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As Of Filer Filing As/For/On Docs:Pgs Issuer Agent 8/08/07 Scripps E W Co/DE 10-Q 6/30/07 6:162 RR Donnelley/FA
Document/Exhibit Description Pages Size 1: 10-Q Quarterly Report HTML 997K 2: EX-12 Ratio of Earnings to Fixed Charges HTML 17K 3: EX-31.(A) Section 302 Ceo Certification HTML 12K 4: EX-31.(B) Section 302 Cfo Certification HTML 12K 5: EX-32.(A) Section 906 Ceo Certification HTML 6K 6: EX-32.(B) Section 906 Cfo Certification HTML 6K
|
| Quarterly Report |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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)
| Ohio | 31-1223339 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| 312 Walnut Street Cincinnati, Ohio |
45202 | |
| (Address of principal executive offices) | (Zip Code) | |
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 July 31, 2007 there were 126,611,996 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 JUNE 30, 2007
| Item No. |
Page | |||
| PART I - FINANCIAL INFORMATION | ||||
| 1 | 3 | |||
| 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
3 | ||
| 3 | 3 | |||
| 4 | 3 | |||
| PART II - OTHER INFORMATION | ||||
| 1 | 3 | |||
| 1A | 3 | |||
| 2 | 4 | |||
| 3 | 4 | |||
| 4 | 5 | |||
| 5 | 5 | |||
| 6 | 5 | |||
| 6 | ||||
2
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 |
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 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 4. | CONTROLS AND PROCEDURES |
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 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 June 30, 2007:
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans Or Programs | |||||
| 4/1/07 - 4/30/07 |
130,000 | $ | 44.42 | 130,000 | 2,343,000 | ||||
| 5/1/07 - 5/31/07 |
143,000 | $ | 43.86 | 143,000 | 2,200,000 | ||||
| 6/1/07 - 6/30/07 |
2,200,000 | ||||||||
| Total |
273,000 | $ | 44.12 | 273,000 | 2,200,000 | ||||
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.
4
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The following table presents information on matters submitted to a vote of security holders at the May 4, 2007 Annual Meeting of Shareholders:
| Description of Matters Submitted |
In Favor | Authority Witheld | ||
| 1. Election of Directors: |
||||
| Class A Common Shares: |
||||
| David A. Galloway |
110,191,115 | 4,364,489 | ||
| Nicholas B. Paumgarten |
109,965,150 | 4,590,454 | ||
| Ronald W. Tysoe |
102,832,335 | 11,723,269 | ||
| Julie A. Wrigley |
109,893,503 | 4,662,101 | ||
| Common Voting Shares: |
||||
| William R. Burleigh |
35,593,746 | 770,000 | ||
| John H. Burlingame |
36,363,746 | |||
| Kenneth W. Lowe |
36,363,746 | |||
| Jarl Mohn |
36,363,746 | |||
| Jeffrey Sagansky |
36,363,746 | |||
| Nackey E. Scagliotti |
36,363,746 | |||
| Edward W. Scripps |
36,363,746 | |||
| Paul K. Scripps |
36,363,746 |
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
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.
5
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE E. W. SCRIPPS COMPANY | ||||||||
| Dated: August 8, 2007 | BY: | /s/ Joseph G. NeCastro | ||||||
| Joseph G. NeCastro | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
6
Index to Financial Information
| Item |
Page | |
| F-2 | ||
| F-4 | ||
| F-5 | ||
| Condensed Consolidated Statements of Comprehensive Income and Shareholders’ Equity |
F-6 | |
| F-7 | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
||
| F-29 | ||
| F-29 | ||
| F-31 | ||
| F-32 | ||
| F-32 | ||
| F-33 | ||
| F-34 | ||
| F-37 | ||
| F-39 | ||
| F-42 | ||
| F-43 | ||
| F-44 | ||
| F-45 | ||
| F-47 |
F-1
CONDENSED CONSOLIDATED BALANCE SHEETS
| (in thousands) |
2007 (Unaudited) |
As of 2006 |
2006 (Unaudited) | ||||||
| ASSETS |
|||||||||
| Current assets: |
|||||||||
| Cash and cash equivalents |
$ | 18,778 | $ | 30,450 | $ | 33,733 | |||
| Short-term investments |
2,064 | 2,872 | 1,110 | ||||||
| Accounts and notes receivable (less allowances - $14,586, $15,477, $16,253) |
538,211 | 535,901 | 524,164 | ||||||
| Programs and program licenses |
201,736 | 179,887 | 191,171 | ||||||
| Deferred income taxes |
20,005 | 21,744 | 32,666 | ||||||
| Assets of discontinued operations |
61,237 | 175,478 | |||||||
| Miscellaneous |
34,687 | 43,228 | 36,488 | ||||||
| Total current assets |
815,481 | 875,319 | 994,810 | ||||||
| Investments |
220,639 | 225,349 | 231,399 | ||||||
| Property, plant and equipment |
528,326 | 511,738 | 475,633 | ||||||
| Goodwill and other intangible assets: |
|||||||||
| Goodwill |
1,955,285 | 1,961,051 | 1,940,374 | ||||||
| Other intangible assets |
309,441 | 309,243 | 324,041 | ||||||
| Total goodwill and other intangible assets |
2,264,726 | 2,270,294 | 2,264,415 | ||||||
| Other assets: |
|||||||||
| Programs and program licenses (less current portion) |
272,820 | 249,184 | 189,748 | ||||||
| Unamortized network distribution incentives |
146,004 | 155,578 | 164,303 | ||||||
| Prepaid pension |
9,133 | 9,130 | 54,442 | ||||||
| Miscellaneous |
45,905 | 47,742 | 45,898 | ||||||
| Total other assets |
473,862 | 461,634 | 454,391 | ||||||
| TOTAL ASSETS |
$ | 4,303,034 | $ | 4,344,334 | $ | 4,420,648 | |||
See notes to condensed consolidated financial statements.
