Senior Notes and our Revolving Credit Facility provide, that we may incur significant additional secured debt in the future. The effect of this subordination is that upon a default in payment on, or the acceleration of, any of our secured indebtedness, or in the event of bankruptcy, insolvency, liquidation, dissolution or reorganization of the Company or the guarantors, the proceeds from the sale of assets securing our secured indebtedness would be available to pay obligations on the Senior Notes only after all indebtedness under our Credit Agreement and any other secured debt has been paid in full. As a result, the holders of the Senior Notes may receive less, ratably, than the holders of secured debt in the event of our and the guarantors’ bankruptcy, insolvency, liquidation, dissolution or reorganization.
A court could avoid the Senior Notes or our subsidiaries’ guarantees of the Senior Notes under fraudulent transfer or fraudulent conveyance laws.
Although the guarantees of the Senior Notes provide holders of the Senior Notes with a direct claim against the assets of the subsidiary guarantors, the guarantees of the Senior Notes are not secured by the collateral owned by the guarantors. In addition, under the federal bankruptcy laws and comparable provisions of state fraudulent transfer or fraudulent conveyance laws, the Senior Notes or a guarantee could under certain circumstances be avoided, or claims with respect to the Senior Notes or a guarantee could be subordinated to all other debts of ours or that guarantor. In addition, a bankruptcy court could potentially avoid (i.e., recover) any payments by us or that guarantor pursuant to its guarantee and require those payments to be returned (as applicable) to us or the guarantor or to a fund for our other creditors’ benefit or for the benefit of the other creditors of the guarantor.
Each guarantee of the Senior Notes contains a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. This provision may not be effective as a legal matter to protect the guarantees from being avoided under fraudulent transfer or fraudulent conveyance law, or may eliminate a guarantor’s obligations or reduce a guarantor’s obligations to an amount that effectively makes the guarantee worthless. In a 2009 Florida bankruptcy case (which was subsequently reinstated by the United States Court of Appeals for the Eleventh Circuit on other grounds), this type of provision was found to be ineffective to protect the guarantees.
A bankruptcy court might take these actions if it found, among other things, that when we issued the notes or a subsidiary guarantor executed its guarantee (or, in some jurisdictions, when it became obligated to make payments under its guarantee):
• | we or such subsidiary guarantor received less than reasonably equivalent value or fair consideration for the incurrence of the notes or its guarantee; and |
• | we or such subsidiary guarantor: |
• | was (or was rendered) insolvent by the incurrence of the Senior Notes or the guarantee; |
• | was engaged or about to engage in a business or transaction for which our or its assets constituted unreasonably small capital to carry on our or its business; |
• | intended to incur, or believed that it would incur, obligations beyond our or its ability to pay as those obligations matured; or |
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• | was a defendant in an action for money damages, or had a judgment for money damages docketed against it and, in either case, after final judgment, the judgment was unsatisfied. |
A bankruptcy court could also avoid the Senior Notes or a guarantee of the Senior Notes if it found that we or the subsidiary guarantor issued its guarantee with actual intent to hinder, delay or defraud creditors.
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. Based on financial and other information, we believe that the Senior Notes and the guarantees have been incurred for proper purposes and in good faith and that we and each subsidiary guarantor are solvent and will continue to be solvent, will have sufficient capital for carrying on our or its business and will be able to pay our or its indebtedness as it matures. We cannot assure you, however, that a court reviewing these matters would agree with us. A legal challenge to the notes or a guarantee of the Senior Notes on fraudulent conveyance or fraudulent transfer grounds may focus on the benefits, if any, realized by us or the subsidiary guarantors as a result of the issuance of the guarantees. Specifically, a court would likely find that we or any subsidiary guarantor did not receive reasonably equivalent value or fair consideration for the Senior Notes or any such guarantee if we or such subsidiary guarantor did not substantially benefit directly or indirectly from the issuance of the Senior Notes or the applicable guarantee. Thus, if any such guarantees were legally challenged, it could be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the subsidiary guarantor, the obligations of the applicable subsidiary guarantor were incurred for less than reasonably equivalent value or fair consideration. Therefore, a court could void the obligations under the guarantees, subordinate them to the applicable subsidiary guarantor’s other debt, or take other action detrimental to the holders of the Senior Notes.
The measures of insolvency for purposes of these fraudulent transfer or fraudulent conveyance laws will vary depending on the law applied in any proceeding to determine whether a fraudulent transfer or fraudulent conveyance has occurred, such that we cannot be certain as to: the standards a court would use to determine whether or not we or any subsidiary guarantors were solvent at the relevant time, or, regardless of the standard that a court uses, that it would not determine that we or any subsidiary guarantor was indeed insolvent on that date; that any payments to the holders of the Senior Notes (including under any guarantees) did not constitute preferences, fraudulent transfers or fraudulent conveyances on other grounds; or that the issuance of the Senior Notes and any guarantees would not be avoided or subordinated to our or any subsidiary guarantor’s other debt. Generally, however, we or a subsidiary guarantor would be considered insolvent if:
• | the sum of our or such subsidiary guarantor’s debts, including contingent and unliquidated debts, were greater than the fair value of all of our or such subsidiary guarantor’s assets; |
• | the present fair saleable value of our or such subsidiary guarantor’s assets was less than the amount that would be required to pay our or such subsidiary guarantor’s probable liability on existing debts, including contingent and unliquidated debts, as they become absolute and mature; or |
• | we or any subsidiary guarantor could not pay debts as they become due. |
If a court avoided a guarantee of the Senior Notes, it could enter a judgment against noteholders ordering them to return any amounts previously paid under such guarantee. If any guarantee of the Senior Notes were avoided, noteholders would cease to have a direct claim against the applicable subsidiary guarantor, but they would retain their rights against us and any other subsidiary guarantors, although there is no assurance that our entities’ respective assets would be sufficient to pay the Senior Notes in full.
Additionally, under federal bankruptcy or applicable state insolvency law, if bankruptcy or insolvency proceedings were initiated by or against us or any subsidiary guarantor within 90 days (or one year before commencement of a bankruptcy proceeding if the creditor that benefited from the payment is an “insider” under the United States Bankruptcy Code) after any payment by us or a subsidiary guarantor with respect to the notes or any guarantee, all or a portion of such payment could be avoided as a preferential transfer, and the recipient of such payment could be required to return it.
Finally, as a court of equity, the bankruptcy court may otherwise subordinate the claims in respect of the notes or any guarantees to other claims against us or any subsidiary guarantors under the principle of equitable subordination, if the court determines that: (i) the holder of the notes engaged in some type of inequitable conduct; (ii) such inequitable conduct resulted in injury to our or such subsidiary guarantor’s other creditors or conferred an unfair advantage upon the holder of the Senior Notes; and (iii) equitable subordination is not inconsistent with the provisions of the United States Bankruptcy Code.
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The Senior Notes are effectively subordinated to the claims of the creditors of our non-guarantor subsidiaries.
