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 September 30, 2010. The company is an accelerated filer and is not a shell company. As of October 28, 2010, there were 45,993,507 Class A Common shares and 11,932,735 Common Voting shares outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Operating Revenues | $183.6 million | $556.7 million |
| Net Income (Attributable to Shareholders) | $6.2 million | $104.9 million |
| Operating Income (Continuing Ops) | $0.7 million | $2.7 million |
| Cash and Cash Equivalents | $169.5 million | $169.5 million (Ending Balance) |
| Long-Term Debt | $0.9 million | $0.9 million (Ending Balance) |
| Net Cash Provided by Operating Activities | N/A | $49.5 million |
| Capital Expenditures | N/A | $8.7 million |
Note: Net income for the nine-month period is significantly influenced by a $99.7 million gain from discontinued operations (sale of licensing business).
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 8.6% in Q3 2010 and 3.9% year-to-date compared to 2009. Television revenues surged 31.3% in Q3 and 21.4% year-to-date, driven by political advertising and economic recovery. Newspaper revenues declined 3.8% in Q3 and 5.0% year-to-date, though the rate of decline moderated.
- Profitability: The company reported a net income of $6.2 million for Q3 2010, a significant turnaround from a net loss of $3.3 million in Q3 2009. Year-to-date net income was $104.9 million, compared to a loss of $221.7 million in 2009. The 2009 loss was heavily impacted by a $216.4 million goodwill impairment charge in the Television segment.
- Discontinued Operations: In Q2 2010, Scripps sold its character licensing business (UML) for $175 million, resulting in a pre-tax gain of $162 million. This gain is classified as discontinued operations and is the primary driver of the year-to-date net income.
- Debt Reduction: Long-term debt decreased from $35.9 million at year-end 2009 to $0.9 million at September 30, 2010, as the company paid down its variable rate credit facility.
- Restructuring: Restructuring costs were $3.2 million in Q3 2010 and $10.3 million year-to-date, compared to $1.2 million and $4.2 million in the respective 2009 periods, related to the "Scripps 3.0" reorganization.
Guidance, Outlook, and Risks
- Outlook: Management expects Q4 2010 television ad revenue growth of 35% to 40%, including approximately $28 million in political advertising. Newspaper ad revenue declines are expected to continue moderating. Total newspaper expenses are expected to increase in the low single digits due to newsprint prices, while television expenses are expected to increase in the high single digits.
- Capital Allocation: In October 2010, the Board authorized a $75 million share repurchase program expiring December 31, 2012. The company also amended its credit facility to allow up to $200 million in aggregate acquisitions or capital returns.
- Risks and Contingencies:
- Network Affiliations: Scripps is negotiating renewals with ABC and NBC. The company expects future agreements will require payments for programming rather than receiving network compensation, which has historically been a revenue source.
- Legal Proceedings: The company is involved in ordinary course legal proceedings (defamation, employment, etc.), none of which are expected to result in material loss.
- Tax Uncertainty: The effective tax rate for continuing operations was 339% for the nine months ended September 30, 2010, primarily due to state taxes and accruals for uncertain tax positions.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $99.7 million gain from the sale of the licensing business, which drove the majority of the year-to-date net income.
- Network Affiliation Renewals: Monitor the outcome of negotiations with ABC and NBC, as the shift from receiving compensation to paying for programming could materially impact future television margins.
- Share Repurchase Execution: Track the utilization of the newly authorized $75 million share repurchase program and its impact on liquidity.
- Newsprint Costs: Watch for volatility in newsprint prices, which are expected to drive a low single-digit increase in newspaper expenses in Q4.
- Pension Contributions: Note the $66.4 million contribution to defined benefit plans in the first nine months of 2010, which significantly impacted operating cash flow.