The E. W. Scripps Company — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2012. Scripps operates television stations, newspapers, and syndication and other businesses. Results include the nine television stations acquired from McGraw-Hill in December 2011.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $219.6 million | $167.9 million | $643.7 million | $531.3 million |
| Operating income (loss) | $18.3 million | $(17.9) million | $28.5 million | $(30.7) million |
| Net income (loss) | $12.0 million | $(10.7) million | $13.0 million | $(21.8) million |
| Diluted EPS | $0.21 | $(0.19) | $0.22 | $(0.38) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $124.3 million | $4.5 million |
- Q3 operating margin was approximately 8.4%, versus a loss in the prior-year quarter. Revenue rose 30.8% as reported; excluding acquired stations, management reported growth of 15%.
- Television segment revenue was $125.3 million and segment profit $41.8 million in Q3, compared with $69.9 million and $8.1 million, respectively, a year earlier. Newspaper revenue fell 3.7% to $92.4 million, while segment profit increased to $4.2 million from $3.0 million.
- Nine-month operating cash flow improved by about $119.8 million year over year. Management attributed most of the increase to stronger operating results and timing of tax payments and refunds, including $28 million of tax refunds from carryback of 2011 losses.
- At September 30, cash and cash equivalents were $209.7 million; restricted cash was $10.0 million. Debt totaled $200.1 million, including $15.9 million current and $184.2 million long-term. The $100 million revolving facility had no borrowings. Current assets were $370.4 million and current liabilities $147.1 million.
- Capital expenditures were $14.2 million for the first nine months, versus $7.8 million in 2011. Total 2012 capital expenditures were expected to be approximately $26 million.
Material changes versus prior comparable periods
- Television growth reflected the McGraw-Hill acquisition, strong advertising at legacy stations, higher retransmission revenue and substantial political spending. Political advertising was $33.9 million in Q3 2012 versus $2.1 million in Q3 2011.
- Newspaper revenue continued to weaken: Q3 print advertising declined 5.3% and circulation revenue declined 2.8%. Management cited sluggish economic conditions, secular pressure on print advertising, and lower paid circulation levels.
- Interest expense increased to $3.3 million in Q3 and $9.7 million year to date, primarily due to acquisition-related borrowing. The company repaid $11.9 million of debt during the first nine months.
- Q3 2011 included a $9 million non-cash impairment charge on newspaper assets; there was no comparable impairment in 2012. Nine-month 2012 acquisition and integration costs included a $5.7 million non-cash contract termination charge related to the acquired stations.
Outlook, commentary, risks and unusual items
- Management expected political advertising to displace some traditional advertising, which it anticipated would return to stations in the second half of Q4. It highlighted continued contractual retransmission rate increases as a potential source of future revenue growth.
- Management said cash, operating cash flow and available revolver capacity should be sufficient for operating and capital needs over the next 12 months. It expected $0.3 million of additional defined-benefit pension contributions in the remainder of 2012.
- In November 2012, the board authorized a new share repurchase program of up to $100 million through December 2014. Management said it currently intended to fund approximately half from cash and half from potential employee stock-option exercise proceeds. The prior $75 million authorization was completed in Q3.
- The term loan bears interest at LIBOR plus a leverage-based margin; the stated rate was 4.22% at September 30. A $75 million interest-rate swap fixes LIBOR at 1.08% on that notional amount through March 2016. Scripps reported compliance with all debt covenants and no excess-cash-flow prepayment requirement at quarter-end.
- The company recognized $3.7 million of previously unrecognized tax benefits in Q3 after statutes of limitations lapsed. It reported $33.1 million of net deferred tax assets, most of which reverse in 2013; management said realization was more likely than not, but warned weaker economic conditions could require a valuation allowance.
- The Edward W. Scripps Trust terminated October 18, 2012. After distribution of its assets, shares subject to the Scripps Family Agreement are expected to represent approximately 98% of Common Voting shares; the agreement gives its parties the ability to elect two-thirds of the board and influence matters not requiring a Class A vote. This concentration could deter a change-of-control transaction and adversely affect Class A share value.
- Management identified advertising demand and economic conditions, consumer tastes, newsprint and program costs, labor relations, technology, competition, interest rates, regulation and third-party vendors among forward-looking risks. Ordinary-course litigation was not expected to result in material loss. No material changes to other previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether television advertising and retransmission revenue growth persists after the election-related political spending surge, and whether displaced traditional advertising returns as expected.
- Whether newspaper advertising and circulation declines continue, and whether cost reductions and digital initiatives offset them.
- Debt repayment, interest-rate exposure, covenant headroom and the company’s actual funding and execution of the new share repurchase program.
- The timing and distribution of Trust assets, operation of the Scripps Family Agreement and resulting voting control.
- Realization of deferred tax assets as they reverse, and the assumptions supporting management’s assessment that no valuation allowance is needed.
- Actual 2012 capital spending and cash generation relative to management’s estimates; operating cash flow included significant working-capital and tax timing benefits.