We conduct substantially all of our business through our subsidiaries, substantially all of which are guarantors of the Senior Notes. The indenture governing the Senior Notes, however, in certain circumstances permits non-guarantor subsidiaries. The indenture governing the Senior Notes also permits the incurrence of certain indebtedness by our non-guarantor subsidiaries. Claims of creditors of any non-guarantor subsidiaries, including trade creditors, will generally have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the notes.
We may be unable to repurchase the Senior Notes upon a change of control.
Upon the occurrence of a change of control, as defined in the indenture governing the notes, we will be required to offer to repurchase such Senior Notes in cash at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any. A change of control will also constitute an event of default under our Credit Agreement that will permit the lenders to accelerate the maturity of the borrowings thereunder and may trigger similar rights under our other indebtedness then outstanding. In the event of a change of control, we may not have sufficient funds to repurchase all of the Senior Notes, and to repay the amounts outstanding under our Credit Agreement or other indebtedness.
We cannot be sure that a market for the Senior Notes will continue.
We cannot assure you as to:
• | the liquidity of any trading market for the Senior Notes; |
• | your ability to sell your Senior Notes; or |
• | the price at which you may be able to sell your Senior Notes. |
The Senior Notes may trade at a discount from their respective initial offering prices, depending upon prevailing interest rates, the market for similar securities and other factors, including general economic conditions, our financial condition, performance and prospects and prospects for companies in our industry generally. In addition, the liquidity of any trading market in the Senior Notes and the market prices quoted for the Senior Notes may be adversely affected by changes in the overall market for high-yield securities.
You cannot be sure that an active trading market will be sustained for any of the Senior Notes. The lack of any such trading market may adversely affect the trading prices of the Senior Notes.
Key covenants of the indenture governing the Senior Notes will be suspended if the Senior Notes achieve investment grade ratings.
Most of the restrictive covenants in the indenture governing the Senior Notes do not apply during any period in which the Senior Notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s Rating Services. At such time, we may take actions, such as incurring additional debt or making certain dividends or distributions, that would otherwise be prohibited under the indenture. Such prior actions will be permitted even if we later become subject again to the restrictive covenants. Ratings are given by these rating agencies based upon analyses that include many subjective factors. We cannot assure you that any of the Senior Notes will achieve or maintain investment grade ratings, nor can we assure you that investment grade ratings, if granted, will reflect all of the factors that would be important to holders of the Senior Notes.
Holders of the Senior Notes are not entitled to registration rights, and we do not currently intend to register any of the Senior Notes under applicable securities laws.
There will be restrictions on your ability to transfer or resell the Senior Notes without registration under applicable securities laws. The Senior Notes were offered and sold pursuant to an exemption from registration under U.S. and applicable state securities laws, and we do not currently intend to register any of the Senior Notes or the respective guarantees. The holders of the Senior Notes will not be entitled to require us to register any of the notes for resale or otherwise. Because you may transfer or resell the Senior Notes in the United States only in a transaction registered under or exempt from the registration requirements of U.S. and applicable state securities laws, you may be required to bear the risk of your investment for an indefinite period of time.
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An adverse rating on the Senior Notes may cause their trading price to fall.
The Senior Notes are rated by securities ratings agencies. Ratings agencies may lower their respective ratings on the notes in the future. If rating agencies reduce, or indicate that they may reduce, their ratings in the future, the trading price of the Senior Notes could decline significantly.
Risks Related to Our Indebtedness
We have substantial debt and have the ability to incur significant additional debt. The principal and interest payment obligations on such debt may restrict our future operations and impair our ability to meet our long-term obligations.
As of December 31, 2017, we and the guarantors had approximately $702 million in aggregate principal amount of outstanding indebtedness (excluding intercompany debt), approximately $400 million of which constituted senior debt (including the Senior Notes), and none of which was secured. We have the ability to incur up to $125 million of indebtedness under our Credit Agreement all of which is secured indebtedness, effectively ranking senior to the Senior Notes to the extent of the value of the assets securing such indebtedness. Our Credit Agreement matures in April 2022. In addition, the terms of the indenture to be entered into in connection with the issuance of the Senior Notes will permit us to incur additional indebtedness, subject to our ability to meet certain conditions.
Our outstanding debt may have important consequences to you. For instance, it could:
• | require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which would reduce funds available for other business purposes, including capital expenditures and acquisitions; |
• | place us at a competitive disadvantage compared to some of our competitors that may have less debt and better access to capital resources; |
• | limit our ability to obtain additional financing required to fund acquisitions, working capital and capital expenditures and for other general corporate purposes; and |
• | make it more difficult for us to satisfy our financial obligations, including those relating to the Senior Notes. |
Our ability to service our significant financial obligations depends on our ability to generate significant cash flow. This is partially subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, that future borrowings will be available to us under our Credit Agreement or any other credit facilities, or that we will be able to complete any necessary financings, in amounts sufficient to enable us to fund our operations or pay our debts and other obligations, or to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. Additional debt or equity financing may not be available in sufficient amounts, at times or on terms acceptable to us, or at all. Specifically, volatility in the capital markets may also impact our ability to obtain additional financing, or to refinance our existing debt, on terms or at times favorable to us. If we are unable to implement one or more of these alternatives, we may not be able to service our debt or other obligations, which could result in us being in default thereon, in which circumstances our lenders could cease making loans to us, and lenders or other holders of our debt could accelerate and declare due all outstanding obligations under the respective agreements, which would likely have a material adverse effect on us.
The agreements governing our various debt obligations impose restrictions on our operations and limit our ability to undertake certain corporate actions.
The agreements governing our various debt obligations, including the indenture that governs the Senior Notes and the agreements governing our Credit Agreement, include covenants imposing significant restrictions on our operations. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions, subject to certain limitations, on our ability to, among other things:
• | incur additional debt; |
• | declare or pay dividends, redeem stock or make other distributions to stockholders; |
• | make investments or acquisitions; |
• | create liens or use assets as security in other transactions; |
20
• | issue guarantees; |
• | merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; |
• | engage in transactions with affiliates; and |
• | purchase, sell or transfer certain assets. |
Any of these restrictions and limitations could make it more difficult for us to execute our business strategy.
Our Credit Agreement requires us to comply with certain financial ratios and covenants; our failure to do so will result in a default thereunder, which would have a material adverse effect on us.
