The E. W. Scripps Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the same 2012 periods. Scripps operates television stations, newspapers and syndication businesses, with digital services across its media operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $189.5 million | $219.6 million | $596.0 million | $643.7 million |
| Operating income (loss) | $(8.2) million | $18.3 million | $(3.7) million | $28.5 million |
| Net income (loss) | $(8.9) million | $12.0 million | $(8.3) million | $13.0 million |
| Diluted EPS | $(0.16) | $0.21 | $(0.15) | $0.22 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $25.9 million | $124.3 million |
Q3 revenue fell 13.7%; nine-month revenue fell 7.4%. Advertising was $141.1 million in Q3 and $446.4 million year to date, down from $175.0 million and $499.5 million, respectively. Subscription revenue was $28.2 million in Q3 and $86.8 million year to date. The filing reports no consolidated gross-margin measure.
- Television: Q3 revenue decreased 20.8% to $99.3 million and segment profit fell 54.8% to $18.9 million. Political advertising was $1.0 million versus $33.9 million a year earlier; 2012 also benefited from Olympics programming. Retransmission revenue rose 40.4% to $10.4 million.
- Newspapers: Q3 revenue decreased 4.4% to $88.3 million and segment profit fell 28.5% to $3.0 million. Advertising and marketing revenue declined 8.1%; Q3 subscription revenue grew 1.4% to $28.2 million.
- Cash generation: Nine-month operating cash flow dropped by $98.3 million year over year, reflecting working-capital movements and lower segment profit. Working capital used $13.5 million of cash in 2013, compared with providing $56.6 million in 2012.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $202.1 million, restricted cash $8.2 million, and total current assets $360.1 million; current liabilities were $152.4 million.
- Total debt was $184.2 million, including $38.9 million classified as current. The term loan carried a 3.68% interest rate; no revolving-credit borrowings were outstanding. The company reported compliance with its debt covenants.
- The existing agreement includes a $100 million revolving facility and expires in December 2016. Scripps expected to make an approximately $15 million excess-cash-flow debt payment in Q4, in addition to scheduled payments.
- Nine-month capital expenditures were $15.5 million. Management expected about $5 million of additional capital expenditures for the remainder of 2013 and said cash, short-term investments and operating cash flow should meet operating and capital needs over the next 12 months.
- Cash used for share repurchases was $69.3 million in the first nine months. The company had repurchased 2.13 million shares in Q3 for $34.4 million, with $30.7 million remaining under its $100 million authorization through December 2014.
Changes, outlook and notable items
- The sharp year-over-year revenue and earnings decline primarily reflected the expected off-election-year reduction in political advertising and continuing secular declines in print advertising. Political revenue was down $32.9 million in Q3 and $47.7 million year to date.
- Management said all newspaper markets had launched a bundled subscription model by Q3 and expected subscription gains in coming quarters as subscriptions renew. It also expected digital investments to support revenue growth, with 81 digital-only sales staff hired year to date and approximately 100 expected by year-end.
- Scripps was negotiating a proposed $275 million refinancing: a $200 million term loan and $75 million revolver. Management anticipated lower rates and greater flexibility if completed; completion was not assured. The company expected a potential write-off of up to $7 million in unamortized fees.
- Q3 included a $0.5 million SERP settlement charge; the nine-month charge was $1.1 million. A second-quarter remeasurement reduced pension liabilities and accumulated comprehensive loss by $3.3 million.
- The nine-month effective tax rate was 46.6%, versus 20.8% in 2012; management said small changes in estimated pretax results materially affect the rate. The company recognized $2.4 million of previously unrecognized tax benefits in 2013.
- Risks cited include advertising demand and economic conditions, consumer preferences, newsprint and program costs, labor relations, competition, technology, interest rates, regulatory rulings and reliance on third-party vendors. The filing also highlights founder-family descendants’ control of approximately 93% of Common Voting Shares, which could inhibit a change of control.
- Ordinary-course litigation was not expected to result in material loss. No material changes to other previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor items to verify
- Whether the proposed refinancing was completed, on what terms, and whether any fee write-off occurred.
- Whether the anticipated Q4 excess-cash-flow repayment and scheduled debt payments were made, and the resulting liquidity and covenant headroom.
- Whether the bundled subscription rollout translated into sustained subscription growth, and whether digital revenue growth offset continued print-advertising weakness.
- How much of the decline in operating cash flow reflects temporary working-capital timing versus continuing operating deterioration.
- Potential tax-rate volatility, realization of deferred tax assets, and the impact of future pension costs or obligations.
- The pace and price of share repurchases relative to debt reduction and investment needs.