Quarterly Report
Table of Contents

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, 2006

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, 2006 there were 126,832,164 of the Registrant’s Class A Common Shares outstanding and 36,568,226 of the Registrant’s Common Voting Shares outstanding.

 



Table of Contents

INDEX TO THE E. W. SCRIPPS COMPANY

REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006

 

Item No.

       Page

PART I - FINANCIAL INFORMATION

1   Financial Statements    3
2   Management’s Discussion and Analysis of Financial Condition and Results of Operations    3
3   Quantitative and Qualitative Disclosures About Market Risk    3
4   Controls and Procedures    3

PART II - OTHER INFORMATION

1   Legal Proceedings    3
1A.   Risk Factors    3
2   Unregistered Sales of Equity and Use of Proceeds    4
3   Defaults Upon Senior Securities    4
4   Submission of Matters to a Vote of Security Holders    5
5   Other Information    5
6   Exhibits    5
  Signatures    6

 

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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

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.

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, 2005.

 

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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 equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended June 30, 2006:

 

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

           
           
           
           
4/1/06 - 4/30/06    133,000    $ 44.87    133,000    3,697,000
5/1/06 - 5/30/06    147,000    $ 46.18    147,000    3,550,000
6/1/06 - 6/30/06             3,550,000
                     
Total    280,000    $ 45.55    280,000    3,550,000
                     

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.

 

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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, 2006 Annual Meeting of Shareholders:

 

Description of Matters Submitted

   In Favor   

Authority

Witheld

     

1. Election of Directors:

     
    Class A Common Shares:      

David A. Galloway

   108,452,372    2,614,329

Nicholas B. Paumgarten

   103,040,759    8,025,942

Ronald W. Tysoe

   106,213,841    4,852,860

Julie A. Wrigley

   107,870,334    3,196,367
    Common Voting Shares:      

William R. Burleigh

   32,121,640    770,000

John H. Burlingame

   32,891,640   

Kenneth W. Lowe

   32,891,640   

Jarl Mohn

   32,891,640   

Jeffrey Sagansky

   32,891,640   

Nackey E. Scagliotti

   32,891,640   

Edward W. Scripps

   32,891,640   

Paul K. Scripps

   32,891,640   

2. Approve technical amendment to the Code of

     
      Regulations:      
    Common Voting Shares:    32,891,640   

ITEM 5. OTHER INFORMATION

Item 1.01 Entry into a Material Definitive Agreement

On June 29, 2006, we entered into a 5-Year Competitive Advance and Revolving Credit Facility Agreement (the “Revolver”) that permits $750 million in aggregate borrowings and expires in July 2011.

The Revolver replaced our prior Competitive Advance and Revolving Credit Facilities that collectively permitted aggregate borrowings up to $550 million and consisted of two facilities that were due to expire in March 2007 and July 2009.

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 Revolver is filed as Exhibit 10.40 to this Form 10-Q.

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.

 

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SIGNATURES

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 9, 2006

  BY:  

/s/ Joseph G. NeCastro

    Joseph G. NeCastro
    Executive Vice President and Chief Financial Officer

 

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THE E. W. SCRIPPS COMPANY

Index to Financial Information

 

Item

   Page

Condensed Consolidated Balance Sheets

   F-2

Condensed Consolidated Statements of Income

   F-4

Condensed Consolidated Statements of Cash Flows

   F-5

Condensed Consolidated Statements of Comprehensive Income and Shareholders’ Equity

   F-6

Condensed Notes to Consolidated Financial Statements

   F-7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Forward-Looking Statements

   F-32

Executive Overview

   F-32

Critical Accounting Policies and Estimates

   F-34

Results of Operations

  

Consolidated Results of Operations

   F-35

Business Segment Results

   F-37

Scripps Networks

   F-40

Newspapers

   F-43

Broadcast Television

   F-47

Interactive Media

   F-49

Liquidity and Capital Resources

   F-50

Quantitative and Qualitative Disclosures About Market Risk

   F-51

Controls and Procedures

   F-53

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

          As of     
     June 30,    December 31,    June 30,
( in thousands )    2006    2005    2005
     ( Unaudited )         ( Unaudited )

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 33,733    $ 19,243    $ 26,434

Short-term investments

     1,110      12,800      13,796

Accounts and notes receivable (less allowances - $16,253, $18,463, $17,967)

     524,164      493,075      450,152

Programs and program licenses

     191,171      172,879      148,481

Inventories

     12,341      11,725      11,270

Deferred income taxes

     32,666      32,269      30,507

Assets of discontinued operations

     175,478      230,694      332,567

Miscellaneous

     24,147      22,841      19,100
                    

Total current assets

     994,810      995,526      1,032,307
                    

Investments

     231,399      210,021      226,596
                    

Property, plant and equipment

     475,633      490,891      475,471
                    

Goodwill and other intangible assets:

        

Goodwill

     1,940,374      1,647,794      1,653,374

Other intangible assets

     324,041      227,585      240,915
                    

Total goodwill and other intangible assets

     2,264,415      1,875,379      1,894,289
                    

Other assets:

        

Programs and program licenses (less current portion)