We are required to comply with certain financial covenants under our Credit Agreement. Our ability to comply with these requirements may be affected by events affecting our business, but beyond our control, including prevailing general economic, financial and industry conditions. These covenants could have an adverse effect on us by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities. The breach of any of these covenants or restrictions could result in a default under the applicable senior credit facility. Upon a default under any of our debt agreements, the lenders or debt holders thereunder could have the right to declare all amounts outstanding, together with accrued and unpaid interest, to be immediately due and payable, which could, in turn, trigger defaults under other debt obligations and could result in the termination of commitments of the lenders to make further extensions of credit under such senior credit facility. If we were unable to repay our secured debt to our lenders, or were otherwise in default under any provision governing our outstanding secured debt obligations, our secured lenders could proceed against us and the subsidiary guarantors and against the collateral securing that debt. Any default resulting in an acceleration of outstanding indebtedness, a termination of commitments under our financing arrangements or lenders proceeding against the collateral securing such indebtedness would likely result in a material adverse effect on our business, financial condition and results of operations.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Borrowings under our Credit Agreement are at variable rates of interest and expose us to interest rate risk. If the London Interbank Offered Rate were to increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available to service our obligations, including making payments on the notes, would decrease.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We own substantially all of the facilities and equipment used by our television stations. We own, or co-own with other broadcast television stations, the towers used to transmit our television signals.
Item 3. | Legal Proceedings |
We are involved in litigation arising in the ordinary course of business, such as defamation actions and governmental proceedings primarily relating to renewal of broadcast licenses, none of which is expected to result in material loss.
Item 4. | Mine Safety Disclosures |
None.
21
Executive Officers of the Company — Executive officers serve at the pleasure of the Board of Directors.
Name | Age | Position | ||
Adam P. Symson | 43 | President and Chief Executive Officer (since August 2017); Chief Operating Officer (November 2016 to August 2017); Senior Vice President, Digital (February 2013 to November 2016); Chief Digital Officer (2011 to February 2013); Vice President Interactive Media, Television (2007 to 2011) | ||
Lisa A. Knutson | 52 | Executive Vice President, Chief Financial Officer (since October 2017); Executive Vice President, Chief Strategy Officer (August 2017 to October 2017); Senior Vice President, Chief Administrative Officer (2011-2017); Senior Vice President, Human Resources (2008 to 2011) | ||
William Appleton | 69 | Executive Vice President, General Counsel (since August 2017); Senior Vice President, General Counsel (July 2008 to August 2017); Managing Partner Cincinnati office, Baker & Hostetler, LLP (2003 to 2008) | ||
Brian G. Lawlor | 51 | President, Local Media (since August 2017); Senior Vice President, Broadcast (January 2009 to August 2017); Vice President/General Manager of WPTV (2004 to 2008) | ||
Douglas F. Lyons | 61 | Senior Vice President, Controller and Treasurer (since December 2017), Vice President, Controller (since July 2008) and Treasurer (since May 2015), Vice President, Finance and Administration (2006-2008), Director, Financial Reporting (1997-2006) | ||
Laura M. Tomlin | 42 | Senior Vice President, National Media (since August 2017); Vice President, Digital Operations (2014 to 2017) | ||
22
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our Class A Common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “SSP.” As of December 31, 2017, there were approximately 9,500 owners of our Class A Common shares, based on security position listings, and approximately 50 owners of our Common Voting shares (which do not have a public market).
The range of market prices of our Class A Common shares, which represents the high and low sales prices for each full quarterly period, are as follows:
Quarter | ||||||||||||||||
1st | 2nd | 3rd | 4th | |||||||||||||
2017 | ||||||||||||||||
Market price of common stock: | ||||||||||||||||
High | $ | 23.59 | $ | 23.58 | $ | 20.05 | $ | 19.18 | ||||||||
Low | 18.20 | 16.88 | 17.11 | 14.02 | ||||||||||||
Cash dividends per share of common stock | $ | — | $ | — | $ | — | $ | — | ||||||||
2016 | ||||||||||||||||
Market price of common stock: | ||||||||||||||||
High | $ | 19.25 | $ | 17.69 | $ | 17.80 | $ | 19.41 | ||||||||
Low | 15.59 | 14.66 | 14.93 | 12.62 | ||||||||||||
Cash dividends per share of common stock | $ | — | $ | — | $ | — | $ | — | ||||||||
There were no sales of unregistered equity securities during the quarter for which this report is filed.
The following table provides information about Company purchases of Class A Common shares during the quarter ended December 31, 2017 and the remaining amount that may still be purchased under the program.
Period | Total number of shares purchased | Average price paid per share | Total market value of shares purchased | Maximum value that may yet be purchased under the plans or programs | |||||||||||
10/1/17 — 10/31/17 | 106,000 | $ | 18.15 | $ | 1,923,723 | $ | 86,864,120 | ||||||||
11/1/17 — 11/30/17 | 141,000 | 15.10 | 2,128,871 | $ | 84,735,249 | ||||||||||
12/1/17 — 12/31/17 | 137,000 | 15.54 | 2,129,220 | $ | 82,606,029 | ||||||||||
Total | 384,000 | $ | 16.10 | $ | 6,181,814 | ||||||||||
In November 2016, our Board of Directors authorized a repurchase program of up to $100 million of our Class A Common shares through December 31, 2018. At December 31, 2017, $82.6 million remained under the authorization.
23
Performance Graph — Set forth below is a line graph comparing the cumulative return on the Company’s Class A Common shares, assuming an initial investment of $100 as of December 31, 2012, and based on the market prices at the end of each year and assuming dividend reinvestment, with the cumulative return of the Standard & Poor’s Composite-500 Stock Index and an Index based on a peer group of media companies. The spin-off of our newspaper business at April 1, 2015 is treated as a reinvestment of a special dividend pursuant to SEC rules.
We regularly evaluate and revise our Peer Group Index as necessary so that it is reflective of our Company’s portfolio of businesses. The companies that comprise our Peer Group Index are Nexstar Broadcasting Group, TEGNA, Sinclair Broadcast Group, Tribune Media, Gray Television, Saga Communications and Beasley Broadcast Group. The Peer Group Index is weighted based on market capitalization.
Our peer group was revised in 2017 to exclude Media General, which was acquired by Nexstar Broadcasting Group.
12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | |||||||||||||||||||
The E.W. Scripps Company | $ | 100.00 | $ | 200.93 | $ | 206.75 | $ | 119.16 | $ | 202.62 | $ | 163.84 | ||||||||||||
S&P 500 Index | 100.00 | 132.39 | 150.51 | 152.59 | 170.84 | 208.14 | ||||||||||||||||||
Peer Group Index | 100.00 | 213.91 | 196.14 | 184.80 | 178.82 | 222.61 | ||||||||||||||||||
24
Item 6. | Selected Financial Data |
The Selected Financial Data required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis of Financial Condition and Results of Operations required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The market risk information required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
Item 8. | Financial Statements and Supplementary Data |
The Financial Statements and Supplementary Data required by this item are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
The Controls and Procedures required by this item are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
Item 9B. | Other Information |
None.
25
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3).
Information required by Item 10 of Form 10-K relating to directors is incorporated by reference to the material captioned “Election of Directors” in our definitive proxy statement for the Annual Meeting of Shareholders (“Proxy Statement”). Information regarding Section 16(a) compliance is incorporated by reference to the material captioned “Report on Section
16(a) Beneficial Ownership Compliance” in the Proxy Statement.
