UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2007
OR
For the transition period from to
Commission File Number 0-16914
THE E. W. SCRIPPS COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
312 Walnut Street
Cincinnati, Ohio
Registrant’s telephone number, including area code: (513) 977-3000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 31, 2007 there were 126,322,999 of the Registrant’s Class A Common shares outstanding and 36,568,226 of the Registrant’s Common Voting shares outstanding.
INDEX TO THE E. W. SCRIPPS COMPANY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007
Item No.
Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Legal Proceedings
Risk Factors
Unregistered Sales of Equity and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits
Signatures
2
PART I
As used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us” or “Scripps” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies or to all of them taken as a whole.
ITEM 1. FINANCIAL STATEMENTS
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation arising in the ordinary course of business, such as defamation actions, employment and employee relations and various governmental and administrative proceedings, none of which is expected to result in material loss.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006.
3
ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
There were no sales of unregistered equity securities during the quarter for which this report is filed.
The following table provides information about Company purchases of Class A shares during the quarter ended September 30, 2007:
Period
Total Numberof Shares Purchasedas Part of PubliclyAnnounced Plans
or Programs
7/1/07 - 7/31/07
8/1/07 - 8/31/07
9/1/07 - 9/30/07
Total
Under a share repurchase program authorized by the Board of Directors on October 28, 2004, we were authorized to repurchase up to 5.0 million Class A Common shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the quarter for which this report is filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter for which this report is filed.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The information required by this item is filed as part of this Form 10-Q. See Index to Exhibits at page E-1 of this Form 10-Q.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Joseph G. NeCastro
5
Index to Financial Information
Item
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Comprehensive Income and Shareholders’ Equity
Condensed Notes to Consolidated Financial Statements
Forward-Looking Statements
Executive Overview
Critical Accounting Policies and Estimates
Results of Operations
Consolidated Results of Operations
Discontinued Operations
Continuing Operations
Business Segment Results
Scripps Networks
Newspapers
Broadcast Television
Interactive Media
Liquidity and Capital Resources
F-1
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts and notes receivable (less allowances—$7,627, $15,477, $15,474)
Programs and program licenses
Deferred income taxes
Assets of discontinued operations
Miscellaneous
Total current assets
Investments
Property, plant and equipment
Goodwill and other intangible assets:
Goodwill
Other intangible assets
Total goodwill and other intangible assets
Other assets:
Programs and program licenses (less current portion)
Unamortized network distribution incentives
Prepaid pension
Total other assets
TOTAL ASSETS
See notes to condensed consolidated financial statements.
F-2
(in thousands, except share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Customer deposits and unearned revenue
Accrued liabilities:
Employee compensation and benefits
Network distribution incentives
Accrued income taxes
Accrued marketing and advertising costs
Accrued interest
Liabilities of discontinued operations
Other current liabilities
Total current liabilities
Long-term debt (less current portion)
Other liabilities (less current portion)
Minority interests
Shareholders’ equity:
Preferred stock, $.01 par—authorized: 25,000,000 shares; none outstanding
Common stock, $.01 par:
Class A—authorized: 240,000,000 shares; issued and outstanding: 126,294,010, 126,974,721; and 126,723,327 shares
Voting—authorized: 60,000,000 shares; issued and outstanding: 36,568,226, 36,568,226 and 36,568,226 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of income taxes:
Unrealized gains on securities available for sale
Pension liability adjustments
Foreign currency translation adjustment
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
F-3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Operating Revenues:
Advertising
Referral fees
Network affiliate fees, net
Circulation
Licensing
Other
Total operating revenues
Costs and Expenses:
Production and distribution
Marketing and advertising
Other costs and expenses
Total costs and expenses
Depreciation, Amortization, and Losses (Gains):
Depreciation
Amortization of intangible assets
Gain on formation of Colorado newspaper partnership
Losses on disposal of property, plant and equipment
Hurricane recoveries, net
Net depreciation, amortization and losses (gains)
Operating income
Interest expense
Equity in earnings of JOAs and other joint ventures
Miscellaneous, net
Income from continuing operations before income taxes and minority interests
Provision for income taxes
Income from continuing operations before minority interests
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
Net income (loss) per basic share of common stock:
Income (loss) from discontinued operations
Net income per basic share of common stock
Net income (loss) per diluted share of common stock:
Net income per diluted share of common stock
Net income per share amounts may not foot since each is calculated independently.
F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows from Operating Activities:
Loss (income) from discontinued operations
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Programs and program licenses costs
Depreciation and intangible assets amortization
Network distribution incentive amortization
Excess tax benefits of stock compensation plans
Stock and deferred compensation plans
Minority interests in income of subsidiary companies
Program payments
Dividends received from JOAs and other joint ventures
Capitalized network distribution incentives
Prepaid and accrued pension expense
Other changes in certain working capital accounts, net
Net cash provided by continuing operating activities
Net cash used in discontinued operating activities
Net operating activities
Cash Flows from Investing Activities:
Purchase of subsidiary companies, minority interest, and long-term investments
Proceeds from formation of Colorado newspaper partnership, net of transaction costs
Additions to property, plant and equipment
Decrease (increase) in short-term investments
Sale of long-term investments
Net cash used in continuing investing activities
Net cash provided by discontinued investing activities
Net investing activities
Cash Flows from Financing Activities:
Increase in long-term debt
Payments on long-term debt
Dividends paid
Dividends paid to minority interests
Repurchase Class A Common shares
Proceeds from employee stock options
Net cash provided by (used in) continuing financing activities
Net cash used in discontinued financing activities
Net financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of period
F-5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
AND SHAREHOLDERS’ EQUITY (UNAUDITED)
As of December 31, 2005
Comprehensive income:
Unrealized gains (losses) on investments, net of tax of $(526) and $(603)
Adjustment for losses (gains) in income, net of tax of $6
Change in unrealized gains (losses) on investments
Tax adjustment to minimum pension liability
Currency translation, net of tax of $(52) and $212
Total comprehensive income
Adoption of FAS 123-R
Dividends: declared and paid—$.35 per share
Convert 100,000 Voting shares to Class A shares
Repurchase 1,113,000 Class A Common shares
Compensation plans, net: 816,822 shares issued; 72,065 shares repurchased; 2,816 shares forfeited
Tax benefits of compensation plans
As of September 30, 2006
As of December 31, 2006
Unrealized gains (losses) on investments, net of tax of $2,350 and $1,885
Adjustment for losses (gains) in income, net of tax of $19
Amortization of prior service costs, actuarial losses, and transition obligations, net of tax of $(1,000) and $(308)
Currency translation, net of tax of $(1,107) and $(517)
FIN 48 transition adjustment
Dividends: declared and paid—$.40 per share
Repurchase 1,300,000 Class A Common shares
Compensation plans, net: 666,423 shares issued;
45,534 shares repurchased; 1,600 shares forfeited
As of September 30, 2007
F-6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto included in our 2006 Annual Report on Form 10-K. In management's opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.
Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.
Nature of Operations—We are a diverse media concern with interests in national television networks, newspaper publishing, broadcast television, interactive media, and licensing and syndication. All of our media businesses provide content and advertising services via the Internet. Our media businesses are organized into the following reportable business segments: Scripps Networks, Newspapers, Broadcast television, and Interactive media. Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics. Additional information for our business segments is presented in Note 18.
Use of Estimates—The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.
Our financial statements include estimates and assumptions used in accounting for our defined benefit pension plans; the recognition of certain revenues; rebates due to customers; the periods over which long-lived assets are depreciated or amortized; the fair value of such long-lived assets; income taxes payable; estimates for uncollectible accounts receivable; and self-insured risks.
While we re-evaluate our estimates and assumptions on an ongoing basis, actual results could differ from those estimated at the time of preparation of the financial statements.
Newspaper Joint Operating Agreements (“JOA”)—We include our share of JOA earnings in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Income. The related editorial costs and expenses are included within costs and expenses in our Condensed Consolidated Statements of Income. Our residual interest in the net assets of the Denver and Albuquerque JOAs is classified as an investment in the Condensed Consolidated Balance Sheets. We do not have a residual interest in the net assets of the Cincinnati JOA.
