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, 2015 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. o
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 $22.85 per share closing price for such stock on June 30, 2015, was approximately $1,328,000,000. 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, 2016, there were 71,989,385 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 2016 annual meeting of shareholders.
Index to The E. W. Scripps Company Annual Report
on Form 10-K for the Year Ended December 31, 2015
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 our businesses. We base our forward-looking statements on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. You should evaluate our forward-looking statements, which are as of the date of this filing, with the understanding of their inherent uncertainty. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of the statement.
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PART I
Item 1. | Business |
We are a diverse, 137-year-old media enterprise with interests in television and radio broadcasting, as well as local and national digital 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 through a growing portfolio of television, radio and digital media brands. We also operate an expanding collection of local and national digital journalism and information businesses including our podcast business, Midroll Media, and over-the-top ("OTT") video news service, Newsy. We also produce television programming, run an award-winning investigative reporting newsroom in Washington, D.C., and serve as the longtime steward of the nation's largest, most successful and longest-running educational program, the Scripps National Spelling Bee. For a full listing of our media companies and their associated websites, visit http://www.scripps.com.
On April 1, 2015, Scripps and Journal Communications, Inc. ("Journal") closed the merger of their broadcast operations and spin-off of their newspaper businesses into a separate publicly traded company. Upon completion of the transactions, Scripps shareholders received 0.25 shares of common stock of Journal Media Group for each share of Scripps stock. A $60 million special cash dividend, which was approximately $1.00 per share, was also paid to the Scripps shareholders. Journal shareholders received 0.195 shares of common stock of Journal Media Group and 0.5176 class A common shares of Scripps for each share of Journal stock.
The merged broadcast operations, which retained The E. W. Scripps Company name, is one of the nation’s largest independent TV station ownership groups, reaching nearly one in five U.S. television households and serving 24 markets. We also own 34 radio stations in eight markets. The company has approximately 3,800 employees across its television, radio and digital media operations. The merger enhances our national broadcast footprint, and we now have affiliations with all of the "Big 4" television networks.
The merger with the Journal broadcast business further leverages Scripps' digital investments, adding large and attractive markets to the portfolio, including Nashville, Las Vegas and Milwaukee. The company is expecting to build and launch market-leading digital brands that serve growing digital media audiences, in addition to supporting the on-air local news brands.
In 2011, we signaled our commitment to developing our digital media business by combining all of our digital initiatives into a single organization. Under the direction of our digital leadership, this focus allows us to find new and efficient platforms for bringing together advertisers and audiences. After completing the Journal transactions in 2015, we began reporting digital as a segment.
We continued our expansion of our national digital business with the July 22, 2015 acquisition of Midroll Media, a Los Angeles-based company that creates original podcasts and operates a network that sells advertising for more than 200 shows, including “WTF with Marc Maron" and "Comedy Bang! Bang!” The purchase price was $50 million in cash, plus a $10 million earnout provision.
On June 16, 2014, we acquired two television stations owned by Granite Broadcasting Corporation for $110 million in cash. The acquisition included an ABC-affiliated station in Buffalo and a MyNetworkTV affiliate in Detroit that is now operated as a duopoly with our ABC affiliate.
On January 1, 2014, we acquired Media Convergence Group, which operates as Newsy, a video news provider, for $35 million in cash. Newsy adds a new dimension to our video news strategy with a storytelling approach, specifically geared toward OTT audiences.
On December 30, 2011, we acquired the television station group owned by McGraw-Hill Broadcasting Company, Inc. for $212 million in cash. The acquisition included four ABC-affiliated television stations, as well as five Azteca America Spanish-language affiliates.
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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TELEVISION
Scripps has operated broadcast television stations since 1947, when it launched Ohio’s first television station, WEWS, in Cleveland. Today, our television station group reaches approximately 18% of the nation’s television households and includes 15 ABC affiliates, five NBC affiliates, two FOX affiliates, two CBS affiliates and four non big-four affiliated stations. We also own five Azteca America Spanish-language affiliates. In five of our markets, we operate both television and radio stations. Multiple properties in the same market help us to better serve advertisers, viewers and listeners and help improve our operating efficiencies.
We produce high-quality news, information and entertainment content that informs and engages local and national 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 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 internally produced programming. We have implemented a strategy to rely less on expensive syndicated programming and to replace it with internally developed programming. We currently air three original shows, The List, The Now, and RightThisMinute. The List is an Emmy award winning infotainment show aired on weeknights. The Now is a news show designed to take the audience into a deeper dive into the day's events. RightThisMinute is a daily news and entertainment program featuring viral videos. We wholly own The List and The Now and are a partner in RightThisMinute. These three shows have replaced expensive syndicated content in the markets in which they air. We intend to roll them out in the rest of our markets when commitments to air syndicated programming expire. In the upcoming years, we look to further expand our programming strategy of creating internally produced content and syndicating these shows. We believe this strategy has the potential to improve our television division's financial performance for years to come.
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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) | Station Rank in Market (3) | Percentage of U.S. Television Households in Mkt (4) | Average Audience Share (5) | |||||||||
WFTS-TV | Tampa, Ch. 28 | ABC/29 | 2019 | 2021 | 11 | 12 | 4 | 1.6% | 5 | |||||||||
KNXV-TV | Phoenix, Ch. 15 | ABC/15 | 2019 | 2022 | 12 | 13 | 4 | 1.6% | 6 | |||||||||
WXYZ-TV | Detroit, Ch. 7 | ABC/41 | 2019 | 2021 | 13 | 8 | 2 | 1.6% | 10 | |||||||||
WMYD-TV | Detroit, Ch. 20 | MY/21 | 2016 | 2021 | 13 | 8 | 6 | 1.6% | 2 | |||||||||
KMGH-TV | Denver, Ch. 7 | ABC/7 | 2019 | 2022 | 17 | 11 | 3 | 1.4% | 6 | |||||||||
WEWS-TV | Cleveland, Ch. 5 | ABC/15 | 2019 | 2021 | 18 | 8 | 2 | 1.3% | 9 | |||||||||
WMAR-TV | Baltimore, Ch. 2 | ABC/38 | 2019 | 2020 | 26 | 6 | 4 | 1.0% | 4 | |||||||||
WRTV-TV | Indianapolis, Ch. 6 | ABC/25 | 2019 | 2021 | 27 | 9 | 3 | 1.0% | 8 | |||||||||
KGTV-TV | San Diego, Ch. 10 | ABC/10 | 2019 | 2022 | 28 | 11 | 3 | 0.9% | 5 | |||||||||
WTVF-TV | Nashville, Ch. 5 | CBS/25 | 2018 | 2021 | 29 | 11 | 1 | 0.9% | 15 | |||||||||
KSHB-TV | Kansas City, Ch. 41 | NBC/42 | 2018 | 2022 | 33 | 8 | 4 | 0.8% | 7 | |||||||||
KMCI-TV | Lawrence, Ch. 38 | Ind./41 | N/A | 2022 | 33 | 8 | 7 | 0.8% | 1 | |||||||||
WTMJ-TV | Milwaukee, Ch. 4 | NBC/28 | 2018 | 2021 | 35 | 16 | 3 | 0.8% | 9 | |||||||||
WCPO-TV | Cincinnati, Ch. 9 | ABC/22 | 2019 | 2021 | 36 | 5 | 3 | 0.8% | 8 | |||||||||
WPTV-TV | W. Palm Beach, Ch. 5 | NBC/12 | 2018 | 2021 | 38 | 7 | 1 | 0.7% | 9 | |||||||||
KTNV-TV | Las Vegas, Ch. 13 | ABC/13 | 2017 | 2022 | 40 | 18 | 4 | 0.7% | 6 | |||||||||
WKBW-TV | Buffalo, Ch. 7 | ABC/38 | 2018 | 2023 | 53 | 8 | 3 | 0.5% | 7 | |||||||||
KJRH-TV | Tulsa, Ch. 2 | NBC/8 | 2018 | 2022 | 60 | 10 | 4 | 0.5% | 8 | |||||||||
WFTX-TV | Fort Myers/Naples, Ch. 4 | FOX/35 | 2019 | 2021 | 61 | 10 | 3t | 0.5% | 5 | |||||||||
WGBA-TV | Green Bay/Appleton, Ch. 26 | NBC/41 | 2016 | 2021 | 68 | 8 | 4 | 0.4% | 8 | |||||||||
WACY-TV | Green Bay/Appleton, Ch. 32 | MY/27 | 2016 | 2021 | 68 | 8 | 7 | 0.4% | 1 | |||||||||
KGUN-TV | Tucson, Ch. 9 | ABC/9 | 2017 | 2022 | 70 | 15 | 3 | 0.4% | 11 | |||||||||
KWBA-TV | Tucson, Ch. 58 | CW/44 | 2016 | 2022 | 70 | 15 | 8 | 0.4% | 1 | |||||||||
KMTV-TV | Omaha, Ch. 3 | CBS/45 | 2016 | 2022 | 74 | 11 | 3 | 0.4% | 10 | |||||||||
KIVI-TV | Boise, Ch. 6 | ABC/24 | 2017 | 2022 | 107 | 13 | 3 | 0.2% | 8 | |||||||||
WSYM-TV | Lansing, Ch. 47 | FOX/38 | 2019 | 2021 | 113 | 7 | 4 | 0.2% | 6 | |||||||||
KERO-TV | Bakersfield, Ch. 23 | ABC/10 | 2019 | 2022 | 126 | 4 | 4 | 0.2% | 5 | |||||||||
All market and audience data is based on the November 2015 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) | Station Rank in Market is based on Average Audience Share as described in (5). |
(4) | 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. |
(5) | Average Audience Share represents the number of television households tuned to a specific station from 6 a.m. to 2 a.m. M-SU, as a percentage of total viewing households in the Designated Market Area. |
Historically, we have been successful in renewing our expiring FCC licenses.
