Business Context and Reporting Period
Company: The E. W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: Scripps operates in three primary segments: Newspapers, Scripps Networks (cable television), and Broadcast Television. The company also holds significant investments in joint ventures, including the Denver Newspaper Agency (JOA) and the Food Network.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Total Operating Revenues | $359.8 million | $362.1 million |
| Operating Income | $82.4 million | $61.2 million |
| Net Income | $39.9 million | $66.4 million |
| Diluted EPS | $0.50 | $0.83 |
| EBITDA (Total) | $96.3 million | $86.0 million |
| Cash Flow from Operations | $47.8 million | $75.4 million |
| Total Debt (Current + Long-Term) | $705.6 million | $746.2 million |
| Cash and Equivalents | $13.3 million | $13.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 0.6% year-over-year. Newspapers revenue fell 2.9% and Licensing revenue dropped 11.4%, partially offset by a 7.8% increase in Scripps Networks revenue.
- Operating Income Growth: Despite lower revenues, Operating Income increased 34.6% (from $61.2M to $82.4M). This was primarily driven by a significant reduction in amortization of goodwill and intangible assets due to the adoption of FAS No. 142, which eliminated the amortization of goodwill effective Jan 1, 2002.
- Net Income Drop: Net Income decreased 40% to $39.9 million. The decline is largely attributed to a $67.2 million swing in "Investment results," which turned from a $58.8 million gain in Q1 2001 (driven by the AOL/Time Warner exchange) to an $8.4 million loss in Q1 2002 (due to write-downs).
- Cost Reductions: Newsprint and ink costs decreased 31.7% due to a 22% drop in newsprint prices. Interest expense fell 47% due to lower interest rates on variable debt.
Guidance, Outlook, and Risks
- Accounting Change: The company adopted FAS No. 142. While goodwill is no longer amortized, a transitional impairment evaluation must be completed by June 30, 2002. Any impairment loss will be recorded as a cumulative effect of a change in accounting principle.
- Segment Outlook:
- Scripps Networks: Start-up losses for new networks (DIY and Fine Living) are projected to reduce full-year EBITDA by $28 million to $33 million. Excluding these start-up costs, EBITDA increased 51% in the quarter.
- Newsprint: Prices are expected to remain lower than the prior year, aiding margins.
- Liquidity: The company maintains a $675 million credit facility expiring in September 2002, which is expected to be replaced. Net debt decreased to $705 million. Cash flow from operations is expected to substantially exceed capital expenditures and dividends for the full year.
- Risks:
- Market Risk: Exposure to interest rate changes, foreign currency fluctuations (Japanese Yen), and newsprint prices.
- Investment Volatility: Significant exposure to the market value of investments, particularly AOL Time Warner stock, which saw a decline in fair value.
- Advertising Demand: Soft demand in classified advertising, particularly "help wanted" categories.
Investor Verification Checklist
- FAS 142 Impact: Verify the outcome of the goodwill impairment testing required by June 30, 2002, as this could result in a significant non-cash charge.
- Investment Portfolio: Review the valuation of the AOL Time Warner stake and other venture capital investments, which contributed to the volatility in net income.
- Debt Maturity: Confirm the status of the $675 million credit facility renewal prior to its September 2002 expiration.
- Start-up Costs: Monitor the actual vs. projected start-up losses for the DIY and Fine Living networks against the $28M-$33M full-year estimate.
- Denver JOA: Assess the stability of the Joint Operating Agency profits, which contributed $15.1 million to revenue.