F-7
Revenue Recognition—Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibilty is reasonably assured. When a sales arrangement contains multiple elements, such as the sale of advertising and other services, revenue is allocated to each element based upon its relative fair value. Revenue recognition may be ceased on delinquent accounts depending upon a number of factors, including the customer’s credit history, number of days past due, and the terms of any agreements with the customer. Revenue recognition on such accounts resumes when the customer has taken actions to remove their accounts from delinquent status, at which time any associated deferred revenues would also be recognized. Revenue is reported net of our remittance of sales taxes, value added taxes and other taxes collected from our customers.
Our primary sources of revenue are from:
The sale of print, broadcast, and Internet advertising.
Referral fees and commissions from retailers and service providers.
Fees for programming services (“network affiliate fees”).
The sale of newspapers.
Licensing royalties.
The revenue recognition policies for each source of revenue are described in our annual report on Form 10-K for the year ended December 31, 2006.
Production and Distribution—Production and distribution costs include costs incurred to distribute our programming to cable and satellite systems, produce and distribute our newspapers and other publications to readers, and other costs incurred to provide our products and services to consumers. These costs are expensed as incurred.
Stock-Based Compensation—We have a Long-Term Incentive Plan (the “Plan”) which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2006. The Plan provides for the award of incentive and nonqualified stock options, stock appreciation rights, restricted and unrestricted Class A Common shares and performance units to key employees and non-employee directors.
In accordance with Financial Accounting Standard No. 123(R)—Share Based Payment (“FAS 123(R)”), compensation cost is based on the grant-date fair value of the award. The fair value of awards that grant the employee the right to the appreciation of the underlying shares, such as stock options, is measured using a lattice-based binomial model. The fair value of awards that grant the employee the underlying shares is measured by the fair value of a Class A Common share.
Certain awards of Class A Common shares have performance conditions under which the number of shares granted is determined by the extent to which such performance conditions are met. Compensation costs for such awards are measured by the grant-date fair value of a Class A Common share and the number of shares earned. In periods prior to completion of the performance period, compensation costs are based upon estimates of the number of shares that will be earned.
F-8
Compensation costs, net of estimated forfeitures due to termination of employment or failure to meet performance targets, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. However, because stock compensation grants vest upon the retirement of the employee, grants to retirement-eligible employees are expensed immediately and grants to employees who will become retirement eligible prior to the end of the stated vesting period are expensed over such shorter period. The vesting of certain awards is also accelerated if performance measures are met. If it is expected those performance measures will be met, compensation costs are expensed over the accelerated vesting period.
Compensation costs of stock options are estimated on the date of grant using a lattice-based binomial model. The weighted-average assumptions used in the model are as follows:
Three months ended
September 30,
Nine months ended
Weighted-average fair value of options granted
Assumptions used to determine fair value:
Dividend yield
Risk-free rate of return
Expected life of options (years)
Expected volatility
Stock based compensation costs totaled $4.6 million for the third quarter of 2007 and $5.3 million for the third quarter of 2006. Year-to-date stock based compensation costs totaled $21.8 million in 2007 and $23.2 million in 2006.
Net Income Per Share—The following table presents information about basic and diluted weighted-average shares outstanding:
Basic weighted-average shares outstanding
Effect of dilutive securities:
Unvested restricted stock and share units held by employees
Stock options held by employees and directors
Diluted weighted-average shares outstanding
Stock options to purchase 6,638,615 common shares were anti-dilutive as of September 30, 2007, and are, therefore, not included in the computation of diluted weighted-average shares outstanding.
F-9
2. ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting Changes—In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarified the accounting for tax positions recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.
In accordance with FIN 48, the benefits of tax positions will not be recorded unless it is more likely than not that the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50%-likelihood of being realized.
We adopted FIN 48 as of the beginning of our 2007 fiscal year. See Note 6 to the Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards—In September 2006, the FASB issued FAS 157, Fair Value Measurements (“FAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the effect that the adoption of FAS 157 will have on our financial statements.
In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“FAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of FAS 159 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the effect that the adoption of FAS 159 will have on our financial statements.
In June 2007, the FASB ratified EITF 06-11, Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. We are currently evaluating the effect that the adoption of EITF 06-11 will have on our consolidated financial statements.
3. ACQUISITIONS
In the second quarter of 2007, we acquired newspaper publications in areas contiguous to our existing newspaper markets for total consideration of $2.0 million.
In the first and second quarter of 2006, we acquired an additional 4% interest in our Memphis newspaper and 2% interest in our Evansville newspaper for total consideration of $22.4 million. We also acquired a newspaper publication for total consideration of $0.7 million.
In the third quarter of 2006, we acquired newspapers and other publications in areas contiguous to our existing newspaper markets for total consideration of $2.0 million.
F-10
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the dates of acquisition. The allocation of the purchase price to the assets and liabilities of the Recipezaar and Pickle acquisitions are based upon preliminary estimates and are therefore subject to change. The allocation of the purchase price for the other acquisitions summarized below reflects final values assigned which may differ from preliminary values reported in the financial statements for prior periods.
Accounts receivable
Other current assets
Amortizable intangible assets
Total assets acquired
Current liabilities
Minority interest
Net purchase price
Pro forma results of operations, assuming the uSwitch acquisition had taken place at the beginning of 2006, are included in the following table. The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisition, additional depreciation and amortization of the assets acquired and excludes pre-acquisition transaction related expenses incurred by uSwitch. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the acquisition been completed at the beginning of 2006. Pro forma results are not presented for the other acquisitions completed during 2006 or 2007 because the combined results of operations would not be significantly different from reported amounts.
September 30,2006
Operating revenues
Income from continuing operations per share of common stock:
Basic
Diluted
F-11
4. DISCONTINUED OPERATIONS
In the first quarter of 2006, we undertook a deliberate and careful assessment of strategic alternatives for Shop At Home which culminated in the sale of the operations of the Shop At Home television network and certain assets to Jewelry Television in June 2006 for approximately $17 million in cash. Jewelry Television also assumed a number of Shop At Home’s television affiliation agreements. We also reached agreement in the third quarter of 2006 to sell the five Shop At Home-affiliated broadcast television stations for cash consideration of $170 million. On December 22, 2006, we closed the sale for the three stations located in San Francisco, CA, Canton, OH and Wilson, NC. The sale of the two remaining stations located in Lawrence, MA, and Bridgeport, CT closed on April 24, 2007.
In accordance with the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of businesses held for sale or that have ceased operations are presented as discontinued operations within our results of operations. Accordingly, these businesses have also been excluded from segment results for all periods presented.
Operating results of our discontinued operations were as follows:
Income (loss) from discontinued operations:
Income (loss) from operations
Loss on divestiture
Income (loss) from discontinued operations, before tax
Income taxes (benefit)
The loss on divestiture in 2006 represents losses on the sale of property and other assets to Jewelry Television.
Upon reaching agreement to sell the five Shop At Home-affiliated broadcast television stations in the third quarter of 2006, we recognized a $7.5 million impairment charge to reduce the carrying value of the stations’ FCC licenses to their fair value.
F-12
Shop At Home’s loss from operations in the 2006 year-to-date period also includes a $6.4 million pre-tax charge to write-down assets on the Shop At Home television network, $13.7 million in costs associated with employee termination benefits, and $3.3 million in costs associated with the termination of long-term agreements. Information regarding employee benefit and long-term contract termination accruals for 2006 is as follows:
Employee termination benefits
Other long-term agreement costs
Information regarding long-term contract termination accruals for 2007 is as follows:
Assets and liabilities of our discontinued operations for applicable periods consisted of the following:
Assets:
Intangible assets
Other assets
Liabilities:
Other liabilities
F-13
5. OTHER CHARGES AND CREDITS
2007—Investment results, reported in the caption “Miscellaneous, net” in our Condensed Consolidated Statements of Income, include realized gains from the sale of certain investments in the third quarter of 2007. Net income was increased by $5.9 million.
