SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company (Scripps)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: A diverse media company operating 10 television stations (ABC, NBC, and independent affiliates) and daily/community newspapers in 13 U.S. markets. The company also engages in syndication and digital media initiatives.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 2.1% year-over-year. This was driven by a 5.7% decline in newspaper revenues (due to weakness in print advertising) which offset a 3.2% increase in television revenues.
• Widened Loss: The net loss from continuing operations expanded significantly from $2.1 million in Q1 2010 to $8.9 million in Q1 2011. This was primarily due to lower newspaper segment profit and increased operating expenses.
• Expense Increases:
  • Employee Compensation: Increased 5.6% due to the restoration of employer matching contributions to defined contribution plans and supplemental pension contributions.
  • Program Costs: Increased 7.3% as the company began paying network affiliation fees to ABC and NBC under new agreements, replacing the previous model of receiving network compensation.
  • Newsprint Costs: Increased 8.0% due to a 20% rise in newsprint prices, partially offset by reduced consumption.
• Cash Flow Volatility: Operating cash flow swung from a positive $31.6 million in Q1 2010 to a negative $7.8 million in Q1 2011. This was largely due to the timing of tax payments ($8 million estimated payment for 2010) and accelerated payments for network affiliation and syndicated programming fees.

Outlook, Management Commentary, and Risks

• Restructuring: The company is continuing restructuring programs in television and newspaper operations, including automation and centralization of processes. Restructuring costs were $2.1 million in Q1 2011, down from $3.3 million in the prior year. These efforts are expected to continue through 2012.
• Strategic Agreements:
  • Entered an agreement with Universal Uclick to provide syndication services for United Media news features and comics.
  • Entered a news production and services agreement with Raycom Media for WFLX (West Palm Beach).
• Capital Allocation: The company repurchased $6.6 million of Class A Common shares in Q1 2011 under a $75 million authorization. Approximately $68.4 million remains available under this program.
• Liquidity: Management expects cash to be sufficient to meet operating and capital needs for the next 12 months. Capital expenditures for the remainder of 2011 are projected at approximately $17 million.
• Risks: Key risks include continued weakness in newspaper advertising demand, rising newsprint prices, and the impact of economic conditions on local and national advertising markets. The company also faces uncertainty regarding future tax refunds and the realization of deferred tax assets if economic conditions worsen.

Investor Verification Checklist

• Network Affiliation Costs: Verify the long-term impact of the shift from receiving network compensation to paying affiliation fees on the Television segment's profitability.
• Newspaper Segment Trajectory: Assess the sustainability of the 67.4% year-over-year decline in newspaper segment profit and the effectiveness of cost-cutting measures.
• Cash Flow Timing: Confirm that the negative operating cash flow in Q1 2011 was primarily due to one-time timing factors (tax payments, fee prepayments) rather than a structural deterioration in working capital.
• Share Repurchase Program: Monitor the remaining $68.4 million authorization and the company's commitment to returning capital amidst operating losses.
• Deferred Tax Assets: Review the valuation of the $37.3 million in net deferred tax assets, as future taxable income estimates could require valuation allowances.