     189,748      169,624      172,636

Unamortized network distribution incentives

     164,303      172,271      181,792

Prepaid pension

     54,442      66,153      24,409

Miscellaneous

     45,898      52,763      48,527
                    

Total other assets

     454,391      460,811      427,364
                    

TOTAL ASSETS

   $ 4,420,648    $ 4,032,628    $ 4,056,027
                    

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

           As of        
     June 30,     December 31,     June 30,  
( in thousands, except share data )    2006     2005     2005  
     ( Unaudited )           ( Unaudited )  

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 85,375     $ 92,084     $ 108,089  

Customer deposits and unearned revenue

     49,254       53,521       53,593  

Accrued liabilities:

      

Employee compensation and benefits

     67,221       75,069       61,396  

Network distribution incentives

     7,969       8,871       14,372  

Accrued income taxes

     10,203       4,705       46,771  

Miscellaneous

     90,103       83,720       76,228  

Liabilities of discontinued operations

     44,964       46,863       58,401  

Other current liabilities

     30,854       29,103       24,016  
                        

Total current liabilities

     385,943       393,936       442,866  
                        

Deferred income taxes

     355,932       312,961       262,192  
                        

Long-term debt (less current portion)

     1,042,434       825,775       899,845  
                        

Other liabilities (less current portion)

     122,752       121,616       107,086  
                        

Minority interests

     97,783       91,261       94,438  
                        

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: 126,939,429, 126,994,386; and 127,072,394 shares

     1,269       1,270       1,270  

Voting - authorized: 60,000,000 shares; issued and outstanding: 36,568,226, 36,668,226 and 36,668,226 shares

     366       367       367  
                        

Total

     1,635       1,637       1,637  

Additional paid-in capital

     395,614       363,416       341,000  

Stock compensation:

      

Performance awards and restricted stock units

       4,828       2,634  

Unvested restricted stock awards

       (1,634 )     (2,887 )

Retained earnings

     2,008,434       1,930,994       1,920,486  

Accumulated other comprehensive income (loss), net of income taxes:

      

Unrealized gains on securities available for sale

     4,751       4,906       4,321  

Pension liability adjustments

     (18,550 )     (18,550 )     (18,495 )

Foreign currency translation adjustment

     23,920       1,482       904  
                        

Total shareholders’ equity

     2,415,804       2,287,079       2,249,600  
                        

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 4,420,648     $ 4,032,628     $ 4,056,027  
                        

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three months ended
June 30,
   

Six months ended

June 30,

 
( in thousands, except per share data )    2006     2005     2006     2005  

Operating Revenues:

        

Advertising

   $ 465,387     $ 427,995     $ 884,145     $ 802,051  

Referral fees

     64,531       1,047       122,684       1,047  

Network affiliate fees, net

     49,247       39,624       97,533       81,599  

Circulation

     30,423       31,784       62,957       65,573  

Licensing

     17,580       16,772       36,510       37,880  

Other

     14,746       23,249       27,814       35,224  
                                

Total operating revenues

     641,914       540,471       1,231,643       1,023,374  
                                

Costs and Expenses:

        

Employee compensation and benefits (exclusive of JOA editorial compensation costs)

     157,170       136,363       318,899       273,393  

Marketing and advertising

     53,153       28,043       111,474       55,150  

Programs and program licenses

     58,260       55,101       113,738       109,276  

Newsprint and ink

     22,277       20,335       45,751       41,154  

JOA editorial costs and expenses

     8,760       9,277       17,973       18,274  

Other costs and expenses

     121,329       104,377       235,351       203,943  
                                

Total costs and expenses

     420,949       353,496       843,186       701,190  
                                

Depreciation, Amortization, and Losses (Gains):

        

Depreciation

     18,851       14,890       36,105       28,897  

Amortization of intangible assets

     14,582       1,282       22,676       2,578  

Gain on formation of Colorado newspaper partnership

         (3,535 )  

Losses (gains) on disposal of property, plant and equipment

     60       (91 )     156       (42 )

Hurricane recoveries, net

     (1,750 )     (1,892 )     (1,750 )     (1,892 )
                                

Net depreciation, amortization and losses (gains)

     31,743       14,189       53,652       29,541  
                                

Operating income

     189,222       172,786       334,805       292,643  

Interest expense

     (15,537 )     (7,559 )     (27,690 )     (14,931 )

Equity in earnings of JOAs and other joint ventures

     14,611       21,203       25,981       39,360  

Interest and dividend income

     609       374       1,151       582  

Miscellaneous, net

     942       (400 )     1,979       (67 )
                                

Income from continuing operations before income taxes and minority interests

     189,847       186,404       336,226       317,587  

Provision for income taxes

     65,249       66,157       115,797       113,073  
                                

Income from continuing operations before minority interests

     124,598       120,247       220,429       204,514  

Minority interests

     19,726       17,290       34,075       28,625  
                                

Income from continuing operations

     104,872       102,957       186,354       175,889  

Income (loss) from discontinued operations, net of tax

     (33,728 )     (5,368 )     (40,145 )     (8,289 )
                                

Net income

   $ 71,144     $ 97,589     $ 146,209     $ 167,600  
                                

Net income (loss) per basic share of common stock:

        

Income from continuing operations

   $ .64     $ .63     $ 1.14     $ 1.08  

Income (loss) from discontinued operations

     (.21 )     (.03 )     (.25 )     (.05 )
                                

Net income per basic share of common stock

   $ .44     $ .60     $ .90     $ 1.03  
                                

Net income (loss) per diluted share of common stock:

        

Income from continuing operations

   $ .64     $ .62     $ 1.13     $ 1.06  

Income (loss) from discontinued operations

     (.20 )     (.03 )     (.24 )     (.05 )
                                

Net income per diluted share of common stock

   $ .43     $ .59     $ .89     $ 1.01  
                                

Net income per share amounts may not foot since each is calculated independently.