A majority of our newspapers offered voluntary separation plans to eligible employees during 2007. In connection with the acceptance of the offer by 137 employees, we accrued severance related costs of $8.9 million in the second quarter of 2007. These costs reduced year-to-date net income $5.4 million. Cash expenditures related to these separation plans were $6.7 million through the third quarter of 2007.
Due to changes in a distribution agreement at our Shopzilla business, we wrote down intangible assets during the first quarter of 2007 to reflect that certain components of the contract were not continued. This resulted in a charge to amortization of $5.2 million that reduced year-to-date net income $3.3 million.
In connection with the adoption of FIN 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the tax provision in the first quarter of 2007 increasing year-to-date net income $4.0 million.
2006—In February 2006, we completed the formation of a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that operates certain of both companies’ newspapers in Colorado. We contributed the assets of our Boulder Daily Camera, Colorado Daily and Bloomfield Enterprise newspapers for a 50% interest in the partnership. MediaNews contributed the assets of publications they operate in Colorado. In addition, MediaNews paid us cash consideration of $20.4 million. We recognized a pre-tax gain of $3.5 million in the first quarter of 2006 upon completion of the transaction, which increased net income by $2.1 million.
Certain of our Florida operations sustained hurricane damages in 2004 and 2005. Throughout the course of 2006, we reached final settlement agreements with insurance providers and other responsible third parties on certain of our property and business interruption claims and recorded insurance recoveries of $1.9 million, which increased net income by $1.2 million.
6. INCOME TAXES
We file a consolidated federal income tax return and separate state income tax returns for each subsidiary company. Included in our federal and state income tax returns is our proportionate share of the taxable income or loss of partnerships and incorporated limited liability companies that have been elected to be treated as partnerships for tax purposes (“pass-through entities”). Our financial statements do not include any provision (benefit) for income taxes on the income (loss) of pass-through entities attributed to the non-controlling interests.
Food Network is operated under the terms of a general partnership agreement. Fine Living is a limited liability company and is treated as a partnership for tax purposes. As a result, federal and state income taxes for these pass-through entities accrue to the individual partners.
Consolidated income before income tax consisted of the following:
Income allocated to Scripps
Income of pass-through entities allocated to non-controlling interests
Income from continuing operations before income taxes and minority interest
F-14
Effective January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes. In accordance with FIN 48, we recognized a $30.9 million increase in our liability for unrecognized tax benefits, interest, and penalties with a corresponding decrease to the January 1, 2007 balance of retained earnings.
Unrecognized tax benefits (all of which would impact the effective tax rate if recognized) were $47.7 million at January 1, 2007. Included in the balance of unrecognized tax benefits at January 1, 2007, is $7.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of January 1, 2007, we had $4.9 million accrued for the potential payment of interest and penalties.
As of January 1, 2007, we have settled all federal income tax years through 2001 with the Internal Revenue Service. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return.
The income tax provision for interim periods is determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period. To determine the annual effective income tax rate, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax. The actual effective income tax rate for the full year may differ from these estimates if income before income tax is greater or less than what was estimated or if the allocation of income to jurisdictions in which it is taxed is different from the estimated allocations. We review and adjust our estimated effective income tax rate for the full year each quarter based upon our most recent estimates of income before income tax for the full year and the jurisdictions in which we expect that income will be taxed.
Information regarding our expected effective income tax rate from continuing operations for the full year of 2007 and the actual effective income tax rate from continuing operations for the full year of 2006 is as follows:
Statutory rate
Effect of:
State and local income taxes, net of federal income tax benefit
Adjustment of state net operating loss carryforward valuation allowance
Adjustment of tax balances (1)
Tax adjustments related to statutory rate changes (2)
Section 199—Production Activities Deduction
Effective income tax rate
F-15
7. JOINT OPERATING AGREEMENTS AND NEWSPAPER PARTNERSHIPS
Three of our newspapers are operated pursuant to the terms of joint operating agreements (“JOAs”). The Newspaper Preservation Act of 1970 provides a limited exemption from anti-trust laws, permitting competing newspapers in a market to combine their sales, production and business operations in order to reduce aggregate expenses and take advantage of economies of scale, thereby allowing the continuing operation of both newspapers in that market. Each newspaper in a JOA maintains a separate and independent editorial operation.
The table below provides certain information about our JOAs.
Newspaper
Publisher of Other Newspaper
Year JOAEntered Into
Year of JOAExpiration
The JOAs generally provide for renewals unless an advance termination notice ranging from two to five years is given to either party. Gannett Co., Inc. has notified us of its intent to terminate the Cincinnati JOA upon its expiration in December 2007. In July 2007, we announced that we will cease publication of our newspapers that participate in the Cincinnati JOA at the end of the year.
The combined sales, production and business operations of the newspapers are either jointly managed or are solely managed by one of the newspapers. The sales, production and business operations of the Denver newspapers are operated by the Denver Newspaper Agency, a limited liability partnership (the “Denver JOA”). Each newspaper owns 50% of the Denver JOA and shares management of the combined newspaper operations. We do not have management responsibilities for the combined operations of the other two JOAs.
Under the terms of a JOA, operating profits earned from the combined newspaper operations are distributed to the partners in accordance with the terms of the joint operating agreement. We receive a 50% share of the Denver JOA profits, a 40% share of the Albuquerque JOA profits, and approximately 20% to 25% of the Cincinnati JOA profits.
In the third quarter of 2007, we announced that we are seeking a buyer for The Albuquerque Tribune and intend to close the newspaper if a qualified buyer is not found. We also reached an agreement in principle with the Journal Publishing Company, the publisher of the Albuquerque Journal (“Journal”), to terminate the Albuquerque joint operating agreement between the Journal and our Albuquerque Tribune newspaper following the sale or closure of our newspaper. Under the new agreement with the Journal Publishing Company, we will continue to own an approximate 40% residual interest in the Albuquerque Publishing Company, G.P. (the “Partnership”). The Partnership will direct and manage the operations of the continuing Journal newspaper and we will receive a share of the Partnership’s profits commensurate with our residual interest.
In February 2006, we formed a newspaper partnership with MediaNews Group, Inc. that operates certain of both companies’ newspapers in Colorado, including their editorial operations. We have a 50% interest in the partnership.
Our share of the operating profit (loss) of JOAs and newspaper partnerships are reported as “Equity in earnings of JOAs and other joint ventures” in our financial statements.
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8. INVESTMENTS
Investments consisted of the following:
Securities available for sale (at market value):
Time Warner (common shares—2007, 2,008,000; 2006, 2,011,000)
Other available-for-sale securities
Total available-for-sale securities
Denver JOA
Colorado newspaper partnership
Joint ventures
Other equity securities
Total investments
Investments available for sale represent securities of publicly-traded companies. Investments available for sale are recorded at fair value based upon the closing price of the security on the reporting date. As of September 30, 2007, there were no significant unrealized losses on our available-for-sale securities.
Cash distributions from the Denver JOA have exceeded earnings since the third quarter of 2005, primarily as a result of increased depreciation on assets that were retired upon consolidation of DNA’s newspaper production facilities.
In the first quarter of 2007, we contributed our 12% interest in Fox Sports Net South for a 7.25% interest in Fox-BRV Southern Sports Holdings, LLC (“Fox-BRV”). Fox-BRV will manage and operate both the Sports South and Fox Sports Net South regional television networks.
