E.W. Scripps Company — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; comparisons are with Q2 and first half of 2010. Scripps operates television stations, newspapers, and syndication and other media businesses. Figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $183.0 | $188.8 | $363.4 | $373.1 |
| Operating income (loss) | $(2.2) | $3.2 | $(12.7) | $2.0 |
| Continuing-operations net income (loss) | $(2.2) | $1.8 | $(11.1) | $(0.2) |
| Net income (loss), including discontinued operations | $(2.2) | $99.5 | $(11.1) | $98.6 |
| Continuing-operations basic EPS | $(0.04) | $0.03 | $(0.19) | $0.00 |
| Cash from continuing operations | Not presented | Not presented | $(12.0) | $(13.5) |
Q2 revenue fell 3.0%; first-half revenue fell 2.6%. Q2 operating margin was approximately negative 1.2%, versus positive 1.7% a year earlier. First-half operating margin was approximately negative 3.5%, versus positive 0.5%.
By segment, Q2 television revenue rose 3.0% to $77.0 million and segment profit increased 1.7% to $13.5 million. Newspaper revenue declined 5.6% to $102.0 million, while segment profit fell 66.5% to $4.9 million. Syndication and other revenue fell 32.7% to $4.0 million and posted a $1.4 million segment loss.
At June 30, cash and cash equivalents were $157.0 million, restricted cash was $10.0 million, and current assets were $324.4 million versus current liabilities of $107.1 million. Total liabilities were $205.7 million; the filing reports no outstanding borrowings under the revolver and $90 million of borrowing capacity. Shareholders’ equity was $563.0 million. Cash declined $48.0 million from year-end, including $23.3 million used for share repurchases.
Material changes versus the prior comparable period
- Newspaper weakness drove the consolidated revenue decline: Q2 newspaper print advertising fell 7.7%; national newspaper advertising fell 30.9%. Management cited ongoing economic and secular pressure on newspaper advertising.
- Television benefited from higher local advertising, retransmission fees, digital revenue, and fees under a WFLX service agreement. Those gains were partly offset by the end of network compensation under renewed ABC and NBC affiliation agreements, which now require Scripps to pay network programming fees.
- Newsprint and press supplies expense increased 9.7% in Q2 and 8.8% in the first half, primarily reflecting higher newsprint prices. Newspaper distribution costs also rose.
- 2010 reported net income included the after-tax gain and operating results from the sale of United Media Licensing. The business was sold in June 2010 for $175 million, generating a $162 million pretax gain; this makes reported net income comparisons with 2010 substantially non-comparable.
Outlook, commentary, risks, and unusual items
- Management expected cash on hand at June 30 to be sufficient for operating and capital needs over the next 12 months. Capital expenditures were $4.5 million in the first half; approximately $8 million was expected for the remainder of 2011.
- Replacing Oprah with lower-cost programming late in Q3 was expected to reduce program and license costs by approximately 25% in Q4 versus Q2 2011.
- Restructuring and newspaper systems work are expected to continue through 2012; related costs were $3.9 million in the first half of 2011. Strategic initiative spending was approximately $3 million in the first half.
- Scripps completed the transition of United Media syndication services to Universal Uclick in June under a five-year agreement. Scripps retains certain copyrights and licensing control and receives a fixed fee. The WFLX agreement provides a minimum annual fee and potential incentives.
- Key risks cited include advertising demand and broader economic conditions, consumer tastes, newsprint and programming costs, labor relations, technology, competition, interest rates, regulation, and reliance on third-party vendors. Management said there were no material changes to the 2010 Form 10-K risk factors.
- Ordinary-course litigation, including defamation and broadcast-license matters, was not expected to result in material loss. Scripps remains guarantor on a former subsidiary’s lease, with approximately $7.4 million of remaining payments; management considered the likelihood of a cost remote and recorded no liability.
- The company had repurchased 1.88 million Class A shares for $16.7 million during Q2 and $23 million year to date under a $75 million authorization expiring December 31, 2012. No senior-security defaults were reported.
Important facts for investors to verify
- Whether newspaper advertising stabilizes, particularly classified, national, and preprint revenue, and whether cost increases continue to pressure newspaper segment profit.
- Whether television advertising and retransmission growth can offset higher affiliation fees and the loss of network compensation.
- Execution and costs of restructuring, digital initiatives, and the expected Q4 programming-cost reduction.
- Cash use, capital spending, share repurchases, and availability under the asset-based revolver; the facility expires June 30, 2013 and includes a fixed-charge coverage test if excess availability falls to $30 million or less.
- Realization of deferred tax assets and exposure to uncertain tax positions; management noted future taxable-income estimates could require valuation allowances if conditions worsen.