SSP

Business Context and Reporting Period

Company: The E.W. Scripps Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: A diverse media concern operating national television networks (Scripps Networks), newspaper publishing, broadcast television, television retailing (Shop At Home), and online comparison shopping (Shopzilla). The company is undergoing a strategic transformation from traditional print/broadcast to electronic media platforms.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 19.0% year-over-year for the quarter and 15.8% year-to-date. Growth was driven by Scripps Networks (advertising and affiliate fees) and the acquisition of Shopzilla.
• Profitability: Net income rose 47.8% for the quarter and 17.5% year-to-date. This includes a significant one-time gain from discontinued operations.
• Discontinued Operations: The company terminated the Birmingham Post-Herald joint operating agreement and ceased publication, resulting in a $24.7 million net gain from discontinued operations for the quarter (compared to $0.6 million in the prior year).
• Acquisitions: Completed the acquisition of Shopzilla on June 27, 2005, for approximately $570 million. This added $35.2 million in revenue and $7.3 million in segment profit for the quarter.
• Debt Levels: Long-term debt increased significantly from $532.7 million (Dec 31, 2004) to $857.9 million (Sept 30, 2005) to finance the Shopzilla acquisition.
• Segment Performance:
  • Scripps Networks: Segment profit increased 38.4% to $87.9 million.
  • Newspapers: Segment profit decreased 23.3% to $41.6 million, impacted by a $9.1 million increase in depreciation at the Denver JOA due to facility consolidation.
  • Broadcast Television: Segment profit decreased 36.1% to $14.7 million, primarily due to the absence of political advertising in an off-election year.

Guidance, Outlook, and Risks

• Outlook: Management projects continued strong, double-digit profit and revenue growth for Scripps Networks through 2005. Shopzilla is expected to generate $13–$15 million in segment profit in Q4 2005.
• Political Cycle: Broadcast television revenues are expected to be down 12–14% year-over-year in Q4 2005 due to the lack of political advertising compared to the 2004 election cycle.
• Hurricane Impact: Operations in Florida were affected by Hurricane Wilma. The company expects restoration costs and asset impairment losses to be recorded in Q4 2005. Insurance recoveries for 2004 hurricanes are still being negotiated for certain newspaper claims.
• JOA Consolidation: The Denver JOA facility consolidation is expected to reduce equity in earnings by $11.3 million in Q4 2005 and approximately $3 million per quarter through Q2 2007.
• Accounting Changes: The company will adopt FAS 123-R (Share-Based Payments) on January 1, 2006, which will require fair-value recognition of stock-based compensation, potentially impacting future net income.

Investor Verification Checklist

• Discontinued Operations: Verify the sustainability of earnings by excluding the $24.7 million one-time gain from the Birmingham Post-Herald termination.
• Shopzilla Integration: Monitor the integration of Shopzilla and the realization of projected Q4 profits ($13–$15 million) given the competitive online shopping environment.
• Debt Servicing: Assess the impact of increased interest expense (up 69.8% for the quarter) resulting from the $325 million increase in long-term debt.
• Hurricane Wilma Exposure: Review Q4 2005 filings for specific quantification of restoration costs and asset impairments related to Hurricane Wilma in Florida.
• Denver JOA Depreciation: Confirm the timing and magnitude of the $11.3 million earnings reduction in Q4 2005 related to the Denver facility consolidation.
• Stock Repurchases: Note that the company repurchased 502,500 shares in Q3 2005 under a program authorizing up to 5 million shares.