We have adopted a code of conduct that applies to all employees, officers and directors of Scripps. We also have a code of ethics for the CEO and Senior Financial Officers that meets the requirements of Item 406 of Regulation S-K and the NYSE listing standards. Copies of our codes of ethics are posted on our website at http://www.scripps.com.
Information regarding our audit committee financial expert is incorporated by reference to the material captioned “Corporate Governance” in the Proxy Statement.
The Proxy Statement will be filed with the Securities and Exchange Commission in connection with our 2018 Annual Meeting of Shareholders.
Item 11. | Executive Compensation |
The information required by Item 11 of Form 10-K is incorporated by reference to the material captioned “Compensation Discussion and Analysis” and “Compensation Tables” in the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 12 of Form 10-K is incorporated by reference to the material captioned “Report on the Security Ownership of Certain Beneficial Owners,” “Report on the Security Ownership of Management,” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by Item 13 of Form 10-K is incorporated by reference to the materials captioned “Corporate Governance” and “Report on Related Party Transactions” in the Proxy Statement.
Item 14. | Principal Accounting Fees and Services |
The information required by Item 14 of Form 10-K is incorporated by reference to the material captioned “Report of the Audit Committee of the Board of Directors” in the Proxy Statement.
26
PART IV
Item 15. | Exhibits and Financial Statement Schedules | |
Documents filed as part of this report:
(a) | The consolidated financial statements of The E.W. Scripps Company are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1. |
The reports of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, dated February 28, 2018, are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1.
(b) | There are no supplemental schedules that are required to be filed as part of this Form 10-K. |
(c) | An exhibit index required by this item appears below. |
27
The E.W. Scripps Company
Index to Consolidated Financial Statement Schedules
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Report Date | |||||
2.01 | S-4 | 333-200388 | 2.1 | 11/20/2014 | ||||||
3.01 | 8-K | 000-16914 | 99.03 | 2/17/2009 | ||||||
3.02 | 8-K | 000-16914 | 10.02 | 5/10/2007 | ||||||
3.03 | 8-K | 000-16914 | 3.1 | 3/11/2015 | ||||||
10.01 | DEF 14A | 000-16914 | Appendix | 5/4/2015 | ||||||
10.02 | 10-Q | 000-16914 | 10.02 | 9/30/2017 | ||||||
10.03 | DEF 14A | 000-16914 | Appendix | 6/13/2008 | ||||||
10.04 | 8-K | 000-16914 | 10.03B | 2/9/2005 | ||||||
10.05 | 10-K | 000-16914 | 10.07 | 12/31/2015 | ||||||
10.06 | 8-K | 000-16914 | 10.1 | 2/23/2015 | ||||||
10.07 | S-8 | 333-151963 | 99 | 6/26/2008 | ||||||
10.08 | SC 13D | 005-43473 | 2 | 6/5/2015 | ||||||
10.09 | 8-K | 000-16914 | 10.61 | 5/8/2008 | ||||||
10.10 | 10-Q | 000-16914 | 10.10 | 9/30/2017 | ||||||
10.11 | 8-K | 000-16914 | 10.66 | 2/15/2011 | ||||||
10.12 | 8-K | 000-16914 | 10.1 | 11/4/2014 | ||||||
10.13 | 8-K | 000-16914 | 10.1 | 7/10/2017 | ||||||
10.14 | 10-K | 000-16914 | 10.13 | 12/31/2016 | ||||||
10.15 | 10-Q | 000-16914 | 10.14 | 9/30/2017 | ||||||
10.16 | 10-Q | 000-16914 | 10.15 | 9/30/2017 | ||||||
10.17 | 10-Q | 000-16914 | 10.16 | 9/30/2017 | ||||||
10.18 | 8-K | 000-16914 | 10.1 | 4/1/2015 | ||||||
10.19 | 10-K | 000-16914 | 10.23 | 12/31/2015 | ||||||
10.20 | 10-K | 000-16914 | 10.19 | 12/31/2016 | ||||||
10.21 | 8-K | 000-16914 | 10.1 | 4/20/2017 | ||||||
10.22 | 8-K | 000-16914 | 10.1 | 4/28/2017 | ||||||
10.23 | 8-K | 000-16914 | 10.2 | 4/28/2017 | ||||||
14 | 10-K | 000-16914 | 14 | 12/31/2004 | ||||||
21 | * | |||||||||
23 | * | |||||||||
31(a) | * | |||||||||
31(b) | * | |||||||||
32(a) | * | |||||||||
32(b) | * | |||||||||
101.INS | XBRL Instance Document (furnished herewith) | * | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document (furnished herewith) | * | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith) | * | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith) | * | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (furnished herewith) | * | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith) | * | ||||||||
* - As filed herewith
28
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE E. W. SCRIPPS COMPANY | ||
Dated: February 28, 2018 | By: | /s/ Adam P. Symson |
Adam P. Symson | ||
President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated, on February 28, 2018.
Signature | Title | |
/s/ Adam P. Symson | President and Chief Executive Officer | |
Adam P. Symson | (Principal Executive Officer) | |
/s/ Lisa A. Knutson | Executive Vice President and Chief Financial Officer | |
Lisa A. Knutson | ||
/s/ Douglas F. Lyons | Senior Vice President, Treasurer and Controller | |
Douglas F. Lyons | (Principal Accounting Officer) | |
/s/ Charles Barmonde | Director | |
Charles Barmonde | ||
/s/ Richard A. Boehne | Chairman of the Board of Directors | |
Richard A. Boehne | ||
/s/ Kelly P. Conlin | Director | |
Kelly P. Conlin | ||
/s/ John W. Hayden | Director | |
John W. Hayden | ||
/s/ Anne M. La Dow | Director | |
Anne M. La Dow | ||
/s/ Roger L. Ogden | Director | |
Roger L. Ogden | ||
/s/ J. Marvin Quin | Director | |
J. Marvin Quin | ||
/s/ R. Michael Scagliotti | Director | |
R. Michael Scagliotti | ||
/s/ Peter B. Thompson | Director | |
Peter B. Thompson | ||
/s/ Kim Williams | Director | |
Kim Williams | ||
29
The E.W. Scripps Company
Index to Consolidated Financial Statement Information
Item No. | Page | ||
F-1
Selected Financial Data
Five-Year Financial Highlights
For the years ended December 31, | ||||||||||||||||||||
(in millions, except per share data) | 2017 (1) | 2016 (1) | 2015 (1) | 2014 (1) | 2013 (1) | |||||||||||||||
Summary of Operations (2) | ||||||||||||||||||||
Total operating revenues | $ | 865 | $ | 869 | $ | 654 | $ | 499 | $ | 432 | ||||||||||
Income (loss) from continuing operations before income taxes | (32 | ) | 93 | (112 | ) | 9 | (22 | ) | ||||||||||||
Income (loss) from continuing operations, net of tax | (12 | ) | 60 | (74 | ) | 9 | (10 | ) | ||||||||||||
Depreciation and amortization of intangibles | (56 | ) | (55 | ) | (50 | ) | (32 | ) | (31 | ) | ||||||||||
Per Share Data | ||||||||||||||||||||
Income (loss) from continuing operations — basic and diluted basis | $ | (0.13 | ) | $ | 0.71 | $ | (0.95 | ) | $ | 0.16 | $ | (0.18 | ) | |||||||
Cash dividends | — | — | 1.03 | — | — | |||||||||||||||
Market Value of Common Shares at December 31 | ||||||||||||||||||||
Per share | $ | 15.63 | $ | 19.33 | $ | 19.00 | $ | 22.35 | $ | 21.72 | ||||||||||
Total | 1,276 | 1,585 | 1,591 | 1,274 | 1,217 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets | $ | 2,130 | $ | 1,736 | $ | 1,706 | $ | 1,031 | $ | 966 | ||||||||||
Long-term debt (including current portion) | 702 | 396 | 399 | 196 | 200 | |||||||||||||||
Equity | 937 | 946 | 901 | 520 | 548 | |||||||||||||||
Notes to Selected Financial Data
As used herein and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “Scripps,” “Company,” “we,” “our,” or “us” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies, or to all of them taken as a whole.
