SSP

Business Context and Reporting Period

The E. W. Scripps Company (Scripps) is a diverse media company operating daily and community newspapers in 13 U.S. markets and 10 television stations. This Form 10-Q covers the quarterly period ended June 30, 2010. The reporting period is significantly impacted by the sale of the company's character licensing business (United Media Licensing) in the second quarter, which is classified as discontinued operations.

Key Financial Metrics

Note: Net income is heavily driven by a $162 million pre-tax gain on the sale of the licensing business. Continuing operations generated a loss of $0.2 million for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 5.2% year-over-year for the quarter and 1.7% year-to-date. This growth was driven by the Television segment, which saw a 22.4% revenue increase in the quarter, while the Newspaper segment declined 4.0%.
• Profitability Shift: The company moved from a net loss of $218.4 million in the first half of 2009 to a net income of $98.6 million in the first half of 2010. This reversal is primarily due to the gain on the sale of discontinued operations and the absence of the $216 million goodwill impairment charge recorded in the first quarter of 2009.
• Debt Reduction: Long-term debt decreased significantly from $35.9 million at December 31, 2009, to $0.9 million at June 30, 2010, as the company paid down its variable rate credit facility.
• Cost Management: Employee compensation and benefits decreased $17.2 million year-to-date compared to 2009, driven by a 10% reduction in workforce and prior pay/benefit cuts.

Guidance, Outlook, and Risks

• Outlook: Management expects the year-over-year increase in television advertising revenues to exceed 30% in the third quarter. The rate of decline in newspaper advertising revenues is expected to moderate slightly in the third quarter.
• Restructuring: The company is implementing "Scripps 3.0," a reorganization of newspaper operations to centralize functions and improve efficiency. This may result in additional workforce reductions.
• Network Affiliations: The company is negotiating renewals with ABC and NBC. Management expects the ABC renewal will require payments for programming, reversing the historical model of receiving network compensation.
• Risks: Key risks include the cyclical nature of advertising demand (particularly in retail, real estate, and automotive sectors), rising newsprint prices (expected to be 25% higher in the second half of 2010), and the outcome of network affiliation negotiations.
• Unusual Items: The $162 million gain on the sale of the licensing business is a non-recurring item. Additionally, the 2009 period included a $216 million non-cash goodwill impairment charge not present in 2010.

Investor Verification Checklist

• Continuing Operations Performance: Verify the underlying profitability of the core newspaper and television businesses excluding the one-time gain from discontinued operations.
• Network Affiliation Terms: Monitor the final terms of the ABC and NBC affiliation agreements, specifically regarding the shift from receiving compensation to paying for programming.
• Newsprint Cost Inflation: Assess the impact of the projected 25% increase in newsprint prices in the second half of 2010 on newspaper margins.
• Pension Obligations: Review the status of the defined benefit pension plans, noting the $65.3 million contribution made in Q2 2010 and the freeze on benefit accruals.
• Liquidity Position: Confirm the utilization of the $118 million remaining borrowing capacity under the credit facility and the timing of expected tax refunds (estimated at $57 million).