SSP

Business Context and Reporting Period

Company: The E. W. Scripps Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Scripps is a diverse media company operating in four primary segments: Scripps Networks (national lifestyle TV networks including HGTV and Food Network), Newspapers (daily and community papers in 18 markets), Broadcast Television (10 stations), and Interactive Media (online comparison shopping services Shopzilla and uSwitch). The company also holds licensing rights for properties such as "Peanuts."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 15.9% to $2.498 billion, driven by growth in Scripps Networks (16.5%), Broadcast Television (14.4%), and the inclusion of Interactive Media acquisitions (Shopzilla and uSwitch).
• Profitability: Net income rose 41.8% to $353.2 million. Income from continuing operations increased 17.3% to $397.2 million.
• Discontinued Operations: The company reported a loss from discontinued operations of $44.0 million in 2006, compared to $89.4 million in 2005. This improvement was due to the sale of the Shop At Home network and the termination of the Birmingham Post-Herald newspaper operations.
• Acquisitions: Significant 2006 acquisitions included uSwitch (UK-based comparison shopping service) for approximately $372 million and Shopzilla (acquired in 2005, fully integrated in 2006 results).
• Segment Performance:
  • Scripps Networks: Segment profit increased 25.0% to $517.4 million, fueled by advertising demand and affiliate fee growth.
  • Newspapers: Segment profit declined 12.2% to $195.6 million, impacted by circulation declines and increased newsprint costs.
  • Broadcast Television: Segment profit surged 37.2% to $120.7 million, benefiting from political advertising cycles and major events (Super Bowl, Olympics).

Guidance, Outlook, and Risks

• 2007 Outlook:
  • Scripps Networks: Expected revenue growth of 10-13% for the full year; segment expenses expected to rise 8-10%.
  • Newspapers: Revenue expected to decrease in the low single digits for the full year.
  • Broadcast Television: Revenue expected to decrease 3-5% for the full year due to the absence of Super Bowl/Olympics revenue.
  • Interactive Media: Segment profit expected to range between $60 million and $70 million.
  • Capital Expenditures: Projected at approximately $125 million.
  • Interest Expense: Expected to be approximately $37 million.
• Key Risks:
  • Economic Sensitivity: Approximately 80% of revenues are derived from advertising, which is sensitive to economic downturns.
  • Competition: Intense competition for advertising from digital media and fragmentation of television audiences.
  • Regulatory: FCC regulations regarding media ownership, digital transition, and programming content.
  • Technology: Reliance on search engine algorithms for Interactive Media traffic and the need to adapt to new digital platforms.
  • Cost Pressures: Rising newsprint prices and increasing pension/healthcare costs.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final settlement of Shop At Home divestiture costs and the impact of the Birmingham newspaper termination on future comparability.
• Interactive Media Valuation: Assess the integration progress and profitability trajectory of the uSwitch and Shopzilla acquisitions, particularly regarding customer acquisition costs and search engine dependency.
• JOA Profitability: Monitor the impact of the Denver Newspaper Agency's facility consolidation on equity earnings and the potential termination of the Cincinnati JOA in 2007.
• Debt Structure: Review the maturity schedule of long-term debt ($766 million) and the company's ability to refinance or repay obligations as they come due.
• Pension Obligations: Evaluate the funded status of pension plans and the sensitivity of future expenses to changes in discount rates and asset returns.