Business Context and Reporting Period
Company: The E.W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: A diversified media company operating in four primary segments: Newspaper Publishing, Scripps Networks (cable/satellite programming), Broadcast Television, and Shop At Home (television retailing). The company also holds interests in Joint Operating Agencies (JOAs) for newspapers and various joint ventures.
Key Financial Metrics
| Metric (in thousands) | Q3 2003 | Q3 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Total Operating Revenues | $440,481 | $354,267 | $1,360,521 | $1,079,387 |
| Operating Income | $74,257 | $75,196 | $251,332 | $231,290 |
| Net Income | $51,859 | $45,676 | $169,281 | $112,512 |
| Diluted EPS | $0.64 | $0.57 | $2.08 | $1.40 |
| Cash Flow from Operations (YTD) | $258,922 | $176,166 | $258,922 | $176,166 |
| Total Assets | $2,881,803 | $2,660,045 | $2,881,803 | $2,660,045 |
| Total Debt (Long-term + Current) | $625,863 | $645,438 | $625,863 | $645,438 |
| Cash and Equivalents | $20,222 | $34,361 | $20,222 | $34,361 |
Note: Total Debt calculated as Current portion of long-term debt ($75,171) + Long-term debt ($550,692).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 24.3% in Q3 2003 and 26.0% year-to-date compared to 2002. Approximately two-thirds of this increase is attributable to the October 2002 acquisition of Shop At Home, with the remainder driven by growth in Scripps Networks advertising and affiliate fees.
- Profitability: Net income rose 13.5% in Q3 and 50.5% year-to-date. The significant year-to-date improvement is largely due to a $84.0 million pre-tax investment charge in 2002 (including a $35.1 million Time Warner write-down) compared to only a $3.2 million charge in 2003.
- Cost Structure: Costs and expenses increased 32.2% in Q3 and 31.7% year-to-date, primarily due to the inclusion of Shop At Home operations. Pension expenses also increased due to lower expected returns on plan assets and lower discount rates.
- Debt Reduction: Total debt decreased from $645.4 million in Q3 2002 to $625.9 million in Q3 2003. The company replaced approximately $200 million of variable-rate borrowings with fixed-rate notes in late 2002, though average variable-rate borrowings decreased significantly in 2003.
Guidance, Outlook, and Risks
- Segment Outlook:
- Scripps Networks: Advertising revenues are expected to increase 25-30% year-over-year in Q4 2003. Network affiliate fees are expected to rise ~20%. However, DIY and Fine Living networks are expected to reduce segment profit by approximately $8.4 million in Q4.
- Newspapers: Advertising revenue is expected to grow in low single digits in Q4. Newsprint costs are projected to increase ~10% year-over-year.
- Broadcast Television: Total advertising revenue is expected to be ~10% lower than 2002 due to the absence of significant political advertising (which was high in the 2002 election year).
- Shop At Home: Expected to reduce net income by approximately $0.16 per share for the full year 2003. Management plans to reduce low-yielding distribution in Q4.
- Capital Resources: The company has $486 million available under its credit facilities and a shelf registration allowing for an additional $350 million in borrowing. Cash flow from operations remains the primary liquidity source.
- Risks and Contingencies:
- Investment Volatility: The company holds investments in development-stage businesses (e.g., Digital Theater Systems) and Time Warner, which are subject to market value fluctuations and potential impairment charges.
- Self-Insurance: The company self-insures medical, disability, and workers' compensation claims. A $3 million reduction in liability was recorded in Q3 2003 due to lower-than-anticipated claims, but actual results could vary.
- Regulatory: Ongoing IRS examination of 1996-2001 tax returns; however, a settlement for 1992-1995 returns resulted in an $8.0 million liability reduction in 2002.
Investor Verification Checklist
- Shop At Home Performance: Verify the trajectory of Shop At Home's losses and the effectiveness of the strategy to align merchandising with Scripps Networks, given the segment's negative impact on net income.
- Investment Portfolio Valuation: Review the fair value of the Time Warner stake and Digital Theater Systems (DTS) investment, noting the significant write-downs in 2002 and the recent IPO of DTS.
- Pension Assumptions: Monitor the impact of discount rates and expected returns on plan assets, as these drove increased pension expenses in 2003.
- Debt Covenants: Confirm continued compliance with debt covenants regarding net worth and interest coverage, especially given the mix of fixed and variable-rate debt.
- Political Advertising Cycle: Assess the impact of the non-election year on Broadcast Television revenues compared to the high baseline of 2002.