The New York Times Company — Q3 2018 Form 10-Q
Business context and period: The Company is a global media organization with one reportable segment, encompassing The New York Times and related print and digital businesses. The quarter ended September 30, 2018 and covered 13 weeks; comparable 2017 figures cover the 13 weeks ended September 24, 2017. Nine-month comparisons cover 39 weeks.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Total revenue | $417.3 million | $385.6 million | +8.2% |
| Subscription revenue | $257.8 million | $246.6 million | +4.5% |
| Advertising revenue | $121.7 million | $113.6 million | +7.1% |
| Other revenue | $37.9 million | $25.4 million | +49.3% |
| Operating profit | $41.4 million | $31.8 million | +30.2% |
| Adjusted operating profit (non-GAAP) | $53.7 million | $54.0 million | -0.7% |
| Net income attributable to common stockholders | $25.0 million | $32.3 million | -22.7% |
| Diluted EPS | $0.15 | $0.20 | |
| Adjusted diluted EPS (non-GAAP) | $0.15 | $0.12 |
Q3 GAAP operating margin was approximately 9.9%, compared with 8.3% a year earlier; adjusted operating margin was approximately 12.9%, versus 14.0%. Adjusted measures exclude specified items and should be considered alongside GAAP results.
For the first nine months, revenue increased 4.6% to $1.246 billion. Operating profit was $115.5 million, up 34.1%; net income attributable to common stockholders was $70.5 million, up 15.3%; and diluted EPS was $0.42 versus $0.37. Adjusted operating profit was nearly flat at $168.5 million versus $168.9 million, while adjusted diluted EPS was $0.49 versus $0.40.
Revenue, costs and subscriptions
- Digital-only subscriptions reached approximately 3.095 million at quarter-end, up 24.4% year over year: 2.541 million news subscriptions and 554,000 other product subscriptions. Digital-only subscription revenue rose 18.1% in Q3 to $101.2 million.
- Digital advertising increased 17.3% in Q3, while print advertising decreased 0.7%. Management attributed digital growth to creative services and traditional direct-sold advertising, while noting that large campaigns and partnerships can make results variable.
- Other revenue grew mainly from commercial printing, additional headquarters rental income and Wirecutter affiliate referrals.
- Q3 operating costs increased 8.4% to $380.8 million. Management cited higher marketing, labor and raw-material costs, as well as costs related to the newsroom and advertising business. Adjusted operating costs rose 9.7% to $363.7 million.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $116.4 million, down 21.3% from $147.9 million. Investing activities used $103.8 million, including approximately $62 million of cash capital expenditures and net purchases of marketable securities. Financing activities provided $11.4 million, primarily reflecting $40.7 million of stock-option proceeds, partly offset by dividends and share-based compensation tax withholding.
- At September 30, cash and cash equivalents were $206.2 million; short- and long-term marketable securities totaled $588.3 million. Management reported combined cash and securities of $794.5 million.
- Total debt and capital lease obligations were $252.8 million, leaving cash and marketable securities in excess of those obligations by $541.7 million. Debt primarily reflects the $250 million option to repurchase the headquarters condominium interest, carried at $245.9 million, plus $6.8 million of capital leases.
- Current assets were $782.6 million and current liabilities were $403.0 million. Pension benefit obligations were $363.5 million. Restricted cash was $18.2 million, substantially for workers’ compensation collateral.
Material changes, outlook and risks
- Q3 operating profit included a $4.9 million gain from a pension liability adjustment. The prior-year quarter included a $31.6 million gain from joint ventures below operating profit; this substantially affects the comparison of pretax income and net earnings. Q3 2018 adjusted operating profit was essentially unchanged year over year, as revenue growth was offset by higher adjusted costs.
- The effective tax rate on continuing operations was 28.8% in Q3 2018 versus 39.1% in Q3 2017, primarily reflecting the lower U.S. federal corporate tax rate and the prior-year joint-venture gain.
- No formal earnings guidance is provided in the supplied filing text. Management said cash, operating cash flow and other sources should meet financing needs for the next 12 months, and it expects to continue comparable cash dividends, subject to Board review.
- The Company gave notice of its intention to exercise the headquarters repurchase option in the second half of 2019, for approximately $250 million, and said it believes the property’s market value exceeds the exercise price. Management expected the headquarters redesign and consolidation project’s capital spending to be completed in Q4 2018. It also expected a $12 million to $15 million distribution from the Madison investment wind-down.
- A pension withdrawal-liability dispute remains under appeal. The Company had recorded a $4.0 million liability and stated that the total loss could reasonably exceed that amount by zero to approximately $10 million. Other legal matters could affect results or cash flows in an individual period, though management did not expect their resolution to materially affect financial position.
- Letters of credit totaled $56.2 million, supported in part by approximately $68 million of marketable securities pledged as collateral. Management reported no material changes to its risk factors or market risks. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether digital subscription growth and digital advertising growth continue, and whether they offset print advertising weakness.
- Whether operating costs, particularly marketing, staffing and commercial-printing costs, can be managed as revenue grows.
- Progress and final cash requirements for the 2019 headquarters repurchase, including the use of collateralized securities and related lease arrangements.
- Developments in the pension withdrawal-liability appeal and any change to the recorded liability or estimated exposure.
- Cash-flow performance, capital spending, dividends and the expected Madison distribution; interim results may be seasonal and are not necessarily indicative of full-year results.
- The effects of accounting changes adopted in 2018, including revenue recognition and pension-cost presentation, when comparing reported periods.