Item 1B.
Unresolved Staff Comments
None.
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.
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.
Item 4.
Mine Safety Disclosures
None.
Executive Officers of the Company - Executive officers serve at the pleasure of the Board of Directors.
PART II
Item 5.
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:
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.
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.
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.
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.
Item 6.
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 of this Form 10-K.
Item 7.
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 of this Form 10-K.
Item 7A.
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 of this Form 10-K.
Item 8.
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 of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
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 of this Form 10-K.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
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.
The information required by Item 11
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.
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.
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.
PART IV
Item 15.
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.
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.
(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.
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.
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
The E. W. Scripps Company
Index to Consolidated Financial Statement Information
Selected Financial Data
Five-Year Financial Highlights
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.
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
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:
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.
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:
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.
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:
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.
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:
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:
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
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.
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:
Revenues for the radio division softened at the end of the year and are down compared to the comparable period in 2014 when owned by Journal. Expenses also declined compared to the comparable period when owned by Journal, but by a lower amount.
Digital - Our digital segment includes the digital operations of our local television and radio businesses. It also includes the operations of national digital businesses such as Newsy, an over-the-top video news service, and Midroll, a podcast industry leader.
Our digital operations earn revenue primarily through the sale of advertising and marketing services.
Operating results for our digital segment were as follows:
2015 compared with 2014
Revenues
Digital revenues increased 70% in 2015 compared to 2014. The increase for the year includes $5.9 million and $4.6 million, respectively, from the acquired Journal stations and the Midroll acquisition. The remainder of the increase was driven by our focus on increasing digital advertising revenues with an expanded sales force in our television markets and increased revenue from programmatic advertising.
Costs and Expenses
Digital costs and expenses increased 23% in 2015 compared to 2014 primarily due to the impact of the acquired Journal stations and our acquisition of Midroll.
2014 compared with 2013
Revenues
Digital revenues increased 34% in 2014. The increase for the year includes $3.2 million from the January 2014 acquisition of Newsy, while the remainder of the increase was driven by our focus on increasing digital advertising revenues with an expanded sales force.
Costs and Expenses
Digital costs and expenses increased 28% in 2014 compared to 2013. Employee compensation increased by 53% due to $2.3 million of additional costs from Newsy and the remainder was from the expansion of the sales force. Other expenses decreased 22% due to the elimination of costs incurred in 2013 when we were implementing new systems and processes to make our digital operations more efficient. These costs savings were partially offset by expenses from Newsy.
Shared services and corporate
We centrally provide certain services to our business segments. Such services include accounting, tax, cash management, procurement, human resources, employee benefits and information technology. The business segments are allocated costs for such services at amounts agreed upon by management. Such allocated costs may differ from amounts that might be negotiated at arms-length. Costs for such services that are not allocated to the business segments are included in shared services and corporate costs. Shared services and corporate also includes unallocated corporate costs, such as costs associated with being a public company.
2015 to 2014
Shared services and corporate expenses were $44 million in 2015 and $42 million in 2014 increasing by $1.8 million primarily due to higher incentive compensation.
2014 to 2013
Shared services and corporate expenses were $42 million in 2014 and $41 million in 2013.
Liquidity and Capital Resources
Our primary source of liquidity is our available cash and borrowing capacity under our revolving credit facility.
Operating activities
Cash provided by operating activities for the years ended December 31 is as follows:
2015 to 2014
The $69 million decrease in cash provided by continuing operating activities was primarily attributable to changes in working capital in 2015 compared to 2014, partially offset by a $21 million increase in segment profit. In addition, we incurred transaction costs of $38 million in 2015 and $9.7 million in 2014 in connection with the Journal transactions. Also, the 2015 tax benefit of $33 million will not provide cash until future years when the net operating loss carryforward will reduce taxes payable.
The other primary factors affecting changes in operating activities are described below.
•
Collections of accounts receivable decreased $20 million in 2015 compared to 2014. Collections in an odd year are generally lower due to the impact of political advertising in the preceding period, which is paid in advance, increasing overall collections of accounts receivable in that year.
•
In 2015, we made estimated income tax payments of $15 million. We did not make any significant tax payments in 2014.
•
The timing of payments for accounts payable and accrued expenses decreased working capital by $26 million in 2015.
2014 to 2013
The $72 million increase in cash provided by operating activities from continuing operations was primarily attributable to changes in working capital in 2014 compared to 2013 and higher segment profit in 2014. The primary factors affecting changes in working capital are described below.
•
Collections of accounts receivable increased $13 million in 2014 compared to 2013 primarily due to the impact of 2014 fourth quarter political advertising, which is paid in advance.
•
The accrual of incentive compensation, net of the payment of amounts earned in the prior year, increased working capital by $4.7 million in 2014 and decreased working capital by $9.8 million in 2013.
•
The timing of payments for accounts payable increased working capital by $13 million in 2014.
•
In 2014, $8.4 million of excess tax benefits was reflected as a use of cash.
Investing activities
Cash used in investing activities for the years ended December 31 is as follows:
In 2015, 2014 and 2013 we used $60 million, $159 million and $16 million, respectively, in cash for investing activities for continuing operations. The primary factors affecting our investing activities for the years presented are described below.
•
In 2015, we acquired a podcast industry leader, Midroll Media, for $50 million in cash.
•
In 2015, we invested $5 million to fund the launch and operations of a media company specializing in digital multicasting.
•
In 2015, we received $14.5 million in proceeds from the sale of KNIN, the Fox affiliate located in Boise, ID., which had been placed in a divestiture trust as part of the Journal transactions.
•
In 2014, we completed our acquisition of Media Convergence Group, Inc., which operates as Newsy, an over-the-top video news provider, for $35 million in cash.
•
In 2014, we completed our acquisition of two television stations owned by Granite Broadcasting Corporation for $110 million in cash.
•
In 2014, we completed our acquisition of Geoterrestrial, Inc. ("WeatherSphere") for $4 million in cash.
•
In 2014, we received $5.8 million in proceeds from the sale of excess land.
Financing activities
Cash used in or provided by financing activities for the years ended December 31 is as follows:
In 2015, financing activities provided $2 million in net cash, while in 2014 and 2013, we used $4 million and $35 million, respectively, in net cash for financing activities. The primary factors affecting our financing activities are described below.
On April 1, 2015, we entered into a $500 million second amended revolving credit and term loan agreement ("Second Amended Financing Agreement") to refinance our existing revolving credit and term loan agreement ("Amended Financing Agreement"). The $400 million term loan B matures in November 2020 and a $100 million revolving credit facility matures in November 2018. There were no borrowings under the revolving credit agreements in any of the years.
The Second Amended Financing Agreement includes the maintenance of a net leverage ratio if we borrow more than 20% on the revolving credit facility. The term loan B requires that if we borrow additional amounts or make a permitted acquisition that we cannot exceed a stated net leverage ratio on a pro forma basis at the date of the transaction. We were in compliance with all financial covenants in the Second Amended Financing Agreement at December 31, 2015 and 2014.
The Second Amended Financing Agreement also includes a provision that in certain circumstances we must use a portion of excess cash flow to repay debt. As of December 31, 2015, we were not required to make additional principal payments based on excess cash flow. Under an amendment completed in 2015, any proceeds up to a stipulated amount that we may potentially receive from the upcoming spectrum auction will not be required to pay down the term loan.
The proceeds from the incremental $200 million loan were used to pay off the $116 million Journal term loan assumed in connection with the Journal acquisition, fund the $60 million special dividend paid to the Scripps shareholders in connection with the Journal transactions and for the payment of transaction expenses.
In May 2014, our Board of Directors authorized a repurchase program of up to $100 million of our Class A Common shares through December 2016. Shares may be repurchased from time to time at management's discretion, either in the open market, through pre-arranged trading plans or in privately negotiated block transactions. Under the authorization, we repurchased $16 million of shares at prices ranging from $15.92 to $24.96 per share during 2015. As of December 31, 2015, we have $84 million remaining for share repurchases under this authorization. Through January 31, 2016, we purchased an additional 0.2 million shares for $3.4 million. Under a previous authorization, we purchased $21 million of shares in 2014 and $74 million of shares in 2013.
In 2015, 2014 and 2013, we received $7 million, $17 million and $47 million, respectively, of proceeds from the exercise of employee stock options.
Other
We have met our funding requirements for our defined benefit pension plans under the provisions of the Pension Funding Equity Act of 2004 and the Pension Protection Act of 2006. We expect to contribute between $6 million and $11 million in 2016 to our defined benefit pension plans, including our SERP.
We expect that our cash and short-term investments and cash flows from operating activities will be sufficient to meet our operating and capital needs over the next 12 months.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include the following four categories: obligations under certain guarantees or contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements; obligations under certain derivative arrangements; and obligations under material variable interests.
We may utilize interest rate swaps to manage our interest expense exposure by fixing our interest rate on portions of our floating rate term loan. We have entered into a $75 million notional value interest rate swap expiring in December 2016 which provides for a fixed LIBOR interest rate of 1.08%. We did not provide or receive any collateral for this contract. The fair value of this financial derivative is based on quoted market prices which reflect the present values of the difference between estimated future variable-rate receipts and future fixed-rate payments. Through November 2013, this hedge qualified as, and was designated as, a cash flow hedge. Upon refinancing our debt in November 2013, this hedge no longer qualified as a cash flow hedge.