Other equity securities include securities that do not trade in public markets, so they do not have readily determinable fair values. We estimate the fair values of the other securities approximate their carrying values at September 30, 2007. There can be no assurance we would realize the carrying values of these securities upon their sale.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Land and improvements
Buildings and improvements
Equipment
Computer software
Accumulated depreciation
Net property, plant and equipment
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10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
Other intangible assets:
Amortizable intangible assets:
Carrying amount:
Acquired network distribution
Broadcast television network affiliation relationships
Customer lists
Copyrights and other trade names
Total carrying amount
Accumulated amortization:
Total accumulated amortization
Net amortizable intangible assets
Other indefinite-lived intangible assets:
FCC licenses
Total other indefinite-lived intangible assets
Total other intangible assets
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Activity related to goodwill, amortizable intangible assets and indefinite-lived intangible assets by business segment was as follows:
Goodwill:
Balance as of December 31, 2005
Business acquisitions
Formation of Colorado newspaper partnership
Balance as of September 30, 2006
Balance as of December 31, 2006
Adjustment of purchase price allocations
Foreign currency translation adjustment, inclusive of impact of purchase price adjustments
Balance as of September 30, 2007
Other additions
Amortization
Goodwill of $284.9 million and amortizable intangible assets of $108.1 million were allocated to the uSwitch acquisition in the first quarter of 2006. In the first quarter of 2007, we completed an appraisal of the book and tax bases of the assets acquired and liabilities assumed in the uSwitch acquisition. Primarily due to higher values being assigned to trademarks and relationships with referral service providers, we decreased the amount assigned to goodwill by $14.7 million and increased amounts assigned to amortizable intangible assets by $21.0 million.
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Amortizable intangible assets acquired in the uSwitch acquisition include customer lists, technology, trade names and patents. The customer lists intangible assets are estimated to have useful lives of 5 to 20 years. The other acquired intangibles are estimated to have useful lives of 4 to 9 years.
Amortizable intangible assets acquired in the 2006 and 2007 newspaper acquisitions were customer lists, which are estimated to have useful lives of 3 to 20 years.
Estimated amortization expense of intangible assets for each of the next five years is expected to be $10.2 million for the remainder of 2007, $38.4 million in 2008, $37.6 million in 2009, $34.1 million in 2010, $30.3 million in 2011, $27.3 million in 2012 and $97.5 million in later years.
11. PROGRAMS AND PROGRAM LICENSES
Programs and program licenses consisted of the following:
Cost of programs available for broadcast
Accumulated amortization
Progress payments on programs not yet available for broadcast
Total programs and program licenses
In addition to the programs owned or licensed by us included in the table above, we have commitments to license certain programming that is not yet available for broadcast, including first-run syndicated programming. Such program licenses are recorded as assets when the programming is delivered to us and is available for broadcast. First-run syndicated programming is generally produced and delivered at or near its broadcast date. Such contracts may require progress payments or deposits prior to the program becoming available for broadcast. Remaining obligations under contracts to purchase or license programs not yet available for broadcast totaled approximately $310 million at September 30, 2007. If the programs are not produced, our commitment to license the programs would generally expire without obligation.
Progress payments on programs not yet available for broadcast and the cost of programs and program licenses capitalized totaled $69.7 million in the third quarter of 2007 and $74.6 million in the third quarter of 2006. Year-to-date progress payments and capitalized programs totaled $224 million in 2007 and $206 million in 2006.
Estimated amortization of recorded program assets and program commitments for each of the next five years is as follows:
Remainder of 2007
2008
2009
2010
2011
2012
Later years
Actual amortization in each of the next five years will exceed the amounts presented above as our broadcast television stations and our national television networks will continue to produce and license additional programs.
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12. UNAMORTIZED NETWORK DISTRIBUTION INCENTIVES
Unamortized network distribution incentives consisted of the following:
Network launch incentives
Unbilled affiliate fees
Total unamortized network distribution incentives
Amortization recorded as a reduction to affiliate fee revenue in the consolidated financial statements, and estimated amortization of recorded network distribution incentives for each of the next five years, is presented below.
Amortization of network distribution incentives
Estimated amortization for the next five years is as follows:
Actual amortization could be greater than the above amounts as additional incentive payments may be capitalized as we expand distribution of Scripps Networks.
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13. LONG-TERM DEBT
Long-term debt consisted of the following:
Variable-rate credit facilities, including commercial paper
6.625% notes due in 2007
3.75% notes due in 2008
4.25% notes due in 2009
4.30% notes due in 2010
5.75% notes due in 2012
Other notes
Total long-term debt
We have Competitive Advance and Revolving Credit Facilities expiring in June 2011 (the “Revolver”) and a commercial paper program that collectively permit aggregate borrowings up to $750 million (the “Variable-Rate Credit Facilities”). Borrowings under the Revolver are available on a committed revolving credit basis at our choice of three short-term rates or through an auction procedure at the time of each borrowing. The Revolver is primarily used as credit support for our commercial paper program in lieu of direct borrowings under the Revolver. The weighted-average interest rate on borrowings under the Variable-Rate Credit Facilities was 5.0% at September 30, 2007, 5.3% at December 31, 2006, and 5.3% at September 30, 2006.
During 2006, we repurchased $10 million principal amount of our 3.75% notes due in 2008 for $9.8 million and repurchased $13.8 million principal amount of our 4.25% notes due in 2009 for $13.3 million. In 2007, we have repurchased $37.1 million principal amount of our 4.30% notes due in 2010 for $35.8 million and repurchased $14.6 million principal amount of our 5.75% note due in 2012 for $14.5 million.
Certain long-term debt agreements contain restrictions on the incurrence of additional indebtedness. We were in compliance with all debt covenants as of September 30, 2007.
Current maturities of long-term debt are classified as long-term to the extent they can be refinanced under existing long-term credit commitments.
As of September 30, 2007, we had outstanding letters of credit totaling $8.8 million.
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14. OTHER LIABILITIES
Other liabilities consisted of the following:
Program rights payable
Liability for pension benefits
Tax reserve
15. MINORITY INTERESTS
Non-controlling interests hold an approximate 10% residual interest in Fine Living. The minority owners of Fine Living have the right to require us to repurchase their interests. We have an option to acquire their interests. The minority owners will receive the fair market value for their interests at the time their option is exercised. In 2006, we notified a minority owner that we intend to exercise our call option on their 3.75% interest in Fine Living. The exercise price will be determined by an independent valuation. The put options on the remaining non-controlling interests in Fine Living are currently exercisable. The call options become exercisable in 2016.
Non-controlling interests hold an approximate 30% residual interest in Food Network. The Food Network general partnership agreement is due to expire on December 31, 2012, unless amended or extended prior to that date. In the event of such termination, the assets of the partnership are to be liquidated and distributed to the partners in proportion to their partnership interests.
Minority interests include non-controlling interests of approximately 4% in the capital stock of the subsidiary company that publishes our Memphis newspaper and approximately 6% in the capital stock of the subsidiary company that publishes our Evansville newspaper. The capital stock of these companies does not provide for or require the redemption of the non-controlling interests by us.
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16. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents additional information about the change in certain working capital accounts:
Other changes in certain working capital accounts, net:
Inventories
Accrued employee compensation and benefits
Other accrued liabilities
Other, net
Information regarding supplemental cash flow disclosures is as follows:
Interest paid, excluding amounts capitalized
Income taxes paid continuing operations
Income taxes paid (refunds received) discontinued operations
Total income taxes paid
17. EMPLOYEE BENEFIT PLANS
We sponsor defined benefit pension plans that cover substantially all non-union and certain union-represented employees. Benefits are generally based upon the employee’s compensation and years of service.
We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides defined pension benefits in addition to the defined benefit pension plan to eligible executives based on average earnings, years of service and age at retirement.
Substantially all non-union and certain union employees are also covered by a company-sponsored defined contribution plan. We match a portion of employees’ voluntary contributions to this plan.
Other union-represented employees are covered by defined benefit pension plans jointly sponsored by us and the union, or by union-sponsored multi-employer plans.
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We use a December 31 measurement date for our retirement plans. Retirement plans expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:
Service cost
Interest cost
Expected return on plan assets, net of expenses
Net amortization and deferral
Total for defined benefit plans
Multi-employer plans
SERP
Defined contribution plans
For the year-to-date period of 2007, we contributed $1.7 million to fund current benefit payments for our non-qualified SERP plan. We anticipate contributing an additional $0.9 million to fund the SERP’s benefit payments during the remainder of fiscal 2007. During 2007, we also made required contributions of $2.9 million to our defined benefit plans. Since we have met the minimum funding requirements for our defined benefit plans, we do not anticipate making any additional contributions during the remainder of fiscal 2007.
