SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Scripps is a diversified media company operating in four primary segments: Newspaper Publishing (21 daily newspapers), Scripps Networks (HGTV, Food Network, Fine Living, DIY), Broadcast Television (10 stations), and Shop At Home (acquired 70% controlling interest in October 2002). Advertising historically comprises 70% to 75% of total revenues.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 10.3% to $1.54 billion, driven primarily by Scripps Networks (up 23.2%) and Broadcast Television (up 9.9%). Newspaper revenues remained relatively flat (down 0.9% excluding pre-JOA adjustments).
• Profitability: Net income increased 36% to $188.3 million. This improvement was significantly aided by the adoption of FAS 142, which eliminated the amortization of goodwill and indefinite-lived intangible assets (saving approximately $38.1 million in pre-tax expense compared to 2001).
• Investment Losses: Net investment results were a pre-tax charge of $85.7 million in 2002, compared to a credit of $5.1 million in 2001. This included $80.1 million in write-downs, primarily due to declines in the value of AOL Time Warner and Scripps Ventures investments.
• Acquisition: The company acquired a 70% controlling interest in Shop At Home in October 2002 for $49.5 million. The segment contributed $42.3 million in revenue for the two months of ownership but reported a loss of $1.7 million.
• Denver JOA: The Rocky Mountain News (RMN) contribution to segment profit improved to $9.4 million in 2002, reversing a loss of $12.2 million in 2001, due to cost-cutting measures and rate increases within the Joint Operating Agency.

Guidance, Outlook, and Risks

• 2003 Outlook:
  • Revenues: Advertising revenues for Scripps Networks are expected to increase approximately 20%. Network affiliate fees are expected to rise 15%. Newspaper advertising revenue is projected to grow 3% to 5%. Broadcast local and national advertising is expected to increase 8%.
  • Expenses: Pension expense is expected to rise to approximately $25 million due to lower discount rates and asset returns. Capital expenditures are estimated at $100 million, driven by new facilities in Florida and Cincinnati.
  • Shop At Home: Expected to reduce total segment profit by approximately $10 million in 2003 and dilute earnings per share by $0.10 to $0.15.
  • Interest Expense: Expected to increase approximately 20% to $34 million due to replacing variable rate debt with fixed rate notes.
• Risks and Contingencies:
  • Advertising Dependence: 70-75% of revenue is derived from advertising, making the company sensitive to economic recessions.
  • Newsprint Costs: Suppliers announced a $50 per metric ton price increase effective March 1, 2003.
  • Investment Volatility: Significant exposure to market value risk in investments, particularly AOL Time Warner and private equity funds.
  • Regulatory: Ongoing FCC review of media ownership rules and the transition to digital television broadcasting.

Investor Verification Checklist

• Investment Write-downs: Verify the valuation methodology and future outlook for the $80.1 million in investment write-downs, specifically regarding AOL Time Warner and Scripps Ventures.
• Shop At Home Integration: Assess the timeline for Shop At Home to reach profitability and the accuracy of the projected $10 million drag on 2003 earnings.
• Goodwill Amortization: Confirm the impact of FAS 142 adoption on reported earnings and review the annual impairment testing process for the $1.17 billion goodwill balance.
• Pension Obligations: Review the funded status of pension plans, noting the $107.4 million underfunded obligation and the projected increase in 2003 pension expense.
• Debt Structure: Monitor the shift from variable to fixed-rate debt and the associated increase in interest expense for 2003.