As of December 31, 2015 and 2014, we had outstanding letters of credit totaling $0.8 million and $0.2 million, respectively.
Contractual Obligations
A summary of our contractual cash commitments as of December 31, 2015 is as follows:
Long-term debt - Long-term debt includes our $395 million Term loan B and $8 million of unsecured subordinated notes payable assumed in the Journal transactions. Our term loan B bears interest at rates based on LIBOR, with a 0.75% LIBOR floor, plus a fixed margin of 2.75%. The rate on our term loan B was 3.50% at December 31, 2015. Amounts included in the table may differ from amounts actually paid due to changes in LIBOR. A 1% increase in LIBOR would result in an increase in annual interest payments of approximately $4 million.
Our Financing Agreement also includes a provision that in certain circumstances we must use a portion of excess cash flow to repay debt. Principal payments included in the contractual obligations table reflect only scheduled principal payments and do not reflect any amounts that may be required to be paid under this provision. As of December 31, 2015, we were not required to make any additional principal payments from excess cash flow.
Our unsecured subordinated promissory notes bear interest at a rate of 7.25% per annum payable quarterly.
Other Contractual Obligations - In the ordinary course of business, we enter into long-term contracts to license or produce programming, to secure on-air talent, to lease office space and equipment and to purchase other goods and services.
Programming - Program licenses generally require payments over the terms of the licenses. Licensed programming includes both programs that have been delivered and are available for telecast and programs that have not yet been produced. It also includes payments for our network affiliation agreements. If the programs are not produced, our commitments would generally expire without obligation. Fixed fee amounts payable under our network affiliation agreements are also included. Variable amounts in excess of the contractual amounts payable to the networks are not included in the amounts above.
Talent Contracts - We secure on-air talent for our television stations through multi-year talent agreements. Certain agreements may be terminated under certain circumstances or at certain dates prior to expiration. We expect our employment and talent contracts will be renewed or replaced with similar agreements upon their expiration. Amounts due under the contracts, assuming the contracts are not terminated prior to their expiration, are included in the contractual obligations table.
Operating Leases - We obtain certain office space under multi-year lease agreements. Leases for office space are generally not cancelable prior to their expiration.
Leases for operating and office equipment are generally cancelable by either party with 30 to 90 days notice. However, we expect such contracts will remain in force throughout the terms of the leases. The amounts included in the table above represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration.
We expect our operating leases will be renewed or replaced with similar agreements upon their expiration.
Pension Funding - We sponsor two noncontributory defined benefit pension plans covering certain full-time Scripps employees that began employment prior to June 30, 2008, as well as certain former Journal Communications, Inc. ("Journal") employees following the acquisition of Journal's broadcast group. We also have two non-qualified Supplemental Executive Retirement Plans ("SERPs") covering Scripps employees and certain former Journal employees.
Contractual commitments summarized in the contractual obligations table include payments to meet minimum funding requirements of our defined benefit pension plans and estimated benefit payments for our unfunded SERPs. Contractual pension obligations reflect anticipated minimum statutory pension contributions as of December 31, 2015, based upon pension funding regulations in effect at the time and our current pension assumptions regarding discount rates and returns on plan assets. Actual funding requirements may differ from amounts presented due to changes in discount rates, returns on plan assets or pension funding regulations that are in effect at the time.
Payments for the SERPs have been estimated over a ten-year period. Accordingly, the amounts in the “over 5 years” column include estimated payments for the periods of 2021-2025. While benefit payments under these plans are expected to continue beyond 2025, we do not believe it is practicable to estimate payments beyond this period.
Income Tax Obligations - The contractual obligations table does not include any reserves for income taxes recognized because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes. As of December 31, 2015, our reserves for income taxes totaled $3.5 million, which is reflected as a long-term liability in our Consolidated Balance Sheet.
Purchase Commitments - We obtain audience ratings, market research and certain other services under multi-year agreements. These agreements are generally not cancelable prior to expiration of the service agreement. We expect such agreements will be renewed or replaced with similar agreements upon their expiration.
We may also enter into contracts with certain vendors and suppliers. These contracts typically do not require the purchase of fixed or minimum quantities and generally may be terminated at any time without penalty. Included in the table of contractual obligations are purchase orders placed as of December 31, 2015. Purchase orders placed with vendors, including those with whom we maintain contractual relationships, are generally cancelable prior to shipment. While these vendor agreements do not require us to purchase a minimum quantity of goods or services, and we may generally cancel orders prior to shipment, we expect expenditures for goods and services in future periods will approximate those in prior years.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions that affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
Note 1 to our Consolidated Financial Statements describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. We believe the following to be the most critical accounting policies, estimates and assumptions affecting our reported amounts and related disclosures.
Acquisitions - The accounting for a business combination requires tangible and intangible assets acquired and liabilities assumed to be recorded at estimated fair value. With the assistance of third party appraisals, we generally determine fair values using comparisons to market transactions and a discounted cash flow analysis. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset and the expected period of time over which those cash flows will occur and to determine an appropriate discount rate. Changes in such estimates could affect the amounts allocated to individual identifiable assets. While we believe our assumptions are reasonable, if different assumptions were made, the amount allocated to intangible assets could differ substantially from the reported amounts.
Goodwill and Other Indefinite-Lived Intangible Assets - Goodwill for each reporting unit must be tested for impairment on an annual basis or when events occur or circumstances change that would indicate the fair value of a reporting unit is below its carrying value. At December 31, 2015, we had $586 million of goodwill. For purposes of performing the impairment test for goodwill, our reporting units are our television group, radio group, core digital (comprised of our local digital brands), Midroll and Newsy. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill for the reporting unit is less than its carrying value.
The following is goodwill by reporting unit as of December 31, 2015:
For our annual impairment testing, we have utilized the Step 1, quantitative approach for performing our annual goodwill test. Under that approach, we determine the fair value of our reporting unit generally using market data, appraised values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset or business and the period of time over which those cash flows will occur and to determine an appropriate discount rate. While we believe the estimates and judgments used in determining the fair values were appropriate, different assumptions with respect to future cash flows, long-term growth rates and discount rates could produce a different estimate of fair value. The estimate of fair value assumes certain growth of our businesses, which if not achieved could impact the fair value and possibly result in an impairment of the goodwill. Our annual impairment testing for goodwill indicated that the fair value of all of our television and core digital reporting units exceeded their carrying value by over 50% and our Midroll reporting unit exceed its carrying value by over 10%. The fair value of our other reporting units was less than 10% in excess of their carrying value due to their recent acquisition date and therefore are more susceptible to an adverse change in business or macroeconomic conditions impacting the assumptions underlying the estimated fair value, which could possibly lead to a goodwill impairment charge in the future.
We also assess our goodwill for indications of impairment. In the third quarter of 2015, changes in the market for the distribution of video programming services, including the development of over-the-top distribution platforms such as Apple TV, Comcast's Watchable, PlutoTV, Xumo, Roku and Sling, resulted in the need for additional investment in our video news service, Newsy. The additional investment, combined with the slower development of our original revenue model, created indications of impairment of goodwill as of September 30, 2015.
Under the two-step process required by GAAP, we estimated the fair value of Newsy. We concluded that the fair value of Newsy did not exceed its carrying value as of September 30, 2015. We recorded a $21 million non-cash charge in 2015 to reduce the carrying value of goodwill to $8 million. Changes in the future for the outlook of Newsy reducing expected future cash flows, including additional investments, could result in additional impairment charges in the future.
We have determined that our FCC licenses are indefinite lived assets and not subject to amortization. At December 31, 2015, the carrying value of our FCC licenses was $204 million. They are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired. We compare the estimated fair value of each individual FCC license to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair value is estimated using an income approach referred to as the “Greenfield Approach,” which requires multiple assumptions relating to the future prospects of each individual FCC license. The fair value
of the FCC license is sensitive to each of the assumptions used in the Greenfield Approach and a change in any individual assumption could result in the fair value being less than the carrying value of the asset and an impairment charge being recorded. For example, a 0.5% increase in the discount rate would reduce the aggregate fair value of the FCC licenses by almost $9 million. Our annual impairment testing for our FCC licenses indicated that their fair value exceeded their recorded value. The recorded value of our FCC licenses from the recently acquired television stations are derived from more recent business operating plans and macroeconomic environmental conditions and therefore are more susceptible to an adverse change that could require an impairment charge if future assumptions were to change.
Income Taxes - The accounting for uncertain tax positions and the application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood of whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.
Our deferred tax asset balance included in our Consolidated Balance Sheet was $14 million at December 31, 2015. We are required to assess the likelihood that our deferred tax assets, which include our net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be recoverable from the carryback to prior years, carryforward to future years or through other prudent and feasible tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities. Actual results could differ from our estimates and if we determine the deferred tax asset we would realize would be greater or less than the net amount recorded, an adjustment would be made to the tax provision in that period.