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18. SEGMENT INFORMATION
We determine our business segments based upon our management and internal reporting structure. Our reportable segments are strategic businesses that offer different products and services.
Scripps Networks includes five national television networks and their affiliated Web sites, Home & Garden Television (“HGTV”), Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities. We own approximately 70% of Food Network and approximately 90% of Fine Living. Each of our networks is distributed by cable and satellite television systems. Scripps Networks earns revenue primarily from the sale of advertising time and from affiliate fees from cable and satellite television systems.
Our newspaper business segment includes daily and community newspapers in 17 markets in the U.S. Newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers. We also have newspapers that are operated pursuant to the terms of joint operating agreements. See Note 7. Each of those newspapers maintains an independent editorial operation and receives a share of the operating profits of the combined newspaper operations.
Broadcast television includes six ABC-affiliated stations, three NBC-affiliated stations and one independent. Our television stations reach approximately 10% of the nation’s television households. Broadcast television stations earn revenue primarily from the sale of advertising time to local and national advertisers.
Interactive media includes our online comparison shopping services, Shopzilla and uSwitch. Shopzilla operates a product comparison shopping service that helps consumers find products offered for sale on the Web by online retailers. We acquired uSwitch on March 16, 2006. uSwitch operates an online comparison service that helps consumers compare prices and arrange for the purchase of a range of essential home services including gas, electricity, home phone, broadband providers and personal finance products, primarily in the United Kingdom. Our interactive media businesses earn revenue primarily from referral fees and commissions paid by participating online retailers and service providers.
Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.
The accounting policies of each of our business segments are those described in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2006.
Each of our segments may provide advertising, programming or other services to our other business segments. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits, and other shared services, are allocated to our business segments. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the business segment. Corporate assets are primarily cash, cash equivalents and other short-term investments, property and equipment primarily used for corporate purposes, and deferred income taxes.
Our chief operating decision maker (as defined by FAS 131 – Segment Reporting) evaluates the operating performance of our business segments and makes decisions about the allocation of resources to our business segments using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities (including our proportionate share of JOA restructuring activities), investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.
As discussed in Note 1, we account for our share of the earnings of JOAs and newspaper partnerships using the equity method of accounting. Our equity in earnings of JOAs and newspaper partnerships is included in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Income. Newspaper segment profits include equity in earnings of JOAs and newspaper partnerships. Scripps Networks segment profits include equity in earnings of joint ventures.
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Information regarding our business segments is as follows:
Segment operating revenues:
Newspapers:
Newspapers managed solely by us
JOAs and newspaper partnerships
Boulder prior to formation of Colorado newspaper partnership
Total newspapers
Broadcast television
Interactive media
Licensing and other media
Corporate
Intersegment eliminations
Segment profit (loss):
Depreciation and amortization of intangibles
Losses on disposal of PP&E
Depreciation:
Total depreciation
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Amortization of intangibles:
Total amortization of intangibles
Additions to property, plant and equipment:
Total additions to property, plant and equipment
Business acquisitions and other additions to long-lived assets:
Total assets of continuing operations
Discontinued operations
Total assets
No single customer provides more than 10% of our revenue. We earn international revenues from our uSwitch business that operates primarily in the United Kingdom. We also earn international revenues from the licensing of comic characters and HGTV and Food Network programming in international markets. We anticipate that about 75% of our international revenues, which will approximate $103 million in 2007, will be provided from the United Kingdom and Japanese markets.
Other additions to long-lived assets include investments, capitalized intangible assets, and Scripps Networks capitalized programs and network launch incentives.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations is based upon the condensed consolidated financial statements and the condensed notes to the consolidated financial statements. You should read this discussion in conjunction with those financial statements.
FORWARD-LOOKING STATEMENTS
This discussion and the information contained in the condensed notes to the consolidated financial statements contains certain forward-looking statements related to our businesses, including the proposed separation plan, that are based on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; newsprint prices; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty. We undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.
EXECUTIVE OVERVIEW
The E. W. Scripps Company (“Scripps”) is a diverse media company with interests in national television networks, newspaper publishing, broadcast television stations, interactive media and licensing and syndication. The company’s portfolio of media properties includes: Scripps Networks, with such brands as HGTV, Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); daily and community newspapers in 17 markets and the Washington-based Scripps Media Center, home to the Scripps Howard News Service; 10 broadcast television stations, including six ABC-affiliated stations, three NBC affiliates and one independent; Interactive media, our online comparison shopping services comprising our Shopzilla and uSwitch businesses; and United Media, a leading worldwide licensing and syndication company that is the home of PEANUTS, DILBERT and approximately 150 other features and comics.
On October 16, 2007, Scripps announced that its Board of Directors unanimously authorized management to pursue a plan to separate into two publicly traded companies. The proposed separation will create a new company called Scripps Networks Interactive that will comprise Scripps’ national lifestyle media brands (HGTV, Food Network, DIY, Fine Living and GAC and their category-leading Internet businesses) and online comparison shopping services (Shopzilla and uSwitch and their associated Web sites). The E. W. Scripps Company will continue to include Scripps’ daily and community newspapers, broadcast television stations, character licensing and feature syndication businesses, and the Scripps Media Center in Washington, D. C. The separation will allow each company to have a sharpened strategic focus in an effort to foster continued growth, solid operating performance and a clear vision on how best to build on the specific strengths of the national and local media franchises. The transaction is expected to take the form of a tax-free dividend of Scripps Networks Interactive stock to all Scripps shareholders on a pro-rata basis. The separation, which we expect to be completed in the second quarter of 2008, is contingent upon approval of the final plan by the Board of Directors and holders of Scripps’ Common Voting Shares and a favorable ruling from the Internal Revenue Service on the tax-free nature of the transaction, and the filing and effectiveness of a Form 10 registration statement with the Securities and Exchange Commission.
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During the third quarter of 2007, a continued focus on execution in all operational areas helped us deliver solid performance for the quarter despite a challenging environment at our local media businesses. Our improved consolidated results were led by the success of our national lifestyle brands in our Scripps Networks Division.
Scripps Networks generated strong revenue and segment profit growth during the third quarter of 2007. Our flagship networks, HGTV and Food Network, continued to lead the way, generating 16.2% and 15.6% revenue growth, respectively. Now available in nearly 96 million homes, HGTV delivered record ratings during the quarter, rebounding from some ratings weaknesses in earlier periods of 2007. Food Network’s primetime programming generated the highest ratings for a quarter in the network’s history. While primetime programming has been strong, we continue to work to eliminate the slippage in Food Network’s daytime ratings by developing new talent and programming to fill these spots. At our newer networks, we continue to focus on building the carriage of the networks and developing quality programming. DIY, Fine Living and GAC are all now in the range of 50 million households and each network delivered double-digit revenue growth during the quarter.
Scripps Networks also continues to build momentum on the interactive side of the business, generating 31 percent growth in interactive advertising revenue for the quarter. We continue to add content to our Web sites to drive unique visitors, and our sites have proven to be popular with consumers and advertisers alike. During the quarter, we acquired Recipezaar.com, a user-generated recipe and community site featuring more than 230,000 recipes, and Pickle.com, a site that enables users to easily organize and share photos and videos from any camera or mobile phone device. Our existing portfolio of Web sites, along with these newly acquired sites, continues to establish Scripps Networks as a leading Internet destination for lifestyle content. Overall, the focus at Scripps Networks continues to be driving ratings growth at HGTV and Food Network through the development of popular programming, expanding the distribution of our emerging networks, increasing our Internet-based service offerings, and developing additional revenue streams by utilizing the recognition of our brands.
