Business context and reporting period
The E. W. Scripps Company filed this Form 10-Q for the quarter and nine months ended September 30, 2011. Scripps operated television stations, newspapers in 13 U.S. markets, and a syndication and other business. Amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $167.9 | $183.6 | $531.3 | $556.7 |
| Operating income (loss) | $(17.9) | $0.7 | $(30.7) | $2.7 |
| Continuing-operations income (loss), net of tax | $(10.7) | $5.4 | $(21.8) | $5.2 |
| Net income (loss) attributable to Scripps shareholders | $(10.7) | $6.2 | $(21.8) | $104.9 |
| Basic and diluted EPS | $(0.19) | $0.10 | $(0.38) | $1.64 |
| Cash provided by continuing operating activities | Not reported by quarter | $4.5 | $43.0 |
Q3 operating loss included a $9.0 non-cash impairment charge on assets at four newspapers. Reported operating margin was approximately negative 10.7% in Q3 2011 versus positive 0.4% in Q3 2010; nine-month margin was approximately negative 5.8% versus positive 0.5%.
- Cash and liquidity: Cash and cash equivalents were $147.5 at September 30, down from $204.9 at December 31, 2010. Restricted cash was $10.0. Cash declined $57.5 over the nine-month period. Management said cash on hand was expected to cover operating and capital needs for the next 12 months.
- Cash flow and investment: Nine-month operating cash flow from continuing operations was $4.5, down from $43.0. Capital expenditures were $7.8 versus $11.8; approximately $4.0 of additional 2011 capital spending was expected.
- Debt and borrowing capacity: No borrowings were outstanding under the revolving credit agreement, which had $86 of borrowing capacity and expires June 2013. Outstanding letters of credit were $1.1. The filing does not report a conventional total-debt balance in the presented balance sheet; it reports $99.4 of other liabilities, including pension and other obligations.
- Balance sheet: Total assets were $748.7, total current liabilities $110.6, and total equity $538.7 at September 30, 2011. Current assets were $316.5.
Material changes versus the prior comparable period
- Revenue fell 8.6% in Q3 and 4.6% for the first nine months. Advertising revenue declined 11.3% in Q3 and 6.4% year to date; circulation revenue was nearly flat.
- Newspaper segment revenue declined 4.4% in Q3 and 5.3% year to date, while segment profit fell to $1.6 from $6.6 in Q3 and to $11.9 from $37.8 year to date. Weak print advertising, particularly national and classified categories, and higher newsprint and distribution costs pressured results.
- Television revenue declined 10.9% in Q3 and 1.9% year to date. Lower political advertising in a non-election year and the loss of network compensation under renewed ABC and NBC affiliation agreements were partly offset by higher local advertising, retransmission revenue, and WFLX service revenue. Television segment profit fell 57.7% in Q3 and 27.4% year to date.
- Cash from continuing operations decreased substantially, with management citing lower political advertising and timing of network fees and tax payments/refunds. Working-capital changes used $25.4 of cash in 2011, compared with providing $51.5 in 2010.
- 2010 nine-month net income included $99.7 of discontinued-operations income, principally the after-tax gain on the 2010 sale of United Media Licensing. The 2011 comparative period had no discontinued-operations income.
Outlook, commentary, risks and unusual items
- On October 3, 2011, Scripps agreed to acquire McGraw-Hill’s television station group for $212 in cash. It secured a committed $212 term loan and was arranging that financing and a new $100 revolving facility. Closing was subject to regulatory and other approvals and expected by the first half of 2012. Scripps warned that integration difficulties or underperformance could harm results.
- Management expected television program and program-license costs to decrease approximately 25% in Q4 2011 versus Q3, following replacement of Oprah with lower-cost programming late in Q3.
- Restructuring and common newspaper-systems work was expected to continue through 2012; related costs were $6.5 for the first nine months of 2011.
- The $9 impairment reduced the carrying value of the affected newspaper assets from $36 to estimated fair value of $27. Management noted that further impairment charges could arise if future cash flows fall below estimates.
- Key stated risks include advertising demand and economic conditions, newsprint prices, program costs, labor relations, technology, competition, interest rates, regulation, and reliance on third-party vendors. Litigation in the ordinary course was not expected to result in material loss.
- Scripps repurchased 1,994,129 Class A shares for $16.0 during Q3 at a weighted-average $8.04 per share. Through September 30, it had repurchased approximately $39 under the $75 authorization, leaving approximately $36 available; authorization expires December 31, 2012.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, approvals, final financing terms, and expected leverage related to the proposed $212 McGraw-Hill station acquisition.
- Whether newspaper advertising and segment profitability stabilize, and whether cash generation improves after the working-capital and tax-payment effects described.
- Assumptions supporting the $9 newspaper impairment valuation and the possibility of further write-downs.
- Execution and remaining costs of restructuring, and whether projected Q4 programming-cost reductions materialize.
- Cash availability after share repurchases and acquisition financing, including the distinction between cash, restricted cash, and revolving-credit availability.