Pension Plans - We sponsor two noncontributory defined benefit pension plans covering certain full-time Scripps employees that began employment prior to June 30, 2008, as well as certain former Journal Communications, Inc. ("Journal") employees following the acquisition of Journal's broadcast group. We also have two non-qualified Supplemental Executive Retirement Plans ("SERPs") covering Scripps employees and certain former Journal employees. Both of the defined benefit plans and the SERPs have frozen the accrual of future benefits. Defined benefit pension plan expense for the plans was $58.7 million in 2015, $5.7 million in 2014 and $8.1 million in 2013.
Our 2015 expense includes a non-cash pension settlement charge of $45.7 million related to the completion of an offer to eligible former employees with vested, deferred pension plan benefits to receive their benefits either as a lump-sum distribution or an immediate annuity payment. All distributions were made from existing pension plan assets; company funds were not used to make the lump-sum distributions. The funded status of the plan remained materially unchanged as a result of this offer.
The measurement of our pension obligation and related expense is dependent on a variety of estimates, including: discount rates; expected long-term rate of return on plan assets; and employee turnover, mortality and retirement ages. We review these assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. In accordance with accounting principles, we record the effects of these modifications currently or amortize them over future periods. We consider the most critical of our pension estimates to be our discount rate and the expected long-term rate of return on plan assets.
The assumptions used in accounting for our defined benefit pension plans for 2015 and 2014 are as follows:
The discount rate used to determine our future pension obligations is based upon a dedicated bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans. The rate is determined each year at the plan measurement date and affects the succeeding year’s pension cost. Discount rates can change from year to year based on economic conditions that impact corporate bond yields. A decrease in the discount rate increases pension obligations and has no material impact on pension expense.
For our defined benefit pension plans, as of December 31, 2015, a half percent increase or decrease in the discount rate would have the following effect:
In 2015, we began the transition to a new asset allocation strategy in which approximately 45% of plan assets are invested in a portfolio of fixed income securities with a duration approximately that of the projected payment of benefit obligations. The remaining 55% of plan assets are to be invested in equity securities and other return-seeking assets. The new allocation will be completed by the end of 2016. The expected long-term rate of return on plan assets is based primarily upon the target asset allocation for plan assets and capital markets forecasts for each asset class employed. A decrease in the expected rate of return on plan assets increases pension expense. A 0.5% change in the 2016 expected long-term rate of return on plan assets would increase or decrease our 2016 pension expense by approximately $2 million.
We had cumulative unrecognized actuarial losses for our pension plans of $144 million at December 31, 2015. Unrealized actuarial gains and losses result from deferred recognition of differences between our actuarial assumptions and actual results. In 2015, we had an actuarial gain of $1 million. Based on our current assumptions, we anticipate that 2016 pension expense will include $4.2 million in amortization of unrecognized actuarial losses.
Recently Adopted Standards and Issued Accounting Standards
Recently Issued Accounting Standards - In August 2014, the Financial Accounting Standards Board (FASB) issued new guidance related to the disclosures around going concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued new guidance on revenue recognition. Under this new standard, an entity shall recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step process that requires entities to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. This standard permits the use of either the retrospective or cumulative effect transition method and will be effective for us beginning in 2018. Early adoption is permitted in 2017. We are currently assessing the impact this new guidance will have on our consolidated financial statements and have not yet determined a transition method.
Recently Adopted Accounting Standards - In November 2015, the FASB issued new guidance to classify deferred tax assets (DTAs) and deferred tax liabilities as noncurrent in the balance sheet. We have elected to early adopt this guidance effective December 31, 2015. We adopted this guidance retrospectively which results in us classifying the December 31, 2014 current DTA balance of $10.8 million with the noncurrent DTA for a total December 31, 2014 noncurrent DTA balance of $65.4 million.
In April 2015, the FASB issued new guidance for the presentation of debt issuance costs in the financial statements. Under this new guidance, debt issuance costs (except for lines of credit) are classified in the balance sheet as a deduction from the related debt liability rather than as an asset. Additionally, amortization of these costs must be classified as interest expense. We have elected to early adopt this guidance effective December 31, 2015. Retrospective adoption of this guidance resulted in us classifying $3.3 million and $1.6 million of deferred loan costs as of December 31, 2015 and 2014, respectively, as a reduction of long-term debt. Reported interest expense was not affected.
In April 2014, the FASB issued new guidance on reporting and disclosure requirements related to discontinued operations. With the new guidance, a disposal of a component or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity's operations and financial results. We adopted this guidance effective January 1, 2015.
Quantitative and Qualitative Disclosures about Market Risk
Earnings and cash flow can be affected by, among other things, economic conditions and interest rate changes. We are also exposed to changes in the market value of our investments.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows, and to reduce overall borrowing costs.
The following table presents additional information about market-risk-sensitive financial instruments:
(a)
Includes securities that do not trade in public markets, thus the securities do not have readily determinable fair values. We estimate the fair value of these securities approximates their carrying value. There can be no assurance that we would realize the carrying value upon the sale of these securities.
We may utilize interest rate swaps to manage our interest expense exposure by fixing our interest rate on portions of our floating rate term loan. We have entered into a $75 million notional value interest rate swap expiring in December 2016. Under the terms of the swap, we pay a fixed interest rate of 1.08% and receive interest at a variable rate equal to 30 day LIBOR. We did not provide or receive any collateral for this contract. The fair value of this financial derivative is based on quoted market prices which reflect the present values of the difference between estimated future variable-rate receipts and future fixed-rate payments.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the Company’s internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the fourth quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Scripps’ management is responsible for establishing and maintaining adequate internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:
1.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and
3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable, but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
As required by Section 404 of the Sarbanes Oxley Act of 2002, management assessed the effectiveness of The E. W. Scripps Company and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2015. Management’s assessment is based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2015.
The Company’s independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2015. This report appears on page.
Date: February 26, 2016
BY:
/s/ Richard A. Boehne
Richard A. Boehne
President and Chief Executive Officer
/s/ Timothy M. Wesolowski
Timothy M. Wesolowski
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders,
The E. W. Scripps Company
We have audited the accompanying consolidated balance sheets of The E. W. Scripps Company and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The E.W. Scripps Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 26, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders,
The E. W. Scripps Company
We have audited the internal control over financial reporting of The E. W. Scripps Company and subsidiaries (the "Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated February 26, 2016 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 26, 2016
The E. W. Scripps Company
Consolidated Balance Sheets
See notes to consolidated financial statements.
The E. W. Scripps Company
Consolidated Statements of Operations
See notes to consolidated financial statements.
The E. W. Scripps Company
Consolidated Statements of Comprehensive Income (Loss)
See notes to consolidated financial statements.
The E. W. Scripps Company
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
The E. W. Scripps Company
Consolidated Statements of Equity
* Net of tax payments related to shares withheld for vested stock and RSUs of $5,237 in 2015, $4,261 in 2014 and $6,270 in 2013.
See notes to consolidated financial statements.
THE E. W. SCRIPPS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
As used in the Notes to Consolidated Financial Statements, 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.
Nature of Operations - We are a diverse media enterprise with a portfolio of television, radio and digital media brands. All of our media businesses provide content and advertising services via digital platforms, including the Internet, smartphones and tablets. Our media businesses are organized into the following reportable business segments: television, radio, digital, and syndication and other. Additional information for our business segments is presented in the Notes to Consolidated Financial Statements.
On April 1, 2015, we distributed our newspaper business to our shareholders in a tax-free spin-off. For additional information on the spin-off, see Note 21.
Concentration Risks - Our operations are geographically dispersed and we have a diverse customer base. We believe bad debt losses resulting from default by a single customer, or defaults by customers in any depressed region or business sector, would not have material effect on our financial position, results of operations or cash flows.
We derive nearly 80% of our operating revenues from marketing services, including advertising. Changes in the demand for such services, both nationally and in individual markets, can affect operating results.
Use of Estimates - Preparing financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.
Our financial statements include estimates and assumptions used in accounting for our defined benefit pension plans; the periods over which long-lived assets are depreciated or amortized; the fair value of long-lived assets, goodwill and indefinite lived assets; the liability for uncertain tax positions and valuation allowances against deferred income tax assets; the fair value of assets acquired and liabilities assumed in business combinations; and self-insured risks.
While we re-evaluate our estimates and assumptions on an ongoing basis, actual results could differ from those estimated at the time of preparation of the financial statements.
Consolidation - The consolidated financial statements include the accounts of The E. W. Scripps Company and its majority-owned subsidiary companies. Investments in 20%-to-50%-owned companies where we exert significant influence and all 50%-or-less-owned partnerships and limited liability companies are accounted for using the equity method. We do not hold any interests in variable interest entities. All significant intercompany transactions have been eliminated.
Revenue Recognition - We recognize revenue when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. When a sales arrangement contains multiple elements, such as the sale of advertising and other services, we allocate revenue to each element based upon its relative fair value. We report revenue net of sales and other taxes collected from our customers.
Our primary sources of revenue are from the sale of broadcast and digital advertising, as well as retransmission fees received from cable operators and satellite carriers.
Revenue recognition policies for each source of revenue are outlined below.