In our Interactive Media division, we continue to adapt to a changing competitive landscape that has affected results for the first three quarters of 2007. The energy market in the United Kingdom was unchanged during the quarter, and energy switching remained soft at uSwitch. We continue efforts to grow other service categories at uSwitch including personal finance and insurance products. While referral fee revenue at Shopzilla was modestly lower than the same quarter a year ago, we started to see some positive trends near the end of the period. Results in September indicated that we are getting more efficient at acquiring paid traffic and are making progress attracting free traffic to the site. We continue to focus on improving the customer experience at Shopzilla and driving traffic to the site, and we plan to improve uSwitch results by paring costs down to be more in line with the softer switching activity we have experienced in recent periods.
Our newspaper businesses continue to fight through a difficult period. Industry-wide weakness in local advertising has created a difficult economic environment for newspapers. Revenues declined compared to the same quarter a year ago and was largely impacted by slumping housing and employment markets in Florida and California. We have focused on operating as efficiently as possible and succeeded in that capacity during the quarter. Newspaper expenses were down 3.7% during the quarter which helped offset the decline in revenue. A portion of the reduction in expenses resulted from the voluntary separation plan that was accepted by 137 newspaper division employees during the second quarter of 2007. We continue to focus on the Web sites associated with our newspapers, and have seen positive results with online revenue from newspapers increasing 19 percent over the prior year to $10.4 million.
At our broadcast television stations, third quarter revenue declined compared to the prior year, as anticipated, due to the relative absence of political advertising compared with the same period a year ago.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in estimates that are likely to occur could materially change the financial statements. We believe the accounting for Network Affiliate Fees, Acquisitions, Goodwill and Other Indefinite-Lived Intangible Assets, Income Taxes and Pension Plans to be our most critical accounting policies and estimates. A detailed description of these accounting policies is included in the Critical Accounting Policies Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2006.
There have been no significant changes in those accounting policies or other significant accounting policies except for the impacts of adopting FIN 48. (See Notes 2 and 6 to the Condensed Consolidated Financial Statements).
The trends and underlying economic conditions affecting the operating performance and future prospects differ for each of our business segments. Accordingly, we believe the following discussion of our consolidated results of operations should be read in conjunction with the discussion of the operating performance of our business segments that follows on pages F-34 through F-43.
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Consolidated Results of Operations—Consolidated results of operations were as follows:
Costs and expenses
Discontinued Operations—Discontinued operations include the Shop At Home television network and the five Shop At Home-affiliated broadcast television stations (See Note 4 to the Condensed Consolidated Financial Statements). In accordance with the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of businesses held for sale or that have ceased operations are presented as discontinued operations.
Operating results for our discontinued operations were as follows:
We sold the Shop At Home television network to Jewelry Television on June 21, 2006. The three Shop At Home-affiliated broadcast television stations located in San Francisco, CA, Canton, OH and Wilson, NC were sold on December 22, 2006 and the stations located in Lawrence, MA, and Bridgeport, CT were sold on April 24, 2007. The transactions impact the year-over-year comparability of our discontinued operations results.
The tax benefit that has been recognized in 2007 is primarily attributed to differences that were identified between our prior year tax provision and tax returns.
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In connection with reaching agreement on the sale of the five Shop At Home-affiliated broadcast television stations, Shop At Home’s loss from operations includes an impairment charge of approximately $7.5 million in the third quarter of 2006. Shop At Home’s loss from operations in the 2006 year-to-date period also includes $23.4 million of costs associated with employee termination benefits, the termination of long-term agreements and charges to write-down certain assets of the network.
Continuing Operations—Operating revenues were up slightly in 2007 compared with the year-to-date period of 2006. Increases in revenues at Scripps Networks were partially offset by lower revenues at our newspapers, broadcast television stations and interactive media divisions. Increases in advertising revenues, both on television and the Internet, and higher affiliate fee revenue contributed to the increase in revenues at Scripps Networks. The decline in revenues at our newspapers was attributed to lower local and classified advertising, including particularly weak real estate advertising in the Florida and California markets. Declines in revenue at our broadcast television stations were attributed to the relative absence of political advertising. Additionally, our broadcast television stations generated significant revenues from the broadcast of the Super Bowl on ABC and NBC’s coverage of the Winter Olympics in the first quarter of 2006. Declines in revenues at interactive media were primarily attributed to reduced online energy switching activity at uSwitch and lower referral fee revenue at Shopzilla.
Costs and expenses for the 2007 year-to-date period were primarily impacted by the expanded hours of original programming at our national networks, severance costs related to voluntary separation offers that have been accepted by 137 employees at our newspapers, and costs related to the leadership transition at Shopzilla.
Depreciation incurred on capitalized software development costs at our interactive media businesses contributed to the increase in depreciation and amortization. Additionally, we wrote down intangible assets $5.2 million as a result of changes to the terms of a distribution agreement at our Shopzilla business in the first quarter of 2007.
In the first quarter of 2006, we completed the formation of a newspaper partnership with MediaNews Group, Inc. In conjunction with the transaction, we recognized a pre-tax gain of $3.5 million. Net income was increased by $2.1 million, $.01 per share.
Certain of our Florida operations sustained hurricane damages in 2004 and 2005. Throughout the course of 2006, we reached agreements with insurance providers and other responsible third parties on certain of our property and business interruption claims and recorded insurance recoveries of $1.9 million, which increased net income by $1.2 million, $.01 per share.
Interest expense includes interest incurred on our outstanding borrowings and deferred compensation and other employment agreements. Interest incurred on our outstanding borrowings decreased in 2007 due to lower average debt levels. The average outstanding balance of variable-interest bearing obligations for the year-to-date period of 2007 was $109 million at an average rate of 5.3% compared with $362 million at an average rate of 5.0% for 2006. The average outstanding balance of variable-interest bearing obligations for the third quarter of 2007 was $57 million at an average rate of 5.2% compared with $394 million at an average rate of 5.3% for the third quarter of 2006.
The “Miscellaneous, net” caption in our Condensed Consolidated Statements of Income includes realized gains from the sale of certain investments in the third quarter of 2007. Net income was increased by $5.9 million, $.04 per share.
The income tax provision for interim periods is determined by applying the expected effective income tax rate for the full year to year-to-date income before income tax. Tax provisions are separately provided for certain discrete transactions in interim periods. To determine the annual effective income tax rate for the full-year period, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax.
Our effective income tax rate is affected by the growing profitability of Food Network. Food Network is operated pursuant to the terms of a general partnership, in which we own an approximate 70% residual interest. Income taxes on partnership income accrue to the individual partners. While the income before income tax reported in our financial statements includes all of the income before tax of the partnership, our income tax provision does not include income taxes on the portion of Food Network income that is attributable to the non-controlling interest.
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Information regarding our effective tax rate, and the impact of the Food Network partnership on our effective income tax rate, is as follows:
Income from continuing operations before income taxes and minority interests as reported
Effective income tax rate as reported
Effective income tax rate on income allocated to Scripps
In connection with the adoption of Financial Accounting Standards Board Interpretation No. 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the year-to-date tax provision $4.0 million. Decreases in statutory tax rates in certain of the jurisdictions that we operate also favorably impacted our tax provision in the third quarter of 2007. Changes in these statutory rates reduced our tax provision $2.9 million.
Minority interest increased in the third quarter and year-to-date periods of 2007 primarily due to the increased profitability of the Food Network. Food Network’s profits are allocated in proportion to each partner’s residual interests in the partnership, of which we own approximately 70%.
Business Segment Results—As discussed in Note 18 to the Condensed Consolidated Financial Statements, our chief operating decision maker (as defined by FAS 131—Segment Reporting) evaluates the operating performance of our business segments using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.
Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from our business segment performance measure enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.
In February 2006, we formed a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that operates certain of both companies’ newspapers in Colorado (See Note 5 to the Condensed Consolidated Financial Statements). Our share of the operating profit (loss) of the partnership is recorded as “Equity in earnings of JOAs and other joint ventures” in our financial statements. To enhance comparability of year-over-year results, the results of the contributed publications prior to the formation of the partnership are reported separately in our segment results.