The statement of operations and cash flow data for the five years ended December 31, 2017, and the balance sheet data as of the same dates have been derived from our audited consolidated financial statements. All per-share amounts are presented on a diluted basis. The five-year financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere herein.
(1) | 2017 — On October 2, 2017, we acquired the Katz networks. Operating results are included for periods after the acquisition. | |
2016 — On April 12, 2016, we acquired Cracked. On June 6, 2016, we acquired Stitcher. Operating results for each are included for periods after the acquisitions. | ||
2015 — On April 1, 2015, we acquired the broadcast group owned by Journal Communications, Inc. On July 22, 2015, we acquired Midroll Media. Operating results for each are included for periods after the acquisitions. | ||
2014 — On January 1, 2014, we acquired Media Convergence Group, Inc., which operates as Newsy. On June 16, 2014, we acquired two television stations owned by Granite Broadcasting Corporation. Operating results for each are included for periods after the acquisitions. | ||
F-2
(2) | The five-year summary of operations excludes the operating results of the following entities and the gains (losses) on their divestiture as they are accounted for as discontinued operations: | |
2017 — As of December 31, 2017, our radio station group was classified as held for sale and presented as discontinued operations. | ||
2015 — On April 1, 2015, we completed the spin-off of our newspaper business and its operations are presented as discontinued operations. | ||
F-3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The consolidated financial statements and notes to consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. You should read this discussion in conjunction with those financial statements.
Forward-Looking Statements
Our Annual Report on Form 10-K contains certain forward-looking statements related to the company's businesses that are based on management’s current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties, including changes in advertising demand and other economic conditions that could cause actual results to differ materially from the expectations expressed in forward-looking statements. Such forward-looking statements are made as of the date of this document and should be evaluated with the understanding of their inherent uncertainty. A detailed discussion of principal risks and uncertainties that may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors.” The company undertakes no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.
Executive Overview
The E.W. Scripps Company (“Scripps”) is a diverse media enterprise, serving audiences and businesses through a portfolio of local and national media brands. Our Local Media division is one of the nation’s largest independent TV station ownership groups, with 33 television stations in 24 markets and a reach of nearly one in five U.S. television households. We have affiliations with all of the “Big Four” television networks. In our National Media division, we operate national media brands including podcast industry-leader, Midroll; next-generation national news network; Newsy, and four over-the-air broadcast networks, the Katz networks. We also operate an award-winning investigative reporting newsroom in Washington, D.C., and serve as the longtime steward of one of the nation's largest, most successful and longest-running educational programs, the Scripps National Spelling Bee.
On October 2, 2017, we acquired the Katz networks for $292 million, which is net of a 5% minority interest we owned prior to the transaction. Katz owns and operates four national broadcast networks — Bounce, Grit, Escape and Laff. We financed the acquisition with $300 million in new debt.
Newsy, our national news network focused on younger audiences, launched a major expansion into the cable and satellite marketplace, kicked off by Scripps’ acquisition of carriage contracts from the Retirement Living Television cable network in 2017.
At the end of 2017, we began a comprehensive restructuring of our local and national media brands to position the company for improved performance and continued growth. The reorganization, effective December 31, 2017, includes merging local television and digital operations into a Local Media division and the national brands into a National Media division. In the third quarter, we began a deep analysis of our operating divisions and corporate cost structure, our non-core assets and the opportunities for our national content brands. We are committed to improving operating performance in our local media business, supporting the growth ahead with our national businesses and serving our audiences with news and information across all media platforms.
We also announced plans at the end of 2017 to sell our radio station group, with Kalil & Co. retained to handle the process.
On February 15, 2018, we announced that we will initiate a quarterly dividend. Shareholders of record as of March 1, 2018, will receive a 5 cent per share dividend, payable on March 26, 2018. While we intend to pay regular quarterly dividends for the foreseeable future, all subsequent dividends will be reviewed quarterly and declared at the discretion of the Board of Directors.
F-4
Results of Operations
The trends and underlying economic conditions affecting operating performance and future prospects differ for each of our business segments. Accordingly, you should read the following discussion of our consolidated results of operations in conjunction with the discussion of the operating performance of our individual business segments that follows.
Consolidated Results of Operations
Consolidated results of operations were as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2017 | Change | 2016 | Change | 2015 | |||||||||||||
Operating revenues | $ | 864,834 | (0.5 | )% | $ | 868,820 | 32.8 | % | $ | 654,175 | ||||||||
Employee compensation and benefits | (367,735 | ) | 7.0 | % | (343,570 | ) | 8.6 | % | (316,424 | ) | ||||||||
Programming | (216,467 | ) | 29.6 | % | (166,986 | ) | 48.9 | % | (112,165 | ) | ||||||||
Other expenses | (185,869 | ) | 6.9 | % | (173,797 | ) | 16.3 | % | (149,451 | ) | ||||||||
Acquisition and related integration costs | — | (578 | ) | (37,988 | ) | |||||||||||||
Restructuring costs | (4,422 | ) | — | — | ||||||||||||||
Depreciation and amortization of intangibles | (56,343 | ) | (55,204 | ) | (49,791 | ) | ||||||||||||
Impairment of goodwill and intangibles | (35,732 | ) | — | (24,613 | ) | |||||||||||||
Gains (losses), net on disposal of property and equipment | (169 | ) | (480 | ) | (305 | ) | ||||||||||||
Operating income (loss) | (1,903 | ) | 128,205 | (36,562 | ) | |||||||||||||
Interest expense | (26,697 | ) | (18,039 | ) | (15,099 | ) | ||||||||||||
Defined benefit pension plan expense | (14,112 | ) | (14,332 | ) | (58,674 | ) | ||||||||||||
Miscellaneous, net | 10,636 | (2,646 | ) | (1,421 | ) | |||||||||||||
Income (loss) from continuing operations before income taxes | (32,076 | ) | 93,188 | (111,756 | ) | |||||||||||||
(Provision) benefit for income taxes | 20,054 | (33,266 | ) | 37,884 | ||||||||||||||
Income (loss) from continuing operations, net of tax | (12,022 | ) | 59,922 | (73,872 | ) | |||||||||||||
Income (loss) from discontinued operations, net of tax | (2,595 | ) | 7,313 | (8,605 | ) | |||||||||||||
Net income (loss) | (14,617 | ) | 67,235 | (82,477 | ) | |||||||||||||
Net income (loss) attributable to noncontrolling interest | (1,511 | ) | — | — | ||||||||||||||
Net income (loss) attributable to the shareholders of The E.W. Scripps Company | $ | (13,106 | ) | $ | 67,235 | $ | (82,477 | ) | ||||||||||
In the fourth quarter of 2017, we began the process to divest our radio business. As of December 31, 2017, we have classified the radio segment as held for sale in our Consolidated Balance Sheets and reported its results of operations in discontinued operations in our Consolidated Statements of Operations.
