Item 1B.
Unresolved Staff Comments
None.
We own substantially all of the facilities and equipment used in our newspaper operations.
We own substantially all of the facilities and equipment used by our television stations. We own, or co-own with other broadcast television stations, the towers used to transmit our television signals.
Item 3.
Item 3.
Legal Proceedings
We are involved in litigation arising in the ordinary course of business, such as defamation actions, and governmental proceedings primarily relating to renewal of broadcast licenses, none of which is expected to result in material loss.
Item 4.
Item 4.
Mine Safety Disclosures
None.
Executive Officers of the Company - Executive officers serve at the pleasure of the Board of Directors.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A Common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “SSP.” As of December 31, 2012, there were approximately 4,000 owners of our Class A Common shares, based on security position listings, and 18 owners of our Common Voting shares (which do not have a public market). We did not pay any cash dividends in 2012 or 2011.
The range of market prices of our Class A Common shares, which represents the high and low sales prices for each full quarterly period, are as follows:
There were no sales of unregistered equity securities during the quarter for which this report is filed.
In November 2012, our board of directors authorized a repurchase program of up to $100 million of our Class A Common shares through December 2014. There were no shares repurchased under this authorization through December 31, 2012.
Performance Graph - Set forth below is a line graph comparing the cumulative return on the Company’s Class A Common shares, assuming an initial investment of $100 as of January 1, 2008, and based on the market prices at the end of each year and assuming dividend reinvestment, with the cumulative return of the Standard & Poor’s Composite-500 Stock Index and an Index based on a peer group of media companies. The spin-off of SNI at July 1, 2008 is treated as a reinvestment of a special dividend pursuant to SEC rules.
The following graph compares the return on the Company’s Class A Common shares with that of the indices noted above for the period of July 1, 2008 (date of spin-off) through December 31, 2012. The graph assumes an investment of $100 in our Class A Common shares, the S&P 500 Index, and our peer group index on July 1, 2008 and that all dividends were reinvested.
We continually evaluate and revise our peer group index as necessary so that it is reflective of our Company’s portfolio of businesses. The companies that comprise our current peer group are A.H. Belo, Belo Corporation, Gannett Company, Gray Television, Inc., Journal Communications, Inc., LIN TV Corporation, McClatchy Company, Media General, New York Times Company, and Sinclair Broadcast Group. The peer group index is weighted based on market capitalization.
Item 6.
Item 6.
Selected Financial Data
The Selected Financial Data required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page of this Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page of this Form 10-K.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The market risk information required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page of this Form 10-K.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data required by this item are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
The Controls and Procedures required by this item are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page of this Form 10-K.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3).
Information required by Item 10 of Form 10-K relating to directors is incorporated by reference to the material captioned “Election of Directors” in our definitive proxy statement for the Annual Meeting of Shareholders (“Proxy Statement”). Information regarding Section 16(a) compliance is incorporated by reference to the material captioned “Report on Section 16(a) Beneficial Ownership Compliance” in the Proxy Statement.
We have adopted a code of conduct that applies to all employees, officers and directors of Scripps. We also have a code of ethics for the CEO and Senior Financial Officers that meets the requirements of Item 406 of Regulation S-K and the NYSE listing standards. Copies of our codes of ethics are posted on our Web site at http://www.scripps.com.
Information regarding our audit committee financial expert is incorporated by reference to the material captioned “Corporate Governance” in the Proxy Statement.
The Proxy Statement will be filed with the Securities and Exchange Commission in connection with our 2013 Annual Meeting of Stockholders.
The information required by Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Form 10-K is incorporated by reference to the material captioned “Report on the Security Ownership of Certain Beneficial Owners,” “Report on the Security Ownership of Management,” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to the materials captioned “Corporate Governance” and “Report on Related Party Transactions” in the Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to the material captioned “Report of the Audit Committee of the Board of Directors” in the Proxy Statement.
PART IV
Schedules
Financial Statements and Supplemental Schedule
(a)
The consolidated financial statements of Scripps are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page.
The reports of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, dated March 6, 2013, are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page.
(b)
The Company’s consolidated supplemental schedules are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Schedules at page S-1.
Exhibits
The information required by this item appears at page S-3 of this Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE E. W. SCRIPPS COMPANY
Dated: March 6, 2013
By:
/s/ Richard A. Boehne
Richard A. Boehne
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated, on March 6, 2013.
Signature
Title
/s/ Richard A. Boehne
President, Chief Executive Officer and Director
Richard A. Boehne
(Principal Executive Officer)
/s/ Timothy M. Wesolowski
Senior Vice President, Chief Financial Officer & Treasurer
Timothy M. Wesolowski
/s/ Douglas F. Lyons
Vice President and Controller
Douglas F. Lyons
(Principal Accounting Officer)
/s/ Nackey E. Scagliotti
Chairwoman of the Board of Directors
Nackey E. Scagliotti
/s/ John W. Hayden
Director
John W. Hayden
/s/ Anne La Dow
Director
Anne La Dow
/s/ Roger L. Ogden
Director
Roger L. Ogden
/s/ Mary McCabe Peirce
Director
Mary McCabe Peirce
/s/ J. Marvin Quin
Director
J. Marvin Quin
/s/ Paul Scripps
Director
Paul Scripps
/s/ Kim Williams
Director
Kim Williams
The E. W. Scripps Company
Index to Consolidated Financial Statement Information
Selected Financial Data
Five-Year Financial Highlights
(in millions, except per share data)
Certain amounts may not foot since each is rounded independently.
Notes to Selected Financial Data
As used herein and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “Scripps,” “Company,” “we,” “our,” or “us” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies, or to all of them taken as a whole.
The statement of operations and cash flow data for the five years ended December 31, 2012, and the balance sheet data as of the same dates have been derived from our audited consolidated financial statements. All per-share amounts are presented on a diluted basis. The five-year financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere herein.
Operating revenues and segment profit (loss) represent the revenues and the profitability measures used to evaluate the operating performance of our business segments in accordance with GAAP.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The consolidated financial statements and notes to the consolidated financial statements are the basis for our discussion and analysis of financial condition and results of operations. You should read this discussion in conjunction with those financial statements.
Forward-Looking Statements
Certain forward-looking statements related to our businesses are included in this discussion. Those forward-looking statements reflect our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; newsprint prices; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. You should evaluate our forward-looking statements, which are as of the date of this filing, with the understanding of their inherent uncertainty. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date the statement is made.