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )

 

     Six months ended  
     June 30,  

( in thousands )

 

   2006     2005  

Cash Flows from Operating Activities:

    

Income from continuing operations

   $ 186,354     $ 175,889  

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

    

Depreciation and amortization

     58,781       31,475  

Gain on formation of Colorado newspaper partnership

     (3,535 )  

Deferred income taxes

     3,982       1,146  

Excess tax benefits of stock compensation plans

       5,070  

Dividends received greater (less) than equity in earnings of JOAs and other joint ventures

     12,135       2,172  

Stock and deferred compensation plans

     19,034       7,176  

Minority interests in income of subsidiary companies

     34,075       28,625  

Affiliate fees billed greater than amounts recognized as revenue

     7,041       10,821  

Network launch incentive payments

     (3,090 )     (9,270 )

Payments for programming less (greater) than program cost amortization

     (39,064 )     (16,352 )

Prepaid and accrued pension expense

     11,711       7,770  

Other changes in certain working capital accounts, net

     (36,204 )     (4,045 )

Miscellaneous, net

     4,372       (4,851 )
                

Net cash provided by continuing operating activities

     255,592       235,626  

Net cash provided by (used in) discontinued operating activities

     656       (526 )
                

Net operating activities

     256,248       235,100  
                

Cash Flows from Investing Activities:

    

Purchase of subsidiary companies, minority interest, and long-term investments

     (396,038 )     (536,706 )

Proceeds from formation of Colorado newspaper partnership, net of transaction costs

     20,029    

Additions to property, plant and equipment

     (29,299 )     (15,879 )

Decrease in short-term investments

     11,690       7,120  

Sale of long-term investments

     2,422       2,359  

Miscellaneous, net

     1,750       800  
                

Net cash provided by (used in) continuing investing activities

     (389,446 )     (542,306 )

Net cash provided by (used in) discontinued investing activities

     14,046       (3,957 )
                

Net investing activities

     (375,400 )     (546,263 )
                

Cash Flows from Financing Activities:

    

Increase in long-term debt

     216,894       367,432  

Payments on long-term debt

     (50 )     (52 )

Dividends paid

     (37,605 )     (34,335 )

Dividends paid to minority interests

     (25,248 )     (7,816 )

Repurchase Class A Common shares

     (32,984 )     (2,959 )

Proceeds from employee stock options

     11,501       18,027  

Excess tax benefits of stock compensation plans

     1,473    

Miscellaneous, net

     (1,022 )     (15,083 )
                

Net cash provided by continuing financing activities

     132,959       325,214  

Net cash provided by (used in) discontinued financing activities

     (106 )     104  
                

Net financing activities

     132,853       325,318  
                

Effect of exchange rate changes on cash and cash equivalents

     789    
                

Increase in cash and cash equivalents

     14,490       14,155  

Cash and cash equivalents:

    

Beginning of year

     19,243       12,279  
                

End of period

   $ 33,733     $ 26,434  
                

Supplemental Cash Flow Disclosures:

    

Interest paid, excluding amounts capitalized

   $ 27,353     $ 15,505  
                

Income taxes paid continuing operations

   $ 102,180     $ 65,221  

Income taxes paid (refunds received) discontinued operations

     (25,023 )     (5,435 )
                

Total income taxes paid

   $ 77,157     $ 59,786  
                

See notes to condensed consolidated financial statements.

 

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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, 2004

   $ 1,632     $ 320,359     $ (4,090 )   $ 1,787,221     $ (9,001 )   $ 2,096,121    

Comprehensive income:

              

Net income

           167,600         167,600     $ 97,589  
                                

Unrealized gains (losses) on investments, net of tax of $2,354 and $703

             (4,482 )     (4,482 )     (1,418 )

Adjustment for losses (gains) in income, net of tax of ($480) and ($133)

             891       891       248  
                                

Change in unrealized gains (losses) on investments

             (3,591 )     (3,591 )     (1,170 )

Currency translation, net of tax of $175 and $143

             (678 )     (678 )     (316 )
                                      

Total

           167,600       (4,269 )     163,331     $ 96,103  
                    

Dividends: declared and paid - $.21 per share

           (34,335 )       (34,335 )  

Repurchase 60,000 Class A Common shares

     (1 )     (2,958 )           (2,959 )  

Compensation plans, net: 668,980 shares issued;

              

55,918 shares repurchased; 2,500 shares forfeited

     6       18,529       3,837           22,372    

Tax benefits of compensation plans

       5,070             5,070    
                                                  

As of June 30, 2005

   $ 1,637     $ 341,000     $ (253 )   $ 1,920,486     $ (13,270 )   $ 2,249,600    
                                                  

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

           146,209       22,283       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    
                                                  

See notes to condensed consolidated financial statements.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The 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. Aside from information disclosed in this Form 10-Q, the information disclosed in the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005, has not changed materially. Financial information as of December 31, 2005, included in these financial statements has been derived from the audited consolidated financial statements included in that report. In management’s opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made.

