SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Scripps is a diverse media concern operating in four primary segments: Newspapers (21 daily papers in 19 markets), Scripps Networks (HGTV, Food Network, DIY, Fine Living), Broadcast Television (10 stations in major markets), and Shop At Home (television retailing). The company also operates United Media, the licensing home for "Peanuts" and "Dilbert."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 22.1% to $1.87 billion, driven primarily by the acquisition of Shop At Home (October 2002) and strong growth in Scripps Networks advertising and affiliate fees.
• Profitability: Net income rose 43.8% to $270.8 million. This was aided by a $27.1 million reduction in the income tax provision due to the settlement of prior year tax audits and adjustments to state net operating loss carryforwards.
• Debt Reduction: Long-term debt decreased significantly by approximately $216 million as the company used strong cash flows to pay down borrowings.
• Investment Results: Unlike 2002, which saw an $85.7 million charge for investment impairments (including AOL Time Warner), 2003 saw a much smaller net loss of $3.2 million on investments.
• Segment Performance:
  • Scripps Networks: Segment profit surged 63.9% to $204.3 million, fueled by increased viewership on HGTV and Food Network.
  • Shop At Home: Reported a segment loss of $22.1 million in 2003 compared to $1.7 million in 2002, reflecting integration costs and strategic shifts in product mix.
  • Newspapers: Segment profit remained relatively flat, declining slightly by 0.6% to $268.7 million.

Guidance, Outlook, and Risks

• Acquisition: In December 2003, Scripps announced a definitive agreement to acquire the remaining 30% of Shop At Home and five affiliated stations from Summit America for approximately $184 million, expected to close in Q2 2004.
• 2004 Outlook:
  • Advertising: Expected to increase 4-6% for newspapers and 20-30% for Scripps Networks.
  • Costs: Newsprint costs are projected to rise 12-14%. Programming expenses for networks are expected to increase 25-30%.
  • Capital Expenditures: Estimated at $80-85 million for 2004.
  • Political Cycle: Broadcast television revenues are expected to benefit from the 2004 presidential election cycle, with political advertising projected at $30 million.
• Risks and Contingencies:
  • JOA Expiration: Gannett has notified Scripps of its intent to terminate the Cincinnati Joint Operating Agreement (JOA) upon expiration in 2007. A $1.8 million severance charge was recorded in 2003 related to this.
  • Market Risks: The company faces risks related to newsprint price volatility, consolidation among cable operators, and competition from the Internet for classified advertising.
  • Investments: Continued exposure to market value risk in private equity and development-stage business investments.

Investor Verification Checklist

• Summit America Acquisition: Verify the closing of the $184 million acquisition of Summit America and the associated financing terms.
• Cincinnati JOA: Monitor the operational and financial impact of the impending termination of the Cincinnati Joint Operating Agreement in 2007.
• Network Growth: Confirm the continued distribution growth and viewership ratings for DIY and Fine Living networks to ensure they meet profitability targets.
• Newsprint Costs: Track actual newsprint price increases against the 12-14% forecast for 2004 to assess margin pressure on the newspaper segment.
• Tax Provisions: Review future tax provisions to ensure the $27.1 million benefit in 2003 was a one-time adjustment and not indicative of a permanent rate change.