Executive Overview
The E. W. Scripps Company (“Scripps”) is a diverse media company with interests in television stations and newspaper publishing. The Company’s portfolio of media properties includes: 19 television stations, including ten ABC-affiliated stations, three NBC affiliates, one independent station and five Azteca affiliates: daily and community newspapers in 13 markets and the Washington-based Scripps Media Center, home to the Scripps Howard News Service.
At the end of 2011, we added nine local television stations in four markets through the acquisition of McGraw-Hill Broadcasting Company, Inc. (“McGraw-Hill”), for $212 million in cash, plus a $4.4 million working capital adjustment. This acquisition shifted the balance of the Company's assets toward the television business.
Local and national television advertising, particularly automotive advertising, continued to recover in 2012. We also benefited from strong political advertising that exceeded any previous cycle. At the end of 2011 and in early 2012, we renewed retransmission consent agreements with numerous cable television system operators at higher rates. The renewals are typically for three-year periods. We expect to continue to benefit in the coming years from contractual rate increases included in the renewed contracts and as we regain control of all of our retransmission rights. For the past four years, we have received payment for many of our broadcast signals from Scripps Networks Interactive, Inc. (“SNI”), which negotiated our retransmission consent agreements until we spun it off in 2008. As these contracts have been expiring, we have been renegotiating new contracts with the cable and satellite operators at current market rates, which are significantly higher than the rates we receive from SNI. Agreements with our two largest cable television operators, Time Warner and Comcast, expire in December 2015 and December 2019, respectively.
In September 2012, we launched two original shows - a new game show called Let's Ask America and a nightly infotainment magazine called The List - aired during the access period between evening news and prime time. These shows have been launched in seven of our markets, with the intention of rolling them out in the rest of our markets when commitments to air other programming during that time period expire. The List and Let's Ask America were developed internally or in partnership with others and replace expensive syndicated content. We believe this strategy has the potential to improve our Television division's financial performance for years to come.
Stabilization of the profitability of our newspaper group is the goal of a number of activities pursued by management. We have completed much of our functional reorganization and restructuring, and have begun implementing common advertising and circulation systems across our markets. We expect the majority of implementations to continue through 2013. We are also pursuing a number of marketing and pricing strategies to strengthen our base of subscribers and improve our circulation revenue. We intend to introduce bundled print and digital subscriptions in all of our markets in 2013. During 2011, we completed a review of the advertising and niche products offered in our markets, eliminating unprofitable products from the portfolios in our newspaper markets. By increasing resources to sell products with the highest revenue and profit potential, and focusing on key sales metrics with the help of new customer relationship management tools, we believe our sales executives are better positioned than in previous years to improve the financial performance of the division. We also continue to increase efforts to print and distribute other publications within our newspaper markets.
In 2011 we signaled our commitment to developing our local digital media business by combining all of our digital initiatives into a single organization. Under the direction of our digital leadership, working closely with the leadership of both of our divisions, we believe this focus will deliver long-term financial benefits as we find new and efficient platforms for bringing together advertisers and audiences. We began implementing this new structure in 2012. Under this structure, our digital media group develops products and offerings that enable our newspapers and television stations to provide unique and compelling content online, on tablets and on mobile devices. The digital group will develop content and applications specifically for digital platforms to make the user experience unique. Our digital group also drives the coordinated local and national digital sales efforts for our television and newspaper divisions.
Looking to seize opportunities for long-term value creation, we expect to invest in the content-creation and sales-force functions of our digital operations in 2013.
We allocate a portion of the digital and other shared services costs to each of the divisions. The amounts allocated are at amounts agreed by management, and may differ from amounts that would be charged at arms-length. Costs not allocated to the divisions are reported in Syndication and other. The costs of unallocated digital sales-force functions and content creation as we build those capabilities are expected to be approximately $22 million in 2013.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
Note 1 to the Consolidated Financial Statements describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. We believe the following to be the most critical accounting policies, estimates and assumptions affecting our reported amounts and related disclosures.
Acquisitions - The accounting for a business combination requires assets acquired and liabilities assumed to be recorded at fair value. With the assistance of third party appraisals, we generally determine fair values using comparisons to market transactions and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset and the expected period of time over which those cash flows will occur and to determine an appropriate discount rate. Changes in such estimates could affect the amounts allocated to individual identifiable assets. While we believe our assumptions are reasonable, if different assumptions were made, the amount allocated to intangible assets could differ substantially from the reported amounts.
Long-Lived Assets - Long-Lived Assets (primarily property, plant and equipment and amortizable intangible assets) must be tested for impairment whenever events occur or circumstances change that indicate that the carrying value of an asset or asset group may not be recoverable. A long-lived asset group is determined not to be recoverable if the estimated future undiscounted cash flows of the asset group are less than the carrying value of the asset group.
Estimating undiscounted cash flows requires significant judgments and estimates. We continually monitor the estimated cash flows of our newspaper properties and may incur impairment charges if future cash flows are less than our current estimates.
Goodwill and Other Indefinite-Lived Intangible Assets - Goodwill for each reporting unit must be tested for impairment on an annual basis or when events occur or circumstances change that would indicate the fair value of a reporting unit is below its carrying value. For purposes of performing the impairment test for goodwill, our reporting units are newspapers and television. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill for the reporting unit is less than its carrying value.
To determine the fair value of our reporting units we generally use market data, appraised values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset or business and the period of time over which those cash flows will occur and to determine an appropriate discount rate. While we believe the estimates and judgments used in determining the fair values were appropriate, different assumptions with respect to future cash flows, long-term growth rates and discount rates could produce a different estimate of fair value. Our annual impairment testing for goodwill indicated that our television reporting unit fair value significantly exceeded its recorded value.
We have determined that our FCC licenses are indefinite lived assets and not subject to amortization. They are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We must compare the fair value of each indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair value is estimated using an income approach referred to as the “Greenfield Approach,” which requires multiple assumptions relating to the future prospects of each individual FCC license. The fair value of the FCC license is sensitive to each of the assumptions used in the Greenfield Approach and a change in any individual assumption could result in the fair value being less than the carrying value of the asset and an impairment charge being recorded. For example a 0.5% increase in the discount rate would reduce the aggregate fair value of the FCC licenses by approximately $5 million. Our annual impairment testing for our FCC licenses indicated that their fair value exceeded its recorded value. The recorded value of our FCC licenses from the recently acquired McGraw-Hill acquisition are derived from more recent business operating plans and macroeconomic environmental conditions and therefore are more susceptible to an adverse change that could require an impairment charge if future assumptions were to change.
