SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: A diverse media company operating in national television networks (Scripps Networks), newspaper publishing, broadcast television, television retailing (Shop At Home), online comparison shopping (Shopzilla), and licensing/syndication. The company is transitioning from a traditional print-heavy model to a diversified media portfolio, with Scripps Networks contributing 36% of total operating revenues in 2005 compared to 29% for newspapers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 16.0% to $2.514 billion, driven by growth in Scripps Networks (up 24.8%) and the acquisition of Shopzilla (June 2005). Broadcast television revenues declined 7.3% due to the absence of political advertising in an odd-numbered election year.
• Profitability Decline: Income from continuing operations decreased 26.0% to $223 million. This decline was primarily caused by a $103.1 million non-cash impairment charge related to the goodwill and intangible assets of the Shop At Home segment.
• Debt Increase: Long-term debt increased significantly to $826 million from $533 million, largely to finance the $570 million acquisition of Shopzilla and the $140 million acquisition of the Great American Country (GAC) network in 2004.
• Segment Performance:
  • Scripps Networks: Segment profit rose 36.1% to $414 million, fueled by advertising and affiliate fee growth at HGTV and Food Network.
  • Shop At Home: Reported a segment loss of $28 million, leading to the goodwill write-down and a strategic review of the asset.
  • Shopzilla: Contributed $99 million in revenue and $28 million in profit for the period following its June acquisition.

Guidance, Outlook, and Risks

• Strategic Alternatives for Shop At Home: In February 2006, management announced an intention to seek strategic alternatives for Shop At Home to maximize shareholder value, citing recurring operating losses and challenges in securing high-quality cable distribution.
• 2006 Outlook:
  • Scripps Networks: Expected revenue growth of 18% to 20%.
  • Shopzilla: Expected segment profits of $50 million to $55 million.
  • Broadcast Television: Expected revenue growth of 10% to 12%, aided by the return of political advertising and major sporting events (Super Bowl, Olympics).
  • Capital Expenditures: Expected to range between $115 million and $130 million.
• Key Risks:
  • Asset Impairment: Continued risk of further write-downs if Shop At Home's fair value declines further.
  • Competition: Intense competition for advertising dollars from digital media and fragmentation of television audiences.
  • Regulatory: FCC ownership rules and the transition to digital television broadcasting.
  • Concentrated Control: The Edward W. Scripps Trust holds 87% of Common Voting shares, controlling two-thirds of the Board, which may inhibit potential changes of control.

Investor Verification Checklist

• Shop At Home Valuation: Verify the progress of the strategic review and potential for additional impairment charges beyond the $103.1 million recorded in 2005.
• Shopzilla Integration: Assess the actual performance of Shopzilla against the pro-forma guidance of $50-$55 million in segment profit for 2006.
• Debt Service Capacity: Review the company's ability to service the increased debt load ($826 million) given the reduction in net income from continuing operations.
• Political Advertising Cycle: Confirm the anticipated revenue uplift in Broadcast Television for 2006 due to the presidential election cycle.
• JOA Termination: Monitor the impact of the Cincinnati Joint Operating Agreement (JOA) termination scheduled for 2007.