We operate five low-power stations affiliated with the Azteca America network, a Hispanic network producing Spanish-language programming. The stations are clustered around our California 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
Advertising
We sell advertising to local, national and political customers. The sale of local, national and political commercial spots accounted for 76% of the television segment’s revenues in 2015. Pricing of advertising is based on audience size and share, the demographics of our audiences and the demand for our limited inventory of commercial time. Our television 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 time 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 which call upon advertising agencies, whose clients typically include automobile manufacturers and dealer groups, telecommunications companies and national retailers.
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 or other advocacy groups.
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.
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 preceding the presidential election. Because of the political election cyclicality, 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 and importance of individual political races and issues discussed.
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.
Retransmission Revenues
We earn revenues from retransmission consent agreements with multi-channel video programming distributors ("MVPDs") in our markets. Retransmission revenues were 22% of television segment operating revenues in 2015. The MVPDs are cable operators and satellite carriers who pay us to offer our programming to their customers. The revenue we receive is typically based on the number of subscribers the MVPD has in our local market. There are approximately 19 million subscribers to MVPD services in our markets. As of January 1, 2016, we have renewed contracts covering approximately 3 million subscribers. When we have renewed retransmission consent agreements, they have generally been at higher rates.
Prior to the spin-off in 2008 of Scripps Networks Interactive (SNI), we granted retransmission rights to MVPDs in exchange for carriage of cable networks. Pursuant to an agreement entered into as part of the spin-off, SNI pays us an annual fee for carriage of our broadcast signals by Comcast, limited to the television stations owned prior to the 2008 spin-off. This agreement with SNI expires at the end of 2019, when we expect to renew our retransmission agreement with Comcast for all of our current markets.
Our retransmission consent agreements with MVPD providers expire at various dates through 2019. The approximate number of subscribers to those services by year of expiration is as follows: 4 million in 2016, 2 million in 2017, 6 million in 2018 and 7 million in 2019. We expect our retransmission consent agreements with MVPD providers to be renewed upon expiration.
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Other
FCC rules allow broadcasters to transmit additional digital channels within the spectrum allocated to each FCC license holder. This provides viewers with additional programming alternatives at no additional cost to them. With these additional channels we may broadcast our own programs or programming of other providers such as Grit, Laff, Escape and Bounce. We may consider other alternative programming formats that we could air using our spectrum with the goal of achieving higher profits and community service.
In addition to selling commercials during our programming, we also offer marketing opportunities for our business customers, including sponsorships and community events.
Expenses
Employee costs accounted for 52% of segment costs and expenses in 2015.
We have been centralizing 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.
Programming costs, which include network affiliation fees, syndicated programming and shows produced for us or in partnership with others, were 24% of total segment costs and expenses in 2015.
Our network-affiliated stations pay the networks for the programming that is supplied to us in various dayparts. Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network. In exchange, the network receives affiliation fees and has the right to sell a substantial majority of the advertising time during these broadcasts. We expect our network affiliation agreements to be renewed upon expiration.
RADIO
In 2015, Scripps acquired the Journal broadcast group which included 34 radio stations in eight markets. We operate 28 FM stations and six AM stations.
We employ a variety of sales-related and programming strategies to maximize our share of the advertising spending. We have aligned our radio stations in clusters within a market, building each cluster around a lead station. We seek to create unique and differentiated brand positions at each station within a cluster so that we can offer distinct solutions for a variety of advertisers in each of our markets. This approach has allowed us to target our stations' formats and sales efforts to better serve advertisers and listeners, as well as leverage operating expenses to maximize the performance of each station and the cluster.
Our radio stations focus on providing targeted and relevant local programming that is responsive to the interest of the communities in which we serve, strengthening our brand identity and allowing us to provide effective marketing solutions for advertisers by reaching their targeted audiences.
Our Milwaukee radio station, WTMJ-AM, currently maintains exclusive radio broadcast rights for the Green Bay Packers and Milwaukee Brewers and operates a statewide network for their games.