Income Taxes - The accounting for uncertain tax positions and the application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood of
whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.
We have a significant deferred tax asset balance included in our consolidated balance sheet. We are required to assess the likelihood that our deferred tax assets, which include our net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be recoverable from the carryback to prior years, carryforward to future years or through other prudent and feasible tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities. Actual results could differ from our estimates and if we determine the deferred tax asset we would realize would be greater or less than the net amount recorded, an adjustment would be made to the tax provision in that period.
Pension Plans - We sponsor various noncontributory defined benefit pension plans covering substantially all full-time employees that began employment prior to June 30, 2008 (the majority of our defined benefit pension plans were frozen June 30, 2009), including a SERP, which covers certain executive employees. Pension expense for continuing operations for those plans was $8.6 million in 2012, $8.1 in 2011 and $7.3 million in 2010.
The measurement of our pension obligation and related expense is dependent on a variety of estimates, including: discount rates; expected long-term rate of return on plan assets; expected increase in compensation levels; and employee turnover, mortality and retirement ages. We review these assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. In accordance with accounting principles we record the effects of these modifications currently or amortize them over future periods. We consider the most critical of our pension estimates to be our discount rate and the expected long-term rate of return on plan assets.
The assumptions used in accounting for our defined benefit pension plans for 2012 and 2011 are the following:
The discount rate used to determine our future pension obligations is based upon a dedicated bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans. The rate is determined each year at the plan measurement date and affects the succeeding year’s pension cost. Discount rates can change from year to year based on economic conditions that impact corporate bond yields. A decrease in the discount rate increases pension obligations and pension expense.
For our defined benefit pension plans, as of December 31, 2012, a half percent increase or decrease in the discount rate would have the following effect:
We have target asset allocations to invest plan assets in securities that match the timing of the payment of plan obligations. As a result, approximately 70% of plan assets are invested in a portfolio of fixed income securities with a duration approximately that of the projected payment of benefit obligations. The remaining 30% of plan assets are invested in equity securities and other return-seeking assets. The expected long-term rate of return on plan assets is based primarily upon the target asset allocation for plan assets and capital markets forecasts for each asset class employed. Our expected rate of return on plan assets also considers our historical compound rate of return on plan assets for a 15-year period. A decrease in the expected rate of return on plan assets increases pension expense. A 0.5% change in the 2013 expected long-term rate of return on plan assets of 4.7%, to either 4.2% or 5.2%, would increase or decrease our 2013 pension expense by approximately $2.3 million.
We had cumulative unrecognized actuarial losses for our pension plans of $185 million at December 31, 2012. Unrealized actuarial gains and losses result from deferred recognition of differences between our actuarial assumptions and actual results. In 2012, we had an actuarial loss of $33 million. The cumulative unrecognized net loss is primarily due to declines in corporate bond yields and their impact on our discount rate, as well as the overall unfavorable performance of the equity markets since 2000. Based on our current assumptions, we anticipate that 2013 pension expense will include $4.5 million in amortization of unrecognized actuarial losses.
Recently Adopted Standards and Issued Accounting Standards
Recently Adopted Accounting Standards - In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance did not have a material impact on our consolidated financial position and results of operations.
In September 2011, the FASB issued changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. These changes became effective for us for any goodwill impairment test performed on January 1, 2012, or later. The implementation of this amended accounting guidance did not have a material impact on our consolidated financial position and results of operations.
Recently Issued Accounting Standards - In July 2012, the FASB amended the guidance on testing indefinite-lived assets, other than goodwill, for impairment. Under the revised guidance, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before performing quantitative tests. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not impaired, the entity would not need to perform the quantitative tests. This guidance will be effective for our annual impairment tests for the year ending December 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements; rather it may change management's approach to testing indefinite-lived intangible assets for impairment.
In February 2013, the FASB issued new guidance regarding the disclosure of comprehensive income. The update requires an entity to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional details about those amounts. The update will become effective for us on January 1, 2013. The Company is currently evaluating the impact of this new guidance on its future disclosures.
Results of Operations
The trends and underlying economic conditions affecting the operating performance and future prospects differ for each of our business segments. Accordingly, you should read the following discussion of our consolidated results of operations in conjunction with the discussion of the operating performance of our business segments that follows.
Consolidated Results of Operations - Consolidated results of operations were as follows:
Continuing Operations
2012 compared with 2011
Operating results include certain items that affect the comparisons of 2012 to 2011. The most significant of these items are as follows:
•
The operating results of the McGraw-Hill television station group that we acquired on December, 30, 2011 are included for all of 2012.
•
Acquisition and related integration costs of $5.8 million and $2.8 million were incurred for the acquisition of McGraw-Hill in 2012 and 2011, respectively.
•
Impairment charges to reduce the carrying value of long-lived assets at four of our newspapers were $9 million in 2011.
Operating revenues increased 24% in 2012 as compared to 2011 on an as reported basis and 8.7% on a same-station basis. The revenues from the acquired stations and a 27% increase in revenues in our legacy television stations more than offset a
3.7% decrease in our newspaper revenues. Strong television revenues reflect political revenues of $107 million in 2012 compared to $6.9 million in 2011.
Employee compensation and benefits were $396.2 million in 2012 compared to $348.2 million in 2011. Employee compensation and benefits increased 1.0% or $3.6 million on a same-station basis. The primary factors affecting the increase on a same-station basis in employee compensation and benefits in 2012 are as follows:
•
Increased staffing to support television station newsroom initiatives and additional staffing to support production of internally produced programming led to a 7.7% increase in television employee compensation and benefits.
•
The fourth quarter 2011 newspaper reduction in force and attrition in 2012 led to a $14.7 million reduction in compensation and benefits in the newspaper division. The number of employees in the Newspaper division was down approximately 11% year-over-year.