Advertising - Broadcast advertising revenue is recognized, net of agency commissions, when we air the advertisements. Digital advertising includes time-based, impression-based, and click-through campaigns. We recognize digital advertising revenue from fixed duration campaigns over the period in which the advertising appears. We recognize digital advertising revenue that is based upon the number of impressions delivered or the number of click-throughs as impressions are delivered or as click-throughs occur.
Television advertising arrangements may guarantee the advertiser a minimum audience. We provide the advertiser with additional advertising time if we do not deliver the guaranteed audience size. We recognize broadcast advertising revenue as the guaranteed minimum audience is delivered.
Retransmission - We derive revenues from cable operators and satellite carriers for the retransmission of our broadcast signal. We recognize retransmission revenues based on the contractual terms and rates.
Other Revenues - We derive revenues from sponsorships and community events through our television and radio segments. We also derive revenues from sports affiliation fees we receive in the radio segment. Our digital segment offers digital marketing to our advertising customers and subscription services for access to premium content to our consumers.
Cash Equivalents - Cash equivalents represent highly liquid investments with maturity of less than three months when acquired.
Trade Receivables - We extend credit to customers based upon our assessment of the customer’s financial condition. Collateral is generally not required from customers. We base allowances for credit losses upon trends, economic conditions, review of aging categories, specific identification of customers at risk of default and historical experience. We require advance payment from political advertisers.
A rollforward of the allowance for doubtful accounts is as follows:
Investments - We make investments in private companies. Investment securities can be impacted by various market risks, including interest rate risk, credit risk and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term. Such changes could materially affect the amounts reported in our financial statements.
We record investments in private companies not accounted for under the equity method at cost, net of impairment write-downs, because no readily determinable market price is available.
We regularly review our investments to determine if there has been any other-than-temporary decline in value. These reviews require management judgments that often include estimating the outcome of future events and determining whether factors exist that indicate impairment has occurred. We evaluate, among other factors, the extent to which cost exceeds fair value; the duration of the decline in fair value below cost; and the current cash position, earnings and cash forecasts and near term prospects of the investee. We reduce the cost basis when a decline in fair value below cost is determined to be other than temporary, with the resulting adjustment charged against earnings.
Property, Plant and Equipment - Property, plant and equipment is carried at cost less depreciation. We compute depreciation using the straight-line method over estimated useful lives as follows:
Programs and Program Licenses - Programs and program licenses include the cost of national television network programming, programming produced by us or for us by independent production companies and programs licensed under agreements with independent producers.
Our network affiliation agreements require the payment of affiliation fees to the network. Network affiliation fees consist of pre-determined fixed fees in all cases and variable payments based on a share of retransmission revenues above the fixed fees for some of our agreements.
Program licenses generally have fixed terms, limit the number of times we can air the programs and require payments over the terms of the licenses. We record licensed program assets and liabilities when the programs become available for broadcast. We do not discount program licenses for imputed interest. We amortize program licenses based upon expected cash flows over the term of the license agreement. We classify the portion of the unamortized balance expected to be amortized within one year as a current asset.
The costs of programming produced by us or for us by independent production companies are expensed over the course of the television season. Internal costs, including employee compensation and benefits, to produce daily or live broadcast shows, such as news, sports or daily magazine shows, are expensed as incurred and are not classified in our Consolidated Statements of Operations as program costs.
We review the net realizable value of programs and program licenses for impairment using a day-part methodology, whereby programs broadcast during a particular time period, such as prime time, are evaluated on an aggregate basis.
Program rights liabilities payable within the next twelve months are included in accounts payable. Noncurrent program rights liabilities are included in other noncurrent liabilities.
Goodwill and Other Indefinite-Lived Intangible Assets - Goodwill represents the cost of acquisitions in excess of the acquired businesses’ tangible assets and identifiable intangible assets.
FCC licenses represent the value assigned to the broadcast licenses of acquired broadcast television and radio stations. Broadcast television and radio stations are subject to the jurisdiction of the Federal Communications Commission (“FCC”) which prohibits the operation of stations except in accordance with an FCC license. FCC licenses stipulate each station’s operating parameters as defined by channels, effective radiated power and antenna height. FCC licenses are granted for a term of up to eight years, and are renewable upon request. We have never had a renewal request denied and all previous renewals have been for the maximum term.
We do not amortize goodwill and other indefinite-lived intangible assets, but we review them for impairment at least annually or any time events occur or conditions change that would indicate it is more likely than not the fair value of a reporting unit is below its carrying value. We perform our annual impairment review during the fourth quarter of each year in conjunction with our annual planning cycle. We also assess, at least annually, whether assets classified as indefinite-lived intangible assets continue to have indefinite lives.
We review goodwill for impairment based upon reporting units, which are defined as operating segments or groupings of businesses one level below the operating segment level. Reporting units with similar economic characteristics are aggregated into a single unit when testing goodwill for impairment. Our reporting units are our television group, radio group, core digital (comprised of our local digital brands), Midroll and Newsy.
Amortizable Intangible Assets - Television network affiliations represents the value assigned to an acquired broadcast television station’s relationship with a national television network. Television stations affiliated with national television networks typically have greater profit margins than independent television stations, primarily due to audience recognition of the television station as a network affiliate. We amortize these network affiliation relationships on a straight-line basis over estimated useful lives of 20 years.
We amortize customer lists and other intangible assets in relation to their expected future cash flows over estimated useful lives of up to 10 years.
Impairment of Long-Lived Assets - We review long-lived assets (primarily property, plant and equipment and amortizable intangible assets) for impairment whenever events or circumstances indicate the carrying amounts of the assets may not be recoverable. Recoverability is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the undiscounted cash flow is less than the carrying amount of the assets, then amortizable intangible assets are written down first, followed by other long-lived assets, to fair value. We determine fair value based on discounted cash flows or appraisals. We report long-lived assets to be disposed of at the lower of carrying amount or fair value less costs to sell.
Self-Insured Risks - We are self-insured, up to certain limits, for general and automobile liability, employee health, disability and workers’ compensation claims and certain other risks. Estimated liabilities for unpaid claims totaled $10.7 million and $6.3 million at December 31, 2015 and 2014, respectively. We estimate liabilities for unpaid claims using actuarial methodologies and our historical claims experience. While we re-evaluate our assumptions and review our claims experience on an ongoing basis, actual claims paid could vary significantly from estimated claims, which would require adjustments to expense. Based on the terms of the Master Transaction Agreement, Scripps remains the primary obligor for newspaper insurance claims incurred prior to April 1, 2015. We recorded the liabilities related to these claims on our balance sheet with an offsetting receivable of $3.3 million, which will be paid by Journal Media Group.
Income Taxes - We recognize deferred income taxes for temporary differences between the tax basis and reported amounts of assets and liabilities that will result in taxable or deductible amounts in future years. We establish a valuation allowance if we believe that it is more likely than not that we will not realize some or all of the deferred tax assets.
We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or that we expect to take in a tax return. Interest and penalties associated with such tax positions are included in the tax provision. The liability for additional taxes and interest is included in other liabilities in the Consolidated Balance Sheets.
Risk Management Contracts - We do not hold derivative financial instruments for trading or speculative purposes and we do not hold leveraged contracts. From time to time, we may use derivative financial instruments to limit the impact of interest rate fluctuations on our earnings and cash flows.
Stock-Based Compensation - We have a Long-Term Incentive Plan (the “Plan”) which is described more fully in Note 18. The Plan provides for the award of incentive and nonqualified stock options, stock appreciation rights, restricted stock units (RSUs), restricted and unrestricted Class A Common shares and performance units to key employees and non-employee directors.
We recognize compensation cost based on the grant-date fair value of the award. We determine the fair value of awards that grant the employee the underlying shares by the fair value of a Class A Common share on the date of the award.
Certain awards of Class A Common shares or RSUs have performance conditions under which the number of shares granted is determined by the extent to which such performance conditions are met (“Performance Shares”). Compensation costs for such awards are measured by the grant-date fair value of a Class A Common share and the number of shares earned. In periods prior to completion of the performance period, compensation costs are based upon estimates of the number of shares that will be earned.
Compensation costs, net of estimated forfeitures due to termination of employment or failure to meet performance targets, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. Grants to retirement-eligible employees are expensed immediately and grants to employees who will become retirement eligible prior to the end of the stated vesting period are expensed over such shorter period because stock compensation grants vest upon the retirement of the employee.
Earnings Per Share (“EPS”) - Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our RSUs, are considered participating securities for purposes of calculating EPS. Under the two-class method, we allocate a portion of net income to these participating securities and therefore exclude that income from the calculation of EPS for common stock. We do not allocate losses to the participating securities.
The following table presents information about basic and diluted weighted-average shares outstanding:
(1)
Amount outstanding at Balance Sheet date, before application of the treasury stock method and not weighted for period outstanding.
For 2014, in the determination of dilutive securities, the inclusion of RSUs as participating securities is more dilutive, and therefore, the dilutive EPS calculation excludes them. For 2015 and 2013, we incurred a net loss and the inclusion of RSUs and stock options held by employees and directors were anti-dilutive, and accordingly the diluted EPS calculation excludes those common share equivalents.