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Information concerning our radio stations, their formats and the markets in which they operate is as follows:
Market and Station | Format | Station Rank in Market (1) | Stations in Market (2) | FCC License Class (3) | FCC License Expires in | ||||||
Milwaukee, WI | |||||||||||
WTMJ-AM (4) | News/Talk/Sports | 2 | 36 | B | 2020 | ||||||
WKTI-FM (4) | Country | 14 | 36 | B | 2020 | ||||||
Omaha, NE | |||||||||||
KEZO-FM (4) | Rock | 3 | 19 | C0 | 2013 (5) | ||||||
KKCD-FM (4) | Classic Rock | 11t | 19 | C2 | 2021 | ||||||
KSRZ-FM (4) | Adult Contemporary | 6 | 19 | C | 2021 | ||||||
KXSP-AM | Sports | 16 | 19 | B | 2021 | ||||||
KQCH-FM (4) | Contemporary Hits | 4 | 19 | C | 2021 | ||||||
Tucson, AZ | |||||||||||
KFFN-AM | Sports (Simulcast) | 22t | 23 | C | 2021 | ||||||
KMXZ-FM (4) | Adult Contemporary | 2 | 23 | C | 2021 | ||||||
KQTH-FM (4) | News/Talk | 14t | 23 | A | 2021 | ||||||
KTGV-FM | Rhythmic AC | 16 | 23 | C2 | 2021 | ||||||
Knoxville, TN | |||||||||||
WCYQ-FM | Country | 8t | 19 | A | 2020 | ||||||
WWST-FM (4) | Contemporary Hits | 3 | 19 | C1 | 2020 | ||||||
WKHT-FM (4) | Contemporary Hits/Rhythmic | 5 | 19 | A | 2020 | ||||||
WNOX-FM (4) | Classic Hits | 6 | 19 | C | 2020 | ||||||
Boise, ID | |||||||||||
KJOT-FM | Variety Rock | 22 | 23 | C | 2021 | ||||||
KQXR-FM | Active Rock | 20t | 23 | C1 | 2021 | ||||||
KTHI-FM | Classic Hits | 4 | 23 | C | 2021 | ||||||
KRVB-FM | Adult Alternative | 10t | 23 | C | 2021 | ||||||
Wichita, KS | |||||||||||
KFDI-FM (4) | Country | 1 | 20 | C | 2021 | ||||||
KICT-FM (4) | Rock | 3 | 20 | C1 | 2021 | ||||||
KFXJ-FM (4) | Classic Rock | 7 | 20 | C2 | 2021 | ||||||
KFTI-AM | Classic Country | 20t | 20 | B | 2021 | ||||||
KYQQ-FM | Regional Mexican | 18 | 20 | C0 | 2021 | ||||||
Springfield, MO | |||||||||||
KSGF-AM & FM | News/Talk (Simulcast) | 5 | 18 | B/C3 | 2021 | ||||||
KTTS-FM | Country | 1 | 18 | C | 2021 | ||||||
KSPW-FM | Contemporary Hits | 2 | 18 | C2 | 2021 | ||||||
KRVI-FM | Adult Hits | 8t | 18 | C3 | 2021 | ||||||
Tulsa, OK | |||||||||||
KFAQ-AM (4) | News/Talk | 18 | 24 | A | 2021 | ||||||
KVOO-FM (4) | Country | 10t | 24 | C | 2021 | ||||||
KXBL-FM (4) | Classic Country | 6 | 24 | C1 | 2021 | ||||||
KHTT-FM | Contemporary Hits | 12 | 24 | C0 | 2021 | ||||||
KBEZ-FM | Classic Hits | 7 | 24 | C0 | 2021 | ||||||
(1) | Station Market Rank equals the ranking of each station in its market, according to the Fall 2015 Nielson audio survey. The diary ranking is determined based on the estimated share of persons 12 years and older and the Portable People Meter ("PPM") ranking is based on the estimated share of persons six years and older listening during an average 15-minute increment (also knows as "average quarterly hour," or "AQH," share) occurring Monday-Sunday between 6:00 a.m. and midnight. |
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(2) | Includes stations qualified to be reported in the Fall 2015 Arbitron ratings book. To be reported in a diary market, a station must have met the following requirements among persons 12 years and older occurring Monday-Sunday between 6:00 a.m. and midnight: |
a. | Must be credited for at least one quarter-hour in at least 10 in-tab diaries, have a metro cume rating of 0.495 or greater and a metro AQH rating of 0.05 or greater. |
b. | Must have received at least one quarter-hour of listening credit from at least one in-tab panelist and have a metro cume rating of 0.495 or greater. |
(3) | The FCC license class is a designation for the type of license based upon the radio broadcast service area according to radio broadcast rules compiled in the Code of Federal Regulations. |
(4) | Stations that are broadcasting in digital. |
(5) | License pending renewal. |
Revenue sources
Advertising
The primary source of revenue for our radio stations is from the sale of advertising to local advertisers. We also sell non-traditional advertising, which includes initiatives to attract new local advertisers, such as the creation of new content and programs that combine television or radio with digital, national and political advertising. Although it is not as significant as in the television segment, our radio stations may benefit from political advertising in even numbered years.
We strive to maximize revenue dollars through the broadcast of commercials without diminishing listening levels. While the number of advertisements broadcast during a given time period may vary, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year, unless there has been a format change.
Other
Other revenue includes the sports affiliation fees we receive at WTMJ-AM for the statewide broadcast of the Green Bay Packers and Milwaukee Brewers. We also offer marketing opportunities for our customers, including sponsorships and community events.
Expenses
Employee costs accounted for 48% of segment costs and expenses in 2015.
Programming costs, which are comprised primarily of music license fees and sports rights fees, were 23% of total segment costs and expenses in 2015. We pay music license fees to performing rights organizations which allows us to broadcast music. The sports rights fees include the costs for our exclusive rights to broadcast the Green Bay Packers and Milwaukee Brewers.
Federal Regulation of Broadcasting — Broadcast television and radio are 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, 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 except for the timely-filed application of radio station KEZO-FM, Omaha, NE, which license remains in effect pending processing by the FCC. 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.
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FCC regulations govern the ownership of radio and television stations and other media. Under the FCC's current rules, a license for a television station will generally not be granted or renewed if the grant of the license would result in (i) the applicant 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 “television duopoly rule”), or (ii) the applicant owning or controlling television stations whose total national audience reach exceeds 39% of all television households. The Company enjoys a waiver of this television duopoly rule in the Green Bay, Wisconsin market.
A television station that provides more than 15% of another in-market television station’s weekly programming will be deemed to have an attributable interest in that station that subjects the stations to the FCC’s ownership limits. The FCC in 2014 modified its rules to impose this duopoly rule's restrictions on separately-owned television stations within a market that engage in joint advertising sales, and it is considering imposing disclosure and other limits on local stations that share facilities or services such as program production. Each of stations WPTV-TV, West Palm Beach, Florida, and KIVI-TV, Nampa (Boise), Idaho, is a party to a shared services agreement with another local station pursuant to which it provides, among other services, less than 15% of the other station’s weekly programming. Station WSYM-TV, Lansing, Michigan, is a party to a joint advertising agreement with a local station that would be subject to the revised rule’s requirements, but Congress has granted such stations a “grandfathered” status that will permit continuation of these agreements without attribution through 2025.
The FCC’s local radio ownership rule limits the number of radio stations an entity may own in a given market depending on the size of that radio market. Specifically, in a radio market with 45 or more commercial and noncommercial radio stations, a party may own or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM). In a radio market with between 30 and 44 radio stations, a party may own or control up to seven commercial radio stations, not more than four of which are in the same service. In a radio market with between 15 and 29 radio stations, a party may own or control up to six commercial radio stations, not more than four of which are in the same service. In a radio market with 14 or fewer radio stations, a party may own or control up to five commercial radio stations, not more than three of which are in the same service, except that a party may not own or control more than 50% of the stations in the market, except for combinations of one AM and one FM station. The FCC relies on Nielson to define the radio market in most areas of the country, but for stations outside a Nielson-defined market this definition depends upon a technical analysis of the stations’ service areas. A radio station that provides more than 15% of another in-market station’s weekly programming or sells more than 15% of another in-market station’s weekly advertising will be deemed to have an attributable interest in that station that subjects the stations to the ownership rule limits.
The FCC’s radio-television cross-ownership rule separately limits broadcast ownership, generally allowing: common ownership of one or two television stations and up to six radio stations, or, in certain circumstances, one television station and seven radio stations in any market where at least 20 independent voices would remain after the combination; two television stations and up to four radio stations in a market where at least 10 independent voices would remain after the combination; and one television and one radio station notwithstanding the number of independent voices in the market. A “voice” under this rule generally includes independently owned and locally-received commercial and noncommercial broadcast television and radio stations, significant local newspapers, and one local cable system.
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.
The FCC routinely reviews its ownership rules, and we cannot predict the outcome of the FCC’s ongoing reconsideration of these ownership issues or the effect of any FCC revision of these ownership policies on our stations' operations or our business.