F-2
CONDENSED CONSOLIDATED BALANCE SHEETS
| (in thousands, except share data) |
2007 (Unaudited) |
As of 2006 |
2006 (Unaudited) |
|||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable |
$ | 74,282 | $ | 77,945 | $ | 85,375 | ||||||
| Customer deposits and unearned revenue |
64,497 | 50,524 | 49,254 | |||||||||
| Accrued liabilities: |
||||||||||||
| Employee compensation and benefits |
60,491 | 76,744 | 67,221 | |||||||||
| Network distribution incentives |
4,388 | 3,755 | 7,969 | |||||||||
| Accrued income taxes |
31,311 | 36,798 | 10,203 | |||||||||
| Accrued marketing and advertising costs |
14,714 | 19,937 | 16,299 | |||||||||
| Accrued interest |
10,459 | 10,850 | 7,912 | |||||||||
| Miscellaneous |
61,527 | 68,346 | 65,892 | |||||||||
| Liabilities of discontinued operations |
19,719 | 44,964 | ||||||||||
| Other current liabilities |
32,932 | 34,650 | 30,854 | |||||||||
| Total current liabilities |
354,601 | 399,268 | 385,943 | |||||||||
| Deferred income taxes |
340,610 | 334,223 | 355,932 | |||||||||
| Long-term debt (less current portion) |
623,881 | 766,381 | 1,042,434 | |||||||||
| Other liabilities (less current portion) |
181,257 | 140,598 | 122,752 | |||||||||
| Minority interests |
114,311 | 122,429 | 97,783 | |||||||||
| 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: 126,881,611, 126,974,721; and 126,939,429 shares |
1,269 | 1,270 | 1,269 | |||||||||
| Voting - authorized: 60,000,000 shares; issued and outstanding: 36,568,226, 36,568,226 and 36,568,226 shares |
366 | 366 | 366 | |||||||||
| Total |
1,635 | 1,636 | 1,635 | |||||||||
| Additional paid-in capital |
461,563 | 431,432 | 395,614 | |||||||||
| Retained earnings |
2,210,303 | 2,145,875 | 2,008,434 | |||||||||
| Accumulated other comprehensive income (loss), net of income taxes: |
||||||||||||
| Unrealized gains on securities available for sale |
9,775 | 10,591 | 4,751 | |||||||||
| Pension liability adjustments |
(53,657 | ) | (54,863 | ) | (18,550 | ) | ||||||
| Foreign currency translation adjustment |
58,755 | 46,764 | 23,920 | |||||||||
| Total shareholders’ equity |
2,688,374 | 2,581,435 | 2,415,804 | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 4,303,034 | $ | 4,344,334 | $ | 4,420,648 | ||||||
See notes to condensed consolidated financial statements.
F-3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| (in thousands, except per share data) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
| Operating Revenues: |
||||||||||||||||
| Advertising |
$ | 459,245 | $ | 465,387 | $ | 874,434 | $ | 884,145 | ||||||||
| Referral fees |
59,176 | 64,531 | 121,261 | 122,684 | ||||||||||||
| Network affiliate fees, net |
58,672 | 49,247 | 116,524 | 97,533 | ||||||||||||
| Circulation |
29,579 | 30,423 | 60,457 | 62,957 | ||||||||||||
| Licensing |
17,421 | 17,580 | 35,694 | 36,510 | ||||||||||||
| Other |
15,981 | 14,746 | 33,128 | 27,814 | ||||||||||||
| Total operating revenues |
640,074 | 641,914 | 1,241,498 | 1,231,643 | ||||||||||||
| Costs and Expenses: |
||||||||||||||||
| Employee compensation and benefits |
180,711 | 164,284 | 364,656 | 333,456 | ||||||||||||
| Production and distribution |
71,207 | 74,407 | 142,968 | 148,416 | ||||||||||||
| Programs and program licenses |
70,209 | 58,249 | 133,054 | 113,727 | ||||||||||||
| Marketing and advertising |
49,671 | 53,173 | 111,335 | 111,505 | ||||||||||||
| Other costs and expenses |
71,552 | 70,836 | 141,336 | 136,082 | ||||||||||||
| Total costs and expenses |
443,350 | 420,949 | 893,349 | 843,186 | ||||||||||||
| Depreciation, Amortization, and Losses (Gains): |
||||||||||||||||
| Depreciation |
20,867 | 18,851 | 39,418 | 36,105 | ||||||||||||
| Amortization of intangible assets |
11,343 | 14,582 | 27,234 | 22,676 | ||||||||||||
| Gain on formation of Colorado newspaper partnership |
(3,535 | ) | ||||||||||||||
| Losses on disposal of property, plant and equipment |
243 | 60 | 332 | 156 | ||||||||||||
| Hurricane recoveries, net |
(1,750 | ) | (1,750 | ) | ||||||||||||
| Net depreciation, amortization and losses (gains) |
32,453 | 31,743 | 66,984 | 53,652 | ||||||||||||
| Operating income |
164,271 | 189,222 | 281,165 | 334,805 | ||||||||||||
| Interest expense |
(10,729 | ) | (15,537 | ) | (20,930 | ) | (27,690 | ) | ||||||||
| Equity in earnings of JOAs and other joint ventures |
18,139 | 14,611 | 25,688 | 25,981 | ||||||||||||
| Miscellaneous, net |
2,915 | 1,551 | 3,761 | 3,130 | ||||||||||||
| Income from continuing operations before income taxes and minority interests |
174,596 | 189,847 | 289,684 | 336,226 | ||||||||||||
| Provision for income taxes |
55,917 | 65,249 | 88,308 | 115,797 | ||||||||||||
| Income from continuing operations before minority interests |
118,679 | 124,598 | 201,376 | 220,429 | ||||||||||||
| Minority interests |
20,988 | 19,726 | 38,968 | 34,075 | ||||||||||||
| Income from continuing operations |
97,691 | 104,872 | 162,408 | 186,354 | ||||||||||||
| Income (loss) from discontinued operations, net of tax |
(230 | ) | (33,728 | ) | 3,537 | (40,145 | ) | |||||||||
| Net income |
$ | 97,461 | $ | 71,144 | $ | 165,945 | $ | 146,209 | ||||||||
| Net income (loss) per basic share of common stock: |
||||||||||||||||
| Income from continuing operations |
$ | .60 | $ | .64 | $ | .99 | $ | 1.14 | ||||||||
| Income (loss) from discontinued operations |
.00 | (.21 | ) | .02 | (.25 | ) | ||||||||||
| Net income per basic share of common stock |
$ | .60 | $ | .44 | $ | 1.02 | $ | .90 | ||||||||
| Net income (loss) per diluted share of common stock: |
||||||||||||||||
| Income from continuing operations |
$ | .59 | $ | .64 | $ | .99 | $ | 1.13 | ||||||||
| Income (loss) from discontinued operations |
.00 | (.20 | ) | .02 | (.24 | ) | ||||||||||
| Net income per diluted share of common stock |
$ | .59 | $ | .43 | $ | 1.01 | $ | .89 | ||||||||
| Net income per share amounts may not foot since each is calculated independently. | ||||||||||||||||
See notes to condensed consolidated financial statements.