Derivative Financial Instruments - It is our policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. Derivative financial instruments are utilized to manage interest rate risks. We do not hold derivative financial instruments for trading purposes. All derivatives must be recorded on the balance sheet at fair value. Each derivative is designated as a cash flow hedge or remains undesignated. Changes in the fair value of derivatives that are designated and effective as cash flow hedges are recorded in other comprehensive income and reclassified to the Consolidated Statement of Operations when the effects of the item being hedged are recognized in the statement of operations. These changes are offset in earnings to the extent the hedge was effective by fair value changes related to the risk being hedged on the hedged item. Changes in the fair value of undesignated hedges are recognized currently in the Consolidated Statement of Operations. All ineffective changes in derivative fair values are recognized currently in earnings.
All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, the hedge accounting discussed above is discontinued.
2. Recently Adopted Standards and Issued Accounting Standards
Recently Issued Accounting Standards - In August 2014, the Financial Accounting Standards Board (FASB) issued new guidance related to the disclosures around going concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued new guidance on revenue recognition. Under this new standard, an entity shall recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step process that requires entities to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. This standard permits the use of either the retrospective or cumulative effect transition method and will be effective for us beginning in 2018. Early adoption is permitted in 2017. We are currently assessing the impact this new guidance will have on our consolidated financial statements and have not yet determined a transition method.
Recently Adopted Accounting Standards - In November 2015, the FASB issued new guidance to classify deferred tax assets (DTAs) and deferred tax liabilities as noncurrent in the balance sheet. We have elected to early adopt this guidance effective December 31, 2015. We adopted this guidance retrospectively which results in us classifying the December 31, 2014 current DTA balance of $10.8 million with the noncurrent DTA for a total December 31, 2014 noncurrent DTA balance of $65.4 million.
In April 2015, the FASB issued new guidance for the presentation of debt issuance costs in the financial statements. Under this new guidance, debt issuance costs (except for lines of credit) are classified in the balance sheet as a deduction from the related debt liability rather than as an asset. Additionally, amortization of these costs must be classified as interest expense. We have elected to early adopt this guidance effective December 31, 2015. Retrospective adoption of this guidance resulted in us classifying $3.3 million and $1.6 million of deferred loan costs as of December 31, 2015 and 2014, respectively, as a reduction of long-term debt. Reported interest expense was not affected.
In April 2014, the FASB issued new guidance on reporting and disclosure requirements related to discontinued operations. With the new guidance, a disposal of a component or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity's operations and financial results. We adopted this guidance effective January 1, 2015.
3. Acquisitions
Midroll Media
On July 22, 2015, we acquired Midroll Media, a Los Angeles-based company that creates original podcasts and operates a network that generates advertising revenue for more than 200 shows. The purchase price was $50 million in cash, plus a $10 million earnout payable over three years. We estimated the fair value of the earnout to be $7 million at the acquisition date.
The following table summarizes the final fair values of the assets acquired and the liabilities assumed:
Of the $11 million allocated to intangible assets, $7 million was allocated to advertiser relationships with an estimated amortization period of 5 years and the balance of $4 million was allocated to various other intangible assets.
The goodwill of $46 million arising from the transaction consists largely of the benefit we will derive from being able to enter the podcast market with an established business. We allocated the goodwill to our digital segment. We treated the transaction as an asset acquisition for income tax purposes with a step-up in the assets acquired. The goodwill is deductible for income tax purposes.
From the acquisition date of July 22, 2015 through December 31, 2015, revenues from the acquired Midroll operations were $4.6 million.
Journal Communications Broadcast Group
On April 1, 2015, we acquired the broadcast group owned by Journal Communications, Inc. ("Journal") as part of the transactions described in Note 21. The businesses acquired include 12 television stations and 34 radio stations. We issued 26.4 million Class A Common shares to the Journal shareholders in exchange for their interest in Journal resulting in a purchase price of $636 million. The fair value of the shares issued was determined on the basis of the closing market price of our Class A Common shares on April 1, 2015, the acquisition date.
The following table summarizes the final fair values of the assets acquired and the liabilities assumed:
Of the $295 million allocated to intangible assets, $112 million was for FCC licenses which we determined to have an indefinite life and, therefore, are not amortized. The remaining balance of $183 million was allocated to television network affiliation relationships and advertiser relationships with estimated amortization periods of 10 to 20 years.
The goodwill of $456 million arising from the transaction consists largely of synergies and economies of scale and other benefits of a larger broadcast footprint. The goodwill was allocated to our television ($395 million), radio ($41 million) and digital ($20 million) segments. We treated the transaction as a stock acquisition for income tax purposes resulting in no step-up in the assets acquired. The goodwill is not deductible for income tax purposes.
Concurrent with the acquisition of the Journal television stations, due to FCC conflict ownership rules, Journal was required to dispose of KNIN, the Fox affiliate located in Boise, ID. The station was placed in a divestiture trust for our benefit and was sold to Raycom Media, Inc. on October 1, 2015 for $14.5 million. The sale did not result in a gain or loss.
From the acquisition date of April 1, 2015 through December 31, 2015, revenues from the acquired Journal operations were $200 million.
Granite Broadcasting
On June 16, 2014, we closed our acquisition of two television stations owned by Granite Broadcasting Corporation - the Detroit MyNetworkTV affiliate WMYD-TV and the Buffalo, N.Y. ABC affiliate WKBW-TV ("acquired Granite stations") - for $110 million in cash. The acquisition of WMYD-TV creates a duopoly with our Detroit ABC affiliate WXYZ-TV.
The following table summarizes the final fair values of the assets acquired and the liabilities assumed:
Of the $54 million allocated to intangible assets, $34 million was for FCC licenses which we have determined to have an indefinite life and, therefore, will not be amortized. The remaining balance of $19 million was allocated to television network affiliation relationships and advertiser relationships with estimated amortization periods of 10 to 20 years.
The goodwill of $45 million arising from the transaction consists largely of synergies and economies of scale and other benefits of a larger broadcast footprint, as well as synergies from being able to create a duopoly in our Detroit market. We allocated the goodwill to our television segment. We treated this purchase as an asset acquisition for income tax purposes resulting in a step-up in the assets acquired. The goodwill is deductible for income tax purposes.
Media Convergence Group
On January 1, 2014 we completed our acquisition of Media Convergence Group, Inc., which operates as Newsy, an over-the-top video news provider, for $35 million in cash, plus a working capital adjustment of $0.2 million.
The following table summarizes the final fair values of the assets acquired and the liabilities assumed:
Of the $6 million allocated to intangible assets, $4 million was allocated to customer relationships with an estimated amortization period of 5 years and the balance of $2 million was allocated to various other intangible assets.
The goodwill of $29 million arising from the transaction consists largely of the benefit we will derive from being able to enter the digital video market with an established business. We allocated the goodwill to our digital segment. We treated the transaction as a purchase of stock for income tax purposes resulting in no step-up in the basis of the assets acquired. The goodwill is not deductible for income tax purposes.
Geoterrestrial
On September 16, 2014, we completed our acquisition of Geoterrestrial, Inc. ("WeatherSphere") for $4 million. WeatherSphere is a provider of weather-related mobile apps. The stock purchase agreement includes an earnout provision, whereby up to an additional $2.5 million may be payable over a three year period. We estimated the fair value of the earnout to be $1.2 million. We are not presenting any pro forma results of operations since the impact of the acquisition is not material to prior periods results of operations.
Pro forma results of operations
Pro forma results of operations, assuming the Granite and Journal transactions (collectively the "Acquired Stations") had taken place at the beginning of 2013 and 2014, respectively, are included in the following table. The pro forma results do not include Midroll, Newsy or Weathersphere as the impact of these acquisitions, individually or in the aggregate, are not material to prior year results of operations. The pro forma information includes the historical results of operations of Scripps and the Acquired Stations and adjustments for additional depreciation and amortization of the assets acquired, additional interest expense related to the financing of the transaction and reflecting the transaction costs incurred in 2015 as if they were incurred in the first quarter of 2014. The weighted average shares utilized in calculating the earnings per share assumes that the shares issued to the Journal shareholders were issued on January 1, 2014. The pro forma information does not include efficiencies, cost reductions or synergies expected to result from the acquisition. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the acquisition been completed at the beginning of the period.
4. Asset Write-Downs and Other Charges and Credits
Income (loss) from operations was affected by the following:
2015 - Acquisition and related integration costs of $38.0 million are costs incurred for the Journal transactions and other acquisitions, such as legal and accounting fees, as well as costs to integrate the acquired operations.
We recorded a $24.6 million non-cash charge to reduce the carrying value of our goodwill and certain intangible assets of Newsy and a smaller business. See Note 9 for additional information.
2014 - Acquisition and related integration costs of $9.7 million include costs associated with the acquisition of two television stations from Granite Broadcasting, as well as costs for the Journal transactions.
We recorded a $3.0 million gain from the sale of excess land.
We recorded a $5.9 million non-cash charge to reduce the carrying value of investments.
2013 - We recorded a $4.5 million non-cash loss on the disposition of an investment and to reduce the carrying value of investments.
We recorded a $4.6 million non-cash charge to write-off unamortized deferred loan issuance costs as a result of the debt refinance in the fourth quarter of 2013.