In order to provide additional spectrum for mobile broadband and other services, Congress has granted the FCC authority to conduct spectrum auctions in which some television broadcasters would voluntarily give up spectrum in return for a share of the auction proceeds. The FCC has begun the process of conducting an auction to purchase television broadcast spectrum and intends to complete the auction during 2016. Broadcasters are concerned that the FCC’s approach to the post-auction “repacking” of the remaining television stations into the reduced broadcast spectrum may not adequately protect stations’ over-the-air service and may particularly disadvantage any stations that are relocated to the frequencies that will then be employed for wireless service purposes in other geographic areas. Broadcasters also are concerned that the FCC’s post-auction plans do not provide sufficient time to complete the repacking before the sold spectrum will be authorized for wireless use and that there will not be adequate compensation for those stations that are required to change facilities due to repacking. Implementing the post-auction changes in stations' frequencies and tower site locations may be complicated and costly, and stations located near the Canadian and Mexican borders are at particular risk of service loss and difficulty in finding alternative transmitter sites due to the need to coordinate international frequency use. Despite warnings about potential difficulties, such as a lack of available
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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 plans to impose a “hard” deadline that could require a station that is unable to relocate in time to cease broadcasting on its existing frequency even though its new facility is not yet ready to provide service.
Separately, the FCC has expanded its commitment 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 has tentatively decided to further reduce the spectrum available for television broadcasting by reserving one or two 6 MHz channels 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.
In accord with a Congressional directive, the FCC has recently initiated a new 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.” While the FCC has previously concluded that it lacks authority to require arbitration or mandate station carriage, it has restricted the practice whereby some independently-owned stations in a market would jointly negotiate retransmission consent rights, and it is seeking additional comment on whether it should eliminate its “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.
Other proceedings before the FCC and the courts are reexamining policies that have protected 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. Other ongoing copyright-related controversies involve, for example, the legality of digital recorders or Internet-based recording services that can automatically remove commercials from television broadcast programming during playback. We cannot predict the outcome of these and other proceedings that address the use of new technologies to challenge traditional means of redistributing television broadcast programming or their possible impact on the Company.
Radio station revenues are subject to the regulatory decisions of the Copyright Royalty Board (“CRB”) which sets rates for broadcasters’ royalty payments to music copyright holders for the performance of their works. Whether radio stations should also pay royalties to music performers is a long-standing and controversial topic before Congress. We cannot predict the impact that future decisions of the CRB or Congress with respect to these matters might have upon our radio stations’ revenues 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 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.
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DIGITAL
Our digital segment includes a collection of local and national digital brands. The local brands consist of our television and radio station websites, as well as the related smartphone and tablet apps, which earn revenues from advertising sales and related digital advertising products and marketing services. Our local digital sites offer comprehensive local news, information and user-generated content, as well as national content and other content sources. We continue to enhance our online and digital services using features such as long-form text articles in addition to streaming video and audio, to deliver news and information. Many of our journalists routinely produce videos for consumption through our digital platforms and use an array of social media sites, such as Facebook, YouTube and Twitter, to communicate with and build our audiences. We have embraced mobile technology by offering our products on apps available on the Apple, Android, Kindle Fire and Windows platforms. During the fourth quarter of 2015 our local markets served 253 million page views and had an average of 21.7 million unique users; we had approximately 950,000 monthly active users of our local, mobile and tablet apps; and combined, our local websites and mobile products delivered approximately 25 million video views.
The national digital brands compete on emerging platforms and marketplaces where audience and revenue growth are the fastest, such as over-the-top (OTT) audio and video. OTT refers to the delivery of audio, video and other media over the Internet through third parties such as Hulu, Netflix, HBO NOW and Sling TV. Consumers can access the OTT content through 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. A podcast is a digital audio recording, usually part of a themed series, which can be downloaded from the Internet to a media player or computer. Both OTT video and audio-podcasting platforms enable us to expand our reach and number of viewers beyond that of our local audience and also enable us to attract a variety of different advertisers.
Our national digital brands includes Newsy and Midroll Media (Midroll). Newsy is an OTT video news service focused on the millennial generation that brings perspective and analysis to reporting on world and national news, including politics, entertainment, science and technology. During the fourth quarter of 2015, Roku users spent an average of 27 minutes per session watching Newsy content. Apple TV named Newsy to its "Best of 2015" app list. Another national digital brand, Midroll, is a podcast industry leader that creates original podcasts and operates a network that generates revenue for more than 200 shows, with on-air talent such as Marc Maron and Bill Simmons. Midroll also has a subscription service called Howl which operates through a smartphone app that makes it easier to find and engage with podcasts. During the fourth quarter of 2015, Midroll's podcasts were downloaded an average of 113 million times per month.
Revenue sources
Digital advertising
Our local and national digital operations earn revenue primarily through the sale of advertising to local and national customers. Digital advertising includes fixed-duration campaigns whereby, for a fee, a video preroll, a banner, text or other advertisement appears for a specified period of time; impression-based campaigns where the fee is based on the number of times the advertisement appears in webpages viewed by a user; and click-through campaigns where the fee is based on the number of users who click on an advertisement and are directed to the advertisers’ websites. We use a variety of audience-extension programs to enhance the reach of our websites and garner a larger share of advertising dollars that are spent online.
Another source of advertising revenue comes from our national digital brand Midroll, which earns revenue from the sale of advertisement spots on its original podcasts which it creates and distributes through its owned-and-operated networks, Earwolf and Wolfpop.
Other
Other revenue sources primarily include digital marketing and subscription services.
We offer our local advertising customers additional marketing services, such as managing their search engine marketing campaigns. Additionally, 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.
The primary source of subscription revenue comes from Howl, which is a subscription service launched by Midroll in August 2015, where users pay a standard monthly fee for access to premium content service.
Expenses
Employee costs accounted for 68% of segment costs and expenses in 2015.
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Other segment costs and expenses in 2015 were attributable to news coverage costs, network and digital hosting costs and other miscellaneous expenses.
Syndication and Other
Syndication and other primarily includes the syndication of news features and comics and other features for the newspaper industry.
Employees
As of December 31, 2015, we had approximately 3,800 full-time equivalent employees, of whom approximately 2,800 were with television, 400 with radio and 400 with our digital operations. Various labor unions represent approximately 400 employees, the majority of which are in television. We have not experienced any work stoppages at our current operations since 1985. We consider our relationships with our employees to be satisfactory.
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 by businesses, which is affected by numerous factors. Declines in advertising revenues will adversely affect the profitability of our business.
The demand for advertising on television and radio stations 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. |
• | Television and radio 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 and radio 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 audiences have continued to fragment in recent years as the broad distribution of cable and satellite television has greatly increased the options available to the viewing public. Continued fragmentation of television audiences could adversely impact advertising rates, which will reflect the size and demographics of the audience reached by advertisers through our media businesses. |
• | Television stations have significant exposure to advertising in the automotive 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.
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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 local television and radio advertising marketplace, and may cause downward pricing pressure or affect our pricing, resulting in a loss of revenue that could materially adversely affect broadcast operations.
Several national advertising agencies are now looking at an automated process known as “programmatic buying” to reduce costs related to buying local TV spot 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 local 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 in the broadcast industry. Widespread adoption causing downward pricing pressure could result in a loss of revenue and materially adversely affect future broadcast operations.
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 television broadcast operations.
We deliver our television programming to our audiences over 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 programing directly to consumers, “over-the-top.” The delivery of content directly to the 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 over-the-top by our audiences could result in a reduction of our advertising and retransmission revenues and affect our profitability.
Our radio broadcasting stations similarly confront audience fragmentation caused by a proliferation of alternative digital programming services-including mobile services-that could affect their advertising rates.
Our local 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 television and radio 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 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.
The loss of affiliation agreements could adversely affect our television stations’ 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 MY 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 the programming, and the "Big 4" networks, ABC, NBC, CBS and FOX, also require stations to pay fees for the right to carry 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 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, which may involve higher costs and may not be as attractive to target audiences, resulting in lower advertising revenues. In
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addition, loss of any network affiliation would result in materially lower retransmission revenue, particularly in the case of the "Big 4" networks.