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.

Scripps Networks includes five national television networks and their affiliated websites, Home & Garden Television (“HGTV”), Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 12% interest in FOX Sports Net South, a regional television network. 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 18 markets in the U.S. Three of our newspapers 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. Newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers.

Broadcast television includes six ABC-affiliated stations, three NBC-affiliated stations and one independent. Each station is located in one of the 61 largest television markets in the U.S. 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, acquired on June 27, 2005, 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 which 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 our business segments is presented in Note 17. 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.

Our operations are geographically dispersed and we have a diverse customer base. We believe bad debt losses resulting from default by a single customer, or defaults by customers in any depressed region or business sector, would not have a material effect on our financial position. Approximately 70% of our operating revenues are derived from advertising. Operating results can be affected by changes in the demand for advertising both nationally and in individual markets.

 

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The six largest cable television systems and the two largest satellite television systems provide service to more than 95% of homes receiving HGTV and Food Network. The loss of distribution by any of these cable and satellite television systems could adversely affect our business. While no assurance can be given regarding renewal of our distribution contracts, we have not lost carriage upon the expiration of our distribution contracts with any of these cable and satellite television systems.

One customer accounts for approximately 30% of interactive media’s annual operating revenues. While we can provide no assurance that the revenues from this customer would be replaced, we believe we could reach agreement with alternative providers to offset any adverse financial impact from the loss of this customer.

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.

Revenue Recognition - Our primary sources of revenue are from:

 

    The sale of advertising space, advertising time and internet advertising

 

    Referral fees paid by participating online retailers and service providers

 

    Subscriber fees paid by cable and satellite television systems for our programming services (“network affiliate fees”)

 

    The sale of newspapers to distributors and to individual subscribers

 

    Royalties from licensing copyrighted characters

Revenue is reported net of our remittance of sales taxes and other taxes collected from our customers.

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, 2005.

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 in “JOA editorial costs and expenses.” 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.

 

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Stock-Based Compensation – We have a Long-Term Incentive Plan (the “Plan”), which is described more fully in Note 18 to this Form 10-Q. 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.

As discussed in Note 2, we adopted Financial Accounting Standard No. 123-R - Share Based Payment (“FAS 123-R”), effective January 1, 2006. In accordance with 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 binomial lattice 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.

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.

Prior to January 1, 2006, we applied the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock-based compensation. Under APB 25 we recognized compensation costs equal to the intrinsic value of the award on the date of grant over the vesting period, including grants to retiree-eligible employees. Because stock options were granted with exercise prices equal or greater than the market price of a Class A Common Share on the date of grant, no compensation costs were recognized unless the terms of those options were later modified. Compensation costs were expensed over the requisite service period as each tranche of an award vested. Forfeitures were recognized as they occurred. Any unrecognized compensation cost was recognized upon retirement of an employee prior to the end of the stated vesting period.

Net Income Per Share - The following table presents information about basic and diluted weighted-average shares outstanding:

 

     Three months ended    Six months ended
     June 30,    June 30,

( in thousands )

 

   2006    2005    2006    2005

Basic weighted-average shares outstanding

   163,244    163,365    163,331    163,131

Effect of dilutive securities:

           

Unvested restricted stock held by employees

   218    287    225    295

Stock options held by employees and directors

   1,323    2,124    1,428    1,993
                   

Diluted weighted-average shares outstanding

   164,785    165,776    164,984    165,419
                   

Stock options to purchase 5,844,938 common shares were anti-dilutive as of June 30, 2006 and are therefore not included in the computation of diluted weighted-average shares outstanding.

 

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2. ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting Changes - We adopted FAS 123-R using the modified prospective application method. Under the modified prospective application transition method, the provisions of FAS 123-R are applied to awards granted after the date of adoption and to the unvested portion of awards outstanding as of January 1, 2006. There are no changes in the accounting for awards which vested prior to adoption of FAS 123-R unless the terms of those awards are subsequently modified. Prior period reported amounts have not been restated to apply the provisions of FAS 123-R.

Income from continuing operations in the second quarter of 2006 was reduced by $2.7 million, $.02 per share, as a result of the adoption of FAS 123-R. Income from continuing operations in the year-to-date period was reduced by $8.0 million, $.05 per share.

Net income and earnings per share as if the fair-value based principles of FAS 123-R were applied to all periods presented, on an as reported basis for periods after the adoption of FAS 123-R and on a pro forma period for periods prior to the adoption of FAS 123-R, are as follows:

 

     Three months ended     Six months ended  
     June 30,     June 30,  

( in thousands, except per share data )

 

   2006    2005     2006    2005  

Net income:

          

Reported net income for 2005

      $ 97,589        $ 167,600  

Additional compensation to adjust intrinsic value to fair value

        (3,104 )        (7,176 )
                              

Net income under fair-value based method for all periods

   $ 71,144    $ 94,485     $ 146,209    $ 160,424  
                              

Net income per share of common stock

          

Basic earnings per share:

          

As reported

      $ 0.60        $ 1.03  

Additional compensation to adjust intrinsic value to fair value

        (0.02 )        (0.04 )
                              

Basic earnings per share under fair-value based method

   $ 0.44    $ 0.58     $ 0.90    $ 0.98  
                              

Diluted earnings per share:

          

As reported

      $ 0.59        $ 1.01  

Additional compensation to adjust intrinsic value to fair value

        (0.02 )        (0.04 )
                              

Diluted earnings per share under fair-value based method

   $ 0.43    $ 0.57     $ 0.89    $ 0.97  
                              

Net income per share amounts may not foot since each is calculated independently.

