The New York Times Company — Q1 2018 10-Q
Business context and period. The company is a global media organization with one reportable segment, generating revenue mainly from subscriptions and advertising. The quarter ended April 1, 2018 and comprised 13 weeks; comparisons are with the 13 weeks ended March 26, 2017. Interim results may not indicate full-year performance, in part because the business is seasonal.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $413.9 million | $398.8 million | +3.8% |
| Operating profit | $34.1 million | $27.8 million | +22.4% |
| Operating margin | 8.2% | 7.0% | +1.2 percentage points |
| Net income attributable to common stockholders | $21.9 million | $13.2 million | +66.2% |
| Diluted EPS | $0.13 | $0.08 | +$0.05 |
| Operating cash flow | $17.9 million | $30.1 million | −40.6% |
Revenue growth reflected subscription revenue of $260.6 million (+7.5%), partly offset by advertising revenue of $125.6 million (−3.4%). Other revenue was $27.7 million (+5.0%). Digital-only subscriptions reached 2.783 million, up 25.5%; associated revenue rose 25.8% to $95.4 million. Advertising weakness was concentrated in digital display: total digital advertising declined 6.0%, while print advertising declined 1.8%.
Total operating costs rose 2.6% to $378.0 million, including selling, general and administrative costs up 4.8% to $208.6 million. The company attributed higher costs mainly to compensation, partly offset by lower print production and distribution costs. Net margin was approximately 5.3%, compared with 3.3% in Q1 2017. The lower effective tax rate—19.3% versus 45.0%—was primarily due to the lower U.S. federal corporate tax rate and a stock-based compensation tax benefit.
Cash, debt and liquidity
At April 1, 2018, cash and cash equivalents were $213.8 million; short- and long-term marketable securities totaled $535.5 million. Together these were $749.3 million, exceeding debt and capital lease obligations of $251.1 million by $498.2 million. Operating cash flow was $17.9 million; cash capital expenditure payments were approximately $24.9 million, implying approximate operating cash flow less those payments of negative $7 million. The company said available cash, operating cash flow and other sources should meet financing needs over the next 12 months.
Debt and capital lease obligations included a $250 million principal repurchase option associated with the headquarters sale-leaseback, exercisable in the second half of 2019, and $6.8 million of capital leases. The company gave notice of its intention to exercise the option and stated that it believed the property’s market value exceeded the exercise price. It paid a quarterly dividend of $0.04 per share and expects comparable dividends to continue, subject to Board review. Restricted cash was $18.1 million, substantially to collateralize workers’ compensation obligations.
Material changes, outlook and notable items
- Digital subscription growth more than offset declines in advertising and print subscriptions. Management noted that digital advertising results can be variable because of reliance on commercial partnerships and large campaigns.
- Operating cash flow fell as payments to settle accounts payable, payroll and other liabilities increased. Cash from stock-option exercises was approximately $40.4 million, supporting financing cash flow.
- The company adopted the revenue standard using the modified retrospective method. The adoption increased opening retained earnings by $2.6 million and accelerated recognition for certain content-licensing contracts; management expected the change to reduce 2018 other revenue by $1.3 million. Subscription and advertising revenue were not affected.
- A $94.1 million opening-equity transfer of stranded tax effects from accumulated other comprehensive income to retained earnings was an accounting reclassification, not current-quarter operating income. A pension-plan benefit freeze resulted in a $2.6 million curtailment.
- Management expects an approximately $12 million cash distribution in 2018 from the liquidation of the Madison joint venture. It also expects approximately $8 million of pension contributions for 2018.
- No formal revenue or earnings guidance is provided in the filing. Management reported no material change in risk factors or market risks versus the 2017 Form 10-K.
Risks and contingencies
A dispute with the Newspaper and Mail Deliverers-Publishers’ Pension Fund remains under appeal. The company had recorded a $5.7 million liability; management said the total loss could reasonably exceed that amount by between zero and approximately $10 million. Other pending legal matters could adversely affect results or cash flows in an individual period, although management did not expect their ultimate resolution to materially affect financial position. Letters of credit totaling $56.0 million, collateralized by approximately $63 million in marketable securities, support headquarters sublease commitments and expire in stages through 2019.
Management disclosed no material changes to contractual obligations or off-balance-sheet arrangements. It stated that adoption of the new lease standard would add right-of-use assets and lease liabilities to the balance sheet, but did not expect a material effect on results or liquidity.
Key facts for investors to verify
- Whether digital subscription growth and revenue can continue to offset advertising declines, particularly in digital display.
- Whether compensation and other operating-cost growth remains controlled relative to revenue growth.
- The cash-flow effect of working-capital movements and elevated capital spending.
- The funding and cash-flow implications of exercising the $250 million headquarters repurchase option in 2019.
- The outcome and potential exposure in the pension withdrawal-liability appeal and other legal matters.
- The realization and timing of the expected Madison distribution and the continuing dividend policy.