The E. W. Scripps Company: Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Scripps operates television stations, newspapers, and syndication and other businesses. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $207.9 million | $216.9 million | $406.5 million | $424.1 million |
| Operating income | $8.2 million | $14.4 million | $4.5 million | $10.2 million |
| Operating margin | 3.9% | 6.6% | 1.1% | 2.4% |
| Net income attributable to Scripps shareholders | $3.2 million | $5.4 million | $0.5 million | $1.0 million |
| Diluted EPS | $0.05 | $0.09 | $0.01 | $0.02 |
| Operating cash flow | Not separately reported | Not separately reported | $4.9 million | $67.9 million |
- Q2 revenue fell 4.2% year over year; first-half revenue declined 4.1%. Advertising revenue fell to $158.1 million in Q2 from $168.9 million; subscriptions were $28.1 million versus $28.6 million.
- At June 30, cash and cash equivalents were $218.1 million, down from $242.6 million at December 31, 2012. Restricted cash was $8.2 million. Current assets were $384.1 million and current liabilities $132.3 million.
- Debt totaled $188.2 million, including $27.2 million current and $161.0 million long-term, compared with $196.1 million at year-end. The $100 million revolving facility had no borrowings; the company reported covenant compliance. The term loan rate was 3.70% at June 30.
- First-half investing cash use was $11.4 million, including $12.2 million of capital spending. Financing cash use was $18.0 million, including $34.9 million of share repurchases, partly offset by $33.7 million of employee option proceeds.
Changes versus the comparable period
- Television revenue declined 4.9% in Q2 to $111.4 million, and segment profit fell 12.6% to $30.5 million. Political advertising was $0.8 million versus $11.2 million in Q2 2012. Retransmission revenue increased 34% to $10.5 million, and digital revenue increased 14% to $4.1 million.
- Newspaper revenue declined 3.8% to $93.5 million, while segment profit rose 28.8% to $5.9 million as costs fell faster than revenue. Digital advertising and marketing revenue grew 6.6%; classified revenue declined 11.3%.
- Shared services and corporate costs increased to $12.1 million in Q2 from $7.7 million, including investment in digital initiatives. For the first half, these costs rose to $23.9 million from $16.2 million.
- Operating cash flow fell by $63.0 million year over year for the first half. Management attributed the change primarily to working-capital timing, including lower post-election collections, a $25 million tax refund received in 2012, and higher incentive compensation accruals in 2013.
Outlook, commentary, and risks
- Management expected the bundled newspaper subscription strategy, then launched in all but two markets, to benefit results later in 2013 as subscriptions renewed. It planned to extend the strategy to the remaining markets by summer’s end.
- Scripps had hired 59 digital-only sales employees and expected approximately 100 by year-end. It expected capital expenditures of about $10 million for the remainder of 2013 and stated cash, short-term investments, and operating cash flow should meet operating and capital needs over the next 12 months.
- Management cited an off-election-year decline in political advertising and ongoing secular weakness in newspaper advertising. Forward-looking risks also include economic and advertising conditions, consumer preferences, newsprint and programming costs, labor, technology, competition, interest rates, regulation, and reliance on third-party vendors. No formal earnings guidance was provided.
- The first-half effective tax rate was 114%, affected by the small pretax loss, state taxes, nondeductible items, and tax reserves. Scripps recognized $2.4 million of previously unrecognized tax benefits during the first half.
- A $0.6 million SERP settlement charge was recorded in Q2. Remeasurement reduced pension liabilities and accumulated comprehensive loss by $3.3 million. Pension expense was $11.1 million for the first half, versus $9.5 million a year earlier.
- The board’s $100 million share-repurchase authorization runs through December 2014. Scripps repurchased $34.9 million in the first half; $65.1 million remained available at June 30. Descendants of the founder held approximately 93% of the Common Voting Shares, giving them substantial board-election and voting influence and potentially deterring a change of control.
- Ordinary-course litigation and broadcast-license proceedings were not expected to result in material loss. Management reported effective disclosure controls and no material changes to internal controls during the quarter.
Key facts for investors to verify
- Whether digital advertising growth and bundled subscriptions can offset continuing newspaper advertising and circulation declines.
- How much of the sharp first-half operating-cash-flow decline reflects timing versus ongoing cash-generation pressure, including the expected tax refund and incentive compensation payments.
- Debt repayment requirements, including scheduled payments and the expected additional payment tied to excess cash flow, alongside continued share repurchases and capital spending.
- The sustainability of television retransmission revenue growth and the terms and timing of future standalone retransmission agreements.
- The effect of concentrated family voting control, uncertain tax positions, and pension obligations on valuation and financial flexibility.