SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Scripps operates in three primary segments: Newspapers (including the Denver Rocky Mountain News), Scripps Networks (cable television networks such as HGTV and Food Network), and Broadcast Television. The company also holds significant investments in joint ventures and other equity interests.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 10.5% in Q3 2002 and 5.7% year-to-date compared to 2001. Growth was driven primarily by Scripps Networks (+26.0% Q3) and Broadcast Television (+19.0% Q3).
• Operating Income: Operating income surged 55.4% in Q3 2002 ($94.4M vs $60.8M) and 44.6% year-to-date. This improvement is largely attributed to the cessation of goodwill amortization under FAS No. 142 (effective Jan 1, 2002) and strong performance in cable networks.
• Net Income Volatility: While Q3 net income doubled year-over-year, year-to-date net income declined 12.4% ($112.5M vs $128.4M). This decline is due to significant investment write-downs ($78.6M YTD) and workforce reduction costs, partially offset by an $8.0M tax liability reduction.
• Debt Structure: In July 2002, the company issued $200 million in 5.75% notes due in 2012 to reduce commercial paper borrowings. In October 2002, it repaid $100 million in notes due in 2002.

Guidance, Outlook, and Risks

• Outlook: Management expects advertising revenues to increase modestly in the fourth quarter for newspapers. Scripps Networks advertising revenues are projected to increase 40-45% year-over-year in Q4, with affiliate fee revenues expected to rise approximately 35%. Broadcast television advertising (including political revenue) is expected to increase 10-15% in Q4.
• Acquisitions: The company completed the acquisition of a 70% controlling interest in the Shop At Home television-retailing network on October 31, 2002, for $49.5 million. Net debt is expected to increase in Q4 due to this acquisition and continued network expansion.
• Risks and Contingencies:
  • Investment Risk: Significant write-downs occurred in 2002 due to declines in AOL Time Warner and Scripps Ventures portfolios. Future market conditions could require further impairment charges.
  • Market Risk: Earnings are sensitive to advertising demand, newsprint prices, and interest rates. The company holds no derivative instruments to hedge these risks.
  • Legal: The company is involved in ordinary course litigation (defamation, license renewals), none of which is expected to result in material loss.

Investor Verification Checklist

• Investment Portfolio Valuation: Verify the carrying value and potential for further write-downs in the AOL Time Warner and Scripps Ventures investments, which contributed $78.6M in losses YTD.
• Goodwill Accounting: Confirm the impact of FAS No. 142 adoption on reported earnings, as the cessation of goodwill amortization significantly boosted operating income compared to 2001.
• Network Expansion Costs: Review the sustainability of Scripps Networks' growth given the high "network launch incentive payments" ($89.0M YTD) which reduced operating cash flow.
• Debt Maturity Profile: Assess the company's liquidity position relative to its $645.4M total debt, noting the reliance on commercial paper markets supported by a $600M credit facility.
• Shop At Home Integration: Monitor the financial impact and integration progress of the Shop At Home acquisition completed in October 2002.