Prior to the adoption of FAS 123-R, tax benefits for tax deductions in excess of compensation expense were classified as operating cash flows. Upon the adoption of FAS 123-R, tax benefits related to recorded stock compensation are presented as operating cash flows, while tax benefits resulting from tax deductions in excess of recorded compensation expense are classified as financing cash flows.

Cash flows from operating activities was reduced by $1.5 million and cash flows from financing activities was increased by $1.5 million in the 2006 year-to-date period.

In addition, prior to adoption of FAS 123-R, additional paid-in capital was increased by the intrinsic value of the award on the date of grant. The unvested portion of the award as of each balance sheet date was presented as a reduction in shareholders’ equity as of that date. Upon adoption of FAS 123-R, additional paid-in capital is increased as the fair value of the award is recognized as compensation expense in our statements of income.

Recently Issued Accounting Standards - In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

 

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3. ACQUISITIONS

 

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.

2005

  -   On June 27, 2005, we acquired 100% ownership of Shopzilla for approximately $570 million in cash. Assets acquired in the transaction included approximately $34.0 million of cash and $12.3 million of short-term investments. The acquisition was financed using a combination of cash on hand and additional borrowings. The acquisition enabled us to capitalize on the rapid growth and rising profitability of specialized Internet search businesses and expand our electronic media platform.
    In the third quarter and fourth quarter of 2005, we acquired newspapers and other publications in areas contiguous to our existing newspaper markets. Cash consideration paid for these transactions totaled $8.5 million.

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 uSwitch acquisition is based upon preliminary appraisals and estimates and is 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.

 

     2006    2005  

( in thousands )

 

   uSwitch     Newspapers    Shopzilla     Newspapers  

Short-term investments

        $ 12,279    

Accounts receivable

   $ 9,486          12,670     $ 454  

Other current assets

     583          8,046       93  

Property, plant and equipment

     5,367          25,728       268  

Amortizable intangible assets

     108,091     $ 7,443      142,400       1,840  

Goodwill

     288,320       13,297      401,492       5,851  

Other assets

          138    

Net operating loss carryforwards

          23,499    
                               

Total assets acquired

     411,847       20,740      626,252       8,506  

Current liabilities

     (8,159 )        (24,195 )     (47 )

Deferred income taxes

     (31,531 )        (66,271 )  

Other long-term obligations

          (719 )  

Minority interest

       2,305        10  
                               

Net purchase price

   $ 372,157     $ 23,045    $ 535,067     $ 8,469  
                               

 

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Pro forma results of operations of Scripps, assuming the uSwitch and Shopzilla acquisitions had taken place at the beginning of each respective period, 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 transaction related expenses incurred by the acquired companies. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the acquisitions been completed at the beginning of the period. Pro forma results are not presented for the other acquisitions completed during 2005 and 2006 because the combined results of operations would not be significantly different from reported amounts.

 

     Three months ended
June 30,
  

Six months ended

June 30,

( in thousands, except per share data )    2006    2005    2006    2005

Operating revenues

   $ 641,914    $ 573,667    $ 1,241,909    $ 1,090,014

Income from continuing operations

     104,872      93,653      182,775      157,545

Income from continuing operations per share of common stock:

           

Basic

   $ .64    $ .57    $ 1.12    $ .97

Diluted

     .64      .56      1.11      .95

 

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4. DISCONTINUED OPERATIONS

On June 21, 2006, we reached agreement to sell the operations of the Shop At Home television network and certain of its assets to Jewelry Television. Under the terms of the agreement, Jewelry Television also assumed a number of Shop At Home’s television affiliation agreements.

We continue to seek a buyer for the five Shop At Home-affiliated broadcast television stations. Under the terms of the agreement with Jewelry Television, these stations will continue to air a mix of Shop At Home and Jewelry Television programming. We expect to reach an agreement to sell the stations prior to the end of 2006.

In the third quarter of 2005, we reached an agreement with Advance Publications, Inc., the publisher of the Birmingham News (“News”), to terminate the Birmingham joint operating agreement between the News and our Birmingham Post-Herald newspaper. During the third quarter of 2005, we also ceased publication of our Birmingham Post-Herald newspaper and sold certain assets to the News.

In accordance with the provisions of Financial Accounting Standards (“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.