Programs and program licenses costs decreased approximately 23% in 2012 on a same-station basis. Syndicated programming costs decreased $14.4 million year-over-year due to decisions we made to take control of more programming and rely less on syndicated programming. In the third quarter of 2011 we replaced Oprah with lower-priced syndicated programming in four of our television markets. In the third quarter of 2012 we replaced syndicated programming in seven of our markets, that we aired in the access time period between evening news and prime time with programming we produce internally or in partnership with others. The decrease was off-set by a $1.4 million increase in fees under our network affiliation agreements, which require us to pay a portion of retransmission revenues above a threshold to the network.
Newsprint and press supplies was flat in 2012 compared to 2011. Lower consumption of newsprint reduced costs by $1.3 million, which was offset by increased outside printing costs for specialty advertising products.
Newspaper distribution costs decreased by 1.4% in 2012 compared to 2011 as a result of lower net paid circulation levels. A large portion of our distribution costs are variable and increase or decrease in relation to our circulation levels.
Other expense is comprised of the following:
Other expenses increased 1% or $1.3 million in 2012 on a same-station basis. Costs to promote the launch of The List and Let's Ask America in seven of our television markets led to a $2.7 million increase in marketing and promotion costs.
Depreciation and amortization increased $9.3 million year-over-year due to the impact of the acquisition of the McGraw-Hill television station group at the end of 2011.
Acquisition and related integration costs for 2012 include a $5.7 million non-cash charge associated with the cancellation of the contract with the national advertising firm that represented the acquired stations. In 2011, we incurred $2.8 million of costs associated with our acquisition of the McGraw-Hill television stations.
Interest expense increased to $12.2 million in 2012 due to the borrowings associated with the acquisition of McGraw-Hill television stations.
The effective income tax rate for continuing operations was 29.8% and 38.9% for 2012 and 2011, respectively. The impact of state and local taxes and non-deductible expenses has made our effective rate volatile due to relatively small amounts of pretax income (loss) in each of the reporting periods. In addition, our effective income tax rate has been impacted by tax settlements and changes in our reserve for uncertain tax positions as described below.
•
In 2012, we recognized $5.5 million of previously unrecognized tax benefits primarily due to the lapse of the statutes of limitations in certain jurisdictions, decreasing our effective tax rate by 9.6 percentage points.
•
In 2011, we recorded a benefit of $1.6 million when we settled the examinations of our 2005 to 2009 federal tax returns with the Internal Revenue Service (“IRS”), increasing our effective tax benefit rate by 6.6 percentage points.
2011 compared with 2010
Operating results include certain items that affect the comparisons of 2011 to 2010. The most significant of these items are as follows:
•
Restructuring costs to standardize and centralize functions in our Newspaper divisions totaled $9.9 million in 2011 and $12.7 million in 2010.
•
Acquisition costs of $2.8 million were incurred in 2011 for the acquisition of McGraw-Hill.
•
Impairment charges to reduce the carrying value of long-lived assets at four of our newspapers were $9 million in 2011.
•
In the first quarter of 2011, we entered into a five-year agreement with Universal Uclick (“Universal”) to provide syndication services for the news features and comics of United Media. Under the terms of the agreement we receive a fixed fee from Universal and continue to own certain copyrights and control the licenses for those properties, and manage the business relationships with the creative talent that produces those comics and features. We completed the transition of the services in June 2011.
Operating revenues decreased due to continued secular declines in newspaper print advertising, lower political spending at our television stations in a non-election year and a $9.4 million reduction in newspaper syndication service revenues due to our decision to source sales and fulfillment of United Media's operations to Universal. Print newspaper advertising decreased $18.9 million, or 7.1% in 2011. Political advertising was $6.9 million in 2011 compared to $48.1 million in 2010.
A $4.0 million increase in revenues from higher television retransmission rights and $2.5 million in additional fees to provide news and television services to WFLX in West Palm Beach, Florida offset some of the reductions.
Employee compensation and benefits were $348.2 million in 2011 compared to $344.6 million in 2010. The primary factors affecting the increase in employee compensation and benefits in 2011 were as follows:
•
We restored employer matching contributions to our defined contribution plan in the third quarter of 2010. Employer matching contributions were $6.6 million in 2011 and $1.9 million in 2010.
•
We froze the accrual of benefits under our defined benefit pension plans in 2009. In connection with freezing the plan, we began making supplemental retirement plan contributions to the defined contribution accounts of employees nearing retirement age in the first quarter of 2011. The contributions, which will continue through 2015, were $2.9 million in 2011.
•
Reductions in force and attrition reduced the number of employees in our newspaper division in 2011 compared to 2010 by approximately 2%, resulting in a $1.5 million reduction in employee compensation and benefits in 2011.
Expenses for programs and program licenses decreased in 2011 compared with 2010 primarily due to replacing Oprah at the end of the third quarter with lower-priced programming. Syndication programming costs decreased $5.2 million in 2011. This decrease was partially offset by a $3.3 million increase for network affiliation fees paid under our network affiliation agreements with ABC and NBC.
Newsprint and press supplies increased by $4.0 million compared with 2010, primarily due to higher newsprint costs. Newsprint costs in 2011 increased by $3.1 million as compared with 2010 due to a 9.4% increase in average newsprint prices while newsprint consumption was flat in 2011.
Newspaper distribution costs increased primarily due to transition of distribution processes from internal personnel, expense for which are classified as employee compensation and benefits, to external vendors, expense for which are classified as distribution services.
Other expenses is comprised of the following:
Other expenses decreased 3.1% in 2011 as compared to 2010. The decrease in other expenses is primarily due to reductions in operating expenses from sourcing sales and fulfillment of newspaper syndication services to Universal and continued cost reduction initiatives in the newspaper division.
Interest expense in 2011 decreased compared with 2010 since we had no outstanding borrowings for the majority of 2011.
The effective income tax rate for continuing operations was 38.9% and 2.9% for 2011 and 2010, respectively. The impact of state and local taxes and non-deductible expenses has made our effective rate volatile due to relatively small amounts of pretax income (loss) in each of the reporting periods. In addition, our effective income tax rate has been impacted by tax settlements and changes in our reserve for uncertain tax positions as described below.
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In 2011 we recorded a benefit of $1.6 million when we settled the examinations of our 2005 to 2009 federal tax returns with the Internal Revenue Service (“IRS”), increasing the effective tax benefit rate by 6.6 percentage points.