F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six months ended June 30, |
||||||||
| (in thousands) |
2007 | 2006 | ||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income |
$ | 165,945 | $ | 146,209 | ||||
| Loss (income) from discontinued operations |
(3,537 | ) | 40,145 | |||||
| Income from continuing operations |
162,408 | 186,354 | ||||||
| Adjustments to reconcile income from continuing operations to net cash flows from operating activities: |
||||||||
| Programs and program licenses costs |
133,054 | 113,727 | ||||||
| Depreciation and intangible assets amortization |
66,652 | 58,781 | ||||||
| Network distribution incentive amortization |
13,715 | 14,897 | ||||||
| Equity in earnings of JOAs and other joint ventures |
(25,688 | ) | (25,981 | ) | ||||
| Gain on formation of Colorado newspaper partnership |
(3,535 | ) | ||||||
| Deferred income taxes |
(666 | ) | 3,982 | |||||
| Excess tax benefits of stock compensation plans |
1,102 | |||||||
| Stock and deferred compensation plans |
19,973 | 19,034 | ||||||
| Minority interests in income of subsidiary companies |
38,968 | 34,075 | ||||||
| Program payments |
(176,178 | ) | (152,791 | ) | ||||
| Dividends received from JOAs and other joint ventures |
31,218 | 38,116 | ||||||
| Capitalized network distribution incentives |
(5,476 | ) | (10,946 | ) | ||||
| Prepaid and accrued pension expense |
7,325 | 11,711 | ||||||
| Other changes in certain working capital accounts, net |
(16,257 | ) | (36,204 | ) | ||||
| Miscellaneous, net |
(438 | ) | 4,372 | |||||
| Net cash provided by continuing operating activities |
249,712 | 255,592 | ||||||
| Net cash provided by (used in) discontinued operating activities |
(17,082 | ) | 656 | |||||
| Net operating activities |
232,630 | 256,248 | ||||||
| Cash Flows from Investing Activities: |
||||||||
| Purchase of subsidiary companies, minority interest, and long-term investments |
(2,821 | ) | (396,038 | ) | ||||
| Proceeds from formation of Colorado newspaper partnership, net of transaction costs |
20,029 | |||||||
| Additions to property, plant and equipment |
(52,433 | ) | (29,299 | ) | ||||
| Decrease (increase) in short-term investments |
808 | 11,690 | ||||||
| Sale of long-term investments |
1,339 | 2,422 | ||||||
| Miscellaneous, net |
69 | 1,750 | ||||||
| Net cash provided by (used in) continuing investing activities |
(53,038 | ) | (389,446 | ) | ||||
| Net cash provided by (used in) discontinued investing activities |
60,927 | 14,046 | ||||||
| Net investing activities |
7,889 | (375,400 | ) | |||||
| Cash Flows from Financing Activities: |
||||||||
| Increase in long-term debt |
216,894 | |||||||
| Payments on long-term debt |
(142,616 | ) | (50 | ) | ||||
| Dividends paid |
(42,581 | ) | (37,605 | ) | ||||
| Dividends paid to minority interests |
(47,086 | ) | (25,248 | ) | ||||
| Repurchase Class A Common shares |
(30,103 | ) | (32,984 | ) | ||||
| Proceeds from employee stock options |
11,776 | 11,501 | ||||||
| Excess tax benefits of stock compensation plans |
2,070 | 1,473 | ||||||
| Miscellaneous, net |
(3,751 | ) | (1,022 | ) | ||||
| Net cash provided by (used in) continuing financing activities |
(252,291 | ) | 132,959 | |||||
| Net cash provided by (used in) discontinued financing activities |
(43 | ) | (106 | ) | ||||
| Net financing activities |
(252,334 | ) | 132,853 | |||||
| Effect of exchange rate changes on cash and cash equivalents |
143 | 789 | ||||||
| Increase (decrease) in cash and cash equivalents |
(11,672 | ) | 14,490 | |||||
| Cash and cash equivalents: |
||||||||
| Beginning of year |
30,450 | 19,243 | ||||||
| End of period |
$ | 18,778 | $ | 33,733 | ||||
See notes to condensed consolidated financial statements.