Katz, Cracked and Midroll were acquired on October 2, 2017, April 12, 2016 and July 22, 2015, respectively, and are collectively referred to as the “acquired National Media operations.” The Company completed its acquisition of the Journal television stations on April 1, 2015, which are referred to as the “acquired stations.” The inclusion of operating results from these businesses for the periods subsequent to their acquisitions impacts the comparability of our consolidated and segment operating results.
2017 compared with 2016
Operating revenues were comparable year-over-year. We had higher retransmission and carriage revenues of $39 million and revenues in our National Media group increased more than $52 million. The increase in our National Media group revenues include $41 million of revenues from Katz. These increases were offset by $92 million of lower political revenues from our Local Media group in a non-political year.
F-5
Employee compensation and benefits increased 7.0% in 2017, primarily driven by the expansion of our National Media group, including almost $5 million related to Katz.
Programming expense increased nearly 30% in 2017, primarily due to $22 million of higher network affiliation fees and additional programming cost from Katz. Network affiliation fees increased due to contractual rate increases.
Other expenses increased 6.9% in 2017 compared to the prior year, most of which was driven by Katz.
Depreciation and amortization expense increased slightly from $55 million in 2016 to $56 million in 2017 due to the acquisition of Katz.
Restructuring of $4.4 million includes $3.5 million for severance associated with a change in senior management and other employee groups, as well as outside consulting fees associated with the realignment of the Local and National Media businesses.
The slower development of our original operating model created indications of impairment of Cracked's goodwill in 2017. We concluded that the fair value of Cracked did not exceed its carrying value and recorded a $29 million non-cash charge to reduce the carrying value of goodwill and a $6 million charge to reduce the value of intangible assets.
Interest expense increased in 2017 due to a $2.4 million write-off of loan fees associated with our old Term Loan B which was refinanced in the second quarter of 2017, the higher interest rate on our new senior secured notes and additional interest on new debt issued to finance the Katz acquisition.
Miscellaneous, net increased in 2017 due to a $5.4 million gain on the change in control when we acquired Katz, $3.0 million gain from the sale of our newspaper syndication business and a $3.2 million gain to adjust the purchase price earn out for Midroll.
The effective income tax rate was 62.5% and 35.7% for 2017 and 2016, respectively. State taxes and non-deductible expenses impacted our effective rate. In 2017, we had a provisional estimated benefit of $4.2 million from the change in federal income tax rates for the enactment of the Tax Cuts and Jobs Act which reduced the corporate income tax rate from 35% to 21%. Our effective income tax rates for 2017 and 2016 were impacted by tax settlements and changes in our reserve for uncertain tax positions. In 2017 and 2016, we recognized $1.1 million and $0.9 million, respectively, of previously unrecognized tax benefits upon settlement of tax audits or upon the lapse of the statutes of limitations in certain jurisdictions. In addition, our 2016 provision includes $1.7 million of excess tax benefits from the exercise and vesting of share-based compensation awards.
2016 compared with 2015
Operating revenues increased 33% in 2016 due to an increase of almost $92 million in political advertising revenues, higher retransmission and carriage revenues, as well as the full year impact of the acquired stations and acquired National Media operations. The comparability of year-over-year revenues was impacted by $50 million of revenues from the acquired stations and $18 million of revenues from the acquired National Media operations. Retransmission and carriage revenues, excluding the impact of the acquired stations, increased almost $70 million due to the renewal of retransmission agreements with higher rates and contractual rate increases. Rate increases from the renewal of contracts covering 3 million households were effective at the beginning of 2016 and contracts covering an additional 3 million households were effective in the fourth quarter of 2016.
Employee compensation and benefits increased 8.6% in 2016, primarily driven by the full year impact of the acquired stations and acquired National Media operations.
Programming expense increased 49% in 2016, primarily due to the full year impact of the acquired stations and higher network affiliation fees. Programming costs of the acquired stations was $9.1 million of the increase year-over-year. The remainder of the increase for the year was from higher network affiliation license fees of $47 million, which was partially offset by lower syndicated programming expense.
Other expenses increased approximately 16% in 2016 compared to prior year, most of which was driven by the full year impact of the acquired stations and the acquired National Media operations.
F-6
Acquisition and related integration costs of $0.6 million in 2016 and $38 million in 2015 include costs for spinning off our newspaper operations and costs associated with acquisitions, such as investment banking, legal and accounting fees, as well as costs to integrate the acquired businesses.
Depreciation and amortization expense increased from $50 million in 2015 to $55 million in 2016 due to a full year of expense from the acquired stations, as well as the impact of the acquired National Media operations.
In 2015, we recorded a $25 million non-cash charge to reduce the carrying value of goodwill and certain intangible assets associated with Newsy and a smaller business.
Defined benefit pension plan expense decreased by $44 million from 2015 to 2016. In 2015, defined benefit pension plan expense included a $45.7 million non-cash settlement charge for the lump-sum pension benefit payments made to certain pension participants and a $1.1 million curtailment charge resulting from the spin-off of our newspaper business. The 2016 results included a full year of expense from the pension plans acquired in the Journal transactions.
Interest expense increased year-over-year due to the increased debt related to the Journal Acquisition.
The effective income tax rate was 35.7% and 33.9% for 2016 and 2015, respectively. State taxes and non-deductible expenses impacted our effective rate. Certain portions of the transaction costs we incurred in connection with the Journal transactions in 2015 are not deductible and the 2015 write-down in the carrying value of Newsy goodwill is not deductible for income taxes. In addition, our effective income tax rates for 2016 and 2015 were impacted by tax settlements and changes in our reserve for uncertain tax positions. In 2016 and 2015, we recognized $0.9 million and $2.5 million, respectively, of previously unrecognized tax benefits upon settlement of tax audits or upon the lapse of the statutes of limitations in certain jurisdictions. In addition, our 2016 provision includes $1.7 million of excess tax benefits from the exercise and vesting of share-based compensation awards.
