SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: The Company operates in three primary segments: Newspapers (including the Denver Joint Operating Agency), Scripps Networks (cable television networks such as HGTV and Food Network), and Broadcast Television. The Company also holds significant equity investments, including a 69% interest in The Television Food Network.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 8.6% for the quarter and 4.0% year-to-date compared to 2001. Scripps Networks drove significant growth with an 18.6% quarterly revenue increase, while Newspapers grew 4.3%.
• Net Income Decline: Despite higher operating income, Net Income decreased 31.5% for the quarter and 36.8% year-to-date. This decline is primarily attributed to non-operating investment losses.
• Investment Write-downs: Net investment results were a charge of $65.6 million for the quarter and $73.9 million year-to-date, compared to gains in the prior year. This included a $35.1 million write-down of the AOL Time Warner investment and $3.6 million in costs to wind down venture capital funds.
• Goodwill Accounting: The Company adopted FAS No. 142 effective January 1, 2002, ceasing the amortization of goodwill. This resulted in a reduction of amortization expense compared to 2001, partially offsetting other costs.
• Tax Benefit: A settlement with the IRS regarding 1992-1995 tax returns resulted in an $8.0 million reduction in estimated tax liability, increasing net income.

Guidance, Outlook, and Risks

• Segment Outlook:
  • Newspapers: Advertising demand improved in Q2, but help wanted volume remains low. Q3 advertising revenues are expected to be flat year-over-year. The Denver JOA continues to show improvement due to cost-cutting measures.
  • Scripps Networks: Distribution for HGTV and Food Network continues to grow. Start-up losses for new networks (DIY and Fine Living) are projected to reduce full-year EBITDA by $30 million to $35 million.
  • Broadcast Television: Revenues were boosted by the Stanley Cup playoffs in Detroit. The Company faces exposure to declining ABC audience levels, though NBC affiliate revenues increased.
• Liquidity and Capital: Operating cash flow is expected to substantially exceed capital expenditures and dividends in 2002. The Company issued $200 million in 5.75% notes in July 2002 to refinance debt due in October 2002 and reduce commercial paper borrowings.
• Risks:
  • Market Risk: Earnings are sensitive to advertising demand, newsprint prices, and interest rates. The Company holds significant investments in publicly traded companies (e.g., AOL Time Warner) subject to market volatility.
  • Regulatory: Ongoing litigation regarding broadcast license renewals and defamation actions, though none are expected to result in material loss.
  • Debt Maturity: The $675 million revolving credit facility expires in September 2002 and must be replaced.

Investor Verification Checklist

• Investment Portfolio Valuation: Verify the current fair value and potential for further write-downs of the AOL Time Warner and other equity investments, which significantly impacted net income.
• Debt Refinancing: Confirm the successful replacement of the $675 million revolving credit facility expiring in September 2002.
• Network Start-up Costs: Monitor the actual start-up losses for DIY and Fine Living networks against the projected $30-$35 million full-year reduction in EBITDA.
• Advertising Trends: Track the "help wanted" advertising volume in the newspaper segment, which remains a drag on growth despite overall revenue increases.
• IRS Settlement: Confirm the finalization of the tax settlement and ensure no further liabilities exist for the 1996-2000 tax years currently under examination.