The E. W. Scripps Company — Q1 2013 Form 10-Q
Business context and reporting period: The company operates television stations, newspapers and a syndication business, with digital content and advertising across its media operations. This filing covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless noted.
Financial performance
- Revenue: $198.7 million, down 4.1%. Advertising revenue was $147.1 million, subscriptions $30.5 million and other revenue $21.0 million.
- Profitability: Operating loss was $3.7 million, compared with a $4.2 million loss. Net loss improved to $2.7 million, or $0.05 per diluted share, from $4.4 million, or $0.08 per share. The effective tax rate was 65.0%, including the effect of tax items and a $1.1 million benefit from lapses of statutes of limitations.
- Segment results: Television revenue was $96.9 million (down 2.7%) and segment profit was $16.5 million (down 7.7%). Newspaper revenue was $99.5 million (down 4.7%) and segment profit was $5.9 million (down 17.1%). Syndication and other revenue was $2.3 million (down 28.0%).
- Cash flow: Operating activities used $10.9 million, versus $20.6 million provided in Q1 2012, mainly reflecting a $26.5 million working-capital outflow. Investing activities used $4.2 million, including $5.0 million of capital expenditures. Financing activities used $6.3 million. Cash and cash equivalents fell $21.4 million to $221.2 million.
- Liquidity and debt: Current assets were $382.6 million and current liabilities $124.7 million. Debt totaled $192.1 million, including $18.6 million current; there were no revolving-credit borrowings. The $100 million revolver was available subject to the credit agreement. The company reported compliance with debt covenants.
- Margins and costs: Operating margin was approximately negative 1.9%, versus negative 2.0% in Q1 2012. Lower programming, newsprint and distribution costs partly offset lower revenue; shared services and corporate expense increased to $11.8 million from $8.5 million.
Material changes and management commentary
- Revenue declines reflected lower political advertising in an off-election year and continuing newspaper advertising weakness. Newspaper classified revenue fell 9.6%; subscription revenue fell 3.6% as pricing gains did not offset circulation declines.
- Television retransmission revenue rose 34.5% and digital revenue rose 22.8%, but did not offset weaker political and local advertising. Newspaper digital advertising and marketing revenue increased 2.7%; pure-play digital advertising and marketing grew 13%.
- Management launched bundled newspaper subscriptions in two markets late in Q1 and planned a rollout to all markets by the end of summer, expecting pricing benefits later in 2013. It also planned to increase digital-only sales staff from 35 hired so far in 2013 to approximately 100 by year-end.
- Management expected approximately $20 million of capital expenditures for the remainder of 2013 and stated that cash, short-term investments and operating cash flow should meet operating and capital needs over the next 12 months.
- The company repurchased 942,134 Class A shares for $10.6 million during Q1 under a $100 million authorization running through December 2014; $89.4 million remained available.
Risks, contingencies and unusual items
- Forward-looking results are exposed to advertising demand and economic conditions, consumer preferences, newsprint and programming costs, labor relations, competition, technology, interest rates, regulation and reliance on third-party vendors.
- Founder descendants owned approximately 93% of Common Voting Shares and, under the family agreement, could elect two-thirds of the board, potentially discouraging a change-of-control transaction.
- Debt is floating-rate, though a $75 million interest-rate swap fixes a portion of the exposure through March 2016. Debt is secured by specified real property, subsidiary equity and substantially all other personal property.
- Other notable obligations include pension liabilities of $112.2 million and uncertain-tax-position liabilities of $11.5 million. Management noted that lower future taxable-income estimates could require valuation allowances against deferred tax assets.
- The filing says ordinary-course litigation is not expected to result in material loss. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned bundled-subscription rollout and digital-sales hiring translate into measurable revenue and profit growth.
- Whether newspaper advertising and circulation declines continue, and whether television advertising improves outside political-election periods.
- How working-capital movements affect operating cash flow and whether full-year cash generation supports planned capital spending and share repurchases.
- Debt covenant headroom, scheduled principal repayments and the company’s ability to meet obligations if operating performance weakens.
- The assumptions supporting deferred-tax-asset recoverability, pension funding needs and future tax exposures.