Business Context and Reporting Period
The E.W. Scripps Company (Scripps) is a diverse media concern with interests in national television networks (Scripps Networks), newspaper publishing, broadcast television, interactive media, and licensing. This Form 10-Q covers the quarterly period ended March 31, 2007. The company operates four primary reportable segments: Scripps Networks, Newspapers, Broadcast Television, and Interactive Media.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Operating Revenues | $601.4 million | $589.7 million |
| Operating Income | $116.9 million | $145.6 million |
| Net Income | $68.5 million | $75.1 million |
| Diluted EPS (Net Income) | $0.42 | $0.45 |
| Cash from Continuing Operating Activities | $111.6 million | $160.9 million |
| Total Debt (Long-term + Current) | $786.9 million | $1,129.4 million |
| Cash and Cash Equivalents | $22.3 million | $32.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 2.0% year-over-year, driven by double-digit growth in Scripps Networks (up 13.4%) and Interactive Media (up 7.3%). This growth was partially offset by declines in Newspapers (down 8.9%) and Broadcast Television (down 8.7%).
- Profitability Decline: Operating income decreased 19.7% to $116.9 million. This decline was primarily due to a $3.5 million gain recognized in Q1 2006 from the formation of a Colorado newspaper partnership, which was not repeated in 2007. Additionally, depreciation and amortization expenses increased 35.9% due to a $5.2 million write-down of intangible assets at the Shopzilla business.
- Discontinued Operations: The company reported income from discontinued operations of $3.8 million in Q1 2007, compared to a loss of $6.4 million in Q1 2006. This improvement is largely due to the sale of Shop At Home assets and a tax benefit recognized in 2007.
- Debt Reduction: Total debt decreased significantly from approximately $1.13 billion in Q1 2006 to $786.9 million in Q1 2007, reflecting debt repayments and lower average debt levels.
Guidance, Outlook, and Risks
- Scripps Networks: Management expects total operating revenues to increase 8% to 10% year-over-year in Q2 2007. Expenses are expected to increase approximately 6% due to continued investment in programming and distribution.
- Newspapers: Revenues are expected to decrease 4% to 6% in Q2 2007 due to a weak advertising environment. Costs are expected to rise 1% to 2%, excluding a potential charge of up to $10 million for voluntary employee separation plans.
- Broadcast Television: Revenues are expected to increase in the low single digits in Q2 2007, reflecting the absence of political advertising that boosted Q1 2006 results (Super Bowl and Olympics).
- Interactive Media: Expected to generate segment profits of about $5 million in Q2 2007 and $30 million to $40 million for the full year 2007. Results are impacted by increased competition and leadership transition costs.
- Risks: Key risks include changes in advertising demand, newsprint prices, labor relations, and the impact of foreign currency fluctuations (specifically the British Pound and Japanese Yen) on the uSwitch business.
Investor Verification Checklist
- Intangible Asset Write-downs: Verify the $5.2 million charge related to Shopzilla distribution agreement changes and its impact on future amortization.
- Discontinued Operations Tax Benefit: Confirm the $3.2 million tax benefit recognized in Q1 2007 related to prior year tax provision adjustments.
- Employee Separation Plan: Monitor the actual cost of the voluntary separation plan offered to newspaper employees, estimated up to $10 million in Q2 2007.
- JOA Expiration: Note the expiration of the Cincinnati Joint Operating Agreement in December 2007 and Gannett's intent to terminate.
- Share Repurchases: Track the execution of the remaining 2.5 million shares authorized for repurchase under the current program.