F-5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
AND SHAREHOLDERS’ EQUITY (UNAUDITED)
| (in thousands, except share data) |
Common Stock |
Additional Paid-in Capital |
Stock Compensation |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
Comprehensive Income for the Three Months Ended June 30 | ||||||||||||||||||||
| As of December 31, 2005 |
$ | 1,637 | $ | 363,416 | $ | 3,194 | $ | 1,930,994 | $ | (12,162 | ) | $ | 2,287,079 | ||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||||||
| Net income |
146,209 | 146,209 | $ | 71,144 | |||||||||||||||||||||||
| Unrealized gains (losses) on investments, net of tax of $77 and $(367) |
(144 | ) | (144 | ) | 682 | ||||||||||||||||||||||
| Adjustment for losses (gains) in income, net of tax of $6 |
(11 | ) | (11 | ) | |||||||||||||||||||||||
| Change in unrealized gains (losses) on investments |
(155 | ) | (155 | ) | 682 | ||||||||||||||||||||||
| Currency translation, net of tax of $(264) and $(284) |
22,438 | 22,438 | 24,098 | ||||||||||||||||||||||||
| Total comprehensive income |
168,492 | $ | 95,924 | ||||||||||||||||||||||||
| Adoption of FAS 123-R |
3,194 | (3,194 | ) | ||||||||||||||||||||||||
| Dividends: declared and paid - $.23 per share |
(37,605 | ) | (37,605 | ) | |||||||||||||||||||||||
| Convert 100,000 Voting shares to Class A shares |
|||||||||||||||||||||||||||
| Repurchase 700,000 Class A Common shares |
(7 | ) | (1,813 | ) | (31,164 | ) | (32,984 | ) | |||||||||||||||||||
| Compensation plans, net: 619,470 shares issued; 71,611 shares repurchased; 2,816 shares forfeited |
5 | 28,246 | 28,251 | ||||||||||||||||||||||||
| Tax benefits of compensation plans |
2,571 | 2,571 | |||||||||||||||||||||||||
| As of June 30, 2006 |
$ | 1,635 | $ | 395,614 | $ | 2,008,434 | $ | 10,121 | $ | 2,415,804 | |||||||||||||||||
| As of December 31, 2006 |
$ | 1,636 | $ | 431,432 | $ | 2,145,875 | $ | 2,492 | $ | 2,581,435 | |||||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||||||
| Net income |
165,945 | 165,945 | $ | 97,461 | |||||||||||||||||||||||
| Unrealized gains (losses) on investments, net of tax of $465 and $(1,004) |
(816 | ) | (816 | ) | 1,765 | ||||||||||||||||||||||
| Amortization of prior service costs, actuarial losses, and transition obligations, net of tax of $(692) and $(343) |
1,206 | 1,206 | 597 | ||||||||||||||||||||||||
| Currency translation, net of tax of $(590) and $(518) |
11,991 | 11,991 | 9,470 | ||||||||||||||||||||||||
| Total comprehensive income |
178,326 | $ | 109,293 | ||||||||||||||||||||||||
| FIN 48 transition adjustment |
(30,869 | ) | (30,869 | ) | |||||||||||||||||||||||
| Dividends: declared and paid - $.26 per share |
(42,581 | ) | (42,581 | ) | |||||||||||||||||||||||
| Repurchase 650,000 Class A Common shares |
(7 | ) | (2,029 | ) | (28,067 | ) | (30,103 | ) | |||||||||||||||||||
| Compensation plans, net: 602,883 shares issued; 44,693 shares repurchased; 1,300 shares forfeited |
6 | 28,988 | 28,994 | ||||||||||||||||||||||||
| Tax benefits of compensation plans |
3,172 | 3,172 | |||||||||||||||||||||||||
| As of June 30, 2007 |
$ | 1,635 | $ | 461,563 | $ | 2,210,303 | $ | 14,873 | $ | 2,688,374 | |||||||||||||||||
See notes to condensed consolidated financial statements.
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. 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 collectibility 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 June 30, |
Six months ended |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Weighted-average fair value of options granted |
$ | 12.58 | $ | 12.29 | $ | 12.58 | $ | 12.75 | ||||||||
| Assumptions used to determine fair value: |
||||||||||||||||
| Dividend yield |
1.0 | % | 0.9 | % | 1.0 | % | 0.9 | % | ||||||||
| Risk-free rate of return |
4.7 | % | 4.6 | % | 4.7 | % | 4.6 | % | ||||||||
| Expected life of options (years) |
5.35 | 5.38 | 5.35 | 5.38 | ||||||||||||
| Expected volatility |
20.6 | % | 21.3 | % | 20.6 | % | 21.3 | % | ||||||||
Stock based compensation costs totaled $6.0 million for the second quarter of 2007 and $6.6 million for the second quarter of 2006. Year-to-date stock based compensation costs totaled $17.2 million in 2007 and $17.9 million in 2006.
Net Income Per Share - The following table presents information about basic and diluted weighted-average shares outstanding:
| Three months ended June 30, |
Six months ended June 30, | |||||||
| (in thousands) |
2007 | 2006 | 2007 | 2006 | ||||
| Basic weighted-average shares outstanding |
163,184 | 163,244 | 163,291 | 163,331 | ||||
| Effect of dilutive securities: |
||||||||
| Unvested restricted stock and share units held by employees |
206 | 218 | 214 | 225 | ||||
| Stock options held by employees and directors |
1,000 | 1,323 | 1,152 | 1,428 | ||||
| Diluted weighted-average shares outstanding |
164,390 | 164,785 | 164,657 | 164,984 | ||||
Stock options to purchase 6,341,951 common shares were anti-dilutive as of June 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
| 2007 - | In July 2007, we reached an agreement to acquire Fum Machineworks, Inc. d/b/a Recipezaar.com, a user-generated recipe and community site featuring more than 230,000 recipes, for cash consideration of approximately $25 million. We also acquired Incando Corporation d/b/a Pickle.com, a Web-site that enables users to easily organize and share photos and videos from any camera and mobile phone device, for cash consideration of approximately $4.7 million. These acquisitions are part of our broader strategy at Scripps Networks to move our online businesses beyond extensions of our networks to become multi-branded, user-centric applications that create communities of online consumers in the home, food and lifestyle categories. |
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.