F-34
Information regarding the operating performance of our business segments determined in accordance with FAS 131 and a reconciliation of such information to the consolidated financial statements is as follows:
Discussions of the operating performance of each of our reportable business segments begin on page F-37.
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Segment profit includes our share of the earnings of JOAs and certain other investments included in our consolidated operating results using the equity method of accounting. A reconciliation of our equity in earnings of JOAs and other joint ventures included in segment profit to the amounts reported in our Condensed Consolidated Statements of Income is as follows:
Scripps Networks:
Equity in earnings of joint ventures
Equity in earnings of JOAs and newspaper partnerships
Total equity in earnings of JOAs and other joint ventures
Certain items required to reconcile segment profitability to consolidated results of operations determined in accordance with accounting principles generally accepted in the United States of America are attributed to particular business segments.
Significant reconciling items attributable to each business segment are as follows:
Depreciation and amortization:
Losses on disposal of PP&E:
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Scripps Networks—Scripps Networks includes five national television networks and their affiliated Web sites, HGTV, Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, LLC which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities.
Advertising and network affiliate fees provide substantially all of each network’s operating revenues and employee costs and programming costs are the primary expenses. The demand for national television advertising is the primary economic factor that impacts the operating performance of our networks.
Operating results for Scripps Networks were as follows:
Total segment operating revenues
Segment costs and expenses:
Other segment costs and expenses
Total segment costs and expenses
Segment profit before joint ventures
Equity in income of joint ventures
Segment profit
Supplemental Information:
Billed network affiliate fees
Depreciation and amortization
Capital expenditures
Business acquisitions and other additions to long-lived assets, primarily program assets
Advertising revenues increased primarily due to an increased demand for advertising time and higher advertising rates at our networks. Improved ratings and viewership, particularly at HGTV, and strong pricing in the scatter advertising market contributed to the increases in advertising revenues during the third quarter.
Distribution agreements with cable and satellite television systems currently in force require the payment of affiliate fees over the terms of the agreements. The increase in network affiliate fees is primarily attributed to rate increases and the growth in distribution at DIY, Fine Living and GAC.
As of December 31, 2006, HGTV’s affiliation agreements with Time Warner and Comcast expired. During the third quarter of 2007, we entered into a new long-term affiliation agreement with Comcast. We are currently negotiating a new contract with Time Warner and are operating under a short-term extension to the expired agreement until a new agreement can be reached. The affiliation agreement with Time Warner provides distribution to approximately 17% of HGTV’s subscribers.
We continue to successfully develop our network brands on the Internet. Online advertising revenues were approximately $17.3 million in the third quarter of 2007 compared with $13.2 million in the third quarter of 2006. Year-to-date online advertising revenues were $51.4 million in 2007 compared with $38.9 million in 2006.
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Employee compensation and benefits increased primarily due to the hiring of additional employees to support the growth of Scripps Networks.
Programs and program licenses increased due to the improved quality and variety of programming, and expanded programming hours.
Supplemental financial information for Scripps Networks is as follows:
Quarter Period
Year-to-date
Operating revenues:
HGTV
Food Network
DIY
Fine Living
GAC
Homes reached in September (1):
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Newspapers—We operate daily and community newspapers in 17 markets in the U.S. Our newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers. Three of our newspapers are operated pursuant to the terms of joint operating agreements. Each of those newspapers maintains an independent editorial operation and receives a share of the operating profits of the combined newspaper operations.
Newspapers managed solely by us: The newspapers managed solely by us operate in mid-size markets, focusing on news coverage within their local markets. Advertising and circulation revenues provide substantially all of each newspaper’s operating revenues and employee and newsprint costs are the primary expenses at each newspaper. The operating performance of our newspapers is most affected by newsprint prices and economic conditions, particularly within the retail, labor, housing and auto markets.
Operating results for newspapers managed solely by us were as follows:
Local
Classified
National
Preprint, online and other
Newspaper advertising
Hurricane recoveries (losses), net
Contribution to segment profit
Business acquisitions, including acquisitions of minority interests, and other additions to long-lived assets
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The decrease in advertising revenues was primarily due to weakness in classified and local advertising in our newspaper markets. Decreases in real estate and employment advertising particularly impacted revenues at our Florida and California newspapers.
Increases in preprint, online and other advertising reflect the development of new print and electronic products and services. Additionally, our Internet sites had advertising revenues of $10.4 million in the third quarter of 2007 compared with $8.8 million in the third quarter of 2006. Year-to-date Internet advertising revenues were $31.2 million in 2007 compared with $25.7 million in 2006. Higher advertising rates, resulting from increases in the audience visiting our Web sites, as well as an increase in our online product offerings, contributed to the increase in online revenues. We expect to continue to expand and enhance our online services and to use our local news platform to launch new products, such as streaming video and audio.
Other operating revenues represent revenue earned on ancillary services offered by our newspapers.
Year-to-date employee compensation and benefit costs were increased by an $8.9 million charge recorded in the second quarter of 2007 as a result of voluntary separation offers accepted by eligible employees.
The decrease in production and distribution costs of our newspapers was primarily due to a 10% decrease in newsprint consumption and a 8.6% decrease in newsprint prices.
The increase in year-to-date other segment costs and expenses is attributed to increased spending in online and print initiatives, primarily in our Florida markets.
Excluding the costs of the voluntary separation plans, total costs and expenses of our newspapers were down 1.6% compared with the year-to-date costs of 2006.
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Joint Operating Agreements and Newspaper Partnerships: Three of our newspapers are operated pursuant to the terms of joint operating agreements (“JOAs”). The table below provides certain information about our JOAs.
Year JOA
Entered Into
Year of JOA
Expiration
The Albuquerque Tribune
The Cincinnati Post
Denver Rocky Mountain News
In February 2006, we formed a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that operates certain of both companies’ newspapers in Colorado, including their editorial operations. We have a 50% interest in the partnership.
Operating results for our JOAs and newspaper partnerships were as follows:
Equity in earnings of JOAs and newspaper partnerships included in segment profit:
Denver
Cincinnati
Albuquerque
Colorado
Other newspaper partnerships and joint ventures
Total equity in earnings of JOAs
Operating revenues of JOAs and newspaper partnerships
JOA editorial costs and expenses
Business acquisitions and other additions to long-lived assets
In the third quarter of 2005, the management committee of the Denver Newspaper Agency (“DNA”) approved plans to consolidate DNA’s newspaper production facilities resulting in certain assets of the existing facilities being retired earlier than previously estimated. The reduction in these assets’ estimated useful lives increased DNA’s depreciation expense through April 2007. The increased depreciation resulted in a $3.0 million decrease in our equity in earnings from JOAs in the third quarter of 2006. Year-to-date equity in earnings of JOAs was reduced by $4.0 million in 2007 and $9.3 million in 2006.
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Gannett Co., Inc. has notified us of its intent to terminate the Cincinnati JOA upon its expiration in December 2007. In July 2007, we announced that we will cease publication of our newspapers that participate in the Cincinnati JOA at the end of the year.
Broadcast Television—Broadcast television includes six ABC-affiliated stations, three NBC-affiliated stations and one independent. Our television stations reach approximately 10% of the nation’s television households. Our broadcast television stations earn revenue primarily from the sale of advertising time to local and national advertisers.
National broadcast television networks offer affiliates a variety of programs and sell the majority of advertising within those programs. We receive compensation from the network for carrying its programming. In addition to network programs, we broadcast locally produced programs, syndicated programs, sporting events, and other programs of interest in each station’s market. News is the primary focus of our locally-produced programming.
The operating performance of our broadcast television group is most affected by the health of the local economy, particularly conditions within the retail, auto, telecommunications and financial services industries, and by the volume of advertising time purchased by campaigns for elective office and political issues. The demand for political advertising is significantly higher in even-numbered years, when congressional and presidential elections occur, than in odd-numbered years.