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In 2010 we reduced our reserves for uncertain tax positions by $14.0 million upon the lapse of the statute of limitations and the settlement of the examinations of certain state and local tax returns. The reduction in the reserve for uncertain tax positions reduced our effective rate by 48.9 percentage points.
Business Segment Results - As discussed in the notes to the Consolidated Financial Statements, our chief operating decision maker evaluates the operating performance of our business segments using a measure called segment profit. Segment profit excludes interest, defined benefit plan pension expense (other than current service costs), income taxes, depreciation and amortization, impairment charges, divested operating units, restructuring activities, investment results and certain other items that are included in net income (loss) determined in accordance with accounting principles generally accepted in the United States of America.
Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Generally our corporate executives make financing, tax structure and divestiture decisions. Excluding these items from measurement of our business segment performance enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.
Information regarding the operating performance of our business segments and a reconciliation of such information to the consolidated financial statements is as follows:
Television - Television includes ten ABC-affiliated stations, three NBC-affiliated stations, one independent station and five Azteca affiliates. Our television stations reach approximately 13% of the nation’s households. Our television stations earn revenue primarily from the sale of advertising time to local and national advertisers.
National television networks offer affiliates a variety of programs and sell the majority of advertising within those programs. In addition to network programs, we broadcast locally produced programs, syndicated programs, sporting events, and other programs of interest in each station's market. News is the primary focus of our locally produced programming.
The operating performance of our television group is most affected by the health of the national and local economies, particularly conditions within the automotive, services and retail categories, and by the volume of advertising time purchased by campaigns for elective office and political issues. The demand for political advertising is significantly higher in the third and fourth quarters of even-numbered years.
Operating results for television were as follows:
2012 compared with 2011
The comparability of our television division operating results were affected by the December 30, 2011, acquisition of the McGraw-Hill television station group, the results of which are included following its acquisition date.
Revenues
Television revenues increased 64% for 2012 on an as-reported basis and 27% on a same-station basis.
Television time sales increased $74 million or 27% on a same-station basis. Political advertising was $85 million in 2012 compared to $6.9 million in 2011 on a same-station basis.
Retransmission revenues increased 36% or $5.7 million for 2012 on a same-station basis due to renewal of certain agreements at higher rates and rate increases built into our continuing agreements. Prior to the spin-off of SNI, the rights to retransmit our broadcast signals were included as consideration in negotiations between cable and satellite system operators and the Company's cable networks. SNI pays us fixed fees for the use of our retransmission rights. As the retransmission contracts negotiated by SNI expire, we will negotiate standalone retransmission consent agreements with the cable and satellite system operators. Agreements with our two largest cable television operators, Time Warner and Comcast, expire in December 2015 and December 2019, respectively.
Digital revenues for 2012 increased $5.6 million on an as-reported basis and $2.8 million on a same-station basis.
Other revenues include revenue from news production and television services provided by our West Palm Beach television station to the Raycom station in that market. Other revenues were essentially flat on a same-station basis.
Costs and expenses
Total costs and expenses increased 34% on an as-reported basis and 1% on a same-station basis.
Employee compensation and benefits increased by 7.7% on a same-station basis primarily due to higher accruals under our annual incentive plans, compensation increases and increased staffing to support newsroom initiatives and production of internally produced programming such as The List. Annual incentive plan costs increased $3 million in 2012. Employee compensation and benefits costs associated with production of The List totaled approximately $2 million in 2012.
Programs and program licenses decreased approximately 23% on a same-station basis. Syndicated programming costs decreased $14.4 million year-over-year due to decisions we made to take control of more programming on our stations and rely less on syndicated programming. In the third quarter of 2011 we replaced Oprah with lower-priced syndicated programming in four of our television markets. In the third quarter of 2012 we replaced syndicated programming we aired in the access time period between evening news and prime time with programming we produce internally or in partnership with others in seven of our markets. The decrease in program and program license costs was off-set by a $1.4 million increase in fees under our network affiliation agreements, which require us to pay a portion of retransmission revenues above a threshold to the network.
Other expenses increased 9.5% on a same-station basis. In 2012 we incurred approximately $2.5 million of costs to promote the launch of Let's Ask America and The List in seven of our television markets, and costs to build out our local digital media presence totaled $2.1 million.
2011 compared with 2010
Revenues
Television time sales decreased due to lower political advertising in a non-election year. Excluding the impact of political advertising, revenues increased 7.6% to $294 million. The increase is primarily due to stronger local advertising, particularly in the auto and service categories.
Retransmission revenues increased year over year due to the renewal of certain agreements in 2011 at higher rates. Prior to the spin-off of SNI, the rights to retransmit our broadcast signals were included as consideration in negotiations between cable and satellite system operators and the Company’s cable networks. SNI pays us fixed fees for the use of our retransmission rights.
Under the renewal of our network affiliation agreements with ABC and NBC, we no longer receive network compensation revenue.
Other revenues include amounts from our news production and television services arrangement with WFLX. The increase in 2011 revenues was primarily due to our news production and television services agreement with WFLX starting in 2011.
Cost and expenses
Employee compensation and benefits increased in 2011 compared with 2010 primarily due to increased costs for our defined contribution retirement plans and other employee benefits. We restored the matching contribution to our defined contribution plan in July 2010. Employer matching contributions increased $1.9 million in 2011. In the first quarter of 2011 we began making supplemental retirement plan contributions to employees nearing retirement age increasing expense by $1.0 million in 2011. The supplemental contributions, which continue through 2015, are associated with freezing the accrual of benefits under our defined benefit pension plan in 2009.
Expenses for programs and program licenses decreased in 2011 compared with 2010 primarily due to replacing Oprah at the end of the third quarter with lower-priced programming. Syndication programming costs decreased $5.2 million in 2011. This decrease was partially offset by a $3.3 million increase for network affiliation fees paid under our affiliation agreements with ABC and NBC.
Other expenses in 2011 increased primarily due to increased promotional advertising spending.
Newspapers - We operate daily and community newspapers in 13 markets in the U.S. Our newspapers earn revenue primarily from the sale of advertising to local and national advertisers and from the sale of newspapers to readers. Our newspapers operate in mid-size markets, focusing on news coverage within their local markets. Advertising and circulation revenues provide substantially all of each newspaper’s operating revenues, and employee, distribution and newsprint costs are the primary expenses at each newspaper. The operating performance of our newspapers is most affected by local and national economic conditions, particularly within the retail, labor, housing and automotive markets, as well as newsprint prices.