5. Income Taxes
We file a consolidated federal income tax return, consolidated unitary returns in certain states, and other separate state income tax returns for certain of our subsidiary companies.
The provision for income taxes from continuing operations consisted of the following:
The difference between the statutory rate for federal income tax and the effective income tax rate was as follows:
Nondeductible expenses in 2015 and 2014 include amounts for transaction costs related to the Journal transactions.
The approximate effect of the temporary differences giving rise to deferred income tax assets (liabilities) were as follows:
Total federal operating loss carryforwards were $61 million and state operating loss carryforwards were $256 million at December 31, 2015. The federal operating loss carryforward includes $39 million of deductions from share-based awards, which are not recorded under GAAP until the deduction reduces income taxes payable. Our federal tax loss carryforwards and our state tax loss carryforwards expire through 2035. Because we file separate state income tax returns for certain of our subsidiary companies, we are not able to use state tax losses of a subsidiary company to offset state taxable income of another subsidiary company.
Deferred tax assets totaled $14 million at December 31, 2015. Management believes that it is more likely than not that we will realize the benefits of our federal deferred tax assets and therefore has not recorded a valuation allowance for our federal deferred tax assets. If economic conditions worsen, future estimates of taxable income could be lower than our current estimates, which may require valuation allowances to be recorded in future reporting periods.
We recognize state net operating loss carryforwards as deferred tax assets, subject to valuation allowances. At each balance sheet date, we estimate the amount of carryforwards that are not expected to be used prior to expiration of the carryforward period. The tax effect of the carryforwards that are not expected to be used prior to their expiration is included in the valuation allowance.
During 2013 and 2015, deferred tax assets relating to employee share-based compensation from the vesting of RSU's and the exercise of stock options have not been recognized since we were in a net tax loss position in those years. The additional tax benefits were reflected as net operating loss carryforwards when we filed our tax returns, but the additional tax benefits are not recorded under GAAP until the tax deduction reduces taxes payable. When the tax benefit is recognized, it will be recorded as additional paid-in capital. The amount of unrecognized tax deductions for the years ended December 31, 2015 and 2014 were approximately $16 million and $23 million, respectively.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.6 million at December 31, 2015. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2015 and 2014, we had accrued interest related to unrecognized tax benefits of $0.6 million and $1.2 million, respectively.
We file income tax returns in the U.S. and in various state and local jurisdictions. We are routinely examined by tax authorities in these jurisdictions. At December 31, 2015, we are no longer subject to federal income tax examinations for years prior to 2013. For state and local jurisdictions, we are generally no longer subject to income tax examinations for years prior to 2011.
In 2015 and 2014, we recognized $2.5 million and $6.0 million, respectively, of previously unrecognized net tax benefits primarily due to the lapse of the statute of limitations in certain tax jurisdictions.
Due to the potential for resolution of federal and state examinations, and the expiration of various statutes of limitation, it is reasonably possible that our gross unrecognized tax benefits balance may change within the next twelve months by as much as $0.9 million.
On July 1, 2008, we distributed all of the shares of Scripps Networks Interactive, Inc. (“SNI”) to shareholders of record as of the close of business on June 16, 2008. SNI owned and operated our national lifestyle cable television networks and interactive media businesses. Under the terms of the Tax Allocation Agreement with SNI, we receive any tax deductions for share-based compensation awards held by our employees in SNI. In 2015, 2014 and 2013, we took deductions upon the exercise of those awards that totaled approximately $2.2 million, $8.1 million and $14.3 million, respectively. These benefits are recorded as additional paid-in-capital at the time they are realized. At December 31, 2015, our employees held approximately 0.1 million SNI options which expire through 2017.
6. Restricted Cash
At December 31, 2015 and 2014, we had $6.6 million and $6.8 million, respectively, in a restricted cash account on deposit with our insurance carrier. This account serves as collateral, in place of an irrevocable stand-by letter of credit, to provide financial assurance that we will fulfill our obligations with respect to cash requirements associated with our workers' compensation self-insurance. This cash is to remain on deposit with the carrier until all claims have been paid or we provide a letter of credit in lieu of the cash deposit.
7. Investments
Investments consisted of the following:
Our investments do not trade in public markets, thus they do not have readily determinable fair values. We estimate the fair values of the investments to approximate their carrying values at December 31, 2015 and 2014. There can be no assurance we would realize the carrying values of these securities upon their sale.
8. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
9. Goodwill and Other Intangible Assets
Goodwill by business segment was as follows:
Other intangible assets consisted of the following:
Estimated amortization expense of intangible assets for each of the next five years is $22.3 million in 2016, $19.9 million in 2017, $19.4 million in 2018, $18.8 million in 2019, $18.2 million in 2020 and $176.8 million in later years.
Goodwill and other indefinite-lived assets are tested for impairment annually and any time events occur or conditions change that would indicate it is more likely than not the fair value of a reporting unit is below its carrying value. Such indicators of impairment include, but are not limited to, changes in business climate or other factors resulting in low cash flow related to such assets. The testing for impairment is a two-step process. The first step is the estimation of the fair value of each of the reporting units, which is then compared to their carrying values. If the fair value is less than the carrying value of the reporting unit then an impairment of goodwill may exist. Step two is then performed to determine the amount of impairment.
Changes in the market for the distribution of video programming services, including the development of over-the-top distribution platforms such as Apple TV, Comcast's Watchable, PlutoTV, Xumo, Roku and Sling, has resulted in the need for additional investment in our video news service, Newsy. The additional investment, combined with the slower development of our original revenue model, created indications of impairment of goodwill as of September 30, 2015.
Under the two-step process required by GAAP, we estimated the fair value of Newsy. Fair values were determined using a combination of an income approach, which estimated fair value based upon future revenues, expenses and cash flows discounted to their present value, and a market approach, which estimated fair value using market multiples of various financial measures compared to a set of comparable public companies. The discounted cash flow approach utilized unobservable factors, such as projected revenues and expenses and a discount rate applied to the estimated cash flows. The determination of the discount rate was based on a cost of capital model, using a risk-free rate, adjusted by a stock-beta adjusted risk premium and a size premium. The inputs to the nonrecurring fair value determination of our reporting units are classified as Level 3 fair value measurements under GAAP.
The valuation methodology and underlying financial information used to determine fair value requires significant judgments to be made by management. These judgments include, but are not limited to, long-term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
We concluded that the fair value of Newsy did not exceed its carrying value as of September 30, 2015. Because of the timing and complexity of the calculations required under step two of the process, we had not yet completed the valuation of goodwill as of the issuance of our September 30, 2015 financial statements. However, based upon our preliminary valuations, we recorded a $21 million non-cash charge in the three months ended September 30, 2015 to reduce the carrying value of goodwill and $2.9 million to reduce the value of intangible assets. We completed step two of the goodwill impairment analysis in the fourth quarter of 2015 with no difference between the preliminary estimated impairment charge and the final amount.
We also recorded a $1.5 million goodwill impairment charge on a second small business in 2015.
10. Long-Term Debt
Long-term debt consisted of the following:
* Fair value of the term loan was estimated based on quoted private market transactions and is classified as Level 1 in the fair value hierarchy. The fair value of the unsecured promissory notes is determined based on a discounted cash flow analysis using current market interest rates of comparable instruments and is classified as a Level 2 in the fair value hierarchy.
Financing Agreement
On April 1, 2015, we entered into a $500 million second amended revolving credit and term loan agreement ("Second Amended Financing Agreement") to amend the terms of our existing revolving credit and term loan agreement ("Amended Financing Agreement"), to add an incremental $200 million term loan B borrowing and to increase the line of credit by $25 million. The proceeds from the incremental term loan B borrowing were used to pay off the $116 million Journal term loan assumed in connection with the Journal acquisition, fund the $60 million special dividend paid to the Scripps shareholders and for the payment of transaction expenses. The $400 million term loan B matures in November 2020 and the $100 million revolving credit facility matures in November 2018.
The Second Amended Financing Agreement includes the maintenance of a net leverage ratio if we borrow more than 20% on the revolving credit facility. The term loan B requires that if we borrow additional amounts or make a permitted acquisition that we cannot exceed a stated net leverage ratio on a pro forma basis at the date of the transaction.
The Second Amended Financing Agreement allows us to make restricted payments (dividends and stock repurchases) up to $70 million plus additional amounts based on our financial results and condition. We can also make additional stock repurchases equal to the amount of proceeds that we receive from the exercise of stock options held by our employees. Additionally, we can make acquisitions as long as the pro forma net leverage ratio is less than 4.5 to 1.0.
In certain circumstances, the Second Amended Financing Agreement requires that we must use a portion of excess cash flow, and the proceeds from a sale, to repay debt. As of December 31, 2015, we were not required to make additional principal payments based on excess cash flow. Under an amendment completed in the third quarter of 2015, any proceeds, up to a stipulated amount, that we receive from the upcoming FCC spectrum auction, should we choose to participate and our bid is accepted, will not be required to be used to pay down the term loan.
Under the terms of the Second Amended Financing Agreement, we granted the lenders mortgages on certain of our real property, pledges of our equity interests in our subsidiaries and security interests in substantially all other personal property, including cash, accounts receivables, and equipment.