Operating results for broadcast television were as follows:
Political
Network compensation
Broadcast television operating results are significantly affected by the political cycle. Advertising revenues dramatically increase during even-numbered years, when congressional and presidential elections occur. Consequently, the number of political advertising spots run often displaces some of the advertising run in our local and national advertising categories. The decline in operating revenues during the third quarter of 2007 compared with the third quarter of 2006 was attributed to the relative absence of political advertising.
The broadcast of the Super Bowl on ABC and NBC’s coverage of the Winter Olympics in 2006 contributed to the year-over-year decrease in local and national advertising in the year-to-date period. Advertising revenue related to the Super Bowl and Olympics broadcasts was approximately $9 million in 2006.
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Interactive Media—Interactive media includes our online comparison shopping services, Shopzilla and uSwitch.
Shopzilla operates a product comparison shopping service that helps consumers find products offered for sale on the Web by online retailers. Shopzilla aggregates and organizes information on millions of products from thousands of retailers. Shopzilla also operates BizRate, a Web-based consumer feedback network that collects millions of consumer reviews of stores and products each year.
We acquired uSwitch on March 16, 2006. uSwitch operates an online comparison service that helps consumers compare prices and arrange for the purchase of a range of essential home services including gas, electricity, home phone, broadband providers and personal finance products, primarily in the United Kingdom.
Our interactive media businesses earn revenue primarily from referral fees and commissions paid by participating online retailers and service providers.
Financial information for interactive media is as follows:
Segment operating revenues
Segment profit (loss)
On a pro-forma basis, assuming we had owned uSwitch for all of 2006, operating revenues for the year-to-date period of 2007 decreased 9.3% compared with the year-to-date period of 2006. Operating revenues in 2007 continued to be affected by changing market conditions within these businesses. Lower energy prices in the United Kingdom have resulted in softer switching activity at uSwitch, and competitive changes in comparison shopping has made it more costly to acquire and monetize traffic at Shopzilla.
At uSwitch, we are continuing our efforts to grow revenues from service categories other than energy. Excluding energy related switches, other switching revenues are up nearly 25% in the year-to-date period of 2007 compared with 2006.
At Shopzilla, we have countered the changing competitive landscape by expanding key word lists and making efforts to increase the share of free traffic from search engine marketing. In addition, we are continuing to make site changes to improve monetization from our traffic and we continually evaluate the profitability of traffic in an effort to optimize key word bidding.
Segment profit for the year-to-date period of 2007 has been impacted by first quarter 2007 costs of $10 million to build brand awareness for uSwitch. In addition, we have incurred costs in 2007 for a management transition at Shopzilla and have undertaken efforts to downsize uSwitch which we expect to complete by year-end. Total costs for the year related to the transition and downsizing are expected to be $8 million, of which $7.2 million has been incurred in the year-to-date period of 2007.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our cash flow from operating activities. Marketing services, including advertising and referral fees, provide approximately 80% of total operating revenues, so cash flow from operating activities is adversely affected during recessionary periods. Information about our use of cash flow from operating activities is presented in the following table:
Net cash provided by (used in) discontinued operations
Proceeds from formation of Colorado partnership
Dividends paid, including to minority interests
Employee stock option proceeds
Excess tax benefits on stock awards
Other financing activities
Cash flow available for acquisitions, investments, debt repayment and share repurchase
Sources and uses of available cash flow:
Business acquisitions and net investment activity
Other investing activity
Increase (decrease) in long-term debt
Our cash flow has been used primarily to fund acquisitions and investments, develop new businesses, and repay debt. We expect cash flow from operating activities in 2007 will provide sufficient liquidity to continue the development of our emerging brands and to fund the capital expenditures necessary to support our businesses. Capital expenditures are expected to be approximately $110 million to $125 million for the full year of 2007.
In July 2007, we reached agreements to acquire the Web sites Recipezaar.com and Pickle.com for total cash consideration of approximately $30 million.
In 2007, we repurchased $37.1 million principal amount of our 4.30% note due in 2010 for $35.8 million and repurchased $14.6 million principal amount of our 5.75% note due in 2012 for $14.5 million. In the third quarter of 2006, we repurchased $10 million principal amount of our 3.75% note due in 2008 for $9.8 million.
On April 24, 2007, we closed the sale for the two Shop At Home-affiliated stations located in Lawrence, MA, and Bridgeport, CT, which provided cash consideration of approximately $61 million.
In 2006, we sold certain assets of our Shop At Home business to Jewelry Television for cash consideration of approximately $17 million. Cash expenditures associated with the termination of long-term agreements and employee termination benefits at Shop At Home totaled approximately $14.7 million through the third quarter of 2006.
In March 2006, we acquired 100% of the common stock of uSwitch for approximately $372 million, net of cash and short-term investments acquired. We also acquired minority interests in our Evansville and Memphis newspapers, and acquired certain other newspaper publications, for total consideration of approximately $23 million. In connection with the acquisitions, we entered into a $100 million 364-day revolving credit facility which was subsequently replaced by a new credit facility in the second quarter of 2006 (See Note 13 to the Condensed Consolidated Financial Statements). The remainder of the consideration was financed through cash on hand and additional borrowings on our existing credit facilities.
Pursuant to the terms of the Food Network general partnership agreement, the partnership is required to distribute available cash to the general partners. We expect the cash distributions to the minority partner will approximate $70 million in 2007.
We expect to repurchase our Class A Common shares to offset the dilution resulting from our stock compensation programs each year. In 2007, we have repurchased 1.3 million shares at a total cost of $57.5 million. As of September 30, 2007, we are authorized to repurchase 1.6 million additional shares. The stock repurchase program can be discontinued at any time.
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We have a revolving credit facility expiring in June 2011 that permits aggregate borrowings up to $750 million. Total commercial paper borrowings, which are supported by the facility, were $81.0 million at September 30, 2007.
Our access to commercial paper markets can be affected by macroeconomic factors outside of our control. In addition to macroeconomic factors, our access to commercial paper markets and our borrowing costs are affected by short and long-term debt ratings assigned by independent rating agencies.
In the fourth quarter of 2006, we filed a shelf registration statement with the Securities and Exchange Commission under which an unspecified amount of public debt or equity securities may be issued, subject to approval by the Board of Directors. Proceeds from any takedowns off the shelf will be used for general corporate purposes, including capital expenditures, working capital, securities repurchase programs, repayment of long-term and short-term debt and the financing of acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Earnings and cash flow can be affected by, among other things, economic conditions, interest rate changes, foreign currency fluctuations and changes in the price of newsprint. We are also exposed to changes in the market value of our investments.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows, and to reduce our overall borrowing costs. We manage interest rate risk primarily by maintaining a mix of fixed-rate and variable-rate debt.
Our primary exposure to foreign currencies is the exchange rates between the U.S. dollar and the Japanese yen, British pound and the Euro. Reported earnings and assets may be reduced in periods in which the U.S. dollar increases in value relative to those currencies. Included in shareholders’ equity is $66.5 million of foreign currency translation adjustment gains resulting primarily from the devaluation of the U.S. dollar relative to the British pound since our acquisition of uSwitch in March 2006.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign currency options. We held no foreign currency derivative financial instruments at September 30, 2007.
We also may use forward contracts to reduce the risk of changes in the price of newsprint on anticipated newsprint purchases. We held no newsprint derivative financial instruments at September 30, 2007.
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The following table presents additional information about market-risk-sensitive financial instruments:
Financial instruments subject to interest rate risk:
Total long-term debt including current portion
Financial instruments subject to market value risk:
Total investments in publicly-traded companies
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CONTROLS AND PROCEDURES
Scripps’ management is responsible for establishing and maintaining adequate internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The company’s internal control over financial reporting includes those policies and procedures that:
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error, collusion and the improper overriding of controls by management. Accordingly, even effective internal control can only provide reasonable but not absolute assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was evaluated as of the date of the financial statements. This evaluation was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no changes to the company’s internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
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Index to Exhibits
Exhibit No.
12
31(a)
31(b)
32(a)
32(b)
E-1