Discontinued Operations
Discontinued operations reflect the historical results of our radio operations, which are classified as held for sale and discontinued operations, as well as our newspaper operations, which were spun-off on April 1, 2015.
The 2017 results of discontinued operations include an $8 million goodwill impairment charge for our radio operations.
Upon completion of the spin-off of our newspaper business, generally accepted accounting principles (“GAAP”) required us to assess impairment of the newspaper business long-lived assets using the held-for-sale model. This model compares the fair value of the disposal unit to its carrying value, and if the fair value is lower, then an impairment loss is recorded. Our analysis indicated that, as of April 1, 2015, there was a non-cash impairment loss on the disposal of the newspaper business of $30 million, which is included as a component of discontinued operations.
F-7
Business Segment Results — As discussed in the Notes to Consolidated Financial Statements, our chief operating decision maker evaluates the operating performance of our business segments using a measure called segment profit. Segment profit excludes interest, defined benefit pension plan expense, income taxes, depreciation and amortization, impairment charges, divested operating units, restructuring activities, investment results and certain other items that are included in net income (loss) determined in accordance with accounting principles generally accepted in the United States of America.
Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Generally, our corporate executives make financing, tax structure and divestiture decisions. Excluding these items from measurement of our business segment performance enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.
We allocate a portion of certain corporate costs and expenses, including information technology, certain employee benefits and shared services, to our business segments. The allocations are generally amounts agreed upon by management, which may differ from an arms-length amount. Corporate assets are primarily cash and cash equivalents, restricted cash, property and equipment primarily used for corporate purposes and deferred income taxes.
Effective December 31, 2017, we realigned our businesses into a new internal organization and began reporting to reflect this new structure. Under the new structure we have the following reportable segments: Local Media, National Media and Other. We have recast the operating results for all periods to reflect this change.
Information regarding the operating performance of our business segments and a reconciliation of such information to the consolidated financial statements is as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2017 | Change | 2016 | Change | 2015 | |||||||||||||
Segment operating revenues: | ||||||||||||||||||
Local Media | $ | 779,205 | (6.8 | )% | $ | 836,154 | 31.2 | % | $ | 637,251 | ||||||||
National Media | 80,174 | 187.1 | % | 27,929 | 114.6 | % | 13,014 | |||||||||||
Other | 5,455 | 15.2 | % | 4,737 | 21.2 | % | 3,910 | |||||||||||
Total operating revenues | $ | 864,834 | $ | 868,820 | $ | 654,175 | ||||||||||||
Segment profit (loss): | ||||||||||||||||||
Local Media | $ | 156,890 | $ | 243,298 | $ | 127,597 | ||||||||||||
National Media | (9,260 | ) | (10,156 | ) | (2,448 | ) | ||||||||||||
Other | (2,361 | ) | (2,513 | ) | (3,729 | ) | ||||||||||||
Shared services and corporate | (50,506 | ) | (46,162 | ) | (45,285 | ) | ||||||||||||
Acquisition and related integration costs | — | (578 | ) | (37,988 | ) | |||||||||||||
Restructuring costs | (4,422 | ) | — | — | ||||||||||||||
Depreciation and amortization of intangibles | (56,343 | ) | (55,204 | ) | (49,791 | ) | ||||||||||||
Impairment of goodwill and intangibles | (35,732 | ) | — | (24,613 | ) | |||||||||||||
Gains (losses), net on disposal of property and equipment | (169 | ) | (480 | ) | (305 | ) | ||||||||||||
Interest expense | (26,697 | ) | (18,039 | ) | (15,099 | ) | ||||||||||||
Defined benefit pension plan expense | (14,112 | ) | (14,332 | ) | (58,674 | ) | ||||||||||||
Miscellaneous, net | 10,636 | (2,646 | ) | (1,421 | ) | |||||||||||||
Income (loss) from continuing operations before income taxes | $ | (32,076 | ) | $ | 93,188 | $ | (111,756 | ) | ||||||||||
F-8
Local Media — Our Local Media segment includes fifteen ABC affiliates, five NBC affiliates, two FOX affiliates and two CBS affiliates. We also have two MyTV affiliates, one CW affiliate, one independent station and three Azteca America Spanish-language affiliates. Our Local Media segment earns revenue primarily from the sale of advertising to local, national and political advertisers and retransmission fees received from cable operators, telecommunications companies and satellite carriers.
National television networks offer affiliates a variety of programs and sell the majority of advertising within those programs. In addition to network programs, we broadcast local and national internally produced programs, syndicated programs, sporting events and other programs of interest in each station's market. News is the primary focus of our locally-produced programming.
The operating performance of our Local Media group is most affected by local and national economic conditions, particularly conditions within the automotive, services and retail categories, and by the volume of advertising purchased by campaigns for elective office and political issues. The demand for political advertising is significantly higher in the third and fourth quarters of even-numbered years.
Operating results for our Local Media segment were as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2017 | Change | 2016 | Change | 2015 | |||||||||||||
Segment operating revenues: | ||||||||||||||||||
Core advertising | $ | 493,462 | (1.3 | )% | $ | 500,091 | 4.2 | % | $ | 480,133 | ||||||||
Political | 8,651 | 100,761 | 9,151 | |||||||||||||||
Retransmission | 259,499 | 17.6 | % | 220,723 | 61.6 | % | 136,571 | |||||||||||
Other revenue | 17,593 | 20.7 | % | 14,579 | 27.9 | % | 11,396 | |||||||||||
Total operating revenues | 779,205 | (6.8 | )% | 836,154 | 31.2 | % | 637,251 | |||||||||||
Segment costs and expenses: | ||||||||||||||||||
Employee compensation and benefits | 287,758 | 2.1 | % | 281,956 | 4.3 | % | 270,203 | |||||||||||
Programming | 186,945 | 14.8 | % | 162,821 | 47.1 | % | 110,722 | |||||||||||
Other expenses | 147,612 | (0.3 | )% | 148,079 | 15.0 | % | 128,729 | |||||||||||
Total costs and expenses | 622,315 | 5.0 | % | 592,856 | 16.3 | % | 509,654 | |||||||||||
Segment profit | $ | 156,890 | $ | 243,298 | $ | 127,597 | ||||||||||||
2017 compared with 2016
Revenues
Total Local Media revenues decreased 6.8% in 2017. Core advertising, which includes local and national spot revenues, as well as revenues from our digital sites, decreased by $6.6 million in 2017. The decrease was from weakness in our retail, food stores, media and auto categories, offset by improvement in communications, home improvement and services. Political revenues decreased by $92 million year-over-year in a non-presidential election year.