Interest is payable on the term loan B at rates based on LIBOR, with a 0.75% LIBOR floor, plus a fixed margin of 2.75%. Interest is payable on the revolving credit facility at rates based on LIBOR plus a margin based on our leverage ratio ranging from 2.25% to 2.75%. As of December 31, 2015, the interest rate was 3.50% on the term loan B. The weighted-average interest rate on borrowings was 3.44% and 3.25% during December 31, 2015 and 2014, respectively.
Scheduled principal payments on our term loan B at December 31, 2015 are: $4.0 million in 2016, $4.0 million in 2017 $4.0 million in 2018, $4.0 million in 2019, and $378.5 million in 2020.
Commitment fees of 0.30% to 0.50% per annum, based on our leverage ratio, of the total unused commitment are payable under the revolving credit facility.
As of December 31, 2015 and 2014, we had outstanding letters of credit totaling $0.8 million and $0.2 million, respectively.
Unsecured Subordinated Notes Payable
The unsecured subordinated promissory notes bear interest at a rate of 7.25% per annum payable quarterly. The notes are payable in equal annual installments of $2.7 million on September 30 of 2016, 2017 and 2018, with no prepayment right.
11. Financial Instruments
We are exposed to various market risks, including changes in interest rates. To manage risks associated with the volatility of changes in interest rates, we may enter into interest rate management instruments.
We may utilize interest rate swaps to manage our interest expense exposure by fixing our interest rate on portions of our floating rate term loan. We have entered into a $75 million notional value interest rate swap expiring in December 2016. Under the terms of the swap, we pay a fixed interest rate of 1.08% and receive interest at a variable rate equal to 30 day LIBOR. We did not provide or receive any collateral for this contract.
Fair Value of Derivative Instruments
The notional amounts and fair values of derivative instruments are shown in the table below:
Through November 2013, the above derivative instrument was designated as and qualified as a cash flow hedge and the effective portion of the unrealized gains and losses on the derivative was reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transactions affected earnings. Upon refinancing our term loan B in November 2013, this hedge no longer qualified as a cash flow hedge and gains and losses on the derivative are recognized in current period earnings. The balance in accumulated other comprehensive loss at the date of discontinuance of hedge accounting is being amortized into earnings on a straight-line basis through December 2016. For the years ended December 31, 2015 and 2014, approximately $0.4 million and $0.4 million, respectively, was amortized into earnings from accumulated other comprehensive loss and is included in the reclassified from accumulated OCL, gain/(loss) line in the table below.
12. Fair Value Measurement
We measure certain financial assets and liabilities at fair value on a recurring basis, such as cash equivalents and derivatives. The fair values of these financial assets and liabilities were determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These levels of input are as follows:
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Level 1 - Quoted prices in active markets for identical assets or liabilities.
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Level 2 - Inputs, other than quoted market prices in active markets, that are observable either directly or indirectly.
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Level 3 - Unobservable inputs based on our own assumptions.
The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2015 and 2014:
13. Other Liabilities
Other liabilities consisted of the following:
14. Supplemental Cash Flow Information
The following table presents additional information about the change in certain working capital accounts:
Information regarding supplemental cash flow disclosures is as follows:
In 2015, we acquired an intangible software asset of $7.1 million through a long-term financing arrangement.
15. Employee Benefit Plans
We sponsor two noncontributory defined benefit pension plans covering certain Scripps employees that began employment prior to June 30, 2008, as well as certain former Journal Communications, Inc. ("Journal") employees. We also have two non-qualified Supplemental Executive Retirement Plans ("SERPs") covering Scripps employees and certain former Journal employees. Both of the defined benefit plans and the SERPs have frozen the accrual of future benefits.
We sponsor a defined contribution plan covering substantially all non-union and certain union employees. We match a portion of employees' voluntary contributions to this plan. In connection with freezing the accrual of service credits under certain of our defined benefit pension plans, we began contributing additional amounts (transition credits) to certain employees' defined contribution retirement accounts in 2011. These transition credits, which were made through 2015, were determined based upon the employee’s age, compensation and years of service.
Other union-represented employees are covered by defined benefit pension plans jointly sponsored by us and the union, or by union-sponsored multi-employer plans.
We use a December 31 measurement date for our retirement plans. Retirement plans expense is based on valuations as of the beginning of each fiscal year.
The components of the expense consisted of the following:
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were as follows:
In addition to the amounts summarized above, amortization of actuarial losses of $0.2 million, $0.3 million and $0.4 million were recorded through other comprehensive income in 2015, 2014 and 2013, respectively, related to our SERP plan. We recognized an actuarial gain of $2.3 million in 2015 and actuarial losses of $0.6 million and $0.7 million in 2014 and 2013, respectively, related to our SERP plan. A one-time curtailment charge of $1.1 million was recorded in the second quarter of 2015 related to our defined benefit pension plan as a result of the impact of the spin-off of our newspaper business.
On August 24, 2015, we offered eligible former employees with vested, deferred pension plan benefits the option to receive their benefits either as a lump-sum distribution or an immediate annuity payment. Approximately 4,300 former Scripps employees were eligible for this offer; former Journal Communications employees were not affected. All distributions were made from existing pension plan assets; company funds were not used to make the lump-sum distributions. The funded status of the plan remained materially unchanged as a result of this offer. The lump-sum payments were made in November 2015, at which time we recorded a non-cash pension settlement charge of $45.7 million.
Assumptions used in determining the annual retirement plans expense were as follows:
(1) Ranges presented for discount rate and long-term rate of return on plan assets for 2015 represent the rates used for various remeasurement periods during the year.
The discount rate used to determine our future pension obligations is based on a dedicated bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans. The increase in compensation levels assumption is based on actual past experience and our near-term outlook.
The expected long-term rate of return on plan assets is based upon the weighted-average expected rate of return and capital market forecasts for each asset class employed.
Changes in other key actuarial assumptions affect the determination of the benefit obligations as of the measurement date and the calculation of net periodic benefit costs in subsequent periods. Recent actuarial studies indicate life expectancies are longer and thus increase the total expected benefit payments to plan participants. Our benefit obligations at December 31, 2014 reflected the new life expectancy assumptions which increased our pension obligations by approximately $45 million in 2014.
Obligations and Funded Status - The defined benefit pension plan obligations and funded status are actuarially valued as of the end of each year. The following table presents information about our employee benefit plan assets and obligations:
(1) For 2014, $3.6 million of the SERP liability related to the divested newspaper operations is included in long-term liabilities of discontinued operations.
In 2016, for our defined benefit pension plans, we expect to recognize amortization of actuarial loss from accumulated other comprehensive loss into net periodic benefit costs of $4.2 million (including $0.2 million for the SERP).
Information for pension plans with an accumulated benefit obligation and projected benefit obligation in excess of plan assets was as follows:
Assumptions used to determine the defined benefit pension plans benefit obligations were as follows:
We expect to contribute $1.3 million in 2016 to fund SERP benefits. Additionally, we expect to contribute $5 million to $10 million for our qualified defined benefit pension plans in 2016.
Estimated future benefit payments expected to be paid from the plans for the next ten years are $33.6 million in 2016, $34.4 million in 2017, $35.3 million in 2018, $35.9 million in 2019, $36.8 million in 2020 and a total of $192.4 million for the five years ending 2025.
Plan Assets and Investment Strategy
Our long-term investment strategy for pension assets is to earn a rate of return over time that minimizes future contributions to the plan while reducing the volatility of pension assets relative to pension liabilities. The strategy reflects the fact that we have frozen the accrual of service credits under defined benefit pension plans covering the majority of employees. We evaluate our asset allocation target ranges for equity, fixed income and other investments annually. We monitor actual asset allocations monthly and adjust as necessary. We control risk through diversification among multiple asset classes, managers and styles. Risk is further monitored at the manager and asset class level by evaluating performance against appropriate benchmarks.
Information related to our pension plan asset allocations by asset category were as follows:
U.S. equity securities include common stocks of large, medium and small capitalization companies, which are predominantly U.S. based. Non-U.S. equity securities include companies domiciled outside of the U.S. and American depository receipts. Fixed-income securities include securities issued or guaranteed by the U.S. government, mortgage backed securities and corporate debt obligations. Other investments include real estate funds.
In 2015, we began the transition to a new asset allocation strategy in which approximately 45% of plan assets are invested in a portfolio of fixed income securities with a duration approximately that of the projected payment of benefit obligations. The remaining 55% of plan assets are to be invested in equity securities and other return-seeking assets. The new allocation will be completed by the end of 2016. The expected long-term rate of return on plan assets is based primarily upon the target asset allocation for plan assets and capital markets forecasts for each asset class employed.
The following tables present our plan assets using the fair value hierarchy as of December 31, 2015 and 2014:
Equity securities-common/collective trust funds and fixed income-common/collective trust funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds (equity securities and fixed income securities) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Common/collective trust funds are typically valued at their net asset values that are calculated by the investment manager or sponsor of the fund and have daily or monthly liquidity.
