Business Context and Reporting Period
Company: E.W. Scripps Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company operates in three primary segments: Newspapers, Scripps Networks (cable television), and Broadcast Television. A significant structural change occurred in January 2001 with the commencement of a Joint Operating Agreement (JOA) for the Denver Rocky Mountain News and the Denver Post, altering the revenue and expense recognition for that specific asset.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Total Operating Revenues | $342.1 million | $1,083.5 million |
| Operating Income | $60.8 million | $198.3 million |
| Net Income | $22.6 million | $128.4 million |
| Diluted EPS | $0.28 | $1.61 |
| Cash from Operating Activities | $92.1 million (Quarterly est.) | $215.5 million (YTD) |
| Total Debt (Long-term + Current) | $670.4 million | $670.4 million (as of Sep 30) |
| Cash and Cash Equivalents | $15.3 million | $15.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 16.5% year-over-year for the quarter ($342.1M vs. $409.9M) and 14.0% for the nine-month period ($1,083.5M vs. $1,260.2M). This was driven primarily by a 23.4% drop in Broadcast Television revenues and a 15.6% drop in Licensing revenues.
- Profitability Pressure: Operating income fell 18.3% in the quarter and 18.6% year-to-date. Net income decreased 36.1% in the quarter but increased 11.5% year-to-date due to significant investment gains in 2001.
- Segment Performance:
- Scripps Networks: The strongest performer, with revenues up 14.6% and operating income up 40.1% in the quarter, driven by affiliate fee growth from AT&T and AOL agreements.
- Broadcast Television: Severely impacted by the September 11, 2001, terrorist attacks, which caused a temporary halt in advertising demand. Revenues dropped 23.4% and operating income plummeted 74.7% in the quarter.
- Newspapers: Revenues were relatively flat (-0.3% quarterly), though classified advertising demand remained soft.
- Investment Results: Net investment results swung from a loss of $10.9 million in the quarter to a gain of $50.8 million year-to-date. This was largely due to a $65.9 million gain on the exchange of Time Warner stock for AOL Time Warner stock, partially offset by $35 million in write-downs.
Guidance, Outlook, and Risks
- Impact of September 11: Management noted that third-quarter results were adversely affected by the terrorist attacks, which exacerbated an already weak advertising market. Broadcast stations provided 36 hours of commercial-free news coverage, eliminating ad revenue for that period.
- Denver JOA: The Joint Operating Agreement for the Denver newspapers is expected to improve results over time through cost cutting and rate increases, though the immediate impact has been slowed by a sharp decrease in help-wanted advertising in major metropolitan markets.
- New Network Launches: Start-up losses for new networks (DIY and Fine Living) reduced EBITDA by $5.7 million in the quarter. Full-year start-up losses are expected to reduce EBITDA by approximately $22 million.
- Liquidity: The Company expects cash flow from operations to exceed capital expenditures and dividends. Net debt decreased by $44 million in the first nine months to $670 million. The Company has a $675 million credit facility with a weighted-average interest rate of 3.2% as of September 30, 2001.
- Accounting Changes: The Company plans to adopt EITF Issue 00-25 in 2002, which will reclassify amortization of distribution fees from operating expenses to a reduction of revenue. This will not affect operating income but will reduce reported revenue by approximately $17 million for the nine months ended September 30, 2001.
Investor Verification Checklist
- Investment Volatility: Verify the sustainability of the $50.8 million year-to-date investment gain, which was heavily influenced by the Time Warner/AOL exchange and specific write-downs.
- Advertising Recovery: Monitor the recovery of Broadcast Television advertising revenues post-September 11, given the 23.4% quarterly decline.
- JOA Synergies: Assess whether the Denver JOA cost-saving measures will offset the broader decline in classified advertising demand.
- Debt Servicing: Review the impact of the $670 million debt load, noting that a significant portion ($460.6 million) is due within one year, though the Company has substantial borrowing capacity.
- Revenue Reclassification: Note the upcoming change in revenue recognition for distribution fees in 2002, which will alter year-over-year revenue comparisons.