| 2006 - | On March 16, 2006, we acquired 100% of the common stock of uSwitch Ltd. for approximately $383 million in cash. Assets acquired in the transaction included approximately $10.9 million of cash. The acquisition, financed using a combination of cash on hand and borrowing on both existing and new credit facilities, enables us to further capitalize on the increasing use and profitability of specialized Internet search businesses and to extend the reach of our interactive media businesses into essential home services and international markets. |
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 summarized below reflects final values assigned which may differ from preliminary values reported in the financial statements for prior periods.
| 2007 | 2006 | ||||||||||
| (in thousands) |
Newspapers | uSwitch | Newspapers | ||||||||
| Accounts receivable |
$ | 9,486 | $ | 91 | |||||||
| Other current assets |
583 | ||||||||||
| Property, plant and equipment |
5,368 | 5 | |||||||||
| Amortizable intangible assets |
$ | 997 | 129,095 | 8,468 | |||||||
| Goodwill |
998 | 274,114 | 14,318 | ||||||||
| Total assets acquired |
1,995 | 418,646 | 22,882 | ||||||||
| Current liabilities |
(13,251 | ) | (96 | ) | |||||||
| Deferred income taxes |
(33,238 | ) | |||||||||
| Minority interest |
2,305 | ||||||||||
| Net purchase price |
$ | 1,995 | $ | 372,157 | $ | 25,091 | |||||
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 because the combined results of operations would not be significantly different from reported amounts.
| (in thousands, except per share data) |
Six months ended | ||
| Operating revenues |
$ | 1,241,909 | |
| Income from continuing operations |
184,598 | ||
| Income from continuing operations per share of common stock: |
|||
| Basic |
$ | 1.13 | |
| Diluted |
1.12 | ||
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:
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| (in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
| Operating revenues |
$ | 213 | $ | 80,232 | $ | 1,320 | $ | 164,622 | ||||||||
| Income (loss) from discontinued operations: |
||||||||||||||||
| Income (loss) from operations |
$ | (142 | ) | $ | (40,465 | ) | $ | 467 | $ | (50,504 | ) | |||||
| Loss on divestiture |
(255 | ) | (12,054 | ) | (255 | ) | (12,054 | ) | ||||||||
| Income (loss) from discontinued operations, before tax |
(397 | ) | (52,519 | ) | 212 | (62,558 | ) | |||||||||
| Income taxes (benefit) |
(167 | ) | (18,791 | ) | (3,325 | ) | (22,413 | ) | ||||||||
| Income (loss) from discontinued operations |
$ | (230 | ) | $ | (33,728 | ) | $ | 3,537 | $ | (40,145 | ) | |||||
F-12
In connection with the sale of Shop At Home in the second quarter of 2006, we recognized a $6.2 million pre-tax charge to write-down assets on the Shop At Home television network, $12.3 million in costs associated with employee termination benefits, and $4.4 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:
| (in thousands) |
Second quarter charges |
Third quarter charges / adjustments |
Fourth quarter adjustments |
Cash payments |
Balance as of 2006 | |||||||||||||
| Employee termination benefits |
$ | 12,327 | $ | 1,326 | $ | (13,653 | ) | |||||||||||
| Other long-term agreement costs |
4,404 | (1,142 | ) | $ | (730 | ) | (1,419 | ) | $ | 1,113 | ||||||||
| Total |
$ | 16,731 | $ | 184 | $ | (730 | ) | $ | (15,072 | ) | $ | 1,113 | ||||||
Information regarding long-term contract termination accruals for 2007 is as follows:
| (in thousands) |
Balance as of 2006 |
First quarter Adjustments |
Second quarter Adjustments |
Cash payments |
Balance as of 2007 | |||||||||||||
| Other long-term agreement costs |
$ | 1,113 | $ | (146 | ) | $ | (759 | ) | $ | (208 | ) | $ | — | |||||
Assets and liabilities of our discontinued operations consisted of the following:
| As of | ||||||
| (in thousands) |
2006 |
2006 | ||||
| Assets: |
||||||
| Inventories |
$ | 2,869 | ||||
| Property, plant and equipment |
$ | 4,738 | 8,398 | |||
| Intangible assets |
55,923 | 163,600 | ||||
| Other assets |
576 | 611 | ||||
| Assets of discontinued operations |
$ | 61,237 | $ | 175,478 | ||
| Liabilities: |
||||||
| Deferred income taxes |
$ | 19,277 | $ | 44,402 | ||
| Other liabilities |
442 | 562 | ||||
| Liabilities of discontinued operations |
$ | 19,719 | $ | 44,964 | ||
F-13
5. OTHER CHARGES AND CREDITS
2007 - 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 net income $5.4 million. Cash expenditures related to these separation plans were $5.3 million through the second 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 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 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. In the second quarter 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 $1.8 million, which increased net income by $1.1 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 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:
| Three months ended June 30, |
Six months ended June 30, | |||||||||||
| (in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||
| Income allocated to Scripps |
$ | 153,657 | $ | 170,329 | $ | 250,761 | $ | 302,687 | ||||
| Income of pass-through entities allocated to non-controlling interests |
20,939 | 19,518 | 38,923 | 33,539 | ||||||||
| Income from continuing operations before income taxes and minority interest |
$ | 174,596 | $ | 189,847 | $ | 289,684 | $ | 336,226 | ||||
F-14
Effective January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income Taxes. In accordance with FIN No. 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:
| 2007 | 2006 | |||||
| Statutory rate |
35.0 | % | 35.0 | % | ||
| Effect of: |
||||||
| State and local income taxes, net of federal income tax benefit |
3.7 | 2.1 | ||||
| Income of pass-through entities allocated to non-controlling interests |
(4.2 | ) | (3.7 | ) | ||
| Adjustment of state net operating loss carryforward valuation allowance |
(0.6 | ) | ||||
| Adjustment of tax balances (1) |
(0.6 | ) | ||||
| Section 199 - Production Activities Deduction |
(1.9 | ) | (0.8 | ) | ||
| Miscellaneous |
(0.1 | ) | (0.2 | ) | ||
| Effective income tax rate |
31.9 | % | 31.8 | % | ||
| (1) | 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. |
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 JOA Entered Into |
Year of JOA Expiration | |||
| The Albuquerque Tribune |
Journal Publishing Company | 1933 | 2022 | |||
| The Cincinnati Post |
Gannett Co., Inc. | 1977 | 2007 | |||
| Denver Rocky Mountain News |
MediaNews Group, Inc. | 2001 | 2051 |
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 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.
