SSP

Business Context and Reporting Period

The E. W. Scripps Company (Scripps) filed its Form 10-Q for the quarterly period ended September 30, 2008. Scripps is a diverse media company operating in newspaper publishing, broadcast television, and licensing/syndication. A significant corporate event during this period was the tax-free spin-off of Scripps Networks Interactive, Inc. (SNI) on July 1, 2008. Consequently, SNI and other divested assets are reported as discontinued operations. The company also executed a 1-for-3 reverse stock split in July 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 9.0% in Q3 2008 and 7.6% YTD 2008 compared to 2007. The decline was driven primarily by the Newspapers segment, which saw a 17.1% revenue drop in Q3 due to weakness in classified (real estate, employment, automotive) and local advertising.
• Significant Impairment Charges: The company recorded a massive non-cash goodwill impairment charge of $778.9 million in the second quarter of 2008 related to its newspaper business. Additionally, a $24.9 million charge was recorded in Q3 2008 for the write-down of investments in newspaper partnerships (Denver JOA).
• Debt Reduction: Long-term debt decreased significantly from $504.7 million at year-end 2007 to $60.3 million at September 30, 2008. This was achieved by redeeming remaining balances of outstanding notes in June 2008, resulting in a $26.4 million loss on extinguishment of debt.
• Discontinued Operations: Income from discontinued operations dropped significantly year-over-year as the SNI spin-off was completed in July 2008, removing those earnings from the consolidated statement after that date.

Guidance, Outlook, and Risks

• Outlook: Management anticipates 2009 will be a challenging year due to broad economic uncertainty, continued advertising weakness, high newsprint prices, and a lack of political advertising (non-election year). Costs to complete a new newspaper production facility in Florida are estimated at $60–$65 million.
• Dividend Suspension: To improve financial flexibility, the company has suspended its quarterly dividend.
• Restructuring: In November 2008 (subsequent to the period end), the company announced a plan to reduce its newspaper workforce by approximately 400 people, expecting a $5 million non-cash charge in Q4 2008.
• Liquidity: The company maintains a $200 million Revolving Credit Agreement expiring in June 2013. It must maintain a minimum 3.0 to 1.0 interest coverage ratio and a leverage ratio of less than 3.0 to 1.0.
• Risks: Key risks include economic conditions affecting advertising demand, newsprint price volatility, and the ongoing deterioration of the Denver JOA partnership.

Investor Verification Checklist

• Goodwill Impairment: Verify the assumptions used in the $778.9 million newspaper goodwill write-down and the $24.9 million JOA investment write-down.
• Debt Covenant Compliance: Confirm the company's ability to maintain the required interest coverage and leverage ratios under the new Revolving Credit Agreement given the projected economic headwinds.
• Discontinued Operations: Review the final tax implications and indemnification agreements related to the SNI spin-off, particularly regarding pre-spin-off tax liabilities.
• Restructuring Costs: Monitor the execution of the announced 400-person workforce reduction and the associated $5 million Q4 charge.
• Dividend Policy: Assess the long-term impact of the dividend suspension on shareholder returns and capital allocation strategy.