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’ computer or mobile devices, could adversely affect our retransmission revenue if such technologies are not found to be subject to copyright law 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. Congress, for example, has directed the FCC to reexamine its policies concerning the parties’ legal obligation to bargain in “good faith,” and MVPDs are urging the FCC to prescribe new limits on a station’s ability to limit access to its programming during such negotiations. 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. MVPDs are pressing for legislative and regulatory changes to diminish stations’ negotiating power. 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 will depend 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 is encouraging some television licensees to voluntarily auction away their spectrum rights in order to increase the spectrum available for wireless service use. After this auction, an undetermined number of the remaining television stations will have their licenses modified to specify new operating frequencies and/or new transmitter locations, and the FCC is setting tight deadlines for the completion of these facility changes in order to make the reallocated spectrum promptly available to buyers. Depending on the number of such relocations required, some stations could confront substantial costs and |
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difficulty in completing these relocations within the allotted time, adversely affecting these stations’ over-the-air service. Also, some television stations may be assigned to the spectrum band that is otherwise being reallocated to wireless use, and this separation from other television stations could affect them in unexpected ways, such as limiting their options to offer advanced services in the future.
• | The FCC and other government agencies are considering other proposals intended to promote consumer interests, including proposals to encourage locally-focused public interest television programming and restrict certain types of advertising to children. 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. |
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, 2015, the projected benefit obligations of our pension plans exceeded plan assets by $203 million. Accrual of service credits are frozen under both defined benefit pension plans covering a majority of employees, including those covered under 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, computer 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 expected to routinely involve receiving, storing, processing and transmitting sensitive information. Although we monitor security measures regularly and believe we are not in a key target industry, 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 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 continue in effect after the 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.
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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 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 has agreed to become a wholly owned subsidiary of Gannett Co., Inc. The completion of this merger will neither change the indemnification obligations of Scripps or Journal Media Group described above nor 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 and radio broadcast industries and the financial markets generally; |
• | the political, economic and social situation in the United States; |
• | variations in quarterly operating results; |
• | inability to meet revenue projections; |
• | 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 broadcast industry; |
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• | 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. |
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.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We own substantially all of the facilities and equipment used by our television and radio 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.
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Executive Officers of the Company — Executive officers serve at the pleasure of the Board of Directors.
Name | Age | Position | ||
Richard A. Boehne | 59 | President, Chief Executive Officer and Director (since July 2008); Executive Vice President (1999 to 2008) and Chief Operating Officer (2006 to 2008) | ||
Timothy M. Wesolowski | 57 | Senior Vice President and Chief Financial Officer (since August 2011); Treasurer (2011 to 2015); Senior Vice President Finance - Call Center Division, Convergys Corporation (2010 to 2011); Senior Vice President Finance/Controller, Convergys Corporation (2006 to 2009) | ||
William Appleton | 67 | Senior Vice President and General Counsel (since July 2008); Managing Partner Cincinnati office, Baker & Hostetler, LLP (2003 to 2008) | ||
Lisa A. Knutson | 50 | Senior Vice President/Chief Administrative Officer (since September 2011); Senior Vice President/Human Resources (2008 to 2011) | ||
Brian G. Lawlor | 49 | Senior Vice President/Television (since January 2009); Vice President/General Manager of WPTV (2004 to 2008) | ||
Adam Symson | 41 | Senior Vice President/Digital (since February 2013); Chief Digital Officer (2011 to February 2013); Vice President Interactive Media/Television (2007 to 2011) | ||
Douglas F. Lyons | 59 | Vice President, Controller (since July 2008) and Treasurer (since May 2015); Vice President Finance/Administration (2006 to 2008), Director Financial Reporting (1997 to 2006) | ||
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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, 2015, there were approximately 16,437 owners of our Class A Common shares, based on security position listings, and 70 owners of our Common Voting shares (which do not have a public market). On April 1, 2015, Scripps' shareholders received a $60 million special cash dividend as part of the Journal broadcast merger and newspaper spin-off transactions. We did not pay any cash dividends in 2014.
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 | |||||||||||||
2015 | ||||||||||||||||
Market price of common stock: | ||||||||||||||||
High | $ | 28.44 | $ | 25.41 | $ | 23.10 | $ | 22.56 | ||||||||
Low | 19.73 | 21.73 | 16.01 | 17.27 | ||||||||||||
Cash dividends per share of common stock | $ | — | $ | 1.03 | $ | — | $ | — | ||||||||
2014 | ||||||||||||||||
Market price of common stock: | ||||||||||||||||
High | $ | 21.40 | $ | 21.16 | $ | 21.76 | $ | 23.34 | ||||||||
Low | 16.17 | 16.06 | 16.31 | 15.22 | ||||||||||||
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, 2015 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 | |||||||||||
10/1/15-10/31/15 | 122,340 | $ | 17.64 | $ | 2,158,256 | $ | 86,940,335 | ||||||||
11/1/15-11/30/15 | 40,000 | 20.85 | 834,017 | $ | 86,106,318 | ||||||||||
12/1/15-12/31/15 | 116,500 | 19.99 | 2,328,640 | $ | 83,777,678 | ||||||||||
Total | 278,840 | $ | 19.08 | $ | 5,320,913 | ||||||||||
In May 2014, our Board of Directors authorized a repurchase program of up to $100 million of our Class A Common shares. We repurchased a total of $16 million shares under this authorization through December 31, 2015. An additional $84 million of shares may be repurchased pursuant to the authorization, which expires December 31, 2016.
21
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, 2010, 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 continually 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 Current Peer Group Index are Nexstar Broadcasting Group, TEGNA, Media General, Sinclair Broadcast Group, Tribune Media, Gray Television, Saga Communications and Beasley Broadcast Group.
Our peer group was revised in 2015 to exclude McClatchy, New York Times Company and Tribune Publishing and include Saga Communications and Beasley Broadcast Group following the spin-off of our newspaper business and acquisition of the Journal radio group. The Peer Group Index is weighted based on market capitalization.
12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | |||||||||||||||||||
The E. W. Scripps Company | $ | 100.00 | $ | 78.92 | $ | 106.50 | $ | 213.99 | $ | 220.20 | $ | 212.11 | ||||||||||||
S&P 500 Index | 100.00 | 102.11 | 118.45 | 156.82 | 178.28 | 180.75 | ||||||||||||||||||
Current Peer Group Index | 100.00 | 98.68 | 135.68 | 298.82 | 272.40 | 257.34 | ||||||||||||||||||
Previous Peer Group Index | 100.00 | 91.61 | 121.08 | 257.06 | 233.46 | 217.72 | ||||||||||||||||||
22
The following graph compares the return of the Company's Class A Common shares with that of the indices noted above for the period of April 1, 2015 (date of newspaper spin-off) through December 31, 2015. The graph assumes an investment of $100 in our Class A Common shares, the S&P 500 Index, and an Index based on a peer group of media companies and that all dividends were reinvested. This graph uses the same Peer Group Index stated above.
4/1/2015 | 6/30/2015 | 9/30/2015 | 12/31/2015 | |||||||||||||
The E. W. Scripps Company | $ | 100.00 | $ | 94.62 | $ | 73.17 | $ | 78.67 | ||||||||
S&P 500 Index | 100.00 | 100.66 | 94.18 | 100.82 | ||||||||||||
Current Peer Group Index | 100.00 | 97.87 | 74.28 | 84.97 | ||||||||||||
23
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.
24
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 2016 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.
25
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 26, 2016, 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 at page S-2 of this Form 10-K. |
26
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 26, 2016 | By: | /s/ Richard A. Boehne |
Richard A. Boehne | ||
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 26, 2016.