Operating results for our newspaper business were as follows:
2012 compared with 2011
Revenues
Print advertising revenues declined as continued secular changes in the demand for newspaper advertising continued to affect the operating revenue of newspaper publishers throughout the country. Revenues also declined from our efforts to rationalize unprofitable product offerings. Advertising revenues associated with discontinued products totaled approximately $5.0 million in 2011. Automotive and employment classified advertising and advertising by large national retailers, which tend to make advertising decisions at the national or regional level, not at the local market level, remained particularly weak.
Preprint and other revenues declined at a slightly slower pace than other print advertising. Preprint and other products include inserts and single-sheet advertisements included with the daily newspaper, niche publications such as community newspapers, lifestyle magazines, publications focused on the classified advertising categories of real estate, employment and auto, and other publications aimed at younger readers. We are increasing efforts to sell single-sheet advertisements delivered with our newspapers and to all homes in a market (the “print and deliver” initiative).
Digital revenues include advertising on our newspaper Internet sites, digital advertising provided through audience-extension programs such as our arrangement with Yahoo!, and other digital marketing services we offer to our local advertising customers, such as managing their search engine marketing campaigns.
Circulation revenue decreased in 2012 compared to 2011 as price increases in home delivery and single copy did not offset declines in circulation net paid levels. Net paid levels decreased approximately 5% due to fewer home delivery subscriptions and lower single-copy sales on Sunday.
Other operating revenues, including commercial printing and distribution services, increased due to the impact of initiatives to garner additional revenues in these areas.
Costs and expenses
Employee compensation and benefits decreased due to lower employment levels as a result of the 2011 fourth quarter reduction in force initiative, attrition and the shifting of employees from the newspaper division to the digital operations group. Our Newspaper segment receives a cross charge for services provided by the digital operations group, which is included in other expenses. The number of employees in the Newspaper division decreased approximately 11% year-over-year.
Newsprint and press supplies were flat in 2012 compared to 2011. Lower newsprint consumption reduced costs by $1.3 million. The reduction in newsprint consumption was offset by increased outside printing costs for specialty advertising products.
Distribution costs decreased by 1.4% in 2012 compared to 2011 as a result of lower net paid circulation levels. A large portion of our distribution costs are variable and increase or decrease in relation to our circulation levels.
Other expenses decreased in 2012 primarily due to cost reduction initiatives which was partially offset by the increase in the cross charge for digital services of $4.3 million.
2011 compared with 2010
Revenues
The U.S. economic recession and secular changes in the demand for newspaper advertising affected operating revenue in 2011 and 2010, leading to lower advertising volumes and rate weakness in most of our local markets. Our employment and automotive classified advertising, which had shown signs of improvement in the first half of 2011, softened in the third and fourth quarter. Real estate classified advertising and national advertising remained particularly weak.
Digital revenues include advertising on our newspaper Web sites, digital advertising provided through audience-extension programs such as our arrangement with Yahoo!, and other digital marketing services we offer to our local advertising customers, such as managing their search engine marketing campaigns. In 2011 we began to report revenue from certain of our digital offerings net of the amounts paid to our partners. On an adjusted basis, assuming we had reported 2010 revenues net, digital revenues remained substantially unchanged for the year. Pure-play digital advertising increased 3.6% for the year on an adjusted basis.
Circulation revenue remained substantially unchanged, as higher circulation rates offset declines in circulation net paid levels.
Preprint and other revenues declined in 2011 due to reductions in the number of inserts from large national retailers. Preprint and other products include preprints distributed in the daily newspaper, niche publications and direct mail.
Other operating revenues represent revenue earned on ancillary services offered by our newspapers, including commercial printing and distribution services.
Costs and expenses
Employee compensation and benefits increased in 2011 primarily due to increased costs for our defined contribution retirement plans and other increased employee benefits. We restored the matching contribution to our defined contribution plan in July 2010. Employer matching contributions increased $2.3 million in 2011. In the first quarter of 2011 we began making supplemental retirement plan contributions to employees nearing retirement age increasing expense by $1.7 million in 2011. The supplemental contributions which continue through 2015, are associated with freezing the accrual of benefits under our defined benefit pension plan in 2009. Reductions in force and attrition reduced the number of employees in our newspaper division in 2011 compared to 2010 by approximately 2%, resulting in a $1.5 million reduction in employee compensation and benefits in 2011.
Newsprint and press supplies increased $4.0 million in 2011 primarily due to higher newsprint prices. Average newsprint prices increased 9.4% while newsprint consumption was flat.
Distribution services increased primarily due to transition of distribution processes from internal personnel, expense for which are classified as employee compensation and benefits, to external vendors, expense for which are classified as distribution services.
Other expenses were substantially unchanged in 2011 compared with 2010.
Shared services and corporate
We centrally provide certain services to our business segments. Such services include accounting, tax, cash management, procurement, human resources, employee benefits and information technology. The business segments are allocated costs for such services at amounts agreed upon by management. Such allocated costs may differ from amounts that might be negotiated at arms-length. Costs for such services that are not allocated to the business segments are included in Shared services and corporate costs. Shared services and corporate also includes unallocated corporate costs, including costs associated with being a public company.
2012 to 2011
Shared services and corporate expenses were $36.6 million in 2012 and $30.6 million in 2011. Shared services and corporate expenses increased due to $1.3 million of higher accruals under our annual incentive plans primarily due to improved operating results, costs for employee development and training initiatives, costs to centralize information technology operations and development of digital sales compensation plans.
2011 to 2010
Shared services and corporate expenses were $30.6 million in 2011 and $33.3 million in 2010. Corporate and shared services decreased by $2.7 million in 2011 compared to 2010, primarily due to $2.0 million in employee separation costs in the 2010 period. The 2010 period also included costs of services to design and implement in 2011 high deductible employee directed health plans. Administrative expenses associated with the new plans in 2011 were approximately $1.0 million less than the administrative costs of the prior plans.
Discontinued Operations - Discontinued operations include United Media Licensing and Rocky Mountain News (See Note 4 to the Consolidated Financial Statements). The results of businesses held for sale or that have ceased operations are presented as discontinued operations.