Assets and liabilities of our discontinued operations consisted of the following:

 

( in thousands )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Assets:

        

Accounts receivable

         $ 898

Inventories

   $ 2,869    $ 31,592      29,498

Property, plant and equipment

     8,398      35,330      33,807

Goodwill

           101,135

Intangible assets

     163,600      163,600      167,186

Other assets

     611      172      43
                    

Assets of discontinued operations

   $ 175,478    $ 230,694    $ 332,567
                    

Liabilities:

        

Deferred income taxes

   $ 44,402    $ 45,237    $ 58,389

Other liabilities

     562      1,626      12
                    

Liabilities of discontinued operations

   $ 44,964    $ 46,863    $ 58,401
                    

 

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Operating results of our discontinued operations were as follows:

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 

( in thousands )

 

   2006     2005     2006     2005  

Operating revenues:

        

Shop At Home

   $ 80,232     $ 86,868     $ 164,622     $ 189,012  

Birmingham-Post Herald

       4         18  
                                

Total

   $ 80,232     $ 86,872     $ 164,622     $ 189,030  
                                

Share of earnings of JOA

     $ 1,870       $ 3,453  
                    

Income (loss) from discontinued operations:

        

Shop At Home:

        

Loss from operations

   $ (40,465 )   $ (9,452 )   $ (50,502 )   $ (14,852 )

Loss on divestiture

     (12,054 )       (12,054 )  
                                

Total Shop At Home

     (52,519 )     (9,452 )     (62,556 )     (14,852 )

Birmingham-Post Herald

       1,181       (2 )     2,141  
                                

Income (loss) from discontinued operations, before tax

     (52,519 )     (8,271 )     (62,558 )     (12,711 )

Income taxes (benefit)

     (18,791 )     (2,903 )     (22,413 )     (4,422 )
                                

Income (loss) from discontinued operations

   $ (33,728 )   $ (5,368 )   $ (40,145 )   $ (8,289 )
                                

Shop At Home’s loss from operations includes $12.3 million in costs associated with employee termination benefits, $4.4 million in costs associated with the termination of long-term agreements, and a $6.2 million non-cash charge to write-down assets on the Shop At Home television network. Cash expenditures related to the termination of long-term agreements and the employee termination benefits were $1.2 million through the second quarter of 2006. We expect that cash expenditures for the majority of the remaining obligations will be disbursed in the third quarter of 2006.

The loss on divestiture represents losses on the sale of property and other assets to Jewelry Television.

 

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5. GAIN ON FORMATION OF COLORADO NEWSPAPER PARTNERSHIP AND OTHER ITEMS

Gain on formation of Colorado newspaper partnership - In February of 2006, we completed the formation of a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that will operate 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 also 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. Net income was increased by $2.1 million.

Denver newspaper production facilities - In the third quarter of 2005, the management committee of the Denver Newspaper Agency (“DNA”) approved plans to consolidate DNA’s newspaper production facilities. As a result, assets used in certain of the existing facilities will be retired earlier than previously estimated. The reduction in these assets’ estimated useful lives increased DNA’s depreciation expense. The increased depreciation resulted in a $3.1 million decrease in our equity in earnings from JOAs in the second quarter of 2006 and decreased year-to-date equity in earnings from JOAs $6.3 million. Net income was decreased by $1.9 million in the second quarter of 2006 and $3.9 million for the year-to-date period of 2006. The increased depreciation is expected to decrease equity in earnings from JOAs approximately $3.0 million in each quarter until the second quarter of 2007.

Hurricanes - Certain of our Florida operations sustained hurricane damages in 2004 and 2005. Throughout the course of 2005 and 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 in the second quarter of 2006 and $2.2 million in the second quarter of 2005. The insurance recoveries recorded in 2005 were partially offset by additional estimated losses of $0.3 million. Net income was increased by $1.1 million in 2006 and $1.2 million in 2005. We are still in negotiations with insurance carriers regarding property and business interruption claims sustained by our newspaper operations and are seeking additional recoveries of $0.3 million. Recoveries of unsettled claims will not be recorded until settlement agreements are reached with the insurance providers.

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 (“LLC”) 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    Six months ended
     June 30,    June 30,

( in thousands )

 

   2006    2005    2006    2005

Income allocated to Scripps

   $ 170,329    $ 171,392    $ 302,687    $ 291,857

Income of pass-through entities allocated to non-controlling interests

     19,518      15,012      33,539      25,730
                           

Income from continuing operations before income taxes and minority interest

   $ 189,847    $ 186,404    $ 336,226    $ 317,587
                           

 

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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 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. 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 2006 and the actual effective income tax rate from continuing operations for the full year of 2005 is as follows:

 

     2006     2005  

Statutory rate

   35.0 %   35.0 %

Effect of:

    

State and local income taxes, net of federal income tax benefit

   3.4     3.6  

Income of pass-through entities allocated to non-controlling interests

   (3.4 )   (3.1 )

Section 199 - Production Activities Deduction

   (0.6 )   (0.4 )

Miscellaneous

   0.1     0.3  
            

Effective income tax rate

   34.5 %   35.4 %
            

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 Newspapers    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 Newspapers has notified us of its intent to terminate the Cincinnati JOA upon its expiration in December 2007.

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 have no 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 of 2006, we formed a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that will operate 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:

 

( in thousands, except share data )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Securities available for sale (at market value):

        

Time Warner (common shares - 2006, 2,011,000; 2005, 2,017,000)

   $ 34,794    $ 35,173    $ 33,701

Other available-for-sale securities

     1,967      1,806      4,462
                    

Total available-for-sale securities

     36,761      36,979      38,163

Denver JOA

     129,924      142,633      162,432

Colorado newspaper partnership

     31,635      

Joint ventures

     25,443      24,983      17,828

Other equity securities

     7,636      5,426      8,173
                    

Total investments

   $ 231,399    $ 210,021    $ 226,596
                    

Unrealized gains (losses) on securities available for sale

   $ 7,013    $ 7,251    $ 6,816
                    

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, 2006, 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 2006, primarily as a result of increased depreciation on assets that will be retired upon consolidation of DNA’s newspaper production facilities.