F-16
8. INVESTMENTS
Investments consisted of the following:
| (in thousands, except share data) |
2007 |
As of 2006 |
2006 | ||||||
| Securities available for sale (at market value): |
|||||||||
| Time Warner (common shares - 2007, 2,008,000; 2006, 2,011,000) |
$ | 42,248 | $ | 43,804 | $ | 34,794 | |||
| Other available-for-sale securities |
2,195 | 2,130 | 1,967 | ||||||
| Total available-for-sale securities |
44,443 | 45,934 | 36,761 | ||||||
| Denver JOA |
107,128 | 116,875 | 129,924 | ||||||
| Colorado newspaper partnership |
29,706 | 30,157 | 31,635 | ||||||
| Joint ventures |
31,752 | 24,953 | 25,443 | ||||||
| Other equity securities |
7,610 | 7,430 | 7,636 | ||||||
| Total investments |
$ | 220,639 | $ | 225,349 | $ | 231,399 | |||
| Unrealized gains on securities available for sale |
$ | 14,893 | $ | 16,174 | $ | 7,013 | |||
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 June 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 will be 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 June 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:
| (in thousands) |
2007 |
As of 2006 |
2006 | ||||||
| Land and improvements |
$ | 77,176 | $ | 77,071 | $ | 54,463 | |||
| Buildings and improvements |
268,460 | 258,710 | 252,198 | ||||||
| Equipment |
631,111 | 607,896 | 614,312 | ||||||
| Computer Software |
109,496 | 93,842 | 83,062 | ||||||
| Total |
1,086,243 | 1,037,519 | 1,004,035 | ||||||
| Accumulated depreciation |
557,917 | 525,781 | 528,402 | ||||||
| Net property, plant and equipment |
$ | 528,326 | $ | 511,738 | $ | 475,633 | |||
F-17
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
| (in thousands) |
2007 |
As of 2006 |
2006 |
|||||||||
| Goodwill |
$ | 1,955,285 | $ | 1,961,051 | $ | 1,940,374 | ||||||
| Other intangible assets: |
||||||||||||
| Amortizable intangible assets: |
||||||||||||
| Carrying amount: |
||||||||||||
| Acquired network distribution |
43,415 | 43,415 | 43,415 | |||||||||
| Broadcast television network affiliation relationships |
26,748 | 26,748 | 26,748 | |||||||||
| Customer lists |
228,253 | 204,082 | 198,808 | |||||||||
| Copyrights and other trade names |
53,188 | 34,306 | 32,657 | |||||||||
| Other |
32,797 | 48,971 | 46,211 | |||||||||
| Total carrying amount |
384,401 | 357,522 | 347,839 | |||||||||
| Accumulated amortization: |
||||||||||||
| Acquired network distribution |
(9,149 | ) | (7,758 | ) | (6,344 | ) | ||||||
| Broadcast television network affiliation relationships |
(3,027 | ) | (2,480 | ) | (1,925 | ) | ||||||
| Customer lists |
(61,762 | ) | (39,089 | ) | (24,749 | ) | ||||||
| Copyrights and other trade names |
(9,003 | ) | (5,427 | ) | (3,710 | ) | ||||||
| Other |
(17,641 | ) | (19,147 | ) | (14,875 | ) | ||||||
| Total accumulated amortization |
(100,582 | ) | (73,901 | ) | (51,603 | ) | ||||||
| Net amortizable intangible assets |
283,819 | 283,621 | 296,236 | |||||||||
| Other indefinite-lived intangible assets: |
||||||||||||
| FCC licenses |
25,622 | 25,622 | 25,622 | |||||||||
| Other |
2,087 | |||||||||||
| Total other indefinite-lived intangible assets |
25,622 | 25,622 | 27,709 | |||||||||
| Pension liability adjustments |
96 | |||||||||||
| Total other intangible assets |
309,441 | 309,243 | 324,041 | |||||||||
| Total goodwill and other intangible assets |
$ | 2,264,726 | $ | 2,270,294 | $ | 2,264,415 | ||||||
F-18
Activity related to goodwill, amortizable intangible assets and indefinite-lived intangible assets by business segment was as follows:
| (in thousands) |
Scripps Networks |
Newspapers | Broadcast Television |
Interactive Media |
Licensing and Other |
Total | |||||||||||||||||
| Goodwill: |
|||||||||||||||||||||||
| Balance as of December 31, 2005 |
$ | 240,502 | $ | 789,315 | $ | 216,467 | $ | 401,492 | $ | 18 | $ | 1,647,794 | |||||||||||
| Business acquisitions |
13,297 | 288,320 | 301,617 | ||||||||||||||||||||
| Formation of Colorado newspaper partnership |
(25,731 | ) | (25,731 | ) | |||||||||||||||||||
| Foreign currency translation adjustment |
16,694 | 16,694 | |||||||||||||||||||||
| Balance as of June 30, 2006 |
$ | 240,502 | $ | 776,881 | $ | 216,467 | $ | 706,506 | $ | 18 | $ | 1,940,374 | |||||||||||
| Balance as of December 31, 2006 |