Real estate pertains to an investment in a real estate fund which invests in limited partnerships, limited liability corporations, real estate investment trusts, other funds and insurance company group annuity contracts. The valuations for these holdings are based on property appraisals using cash flow analysis and market transactions.
The following table presents a reconciliation of Level 3 assets held during 2015 and 2014:
16. Segment Information
We determine our business segments based upon our management and internal reporting structure. Our reportable segments are strategic businesses that offer different products and services.
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 and national advertisers and retransmission fees received from cable operators and satellite carriers.
Our radio segment consists of 34 radio stations in eight markets. We operate 28 FM stations and six AM stations. Our radio stations earn revenue primarily from the sale of advertising to local advertisers.
Our digital segment includes the digital operations of our local television and radio businesses. It also includes the operations of national digital businesses such as Newsy, an over-the-top ("OTT") video news service, and Midroll, a podcast industry leader. Our digital operations earn revenue primarily through the sale of advertising and marketing services.
Syndication and other primarily includes the syndication of news features and comics and other features for the newspaper industry.
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.
Our chief operating decision maker evaluates the operating performance of our business segments and makes decisions about the allocation of resources to 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.
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 our business segments is as follows:
The following table presents additions to property, plant and equipment by segment:
Total assets by segment for the years ended December 31 were as follows:
No single customer provides more than 10% of our revenue.
17. Commitments and Contingencies
Minimum payments on noncancelable leases at December 31, 2015 were: $7.0 million in 2016, $6.3 million in 2017, $4.9 million in 2018, $4.3 million in 2019, $3.0 million in 2020 and $5.1 million in later years. We expect our operating leases will be replaced with leases for similar facilities upon their expiration. Rental expense for cancelable and noncancelable leases was $9.7 million in 2015, $8.2 million in 2014 and $6.8 million in 2013.
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.
18. Capital Stock and Share-Based Compensation Plans
Capital Stock - We have two classes of common shares, Common Voting shares and Class A Common shares. The Class A Common shares are only entitled to vote on the election of the greater of three or one-third of the directors and other matters as required by Ohio law.
Share Repurchase Plan - In May 2014, our Board of Directors authorized a repurchase program of up to $100 million of our Class A Common shares through December 2016. Shares may be repurchased from time to time at management's discretion, either in the open market, through pre-arranged trading plans or in privately negotiated block transactions. In 2015, under the authorization, we repurchased a total of $16 million of shares at prices ranging from $15.92 to $24.96 per share. As of December 31, 2015, we have $84 million remaining for share repurchases under this authorization.
Incentive Plans - On May 13, 2010, we adopted The E. W. Scripps Company 2010 Long-Term Incentive Plan (the “Plan”) which terminates on February 15, 2020. The Plan permits the granting of incentive and nonqualified stock options, stock appreciation rights, restricted stock units (RSUs), restricted and unrestricted Class A Common shares and performance units to
key employees and non-employee directors. Any shares previously granted under the 1997 Plan that are subsequently forfeited, terminated, settled in cash or used to satisfy tax withholding obligations become available for issuance under the 2010 Plan.
We satisfy stock option exercises and vested stock awards with newly issued shares. As of December 31, 2015, 5.5 million shares were available for future stock compensation awards.
Effective as of the closing of the Journal transactions, the number and exercise price of all outstanding share awards retained by Scripps employees and directors were adjusted to maintain the awards' economic value. All other terms of the awards, including the terms and conditions relating to vesting, remained the same. Restricted share units outstanding immediately prior to the closing held by newspaper employees became fully vested and were treated in the same manner as outstanding shares of Class A Common shares (i.e. the holders received a combination of Scripps Class A Common shares, shares of Journal Media Group common stock and a cash dividend-equivalent payment in connection with the Scripps special dividend).
Stock Options - Stock options grant the recipient the right to purchase Class A Common shares at not less than 100% of the fair market value on the date the option is granted. We have not issued any new stock options since 2008.
The following table summarizes information about stock option transactions:
The following table presents additional information about exercises of stock options:
(1) Benefits for 2015 and 2013 to be recognized in future years when realizable.
Information about options outstanding and options exercisable by year of grant is as follows:
Restricted Stock Units - Awards of restricted stock units (RSUs) generally require no payment by the employee. RSUs are converted into an equal number of Class A Common shares when vested. These awards generally vest over a three or four year period, conditioned upon the individual’s continued employment through that period. Awards vest immediately upon the retirement, death or disability of the employee or upon a change in control of Scripps or in the business in which the individual is employed. Unvested awards may be forfeited if employment is terminated for other reasons. Awards are nontransferable during the vesting period, but the awards are entitled to all the rights of an outstanding share. There are no post-vesting restrictions on awards granted to employees and non-employee directors.
Long-term incentive compensation includes performance share awards. Performance share awards represent the right to receive an award of RSUs if certain performance measures are met. Each award specifies a target number of shares to be issued and the specific performance criteria that must be met. The number of shares that an employee receives may be less or more than the target number of shares depending on the extent to which the specified performance measures are met or exceeded.
Information and activity for our RSUs is presented below:
The following table presents additional information about restricted stock unit vesting:
(1) Benefits for 2015 and 2013 to be recognized in future years when realizable.
Share-based Compensation Costs
Share-based compensation costs were as follows:
As of December 31, 2015, $6.9 million of total unrecognized compensation costs related to RSUs and performance shares is expected to be recognized over a weighted-average period of 2.1 years.
19. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss ("AOCL") by component, including items reclassified out of AOCL, were as follows:
(a) Included in interest expense in the Consolidated Statements of Operations
(b) Included in defined benefit pension plan expense in the Consolidated Statements of Operations
20. Summarized Quarterly Financial Information (Unaudited)
Summarized quarterly financial information is as follows:
The sum of the quarterly net income per share amounts may not equal the reported annual amount because each amount is computed independently based upon the weighted-average number of shares outstanding for the period.
21. Journal Broadcast Merger and Newspaper Spin-off (Discontinued Operations)
On July 30, 2014, Scripps and Journal Communications, Inc. ("Journal") agreed to merge their broadcast operations and spin-off their newspaper businesses and combine them into a separate publicly traded company. On April 1, 2015, Scripps and Journal separated their respective newspaper businesses and merged them, resulting in each becoming a wholly owned subsidiary of Journal Media Group, Inc. Journal Media Group is headquartered in Milwaukee and combines the 13 Scripps newspapers with Journal's Milwaukee Journal Sentinel.
Immediately following the spin-off and merger of the newspaper businesses, the Journal broadcast operations, and its related digital businesses, were merged into Scripps. The merged broadcast and digital media company, based in Cincinnati, retains The E. W. Scripps Company name. The company’s television operations reach approximately 18% of all U.S. television households, and the Company has approximately 3,800 employees across its television, radio and digital media operations.
As part of the transactions, Scripps' shareholders received a $60 million special cash dividend on April 1, 2015.
Certain agreements between Scripps and Journal Media Group, Inc. became effective in connection with the transactions, including Tax Matters Agreements and a Transition Services Agreement.
Under the Transition Services Agreement, Scripps and Journal Media Group provide certain services to each other for a period that generally does not extend beyond March 31, 2016. The fees for the services are at arms-length amounts. For the year ended December 31, 2015, we received $3.3 million for services provided to Journal Media Group and we paid Journal Media Group $1.2 million for services provided to us. In addition, during the initial transition period, each has paid various invoices for the other party. As of December 31, 2015, Journal Media Group owed Scripps approximately $2.0 million.
The Tax Matters Agreements set forth the allocations and responsibilities of Scripps and Journal Media Group with respect to liabilities for federal, state and local income taxes for periods before and after the spin-off, disputes with taxing authorities and indemnification of income taxes that would become due if the spin-off were taxable. Generally, Scripps is responsible for taxes prior to the separation and Journal Media Group will be responsible for taxes for periods after the separation of their respective businesses.
Until the 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-and-used model. Under this model, if the expected cash flows over the life of the primary asset of the reporting unit are in excess of the carrying amount there is no impairment. Under this model no impairment charges were recorded at March 31, 2015. At the date of the spin-off of our newspaper business, GAAP required us to assess impairment 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, an impairment loss is recorded. Our analysis determined that the carrying value of the newspaper business exceeds its fair value. Discontinued operations includes a $30 million non-cash impairment charge to reduce the carrying value to its estimated fair value. The inputs to the nonrecurring fair value determination of the disposal unit are classified as Level 2 fair value measurements under GAAP.
As a result of the spin-off, Scripps newspapers has been presented as discontinued operations in the financial statements for all periods.
Operating results of our discontinued operations were as follows:
The Company incurred certain non-recurring costs directly related to the spin-off of our newspapers and acquisition of the Journal broadcast stations of $41 million for the year ended December 31, 2015. Accounting and other professional and consulting fees directly related to the newspaper spin-off of $3 million were allocated to discontinued operations in the Consolidated Statements of Operations. The remaining $38 million was recorded in earnings from continuing operations for the year ended December 31, 2015.
The following table presents a summary of the net assets distributed on April 1, 2015 and the amounts included in discontinued operations as of December 31, 2014.
The E. W. Scripps Company
Index to Consolidated Financial Statement Schedules
S-1
The E. W. Scripps Company
S-2