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, 2006. 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 )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Land and improvements

   $ 54,463    $ 57,383    $ 56,984

Buildings and improvements

     252,198      258,350      250,034

Equipment

     697,374      687,379      654,462
                    

Total

     1,004,035      1,003,112      961,480

Accumulated depreciation

     528,402      512,221      486,009
                    

Net property, plant and equipment

   $ 475,633    $ 490,891    $ 475,471
                    

 

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10. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following:

 

( in thousands )

 

  

June 30,

2006

   

As of

December 31,

2005

   

June 30,

2005

 

Goodwill

   $ 1,940,374     $ 1,647,794     $ 1,653,374  
                        

Other intangible assets:

      

Amortizable intangible assets:

      

Carrying amount:

      

Acquired network distribution

     43,415       43,415       44,215  

Broadcast television network affiliation relationships

     26,748       26,748       26,748  

Customer lists

     198,808       118,454       116,639  

Copyrights and other trade names

     32,657       20,562       20,300  

Other

     46,211       20,000       17,775  
                        

Total carrying amount

     347,839       229,179       225,677  
                        

Accumulated amortization:

      

Acquired network distribution

     (6,344 )     (4,952 )     (3,235 )

Broadcast television network affiliation relationships

     (1,925 )     (1,379 )     (824 )

Customer lists

     (24,749 )     (14,123 )     (2,879 )

Copyrights and other trade names

     (3,710 )     (2,081 )     (181 )

Other

     (14,875 )     (6,864 )     (5,492 )
                        

Total accumulated amortization

     (51,603 )     (29,399 )     (12,611 )
                        

Net amortizable intangible assets

     296,236       199,780       213,066  
                        

Other indefinite-lived intangible assets:

      

FCC licenses

     25,622       25,622       25,622  

Other

     2,087       2,087       2,087  
                        

Total other indefinite-lived intangible assets

     27,709       27,709       27,709  
                        

Pension liability adjustments

     96       96       140  
                        

Total other intangible assets

     324,041       227,585       240,915  
                        

Total goodwill and other intangible assets

   $ 2,264,415     $ 1,875,379     $ 1,894,289  
                        

 

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Activity related to goodwill and other intangible assets by business segment was as follows:

 

     Scripps           Broadcast     Interactive     Licensing       

( in thousands )

 

   Networks     Newspapers     Television     Media     and Other    Total  

Goodwill:

             

Balance as of December 31, 2004

   $ 254,689     $ 783,464     $ 219,367     $       $ 18    $ 1,257,538  

Business acquisitions

           411,176          411,176  

Adjustment to purchase price allocation

     (15,340 )              (15,340 )
                                               

Balance as of June 30, 2005

   $ 239,349     $ 783,464     $ 219,367     $ 411,176     $ 18    $ 1,653,374  
                                               

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  
                                               

Amortizable intangible assets:

             

Balance as of December 31, 2004

   $ 29,762     $ 2,907     $ 27,441          $ 60,110  

Business acquisitions

         $ 140,000          140,000  

Adjustment of purchase price allocations

     15,400                15,400  

Other additions

       134              134  

Amortization

     (1,370 )     (334 )     (584 )     (290 )        (2,578 )
                                           

Balance as of June 30, 2005

   $ 43,792     $ 2,707     $ 26,857       139,710        $ 213,066  
                                           

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  
                                           

Other indefinite-lived intangible assets:

             

Balance for all respective periods presented

   $ 919     $ 1,168     $ 25,622          $ 27,709  
                                     

Goodwill of $411.2 million and amortizable intangible assets of $140.0 million were initially allocated to the Shopzilla acquisition in the second quarter of 2005. In the fourth quarter of 2005, we completed an appraisal of the book and tax bases of the assets acquired and liabilities assumed in the Shopzilla acquisition. The amount allocated to goodwill was reduced by $9.7 million and the amounts allocated to amortizable intangible assets were increased by $2.4 million.

We expect that $3.3 million of the goodwill acquired in the Shopzilla acquisition will be deductible for income tax purposes. The goodwill acquired in the uSwitch and Newspaper acquisitions are not expected to be deductible for income tax purposes.

Amortizable intangible assets acquired in the Shopzilla and uSwitch acquisitions include customer lists, technology, trade names and patents. The customer lists intangible assets are estimated to have useful lives of 2 to 20 years. The other acquired intangibles are estimated to have useful lives of 4 to 9 years. The allocation of the purchase price for the uSwitch acquisition is based upon preliminary appraisals and estimates, and is therefore subject to change.

Amortizable intangible assets acquired in the Newspaper acquisitions were customer lists. The customer intangible assets 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 $21.0 million for the remainder of 2006, $41.6 million in 2007, $38.8 million in 2008, $37.6 million in 2009, $33.4 million in 2010, $29.6 million in 2011 and $94.2 million in later years.

 

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11. PROGRAMS AND PROGRAM LICENSES

Programs and program licenses consisted of the following:

 

( in thousands )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Cost of programs available for broadcast

   $ 878,738    $ 798,925    $ 845,798

Accumulated amortization

     616,395      534,246      595,625
                    

Total

     262,343      264,679      250,173

Progress payments on programs not yet available for broadcast

     118,576      77,824      70,944
                    

Total programs and program licenses

   $ 380,919    $ 342,503    $ 321,117
                    

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 $299 million at June 30, 2006. If the programs are not produced, our obligations would generally expire without obligation.