$ | 240,502 | $ | 777,902 | $ | 219,367 | $ | 723,262 | $ | 18 | $ | 1,961,051 | |||||||||||
| Business acquisitions |
998 | 998 | |||||||||||||||||||||
| Adjustment of purchase price allocations |
(14,703 | ) | (14,703 | ) | |||||||||||||||||||
| Foreign currency translation adjustment, inclusive of impact of purchase price adjustments |
7,939 | 7,939 | |||||||||||||||||||||
| Balance as of June 30, 2007 |
$ | 240,502 | $ | 778,900 | $ | 219,367 | $ | 716,498 | $ | 18 | $ | 1,955,285 | |||||||||||
| Amortizable intangible assets: |
|||||||||||||||||||||||
| Balance as of December 31, 2005 |
$ | 41,093 | $ | 4,305 | $ | 26,266 | $ | 128,116 | $ | 199,780 | |||||||||||||
| Business acquisitions |
7,443 | 108,091 | 115,534 | ||||||||||||||||||||
| Formation of Colorado newspaper partnership |
(2,407 | ) | (2,407 | ) | |||||||||||||||||||
| Other additions |
8 | 8 | |||||||||||||||||||||
| Foreign currency translation adjustment |
5,997 | 5,997 | |||||||||||||||||||||
| Amortization |
(1,680 | ) | (462 | ) | (560 | ) | (19,974 | ) | (22,676 | ) | |||||||||||||
| Balance as of June 30, 2006 |
$ | 39,413 | $ | 8,887 | $ | 25,706 | $ | 222,230 | $ | 296,236 | |||||||||||||
| Balance as of December 31, 2006 |
$ | 38,707 | $ | 10,075 | $ | 25,137 | $ | 209,702 | $ | 283,621 | |||||||||||||
| Business acquisitions |
997 | 997 | |||||||||||||||||||||
| Adjustment of purchase price allocations |
21,004 | 21,004 | |||||||||||||||||||||
| Foreign currency translation adjustment, inclusive of impact of purchase price adjustments |
5,431 | 5,431 | |||||||||||||||||||||
| Amortization |
(1,621 | ) | (916 | ) | (560 | ) | (24,137 | ) | (27,234 | ) | |||||||||||||
| Balance as of June 30, 2007 |
$ | 37,086 | $ | 10,156 | $ | 24,577 | $ | 212,000 | $ | 283,819 | |||||||||||||
| Other indefinite-lived intangible assets: |
|||||||||||||||||||||||
| Balance as of December 31, 2005 |
$ | 919 | $ | 1,168 | $ | 25,622 | $ | 27,709 | |||||||||||||||
| Balance as of June 30, 2006 |
$ | 919 | $ | 1,168 | $ | 25,622 | $ | 27,709 | |||||||||||||||
| Balance as of December 31, 2006 |
$ | 25,622 | $ | 25,622 | |||||||||||||||||||
| Balance as of June 30, 2007 |
$ | 25,622 | $ | 25,622 | |||||||||||||||||||
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.
F-19
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 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 $20.3 million for the remainder of 2007, $38.1 million in 2008, $37.3 million in 2009, $33.8 million in 2010, $30.0 million in 2011, $27.2 million in 2012 and $97.1 million in later years.
11. PROGRAMS AND PROGRAM LICENSES
Programs and program licenses consisted of the following:
| (in thousands) |
2007 |
As of 2006 |
2006 | ||||||
| Cost of programs available for broadcast |
$ | 910,506 | $ | 825,943 | $ | 878,738 | |||
| Accumulated amortization |
596,736 | 531,376 | 616,395 | ||||||
| Total |
313,770 | 294,567 | 262,343 | ||||||
| Progress payments on programs not yet available for broadcast |
160,786 | 134,504 | 118,576 | ||||||
| Total programs and program licenses |
$ | 474,556 | $ | 429,071 | $ | 380,919 | |||
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 $315 million at June 30, 2007. If the programs are not produced, our commitment would generally expire without obligation.
Progress payments on programs not yet available for broadcast and the cost of programs and program licenses capitalized totaled $78.7 million in the second quarter of 2007 and $69.6 million in 2006. Year-to-date progress payments and capitalized programs totaled $154 million in 2007 and $131 million in 2006.
Estimated amortization of recorded program assets and program commitments for each of the next five years is as follows:
| (in thousands) |
Programs Available for Broadcast |
Programs Not Yet Available for Broadcast |
Total | ||||||
| Remainder of 2007 |
$ | 92,875 | $ | 47,175 | $ | 140,050 | |||
| 2008 |
116,774 | 133,463 | 250,237 | ||||||
| 2009 |
65,083 | 114,084 | 179,167 | ||||||
| 2010 |
32,919 | 88,351 | 121,270 | ||||||
| 2011 |
5,929 | 64,897 | 70,826 | ||||||
| 2012 |
190 | 24,276 | 24,466 | ||||||
| Later years |
3,835 | 3,835 | |||||||
| Total |
$ | 313,770 | $ | 476,081 | $ | 789,851 | |||
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.
