The E. W. Scripps Company — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2014. Scripps operated television, newspaper, and syndication and other businesses, with digital media activity across its portfolio. The company acquired digital news provider Newsy in January and two television stations from Granite Broadcasting in June.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $211.9 million | $207.9 million | $415.7 million | $406.5 million |
| Operating income (loss) | $(3.0) million | $8.2 million | $(1.1) million | $4.5 million |
| Net income (loss) attributable to Scripps shareholders | $(3.2) million | $3.2 million | $(3.8) million | $0.5 million |
| Basic and diluted EPS | $(0.06) | $0.05 | $(0.07) | $0.01 |
Operating margin was approximately negative 1.4% in Q2 2014, versus 3.9% in Q2 2013; for the first half it was negative 0.3%, versus 1.1%. Costs rose faster than revenue, including employee compensation, digital investment, pension expense, and acquisition-related costs.
- Revenue mix and segments: Q2 television revenue rose 4.0% to $115.8 million, while newspaper revenue fell 1.3% to $92.3 million. Retransmission revenue increased 21% in the quarter; subscription revenue increased 5.7%. First-half segment profit was $48.8 million for television and $14.0 million for newspapers. Q2 segment profit declined 8.9% for television and 7.5% for newspapers.
- Cash flow: First-half operating cash flow was $40.3 million, compared with $4.9 million a year earlier. The filing attributes much of the increase to working-capital timing, particularly receivable collections; it should not be read as solely an improvement in underlying earnings. Capital expenditures were $8.2 million, implying approximate first-half operating cash flow less capital expenditures of $32.1 million.
- Liquidity: Cash and cash equivalents were $91.5 million at June 30, down from $221.3 million at year-end. Current assets were $260.3 million and current liabilities $114.4 million. Cash fell primarily amid $145.2 million of acquisition spending.
- Debt: Long-term debt, including current portion, was $199.0 million, down from $200.0 million at year-end. The term loan rate was 3.25%; the $75 million revolving facility had no borrowings. Scripps reported compliance with financing covenants and no additional excess-cash-flow repayment requirement at June 30.
Material changes versus prior year
- Revenue grew 2.0% in Q2 and 2.3% in the first half, led by television, retransmission fees, and subscriptions. Newspaper advertising and marketing services remained weak, down nearly 6% in Q2.
- Q2 results shifted from profit to loss, as total costs and expenses rose about 8% while revenue grew 2%. First-half earnings also shifted to a net loss.
- First-half acquisition cash outflow was $145.2 million: $110 million for the Granite stations and approximately $35.2 million for Newsy. The acquisitions increased goodwill and intangible assets.
- Cash flow from operations improved substantially from the prior-year period, but the comparison was significantly affected by working-capital changes. Share repurchases totaled $21.2 million in the first half, versus $34.9 million in the prior-year period.
Outlook, commentary, risks, and unusual items
- Management expected cash, operating cash flow, and available borrowing capacity to meet operating and capital needs for the next 12 months. It expected approximately $15 million of capital expenditures for the remainder of 2014 and $25 million to $30 million of costs to complete the Journal transaction.
- Management expected newspaper subscription-revenue growth to moderate as the bundled-subscription model entered its second year. It anticipated substantial retransmission revenue growth in 2015 from higher negotiated rates, while noting that renewals depend on competition, regulation, and industry consolidation.
- On July 30, 2014, after quarter-end, Scripps and Journal Communications agreed to combine broadcast operations and spin off their newspapers as Journal Media Group. The transaction was subject to customary regulatory and shareholder approvals, was expected to close in 2015, and included a proposed $60 million special cash dividend to Scripps shareholders. The merger agreement barred share repurchases before closing.
- Unusual charges included $4.4 million of first-half acquisition and integration costs and a $4.1 million present-value liability related to withdrawal from the GCIU multi-employer pension fund. The final withdrawal liability was still to be determined; payment could be a lump sum or installments over 20 years beginning in 2015.
- Key risks cited include advertising demand and economic conditions, audience tastes, newsprint and programming costs, labor relations, technology, competition, interest rates, regulation, and reliance on third-party vendors. Management reported no material change to the risk factors in the 2013 Form 10-K. Ordinary-course litigation was not expected to result in material loss.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. The filing did not provide formal full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether the Journal transaction received required approvals, closed on schedule, and delivered the anticipated $60 million dividend; verify final transaction costs and terms.
- Whether expected retransmission-rate increases materialized, particularly amid the Comcast/Time Warner Cable proposal and related system divestitures and contract renewals.
- Whether television revenue and profit growth can offset continued newspaper advertising declines and rising digital, compensation, and corporate costs.
- How much of the first-half operating cash-flow increase reflects repeatable performance rather than working-capital timing, and the company’s post-acquisition liquidity and debt capacity.
- The final GCIU withdrawal liability and payment terms, and final purchase-price allocations for the Granite and Newsy acquisitions, which were preliminary.