Retransmission revenues increased by almost $39 million as a result of contractual rate increases, more than offsetting a slight decline in subscribers. Retransmission contracts with cable and satellite television systems with 3 million subscribers were renewed in the fourth quarter of 2016. While we had not previously seen any significant declines in subscribers reported to us by cable and satellite television operators, we began to see declines as second quarter subscriber counts were reported to us in the third quarter.
Other revenues increased from an additional $3 million of fees we receive for a news production and services agreement. Upon the acquisition of Katz, we no longer receive carriage fees from the Katz networks which accounted for $8 million of other revenue in 2017.
Costs and expenses
Employee compensation and benefits increased 2.1% in 2017, primarily from merit increases and higher benefit costs.
F-9
Programming expense, which includes our network affiliation fees and other programming costs, increased nearly 15% in 2017 primarily due to $22 million of higher network affiliation license fees and the cost of producing our new show, Pickler & Ben. Network affiliation fees have been increasing industry-wide due to higher rates on renewals, as well as contractual rate increases, and we expect that they may continue to increase over the next several years.
2016 compared with 2015
The Company completed its acquisition of the Journal television stations on April 1, 2015. The inclusion of operating results from this transaction for the periods subsequent to the acquisitions impacts the comparability of the Local Media division operating results.
Revenues
Total Local Media revenues increased 31% in 2016. The comparability of year-over-year revenues was impacted by $49 million of revenues from the acquired stations. Increased retransmission revenues and higher political revenues in a presidential-election year drove most of the remaining year-over-year increase. Retransmission revenues, excluding the full year impact of the acquired stations, increased almost $70 million due to the renewal of retransmission agreements with higher rates and contractual rate increases. Rate increases from the renewal of contracts covering 3 million households were effective at the beginning of 2016 and contracts covering an additional 3 million households were effective in the fourth quarter of 2016.
Costs and expenses
Employee compensation and benefits increased 4.3% in 2016. The increase was primarily from $15.9 million of incremental compensation and benefits from the full year impact of the acquired stations for the first quarter of 2016.
Programming expense increased 47% in 2016 primarily due to the full year impact of the acquired stations and higher network fees. Programming costs of the acquired stations accounted for $9.1 million of the year-over-year increase. The remainder of the increase was from higher network affiliation license fees of $47 million, partially offset by lower syndicated programming expense.
Other expenses increased nearly 15% in 2016 primarily due to higher general operating expenses and the full year impact of the acquired stations.
F-10
National Media — Our National Media segment is comprised of the operations of our national media businesses including over-the-air broadcast networks, Katz, our podcast business, Midroll, next generation national news network, Newsy, and other national brands. Our National Media group earns revenue primarily through the sale of advertising.
Operating results for our National Media segment were as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2017 | Change | 2016 | Change | 2015 | |||||||||||||
Segment operating revenues: | ||||||||||||||||||
Katz | $ | 40,975 | $ | — | $ | — | ||||||||||||
Midroll | 18,232 | 29.4 | % | 14,093 | 209.3 | % | 4,557 | |||||||||||
Newsy | 10,089 | 109.9 | % | 4,806 | 31.4 | % | 3,658 | |||||||||||
Other revenue | 10,878 | 20.5 | % | 9,030 | 88.2 | % | 4,799 | |||||||||||
Total operating revenues | 80,174 | 187.1 | % | 27,929 | 114.6 | % | 13,014 | |||||||||||
Segment costs and expenses: | ||||||||||||||||||
Employee compensation and benefits | 31,121 | 49.9 | % | 20,767 | 129.3 | % | 9,057 | |||||||||||
Programming | 29,522 | 4,165 | 188.6 | % | 1,443 | |||||||||||||
Other expenses | 28,791 | 118.9 | % | 13,153 | 165.1 | % | 4,962 | |||||||||||
Total costs and expenses | 89,434 | 134.8 | % | 38,085 | 146.3 | % | 15,462 | |||||||||||
Segment loss | $ | (9,260 | ) | $ | (10,156 | ) | $ | (2,448 | ) | |||||||||
Our National Media businesses, Katz, Cracked and Midroll, were acquired on October 2, 2017, April 12, 2016 and July 22, 2015, respectively. The inclusion of operating results from these businesses for the periods subsequent to the acquisitions impacts the comparability of our National Media segment operating results.
2017 compared with 2016
Revenues
Revenues increased 187%, or $52 million, in 2017. The revenues from Katz reflect the three months of revenues since our acquisition. Excluding the results of Katz, revenues increased over 40% year-over-year, driven by Midroll and Newsy. Midroll's revenues increased from advertising growth from existing podcasts, as well as adding new titles to its portfolio primarily through shows in our podcast network. Newsy's revenues increased primarily from the growth of advertising of over-the-top platforms, as well as the new revenues from expansion into cable in the fourth quarter of 2017. The increase in other revenue is primarily from growth in our lifestyle brands.
Cost and Expenses
Costs and expenses increased 135% in 2017, primarily due to the impact of Katz. Excluding the results of Katz, expenses increased approximately 41% for the year.
Employee compensation and benefits increased due to the impact of the Katz acquisition, as well as hiring people for our other National Media businesses.
Programming expense includes the amortization of programming for Katz, podcast production costs and other programming costs. The increase is primarily due to Katz's programming costs since its acquisition and additional programming costs for our podcast business.
2016 compared with 2015
Revenues
Revenues increased 115%, or $15 million, in 2016. A full year of revenue for Midroll and Newsy accounted for the increase.
F-11
Cost and Expenses
Costs and expenses increased 146% in 2016, primarily due to the impact of the acquisitions of Cracked and Midroll, and costs from expanding Newsy's editorial staff and marketing efforts.
Shared services and corporate
We centrally provide certain services to our business segments. Such services include accounting, tax, cash management, procurement, human resources, employee benefits and information technology. The business segments are allocated costs for such services at amounts agreed upon by management. Such allocated costs may differ from amounts that might be negotiated at arms-length. Costs for such services that are not allocated to the business segments are included in shared services and corporate costs. Shared services and corporate also includes unallocated corporate costs, such as costs associated with being a public company.
2017 to 2016
Shared services and corporate expenses were up year-over-year with $50.5 million in 2017, up from $46.2 million in 2016.
2016 to 2015
Shared services and corporate expenses were comparable year-over-year at $46.2 million in 2016 and $45.3 million in 2015.
F-12
Liquidity and Capital Resources
Our primary source of liquidity is our available cash and borrowing capacity under our revolving credit facility.
Operating activities
Cash provided by operating activities for the years ended December 31 is as follows:
For the years ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income (loss) | $ | (14,617 | ) | $ | 67,235 | $ | (82,477 | ) | ||||
Income (loss) from discontinued operations, net of tax | (2,595 | ) | 7,313 | (8,605 | ) | |||||||
Income (loss) from continuing operations, net of tax | (12,022 | ) | 59,922 | (73,872 | ||||||||