F-20
12. UNAMORTIZED NETWORK DISTRIBUTION INCENTIVES
Unamortized network distribution incentives consisted of the following:
| (in thousands) |
2007 |
As of 2006 |
2006 | ||||||
| Network launch incentives |
$ | 100,949 | $ | 111,380 | $ | 124,100 | |||
| Unbilled affiliate fees |
45,055 | 44,198 | 40,203 | ||||||
| Total unamortized network distribution incentives |
$ | 146,004 | $ | 155,578 | $ | 164,303 | |||
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.
| Three months ended June 30, |
Six months ended June 30, | |||||||||||
| (in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||
| Amortization of network distribution incentives |
$ | 6,899 | $ | 7,188 | $ | 13,715 | $ | 14,897 | ||||
Estimated amortization for the next five years is as follows:
| Remainder of 2007 |
$ | 13,316 | |
| 2008 |
31,766 | ||
| 2009 |
34,823 | ||
| 2010 |
24,556 | ||
| 2011 |
24,960 | ||
| 2012 |
14,184 | ||
| Later years |
2,399 | ||
| Total |
$ | 146,004 | |
Actual amortization could be greater than the above amounts as additional incentive payments may be capitalized as we expand distribution of Scripps Networks.
F-21
13. LONG-TERM DEBT
Long-term debt consisted of the following:
| (in thousands) |
2007 |
As of 2006 |
2006 | ||||||
| Variable-rate credit facilities, including commercial paper |
$ | 56,859 | $ | 190,461 | $ | 443,863 | |||
| 6.625% notes due in 2007 |
99,996 | 99,989 | 99,982 | ||||||
| 3.75% notes due in 2008 |
39,653 | 39,356 | 48,380 | ||||||
| 4.25% notes due in 2009 |
86,049 | 86,008 | 99,671 | ||||||
| 4.30% notes due in 2010 |
140,586 | 149,832 | 149,808 | ||||||
| 5.75% notes due in 2012 |
199,373 | 199,310 | 199,248 | ||||||
| Other notes |
1,365 | 1,425 | 1,482 | ||||||
| Total long-term debt |
$ | 623,881 | $ | 766,381 | $ | 1,042,434 | |||
We have Competitive Advance and Revolving Credit Facilities expiring in June 2011 (the “Revolver”) and a commercial paper program that permits 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 5.4% at June 30, 2007, 5.3% at December 31, 2006, and 5.2% at June 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 the second quarter of 2007, we repurchased $9.3 million principal amount of our 4.30% notes due in 2010 for $9.0 million.
In 2003, we entered into a receive-fixed, pay-floating interest rate swap to achieve a desired proportion of fixed-rate versus variable-rate debt. The interest rate swap was due to expire upon the maturity of the $50 million, 3.75% notes in 2008, and effectively converted those fixed-rate notes into variable-rate borrowings. The swap agreement was designated as a fair-value hedge of the underlying fixed-rate notes. Accordingly, changes in the fair value of the interest rate swap (due to movements in the benchmark interest rate) were recorded as adjustments to the carrying value of long-term debt with an offsetting adjustment to either other assets or other liabilities. The changes in the fair value of the interest rate swap and the underlying fixed-rate obligation were recorded as equal and offsetting unrealized gains and losses in the Condensed Consolidated Statements of Income. The interest rate swap was terminated in the third quarter of 2006. The difference between the fair value of the underlying notes and the face amount will be amortized to interest expense over the remaining terms of the notes.
Certain long-term debt agreements contain restrictions on the incurrence of additional indebtedness. We were in compliance with all debt covenants as of June 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 June 30, 2007, we had outstanding letters of credit totaling $8.8 million.
F-22
14. OTHER LIABILITIES
Other liabilities consisted of the following:
| (in thousands) |
2007 |
As of 2006 |
2006 | ||||||
| Program rights payable |
$ | 2,655 | $ | 3,058 | $ | 3,041 | |||
| Employee compensation and benefits |
43,027 | 38,570 | 38,761 | ||||||
| Liability for pension benefits |
59,660 | 53,627 | 40,856 | ||||||
| Network distribution incentives |
8,763 | 10,529 | 11,234 | ||||||
| Tax reserve |
49,003 | 16,869 | 10,000 | ||||||
| Other |
18,149 | 17,945 | 18,860 | ||||||
| Other liabilities (less current portion) |
$ | 181,257 | $ | 140,598 | $ | 122,752 | |||
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.
F-23
16. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents additional information about the change in certain working capital accounts:
| Six months ended June 30, |
||||||||
| (in thousands) |
2007 | 2006 | ||||||
| Other changes in certain working capital accounts, net: |
||||||||
| Accounts receivable |
$ | (2,013 | ) | $ | (30,452 | ) | ||
| Inventories |
(1,052 | ) | (1,432 | ) | ||||
| Accounts payable |
(4,429 | ) | 3,758 | |||||
| Accrued income taxes |
3,051 | 8,073 | ||||||
| Accrued employee compensation and benefits |
(14,406 | ) | (14,211 | ) | ||||
| Accrued interest |
(391 | ) | 2 | |||||
| Other accrued liabilities |
1,667 | 881 | ||||||
| Other, net |
1,316 | (2,823 | ) | |||||
| Total |
$ | (16,257 | ) | $ | (36,204 | ) | ||
Information regarding supplemental cash flow disclosures is as follows:
| Six months ended June 30, |
|||||||
| (in thousands) |
2007 | 2006 | |||||
| Interest paid, excluding amounts capitalized |
$ | 20,790 | $ | 27,353 | |||
| Income taxes paid continuing operations |
$ | 82,560 | $ | 102,180 | |||
| Income taxes paid (refunds received) discontinued operations |
15,952 | (25,023 | ) | ||||
| Total income taxes paid |
$ | 98,512 | $ | 77,157 | |||
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.
F-24