Business Context and Reporting Period
Company: The E. W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: A diversified media company operating in four primary segments: Newspapers (21 daily papers), Scripps Networks (HGTV, Food Network, Fine Living, DIY), Broadcast Television (10 stations), and Shop At Home (television-retailing network, acquired 70% in Q4 2002).
Key Financial Metrics
| Metric (in thousands) | Q1 2003 | Q1 2002 |
|---|---|---|
| Operating Revenues | $445,194 | $344,685 |
| Net Income | $52,689 | $39,880 |
| Diluted EPS | $0.65 | $0.50 |
| Operating Cash Flow | $67,483 | $45,560 |
| Total Assets | $2,881,555 | $2,617,568 |
| Total Debt (Current + Long-term) | $698,767 | $705,619 |
| Cash and Equivalents | $22,457 | $13,330 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 29.2% year-over-year, driven primarily by the inclusion of Shop At Home (revenue of $58.3M) and strong growth in Scripps Networks (up 31.4%).
- Profitability: Net income rose 32% to $52.7M. Excluding a $5.4M pre-tax investment charge in Q1 2002, net income increased 16%.
- Segment Performance:
- Scripps Networks: Segment profit surged 109.3% to $41.6M due to wider distribution and higher advertising rates for HGTV and Food Network.
- Shop At Home: Recorded a segment loss of $5.9M, reducing total segment profit. Management expects this segment to reduce full-year 2003 net income by approximately $0.15 per share.
- Newspapers: Segment profit remained relatively flat (-0.5%), with revenue growth offset by higher pension costs and newsprint expenses.
- Debt Structure: Interest expense increased $1.4M due to replacing variable rate borrowings with fixed rate notes. Net debt decreased slightly to $698M.
Guidance, Outlook, and Risks
- Outlook:
- Newspapers: Advertising revenue expected to increase 2-4% in Q2 2003.
- Scripps Networks: Advertising revenue expected to increase ~30% in Q2; affiliate fees expected to increase ~12%.
- Broadcast TV: Advertising revenue expected to increase 3-5% in Q2.
- Shop At Home: Expected to reduce Q2 segment profit by ~$5M and net income by $0.04 per share.
- Management Commentary: Cash flow from operations exceeded capital expenditures and dividends. Significant cash outflows were attributed to $20.4M in pension contributions and costs associated with developing new programming services.
- Risks and Contingencies:
- Market Conditions: Earnings are sensitive to advertising demand, newsprint prices, and economic conditions.
- Geopolitical Impact: The war in Iraq negatively impacted Q1 results for Broadcast Television and Shop At Home, reducing advertising revenue and increasing news coverage costs.
- Investments: The company holds investments in non-public companies with no readily determinable fair values; realization of carrying value is not assured.
- Legal: Involved in ordinary course litigation (defamation, license renewals), none expected to result in material loss.
Investor Verification Checklist
- Shop At Home Integration: Verify the trajectory of Shop At Home's losses against the projected $0.15 per share full-year impact.
- Pension Obligations: Confirm the impact of the $20M+ pension contributions on future liquidity and the sensitivity of pension expense to discount rate changes.
- Debt Covenants: Review compliance with debt covenants regarding net worth and interest coverage, particularly given the shift to fixed-rate debt.
- Investment Valuation: Assess the fair value of the $18.5M in non-public equity investments and the $43.6M note receivable from Summit America.
- Newsprint Costs: Monitor the effectiveness of the announced $50/ton price increases on operating margins in the Newspapers segment.