SSP

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.

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.