Business Context and Reporting Period
Company: The E. W. Scripps Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Scripps is a diverse media company operating in national television networks (Scripps Networks), newspaper publishing, broadcast television, interactive media, and licensing. The company announced a plan to separate into two independent publicly traded companies: Scripps Networks Interactive (national lifestyle networks and online shopping) and the remaining E. W. Scripps Company (local newspapers, broadcast TV, and licensing). The separation was expected to be completed in the second quarter of 2008.
Key Financial Metrics
| Metric | 2007 | 2006 | Change |
|---|---|---|---|
| Total Operating Revenues | $2,517 million | $2,498 million | +0.8% |
| Operating Income | $210 million | $686 million | -69.4% |
| Net Income (Loss) | ($1.6) million | $353 million | Significant Decline |
| Income from Continuing Ops | ($5.6) million | $397 million | -101.4% |
| Net Cash from Operating Activities | $612 million | $584 million | +4.8% |
| Long-Term Debt | $505 million | $766 million | -34.1% |
| Shareholders' Equity | $2,450 million | $2,581 million | -5.1% |
Note: Net income for 2007 includes a significant non-cash impairment charge of $411 million related to the uSwitch business.
Material Changes vs. Prior Period
- uSwitch Impairment: The primary driver of the decline in profitability was a $411 million non-cash write-down of goodwill and intangible assets for the uSwitch business (Interactive Media segment). This was due to lower energy switching activity in the UK and reduced future cash flow expectations.
- Segment Performance:
- Scripps Networks: Revenues increased 12.6% to $1.18 billion, driven by strong advertising demand and affiliate fee growth at HGTV and Food Network. Segment profit rose 16.6% to $603 million.
- Newspapers: Revenues declined 8.3% to $659 million due to weakness in classified and local advertising, particularly in real estate and employment sectors. Segment profit fell 25.2% to $146 million.
- Broadcast Television: Revenues dropped 10.4% to $326 million, largely due to the absence of political advertising (odd-numbered year) and the lack of major events like the Super Bowl or Olympics that boosted 2006 results.
- Interactive Media: Revenues decreased 5.4% to $256 million. Segment profit plummeted 41.4% to $40 million, excluding the impairment charge.
- Debt Reduction: The company significantly reduced its long-term debt by $261 million, bringing the total balance down to $505 million.
- Discontinued Operations: The company sold the Shop At Home network and affiliated stations in 2006. In 2007, discontinued operations resulted in a net gain of $4 million, compared to a loss of $44 million in 2006.
Guidance, Outlook, and Risks
- Separation Plan: Management expects to complete the separation into two companies in Q2 2008, contingent on shareholder approval, IRS ruling, and SEC registration. Estimated transaction costs are $60–$70 million in 2008.
- Outlook:
- Scripps Networks: Expected revenue growth of 10–12% in Q1 2008.
- Newspapers: Expected revenue decline of 5–7% in Q1 2008 due to continued advertising weakness.
- Broadcast TV: Expected revenue to be flat to up 4% in Q1 2008.
- Risks and Contingencies:
- Economic Sensitivity: Approximately 80% of revenues are derived from advertising, which is sensitive to economic downturns.
- Competition: Intense competition from digital media and search engines for classified advertising and viewer attention.
- Regulatory: FCC regulations regarding digital transition, ownership rules, and retransmission consent.
- uSwitch Concentration: Heavy reliance on energy switching in the UK (63% of uSwitch revenue) exposes the business to volatile energy prices.
Key Facts for Investor Verification
- Impairment Validity: Verify the assumptions used in the discounted cash flow analysis that led to the $411 million uSwitch impairment charge.
- Separation Timeline: Monitor progress on the IRS ruling and SEC Form 10 registration required to finalize the spin-off of Scripps Networks Interactive.
- Newspaper Circulation Trends: Review continued declines in circulation and classified ad revenue, particularly in key markets like Florida and California.
- Debt Covenants: Confirm compliance with debt covenants following the significant debt reduction and the impact of the impairment on leverage ratios.
- uSwitch Diversification: Assess the success of efforts to diversify uSwitch revenue streams beyond energy switching to mitigate future volatility.