Operating results for our discontinued operations were as follows:
In the fourth quarter of 2009 we began a review of our strategic options for United Media Licensing, the character licensing operation of United Media which resulted in the sale of United Media Licensing to Iconix Brand Group for $175 million in cash in 2010. The sale also included certain intellectual property, including the rights to syndicate the Peanuts and Dilbert comic strips.
Liquidity and Capital Resources
Our primary source of liquidity is our available cash and borrowing capacity under our revolving credit facility.
Operating activities
Cash provided from operating activities in the years ended December 31 is as follows:
2012 to 2011
Cash flow provided by continuing operating activities was $173 million in 2012 compared with $15 million in 2011. The $158 million increase was primarily attributable to higher television segment profit in an election year.
In addition to the changes in segment profit, changes in working capital increased cash flow from operating activities by $61 million in 2012 and decreased cash flow from continuing operations by $42 million in 2011. The primary factors affecting the changes in working capital are described below.
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We received $25 million in 2012 for refunds of prior year taxes from the carryback of our 2011 net operating loss, decreasing our working capital. The tax receivable increased working capital by the same amount in 2011.
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The timing of collections of accounts receivable decreased working capital by $10 million in 2012 due to the high level of political adverting in 2012 which is collected in advance.
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Working capital was increased by $8 million in 2011 due to the timing of network affiliation payments. During 2010 we did not make network affiliation payments to ABC while we were negotiating the renewal of our affiliation agreements. The network affiliation payments were made in 2011 upon execution of the renewals.
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Accruals for higher payments under our incentive plans decreased working capital by $5 million in 2012.
2011 to 2010
Cash flow provided by continuing operating activities was $15 million in 2011 compared with $59 million in 2010. The $44 million decline was primarily attributable to lower television segment profit in a non-election year and continued secular declines resulting in lower newspaper segment profit.
In addition to the changes in segment profit, pension contributions and changes in working capital affected the year-over-year cash flow from operating activities. In 2010, we made voluntary contributions totaling $65 million to our defined benefit pension plans. Changes in working capital decreased cash flow from operating activities by $42 million in 2011 and increased cash flow from continuing operating activities by $32 million in 2010. The primary factors affecting the changes in working capital are described below.
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A tax receivable of $25 million for refunds of our 2011 net operating loss increased working capital in 2011.
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Accruals for payments under our annual incentive plans decreased working capital by $8 million in 2010. We reinstated our annual incentive plan in 2010 after suspending it in 2009.
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Working capital was reduced by $8 million in 2010 and increased $8 million in 2011 due to the timing of network affiliation payments. During 2010 we did not make network affiliation payments to ABC while we were negotiating the renewal of our affiliation agreements. The network affiliation payments were made in 2011 upon execution of the renewals.
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In 2010 working capital was decreased by a $7 million payment from SNI for their share of taxes prior to the spin-off.
Investing activities
In 2012 and 2011 we used $32 million and $240 million, respectively in cash for investing activities. In 2010 we had $155 million in net cash flows from investing activities. The primary factors affecting our investing activities for the years are described below.
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In 2012, we increased our capital expenditures to $30 million primarily due to increased investment in our television business.
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In 2011, we paid $216 million to acquire the McGraw-Hill television stations.
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In 2011 our restricted cash increased by $7.5 million from the deposit of cash with our insurance carrier. This account serves as collateral in place of a stand-by letter of credit.
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In 2010 we completed the sale of United Media Licensing which provided net cash from discontinued operations of $163 million.
Financing activities
In 2012 and 2010 we used $25 million and $29 million, respectively in cash for financing activities. In 2011 we had $149 million in net cash flows from financing activities. The primary factors affecting our financing activities for the years are described below.
On December 9, 2011, we entered into a $312 million revolving credit and term loan agreement (“Financing Agreement”). The Financing Agreement was entered into to finance the acquisition of McGraw-Hill and to provide liquidity for ongoing operations. The Financing Agreement has a five-year term and includes a $212 million term loan and a $100 million revolving credit facility. Our previous revolving credit facility was terminated on the funding of the new Financing Agreement on December 30, 2011. There were no borrowings under our revolving credit agreement in 2012 and 2011. We also incurred $9 million of costs in connection with the new Financing Agreement. In 2012 we made $16 million in scheduled principal payments on this debt.
In 2010 we repaid the $35 million outstanding balance on our line of credit.
Our board of directors authorized the repurchase of up to $75 million of our Class A Common shares in 2010. We have repurchased a total of $75 million of shares under this authorization through September 30, 2012, of which, $24 million and $51 million was repurchased in 2012 and 2011, respectively. No additional shares may be repurchased pursuant to the authorization.
In November 2012, our board of directors authorized the repurchase of up to $100 million of our Class A Common shares through December 2014. Shares may be repurchased from time to time at management's discretion, either in the open market, through pre-arranged trading plans or in privately negotiated block transactions. The Company currently intends to fund approximately half of the buybacks from its cash balance and half using cash proceeds from the exercise of employee stock options.
In 2012, we had $18 million of proceeds from the exercise of employee stock options compared to $2 million and $8 million in 2011 and 2010, respectively. The number of options being exercised has increased as options near their expiration period and from increases in our share price. The market price of our shares has moved above the exercise prices of options held by employees. Our employees currently hold options to purchase 8.0 million shares at exercise prices between $7.00 and $10.60 per share and a weighted average exercise price of $9.77.
Other
We have met our funding requirements for our defined benefit pension plans under the provisions of the Pension Funding Equity Act of 2004 and the Pension Protection Act of 2006. We expect to contribute $1.6 million in 2013 to our defined benefit pension plans.
We expect total capital expenditures for 2013 to be approximately $25 million.
We expect that our cash and short-term investments and cash flow from operating activities will be sufficient to meet our operating and capital needs over the next 12 months.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include the following four categories: obligations under certain guarantees or contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements; obligations under certain derivative arrangements; and obligations under material variable interests.
We utilize interest rate swaps to manage our interest expense exposure by fixing our interest rate on portions of our floating rate term loan. We have entered into a $75 million notional value interest rate swap expiring in March 2016 which provides for a fixed LIBOR interest rate of 1.08%. We did not provide or receive any collateral for this contract. The fair value of this financial derivative, which is designated as and qualifies as a cash flow hedge, is based on quoted market prices which reflect the present values of the difference between estimated future variable-rate receipts and future fixed-rate payments.