Signature | Title | |
/s/ Richard A. Boehne | Chairman of the Board of Directors, President, Chief Executive Officer | |
Richard A. Boehne | (Principal Executive Officer) | |
/s/ Timothy M. Wesolowski | Senior Vice President and Chief Financial Officer | |
Timothy M. Wesolowski | ||
/s/ Douglas F. Lyons | Vice President, Controller and Treasurer | |
Douglas F. Lyons | (Principal Accounting Officer) | |
/s/ Charles Barmonde | Director | |
Charles Barmonde | ||
/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/ Mary Peirce | Director | |
Mary Peirce | ||
/s/ J. Marvin Quin | Director | |
J. Marvin Quin | ||
/s/ Kim Williams | Director | |
Kim Williams | ||
27
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) | 2015 (1) | 2014 (1) | 2013 (1) | 2012 (1) | 2011 (1) | |||||||||||||||
Summary of Operations (2) | ||||||||||||||||||||
Total operating revenues | $ | 716 | $ | 499 | $ | 432 | $ | 504 | $ | 314 | ||||||||||
(Loss) income from continuing operations before income taxes | (99 | ) | 9 | (22 | ) | 41 | (25 | ) | ||||||||||||
Net (loss) income from continuing operations | (67 | ) | 9 | (10 | ) | 31 | (14 | ) | ||||||||||||
Depreciation and amortization of intangibles | (52 | ) | (32 | ) | (31 | ) | (30 | ) | (18 | ) | ||||||||||
Per Share Data | ||||||||||||||||||||
(Loss) income from continuing operations — diluted | $ | (0.86 | ) | $ | 0.16 | $ | (0.18 | ) | $ | 0.57 | $ | (0.24 | ) | |||||||
Cash dividends | 1.03 | — | — | — | — | |||||||||||||||
Market Value of Common Shares at December 31 | ||||||||||||||||||||
Per share | $ | 19.00 | $ | 22.35 | $ | 21.72 | $ | 10.81 | $ | 8.01 | ||||||||||
Total | 1,591 | 1,274 | 1,217 | 600 | 435 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets | $ | 1,681 | $ | 1,031 | $ | 966 | $ | 1,031 | $ | 971 | ||||||||||
Long-term debt (including current portion) | 399 | 196 | 200 | 196 | 212 | |||||||||||||||
Equity | 901 | 520 | 548 | 540 | 517 | |||||||||||||||
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, 2015, 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) | 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. | ||
2011 — On December 30, 2011, we acquired the television station group owned by McGraw-Hill Broadcasting, Inc. Operating results are included for periods after the acquisition. | ||
(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: | |
2015 — On April 1, 2015, we completed the spin-off of our newspaper business. | ||
F-2
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
Certain forward-looking statements related to our businesses are included in this discussion. Those forward-looking statements reflect our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. You should evaluate our forward-looking statements, which are as of the date of this filing, with the understanding of their inherent uncertainty. We undertake no obligation to 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 television, radio and digital media brands. We operate an expanding collection of local and national digital journalism and information businesses including our podcast business, Midroll, and over-the-top ("OTT") video news service, Newsy. We also produce television programming, run an award-winning investigative reporting newsroom in Washington, D.C., and serve as the longtime steward of the nation's largest, most successful and longest-running educational program, the Scripps National Spelling Bee.
On April 1, 2015, Scripps and Journal Communications, Inc. ("Journal") closed their transactions to merge their broadcast operations and spin-off their newspaper businesses into a separate publicly traded company. Upon completion of the transactions, Scripps shareholders received 0.25 shares of common stock of Journal Media Group for each share of Scripps stock. A $60 million special cash dividend, which was approximately $1.00 per share, was also paid to the Scripps shareholders. Journal shareholders received 0.195 shares of common stock of Journal Media Group and 0.5176 class A common shares of Scripps for each share of Journal stock they held.
Journal Media Group ("JMG") combined the 13 Scripps newspapers with Journal's Milwaukee Journal Sentinel. Operations for Scripps' newspapers are included in our operating results for the periods prior to April 1, 2015 as discontinued operations.
The merged broadcast operations, which retained The E. W. Scripps Company name, is one of the nation’s largest independent TV station ownership groups, reaching nearly one in five U.S. television households and serving 24 markets. We also own 34 radio stations in eight markets. The company has approximately 3,800 employees across its television, radio and digital media operations. The merger enhances our national broadcast footprint, and we now have affiliations with all of the "Big 4" television networks.
The merger with the Journal broadcast business further leverages Scripps' digital investments, adding large and attractive markets to the portfolio. We expect to build and launch market-leading digital brands that serve growing digital media audiences.
We continued our expansion of our digital business with the July 22, 2015 acquisition of Midroll Media, a Los Angeles-based company that creates original podcasts and operates a network that sells advertising for more than 200 shows, including “WTF with Marc Maron" and "Comedy Bang! Bang!” The purchase price was $50 million in cash, plus a $10 million earnout provision.
The evolution of the OTT market has created new distribution platforms for Newsy. We believe the OTT market provides significant opportunities to expand the Newsy audience. We have announced agreements with Apple TV, Comcast's Watchable, PlutoTV, and Xumo and are accelerating our rollout of Newsy to other OTT services. The development of OTT services will require additional investment in Newsy. The additional investment, combined with other market changes that resulted in the slower development of our original revenue model, created indications of impairment of goodwill as of September 30, 2015. In
F-3
the third quarter of 2015, we recorded a $21 million non-cash charge to reduce the carrying value of goodwill and $2.9 million to reduce the value of certain intangible assets.
Results of Operations
The trends and underlying economic conditions affecting the 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 business segments that follows.
Consolidated Results of Operations
Consolidated results of operations were as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2015 | Change | 2014 | Change | 2013 | |||||||||||||
Operating revenues | $ | 715,656 | 43.5 | % | $ | 498,752 | 15.4 | % | $ | 432,357 | ||||||||
Employee compensation and benefits | (340,042 | ) | 31.9 | % | (257,870 | ) | 14.3 | % | (225,644 | ) | ||||||||
Programs and program licenses | (121,479 | ) | 118.9 | % | (55,487 | ) | 3.1 | % | (53,826 | ) | ||||||||
Other expenses | (163,297 | ) | 41.8 | % | (115,175 | ) | 0.9 | % | (114,164 | ) | ||||||||
Defined benefit pension plan expense | (58,674 | ) | (5,671 | ) | (30.1 | )% | (8,110 | ) | ||||||||||
Acquisition and related integration costs | (37,988 | ) | (9,708 | ) | — | |||||||||||||
Depreciation and amortization of intangibles | (51,952 | ) | (32,180 | ) | (30,522 | ) | ||||||||||||
Impairment of goodwill and intangibles | (24,613 | ) | — | — | ||||||||||||||
(Losses) gains, net on disposal of property, plant and equipment | (483 | ) | 2,872 | (296 | ) | |||||||||||||
Operating (loss) income | (82,872 | ) | 25,533 | (205 | ) | |||||||||||||
Interest expense | (15,099 | ) | (8,494 | ) | (10,437 | ) | ||||||||||||
Miscellaneous, net | (1,421 | ) | (7,693 | ) | (11,350 | ) | ||||||||||||
(Loss) income from continuing operations before income taxes | (99,392 | ) | 9,346 | (21,992 | ) | |||||||||||||
Benefit for income taxes | 32,755 | 111 | 11,907 | |||||||||||||||
Net (loss) income from continuing operations | (66,637 | ) | 9,457 | (10,085 | ) | |||||||||||||
Net (loss) income from discontinued operations, net of tax | (15,840 | ) | 1,072 | 9,611 | ||||||||||||||
Net (loss) income | $ | (82,477 | ) | $ | 10,529 | $ | (474 | ) | ||||||||||
2015 compared with 2014
The Company completed its acquisition of the Journal television and radio stations on April 1, 2015 and the acquisition of two Granite television stations on June 16, 2014, collectively referred to as the "acquired stations." Midroll was acquired on July 22, 2015. The inclusion of operating results from these businesses for the periods subsequent to the acquisitions impacts the comparability of our consolidated and division operating results.
