The E. W. Scripps Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unless noted otherwise, dollar amounts below are in millions. Scripps operates television stations, newspapers, and syndication and other businesses.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $216.9 | $183.0 | $424.1 | $363.4 |
| Operating income (loss) | $14.4 | $(2.2) | $10.2 | $(12.7) |
| Net income (loss) | $5.4 | $(2.2) | $1.0 | $(11.1) |
| Diluted earnings (loss) per share | $0.09 | $(0.04) | $0.02 | $(0.19) |
- Q2 operating margin was approximately 6.6%, compared with a 1.2% operating loss margin in Q2 2011. First-half operating margin was approximately 2.4%, versus a 3.5% loss margin a year earlier.
- Q2 revenue increased 18.5% as reported, but 3.3% excluding the McGraw-Hill stations acquired at the end of 2011. First-half revenue increased 16.7% as reported and 2.8% excluding the acquisition.
- Q2 television revenue was $117.1 million, up 52.0% as reported and 15.8% excluding acquired stations; segment profit was $34.9 million, versus $14.0 million. Newspaper revenue fell 4.7% to $97.2 million and segment profit fell 22.6% to $4.6 million.
- Consolidated advertising revenue was $168.9 million in Q2, up from $138.7 million. Circulation revenue was $28.6 million, down from $29.7 million.
- Six-month operating cash flow was $67.9 million, compared with cash used of $12.0 million in 2011. The improvement reflected stronger segment results, tax timing and refunds, and receivables collections; Scripps received $28 million in tax refunds related to carrying back 2010 losses. Investing cash outflow was $6.9 million and financing cash outflow was $21.8 million.
- Cash and cash equivalents were $167.1 million at June 30, 2012, versus $127.9 million at year-end 2011. Restricted cash was an additional $10.0 million. Total debt was $204.1 million, including $15.9 million current; the term-loan rate was 4.25%. No borrowings were outstanding under the $100 million revolving facility.
- Total assets were $957.5 million and total equity was $510.6 million at June 30, 2012. The filing does not provide a defined consolidated EBITDA measure.
Material changes and unusual items
- The late-2011 McGraw-Hill acquisition added nine television stations and materially affects year-over-year comparisons. The transaction’s preliminary net purchase price was $216.1 million.
- Q2 television benefited from stronger local and national advertising, including $10.3 million of incremental political advertising, and higher retransmission revenue. Legacy television time sales rose 14.1% in the quarter.
- Newspaper results remained pressured: print advertising declined 7.2% in Q2, circulation revenue declined 3.7%, and digital revenue declined 3.3%. Management cited weak economic conditions, secular advertising shifts, and lower paid circulation.
- First-half acquisition and integration costs included a $5.7 million non-cash charge to terminate the acquired stations’ national representation agreement; the representative firm agreed to pay the termination fee. Interest expense increased to $6.4 million for the first half, primarily due to acquisition financing.
- Q2 restructuring costs were $2.4 million. First-half effective tax rate was 56%, versus 22.1% in 2011; management cited state taxes, nondeductible expenses, and interest on uncertain tax positions.
- The company repurchased 1.16 million Class A shares during Q2 for approximately $10.7 million. About $7.2 million remained under the $75 million authorization, which expires December 31, 2012.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected 2012 capital expenditures of approximately $25 million and said cash and operating cash flow should cover operating and capital needs for the next 12 months.
- Management reported continued strength in local and national television advertising, particularly automotive, and expected political advertising in the 2012 cycle to exceed any prior cycle. Renewed retransmission agreements carried substantially higher rates; agreements with Time Warner and Comcast expire in December 2015 and December 2019, respectively.
- Scripps planned to launch two internally produced programs in seven markets in September 2012, with marketing investment, and described ongoing digital product development and newspaper cost, pricing, and subscription initiatives.
- Key stated risks include advertising demand and economic conditions, consumer preferences, newsprint prices, program costs, labor relations, technology, competition, interest rates, regulation, and reliance on third-party vendors. Management said there were no material changes to the risk factors in its 2011 Form 10-K.
- The $312 million five-year credit agreement is secured by substantially all real property and other assets and contains financial covenants. Scripps reported compliance at June 30, 2012, and no excess-cash-flow repayment was then required.
- Ordinary-course litigation, including defamation claims and broadcast-license proceedings, was not expected to result in material loss. Management stated that federal deferred tax assets were more likely than not to be realized, while warning that weaker economic conditions could lead to a valuation allowance.
Investor verification points
- Assess how much of revenue and cash-flow improvement is attributable to the acquisition, political advertising, tax refunds, and working-capital timing.
- Track whether television advertising and retransmission revenue growth persists, and verify the timing and economics of major cable renewals.
- Monitor newspaper advertising, circulation, and digital revenue trends, alongside the effectiveness and costs of restructuring and digital initiatives.
- Review debt paydown, covenant headroom, interest-rate exposure, and the planned share repurchases against liquidity needs.
- Check future tax-rate assumptions and realization of deferred tax assets, as well as pension obligations and contributions.