Business Context and Reporting Period
Company: The E.W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: A diversified media company operating in four primary segments: Newspaper Publishing (21 daily newspapers), Scripps Networks (cable/satellite networks including HGTV, Food Network, Fine Living, and DIY), Broadcast Television (10 stations), and Shop At Home (television-retailing). The company also holds interests in Joint Operating Agencies (JOAs) and various investments.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Total Operating Revenues | $474,846 | $380,435 | $920,040 | $725,120 |
| Operating Income | $100,223 | $89,434 | $177,075 | $156,094 |
| Net Income | $64,733 | $26,956 | $117,422 | $66,836 |
| Diluted EPS | $0.80 | $0.33 | $1.45 | $0.83 |
| Operating Cash Flow (YTD) | $156,740 | $100,768 | ||
| Free Cash Flow (YTD) (Op. Cash Flow - CapEx) |
||||
| Total Assets | $2,900,364 | $2,613,693 | N/A | |
| Total Debt (Long-term + Current) | $704,178 | $668,898 | ||
| Cash & Equivalents | $23,975 | $18,004 | N/A | |
| Shareholders' Equity | $1,651,567 | $1,433,427 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 24.8% in Q2 2003 and 26.9% YTD compared to 2002. This was driven primarily by the inclusion of Shop At Home (acquired Q4 2002) and strong growth in Scripps Networks.
- Profitability Surge: Net income more than doubled in Q2 2003 ($64.7M vs $27.0M). A significant factor was the absence of the $65.6 million pre-tax investment write-down charge recorded in Q2 2002 (related to AOL Time Warner and Scripps Ventures).
- Segment Performance:
- Scripps Networks: Segment profit increased 69.7% in Q2 2003, driven by higher advertising rates and wider distribution.
- Newspapers: Segment profit declined 4.4% in Q2 2003 due to higher newsprint costs (up 10%) and pension expenses, despite growth in national and preprint advertising.
- Shop At Home: Recorded a segment loss of $5.6 million in Q2 2003, attributed to economic weakness and the war in Iraq affecting consumer spending.
- Debt Structure: The company replaced $200 million of variable-rate borrowings with fixed-rate notes to manage interest rate risk, resulting in a slight increase in interest expense.
Guidance, Outlook, and Risks
- Outlook:
- Newspapers: Advertising revenue expected to increase 2-4% in H2 2003. Newsprint costs expected to rise 8-10%.
- Scripps Networks: Advertising revenue expected to grow 20-30% and affiliate fees 15-20% in H2 2003. Programming expenses expected to rise 30%.
- Broadcast TV: Local and national ad revenue expected to grow 8-10% in H2 2003, though total revenue may be slightly lower than 2002 due to reduced political advertising.
- Shop At Home: Expected to reduce full-year 2003 net income by approximately $0.15 per share.
- Risks and Contingencies:
- Investment Volatility: Continued exposure to market value risk in investments (e.g., AOL Time Warner, Digital Theater Systems). Q2 2003 included a $3.2 million write-down.
- Self-Insurance: The company self-insures medical, disability, and workers' compensation. Liabilities are actuarially estimated and could vary significantly.
- Goodwill Impairment: Significant goodwill balance ($1.17 billion) requires periodic impairment testing based on future cash flow estimates.
- Legal: Ongoing litigation in the ordinary course of business (defamation, license renewals), none expected to result in material loss.
Investor Verification Checklist
- Investment Write-downs: Verify the nature and magnitude of the $3.2 million Q2 2003 investment charge compared to the massive $65.6 million charge in Q2 2002 to understand the true operating performance trend.
- Shop At Home Integration: Monitor the trajectory of Shop At Home losses against the expectation of a $0.15 per share drag on full-year earnings.
- Newsprint Costs: Confirm the pass-through of rising newsprint costs (projected 8-10% increase) to advertising rates and circulation prices.
- Debt Covenants: Review compliance with net worth and interest coverage covenants, particularly given the shift to fixed-rate debt.
- Pension Assumptions: Assess the impact of lower discount rates and expected returns on plan assets on future pension expense, which has already increased significantly in 2003.