Operating revenues increased 43% in 2015 compared to 2014. The acquired operations accounted for $217 million of the increase. For stations owned for the entire year, a $52 million decline in political advertising revenue was offset by a $49 million increase in retransmission revenue. In 2014, we completed negotiations with satellite and cable television systems covering approximately 5.6 million subscribers in certain of our markets and our 2015 results reflect the renewal of those agreements. We completed a new agreement, effective January 2016, with Time Warner Cable covering approximately 3 million households. This agreement will contribute to approximately a 60% increase in retransmission revenues in 2016 compared to 2015.
Employee compensation and benefits increased 32% in 2015 compared to 2014 primarily driven by the impact of the acquired stations.
F-4
Programs and program licenses expense more than doubled in 2015 primarily due to the acquisitions and higher network fees. The acquired stations accounted for $39 million of the increase while higher network license fees, offset by lower syndicated programming expense, accounted for the rest. We completed new agreements for 10 of our ABC stations at the beginning of 2015 and one of our CBS stations in July 2015.
Other expenses are comprised of the following:
For the years ended December 31, | |||||||||||
(in thousands) | 2015 | Change | 2014 | ||||||||
Facilities rent and maintenance | $ | 33,937 | 29.9 | % | $ | 26,117 | |||||
Purchased news and content | 8,888 | 76.2 | % | 5,044 | |||||||
Marketing and promotion | 12,097 | 72.9 | % | 6,997 | |||||||
Miscellaneous costs | 108,375 | 40.7 | % | 77,017 | |||||||
Total other expenses | $ | 163,297 | 41.8 | % | $ | 115,175 | |||||
Other expenses increased in 2015 compared to prior year, most of which was driven by the acquired stations.
Acquisition and related integration costs of $38 million in 2015 and $9.7 million in 2014 include costs associated with the Journal transactions and other acquisitions, such as legal and accounting fees, as well as costs to integrate the acquired operations.
Depreciation and amortization expense increased from $32 million in 2014 to $52 million in 2015 due to the acquired stations.
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 plan expense increased year-over-year due to a $45.7 million non-cash settlement charge for the lump-sum pension benefit payments made to certain pension participants, a $1.1 million curtailment charge resulting from the spin-off of our newspaper business and the additional expense related to the pension obligations assumed in the Journal acquisition.
In 2014, a $3 million gain on the sale of excess land is included in gains on disposal of property, plant and equipment.
Interest expense increased year-over-year due to the increased debt related to the Journal acquisition.
Miscellaneous expense of $7.7 million in 2014 included a $5.9 million non-cash charge to reduce the carrying value of investments.
The effective income tax rate was 33.0% and 1.2% for 2015 and 2014, respectively. State and local taxes and non-deductible expenses impacted our effective rate. Portions of the acquisition and integration costs we incurred in connection with the Journal transactions are not deductible and the Newsy goodwill impairment is not deductible for income taxes. In addition, our effective income tax rates for 2015 and 2014 were impacted by tax settlements and changes in our reserve for uncertain tax positions. In 2015 and 2014, we recognized $2.5 million and $6.0 million, respectively, of previously unrecognized tax benefits upon settlement of tax audits or upon the lapse of the statutes of limitations in certain jurisdictions.
2014 compared with 2013
The Company completed its acquisition of two Granite television stations on June 16, 2014. The inclusion of operating results from these stations for the period subsequent to the acquisition impacts the comparability of our consolidated and television division operating results.
Operating revenues increased 15% in 2014 compared to 2013. The increase was driven by $53 million more of political advertising and $13 million more of retransmission revenue, excluding the impact of Granite, while national and local advertising softened in the second half of the year. Digital revenues increased nearly $6 million primarily driven by Newsy, which was acquired in January 2014, as well as increased revenues from our local digital business due to an expanded sales force.
F-5
Retransmission revenues excluding Granite increased approximately 30% in 2014, primarily due to annual rate increases in long-term contracts and the renewal in the middle of the year of a retransmission agreement with an MVPD providing service to about 15% of the subscribers to such services in our markets. We renewed retransmission agreements with MVPDs providing service to another 15% of subscribers to those services later in the year.
Employee compensation and benefits increased 14% in 2014. Employee compensation and benefits associated with supporting our digital operations increased more than $12 million over the prior year. The impact of the acquisition of two Granite television stations on employee compensation and benefits was $4.9 million. The television division incurred severance costs primarily as a result of centralizing our master control hub, which accounted for $1.6 million of the increase. Higher incentive compensation in 2014 accounted for $4.6 million of the increase over 2013.
Programs and program licenses expense increased 3.1% in 2014 primarily due to the Granite acquisition and higher network fees. The acquired Granite stations accounted for $2.9 million of the increase while higher network license fees, offset by lower syndicated programming expense, accounted for the rest.
Other expenses are comprised of the following:
For the years ended December 31, | |||||||||||
(in thousands) | 2014 | Change | 2013 | ||||||||
Facilities rent and maintenance | $ | 26,117 | 23.7 | % | $ | 21,113 | |||||
Purchased news and content | 5,044 | (2.2 | )% | 5,159 | |||||||
Marketing and promotion | 6,997 | (7.4 | )% | 7,560 | |||||||
Miscellaneous costs | 77,017 | (4.1 | )% | 80,332 | |||||||
Total other expenses | $ | 115,175 | 0.9 | % | $ | 114,164 | |||||
Defined benefit pension plan expense decreased to $5.7 million in 2014 from $8.1 million in 2013.
Acquisition and related integration costs of $9.7 million in 2014 include costs associated with the acquisition of two television stations from Granite Broadcasting, as well as costs for the Journal transactions.
Interest expense decreased in 2014 due to a decline in our borrowing rate when we refinanced our debt in the fourth quarter of 2013.
Miscellaneous expense in 2014 includes a $5.9 million non-cash charge to reduce the carrying value of investments. In 2013, miscellaneous expense includes a $3.0 million non-cash loss on the disposition of an investment, as well as a $4.6 million non-cash charge to write-off deferred loan fees as a result of the refinancing of our debt.
The effective income tax rate was 1.2% and 54.1% for 2014 and 2013, respectively. The impact of state and local taxes and non-deductible expenses (including a portion of the transaction costs for the Journal transactions) has made our effective rate volatile due to relatively small amounts of pretax income or loss in each of the reporting periods. In addition, our effective income tax rates for 2014 and 2013 were impacted by tax settlements and changes in our reserve for uncertain tax positions. In 2014 and 2013, we recognized $6.0 million and $3.1 million, respectively, of previously unrecognized tax benefits upon settlement of tax audits or upon the lapse of the statutes of limitations in certain jurisdictions.
Discontinued Operations
Discontinued operations reflect the historical results of our newspaper operations, which were spun-off on April 1, 2015. On April 1, Scripps and Journal separated their newspaper businesses and then combined them through two mergers, resulting in each of them becoming a wholly owned subsidiary of Journal Media Group, Inc.
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 was recorded on the date of the spin-off, April 1, 2015, and is included as a component of discontinued operations.