As of December 31, 2012 and 2011, we had outstanding letters of credit totaling $1.1 million.
Contractual Obligations
A summary of our contractual cash commitments, as of December 31, 2012, is as follows:
Long-term debt - Our long-term debt bears interest at rates based on LIBOR plus a margin determined by our leverage ratio, ranging from 3.5% to 4.0%. The rate on our outstanding borrowing was 3.72% at December 31, 2012. We have also entered into an interest rate swap that provides for a fixed rate of 1.08% on a notional amount of $75 million. Interest included in our contractual obligations table, which includes payments on the interest rate swap, are based upon rates as of December 31, 2012. Amounts included in the table may differ from amounts actually paid due to changes in LIBOR or in our leverage ratio. A 1% increase in LIBOR would result in an increase in annual interest payments of $1.9 million.
Our Financing Agreement also includes a provision that in certain circumstances we must use a portion of excess cash flow to repay debt. Principal payments included in the contractual obligations table reflect only scheduled principal payments and do not reflect any amounts that may be required to be paid under this provision. As of December 31, 2012, we were not required to make any additional principal payments from excess cash flow.
Other Contractual Obligations
In the ordinary course of business we enter into long-term contracts to license or produce programming, to secure on-air talent, to lease office space and equipment, and to purchase other goods and services.
Programming - Program licenses generally require payments over the terms of the licenses. Licensed programming includes both programs that have been delivered and are available for telecast and programs that have not yet been produced. It also includes payment for our network affiliation agreements. If the programs are not produced, our commitments would generally expire without obligation. Fixed fee amounts payable under our network affiliation agreements are also included. Variable amounts to the networks that are payable throughout the life of the contracts are included based on current estimates at December 31, 2012.
We expect to enter into additional program licenses and production contracts to meet our future programming needs.
Talent Contracts - We secure on-air talent for our television stations through multi-year talent agreements. Certain agreements may be terminated under certain circumstances or at certain dates prior to expiration. We expect our employment
and talent contracts will be renewed or replaced with similar agreements upon their expiration. Amounts due under the contracts, assuming the contracts are not terminated prior to their expiration, are included in the contractual commitments table.
Operating Leases - We obtain certain office space under multi-year lease agreements. Leases for office space are generally not cancelable prior to their expiration.
Leases for operating and office equipment are generally cancelable by either party on 30 to 90 day notice. However, we expect such contracts will remain in force throughout the terms of the leases. The amounts included in the table above represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration.
We expect our operating leases will be renewed or replaced with similar agreements upon their expiration.
Pension Funding - We sponsor qualified defined benefit pension plans that cover substantially all non-union and certain union-represented employees. We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”).
Contractual commitments summarized in the contractual obligations table include payments to meet minimum funding requirements of our defined benefit pension plans and estimated benefit payments for our unfunded SERP. Contractual pension obligations reflect anticipated minimum statutory pension contributions as of December 31, 2012, based upon pension funding regulations in effect at the time and our current pension assumptions regarding discount rates and returns on plan assets. Actual funding requirements may differ from amounts presented due to changes in discount rates, returns on plan assets or pension funding regulations that are in effect at the time.
Payments for the SERP plan have been estimated over a ten-year period. Accordingly, the amounts in the “over 5 years” column include estimated payments for the periods of 2018-2022. While benefit payments under these plans are expected to continue beyond 2021, we do not believe it is practicable to estimate payments beyond this period.
Income Tax Obligations - The Contractual Obligations table does not include any reserves for income taxes recognized because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes. As of December 31, 2012, our reserves for income taxes totaled $12.5 million, which is reflected as a long-term liability in our consolidated balance sheet.
Purchase Commitments - We obtain audience ratings, market research and certain other services under multi-year agreements. These agreements are generally not cancelable prior to expiration of the service agreement. We expect such agreements will be renewed or replaced with similar agreements upon their expiration.
We may also enter into contracts with certain vendors and suppliers, including most of our newsprint vendors. These contracts typically do not require the purchase of fixed or minimum quantities and generally may be terminated at any time without penalty. Included in the table of contractual commitments are purchase orders placed as of December 31, 2012. Purchase orders placed with vendors, including those with whom we maintain contractual relationships, are generally cancelable prior to shipment. While these vendor agreements do not require us to purchase a minimum quantity of goods or services, and we may generally cancel orders prior to shipment, we expect expenditures for goods and services in future periods will approximate those in prior years.
Quantitative and Qualitative Disclosures about Market Risk
Earnings and cash flow can be affected by, among other things, economic conditions and interest rate changes. We are also exposed to changes in the market value of our investments.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows, and to reduce overall borrowing costs.
The following table presents additional information about market-risk-sensitive financial instruments:
(a)
Includes securities that do not trade in public markets so the securities do not have readily determinable fair values. We estimate the fair value of these securities approximates their carrying value. There can be no assurance that we would realize the carrying value upon sale of the securities.
We utilize interest rate swaps to manage our interest expense exposure by fixing our interest rate on portions of our floating rate term loan. We have entered into a $75 million notional value interest rate swap expiring in March 2016 which provides for a fixed interest rate of 1.08%. We did not provide or receive any collateral for this contract. The fair value of this financial derivative, which is designated as and qualifies as a cash flow hedge, is based on quoted market prices which reflect the present values of the difference between estimated future variable-rate receipts and future fixed-rate payments.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the Company’s internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Scripps’ management is responsible for establishing and maintaining adequate internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:
1.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and
3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
As required by Section 404 of the Sarbanes Oxley Act of 2002, management assessed the effectiveness of The E. W. Scripps Company and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2012. Management’s assessment is based on the criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2012.
The Company’s independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2012. This report appears on page.
Date: March 6, 2013
BY:
/s/ Richard A. Boehne
Richard A. Boehne
President and Chief Executive Officer
/s/ Timothy M. Wesolowski
Timothy M. Wesolowski
Senior Vice President, Chief Financial Officer & Treasurer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders,
The E.W. Scripps Company
We have audited the internal control over financial reporting of The E. W. Scripps Company and subsidiaries (the "Company") as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2012 of the Company and our report dated March 6, 2013 expressed an unqualified opinion on those consolidated financial statements and the financial statement schedule.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 6, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders,
The E.W. Scripps Company
We have audited the accompanying consolidated balance sheets of The E. W. Scripps Company and subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15.