F-6
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 April 1, 2015, we began reporting our digital operations as a segment. We have recast the operating results for television, syndication and other and shared services and corporate in prior 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) | 2015 | Change | 2014 | Change | 2013 | |||||||||||||
Segment operating revenues: | ||||||||||||||||||
Television | $ | 609,551 | 30.5 | % | $ | 466,965 | 15.0 | % | $ | 405,941 | ||||||||
Radio | 58,881 | — | — | |||||||||||||||
Digital | 38,928 | 70.1 | % | 22,881 | 33.6 | % | 17,131 | |||||||||||
Syndication and other | 8,296 | (6.8 | )% | 8,906 | (4.1 | )% | 9,285 | |||||||||||
Total operating revenues | $ | 715,656 | $ | 498,752 | $ | 432,357 | ||||||||||||
Segment profit (loss): | ||||||||||||||||||
Television | $ | 139,797 | 2.6 | % | $ | 136,319 | 38.3 | % | $ | 98,562 | ||||||||
Radio | 12,837 | — | — | |||||||||||||||
Digital | (17,103 | ) | (25.1 | )% | (22,828 | ) | 22.0 | % | (18,716 | ) | ||||||||
Syndication and other | (1,074 | ) | (1,499 | ) | 11 | |||||||||||||
Shared services and corporate | (43,619 | ) | 4.4 | % | (41,772 | ) | 1.6 | % | (41,134 | ) | ||||||||
Defined benefit pension plan expense | (58,674 | ) | (5,671 | ) | (8,110 | ) | ||||||||||||
Acquisition and related integration costs | (37,988 | ) | (9,708 | ) | — | |||||||||||||
Depreciation and amortization of intangibles | (51,952 | ) | (32,180 | ) | (30,522 | ) | ||||||||||||
Impairment of goodwill and intangibles | (24,613 | ) | — | — | ||||||||||||||
(Losses) gains, net on disposal of property, plant and equipment | (483 | ) | 2,872 | (296 | ) | |||||||||||||
Interest expense | (15,099 | ) | (8,494 | ) | (10,437 | ) | ||||||||||||
Miscellaneous, net | (1,421 | ) | (7,693 | ) | (11,350 | ) | ||||||||||||
(Loss) income from continuing operations before income taxes | $ | (99,392 | ) | $ | 9,346 | $ | (21,992 | ) | ||||||||||
F-7
Television — Our television segment includes 15 ABC affiliates, five NBC affiliates, two FOX affiliates, two CBS affiliates and four non big-four affiliated stations. We also own five Azteca America Spanish-language affiliates. Our television stations reach approximately 18% of the nation’s television households. Our television stations earn revenue primarily from the sale of advertising time to local, national and political advertisers and retransmission fees received from cable operators 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 locally and nationally 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 television 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 time 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 television segment were as follows:
For the years ended December 31, | ||||||||||||||||||
(in thousands) | 2015 | Change | 2014 | Change | 2013 | |||||||||||||
Segment operating revenues: | ||||||||||||||||||
Local | $ | 315,054 | 33.1 | % | $ | 236,772 | 1.9 | % | $ | 232,358 | ||||||||
National | 137,935 | 26.0 | % | 109,448 | (7.5 | )% | 118,375 | |||||||||||
Political | 9,151 | 57,981 | 4,272 | |||||||||||||||
Retransmission | 136,571 | 143.1 | % | 56,185 | 32.2 | % | 42,505 | |||||||||||
Other | 10,840 | 64.8 | % | 6,579 | (22.0 | )% | 8,431 | |||||||||||
Total operating revenues | 609,551 | 30.5 | % | 466,965 | 15.0 | % | 405,941 | |||||||||||
Segment costs and expenses: | ||||||||||||||||||
Employee compensation and benefits | 242,303 | 28.0 | % | 189,261 | 9.3 | % | 173,114 | |||||||||||
Programs and program licenses | 110,722 | 99.5 | % | 55,487 | 3.1 | % | 53,826 | |||||||||||
Other expenses | 116,729 | 35.9 | % | 85,898 | 6.8 | % | 80,439 | |||||||||||
Total costs and expenses | 469,754 | 42.1 | % | 330,646 | 7.6 | % | 307,379 | |||||||||||
Segment profit | $ | 139,797 | 2.6 | % | $ | 136,319 | 38.3 | % | $ | 98,562 | ||||||||
2015 compared with 2014
The Company completed its acquisition of the Journal television stations on April 1, 2015 and the acquisition of two Granite television stations on June 16, 2014, collectively referred to as the "acquired stations." The inclusion of operating results from these businesses for the periods subsequent to the acquisitions impacts the comparability of our television division operating results.
Revenues
Total television revenues increased 31% in 2015. The acquired stations accounted for just over $147 million of the year-over-year increase. For stations owned for the entire year, a $52 million decline in political advertising revenue was offset by a $49 million increase in retransmission revenue. In 2014, we completed negotiations with satellite and cable television systems covering approximately 5.6 million subscribers in certain of our markets and our 2015 results reflect the renewal of those agreements.
Costs and expenses
Employee compensation and benefits increased 28% in 2015 primarily due to the acquired stations.
Programs and program licenses expense nearly doubled during the year compared to 2014, primarily due to the acquisitions and higher network affiliate fees. The acquired stations accounted for $28 million of the increase for the year while
F-8
higher network license fees, offset by lower syndicated programming expense, accounted for the rest. We completed new agreements for 10 of our ABC stations at the beginning of 2015 and one of our CBS stations in July 2015.
Other expenses increased 36% in 2015 primarily due to the impact of the acquired stations.
2014 compared with 2013
The Company completed its acquisition of two Granite television stations on June 16, 2014. The inclusion of operating results from these stations for the period subsequent to the acquisition impacts the comparability of our television division operating results.
Revenues
Total television revenues increased 15%, or $61 million, in 2014 compared to 2013. The increase was driven by $53 million more of political advertising and $13 million more of retransmission revenue excluding the impact of Granite, while national and local advertising softened in the second half of the 2014.
Retransmission revenues excluding Granite increased approximately 30% in 2014, primarily due to annual rate increases in long-term contracts and the renewal in the middle of the year of a retransmission agreement with an MVPD providing service to about 15% of the subscribers to such services in our markets.
Other revenues decreased $1.9 million compared to the prior year, due to a $1.2 million decrease in revenues we received for news production and television services provided by our West Palm Beach television station to another station in the market.
Costs and expenses
Employee compensation and benefits increased $16 million, or 9.3%. The acquired Granite stations accounted for nearly $5 million of the increase, while the addition of approximately 80 positions to staff The List and The Now, two of our internally developed and produced programs, accounted for most of the rest. Also in 2014, we incurred higher incentive compensation of $1.7 million and increased severance costs of $1.6 million, primarily related to centralizing our master control hub.
Programs and program licenses expense increased 3.1% in 2014 primarily due to the Granite acquisition and higher network fees. The acquired Granite stations accounted for $2.9 million of the increase while higher network license fees, offset by lower syndicated programming expense, accounted for the rest.
Other expenses increased 6.8% compared to 2013 primarily due to the acquired Granite stations.
F-9
Radio — Our radio segment consists of 34 radio stations in eight markets. We operate 28 FM stations and six AM stations.
Radio stations earn revenue primarily from the sale of advertising to local advertisers.
Our radio stations focus on providing targeted and relevant local programming that is responsive to the interest of the communities in which we serve, strengthening our brand identity and allowing us to provide effective marketing solutions for advertisers by reaching their targeted audiences.
Operating results for our radio segment were as follows:
For the years ended December 31, | ||||||||||||||||
(in thousands) | 2015 | Change | 2014 | Change | 2013 | |||||||||||
Segment operating revenues: | ||||||||||||||||
Advertising | $ | 56,288 | $ | — | $ | — | ||||||||||
Other | 2,593 | — | — | |||||||||||||
Total operating revenues | 58,881 | — | — | |||||||||||||
Segment costs and expenses: | ||||||||||||||||
Employee compensation and benefits | 22,218 | — | — | |||||||||||||
Programs | 10,757 | — | — | |||||||||||||
Other expenses | 13,069 | — | — | |||||||||||||
Total costs and expenses | 46,044 | — | — | |||||||||||||
Segment profit | $ | 12,837 | $ | — | $ | — | ||||||||||
Revenues for the radio divis