Progress payments on programs not yet available for broadcast and the cost of programs and program licenses capitalized totaled $69.6 million in the second quarter of 2006 and $56.8 million in 2005. Year to date progress payments and capitalized programs totaled $131 million in 2006 and $101 million in 2005.

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 2006

   $ 77,042    $ 43,182    $ 120,224

2007

     94,617      114,231      208,848

2008

     54,808      95,360      150,168

2009

     29,596      75,947      105,543

2010

     5,886      59,999      65,885

2011

     393      27,999      28,392

Later years

     1      1,310      1,311
                    

Total

   $ 262,343    $ 418,028    $ 680,371
                    

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:

 

( in thousands )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Network launch incentives

   $ 315,847    $ 316,774    $ 316,726

Accumulated amortization

     191,747      178,241      163,916
                    

Net book value

     124,100      138,533      152,810

Unbilled affiliate fees

     40,203      33,738      28,982
                    

Total unamortized network distribution incentives

   $ 164,303    $ 172,271    $ 181,792
                    

We capitalized network launch incentives totaling $1.2 million year-to-date in 2005.

Amortization recorded as a reduction to affiliate fee revenue in the consolidated financial statements, and estimated amortization of recorded network launch incentives for each of the next five years, is presented below.

 

     Three months ended    Six months ended
     June 30,    June 30,

( in thousands )

 

   2006    2005    2006    2005

Amortization of network launch incentives

   $ 6,492    $ 7,355    $ 13,506    $ 12,719
                           

 

Estimated amortization for the next five years is as follows:

  

Remainder of 2006

   $ 13,861

2007

     20,910

2008

     23,404

2009

     25,433

2010

     16,814

2011

     16,523

Later years

     7,155
      

Total

   $ 124,100
      

Actual amortization could be greater than the above amounts as additional incentive payments will be capitalized as we expand distribution of Scripps Networks.

 

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13. LONG-TERM DEBT

Long-term debt consisted of the following:

 

( in thousands )

 

  

June 30,

2006

   

As of

December 31,

2005

   

June 30,

2005

 

Variable-rate credit facilities, including commercial paper

   $ 443,863     $ 226,966     $ 300,437  

$100 million, 6.625% notes, due in 2007

     99,982       99,975       99,967  

$50 million, 3.75% notes, due in 2008

     50,000       50,000       50,000  

$100 million, 4.25% notes, due in 2009

     99,671       99,623       99,575  

$150 million, 4.30% notes, due in 2010

     149,808       149,784       149,760  

$200 million, 5.75% notes, due in 2012

     199,248       199,185       199,122  

Other notes

     1,482       1,537       1,590  
                        

Total face value of long-term debt less discounts

     1,044,054       827,070       900,451  

Fair market value of interest rate swap

     (1,620 )     (1,295 )     (606 )
                        

Total long-term debt

   $ 1,042,434     $ 825,775     $ 899,845  
                        

In June 2006, we entered into a Competitive Advance and Revolving Credit Facility (the “Revolver”) and a commercial paper program that permits aggregate borrowings up to $750 million and expires in June 2011 (the “Variable-Rate Credit Facilities”). The Revolver replaced our existing Competitive Advance and Revolving Credit facilities that collectively permitted aggregate borrowings up to $550 million and consisted of two facilities that were due to expire in March 2007 and July 2009. 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 5.2% at June 30, 2006, 4.3% at December 31, 2005, and 3.4% at June 30, 2005.

We have a U.S. shelf registration statement which allows us to borrow up to an additional $300 million as of June 30, 2006.

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 expires upon the maturity of the $50 million, 3.75% notes in 2008, and effectively converts those fixed-rate notes into variable-rate borrowings. The variable interest rate was 5.5% at June 30, 2006, which was based on six-month LIBOR minus a rate spread. 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 agreement (due to movements in the benchmark interest rate) are 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 agreements and the underlying fixed-rate obligation are recorded as equal and offsetting unrealized gains and losses in the Condensed Consolidated Statements of Income. We have structured the interest rate swap to be 100% effective. As a result, there is no current impact to earnings resulting from hedge ineffectiveness.

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, 2006.

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, 2006, we had outstanding letters of credit totaling $9.4 million.

 

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14. OTHER LIABILITIES AND MINORITY INTERESTS

Other liabilities – Other liabilities consisted of the following:

 

( in thousands )

 

  

June 30,

2006

  

As of

December 31,

2005

  

June 30,

2005

Program rights payable

   $ 20,885    $ 21,615    $ 27,043

Employee compensation and benefits

     85,927      84,903      72,410

Network distribution incentives

     19,203      22,758      32,881

Other

     35,952      32,923      27,438
                    

Total other liabilities

     161,967      162,199      159,772

Current portion of other liabilities

     39,215      40,583      52,686
                    

Other liabilities (less current portion)

   $ 122,752    $ 121,616    $ 107,086
                    

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. The put and call options become exercisable at various dates through 2016. Put options on an approximate 6% non-controlling interest in Fine Living are currently exercisable. The remaining put options, comprising an approximate 4% interest in Fine Living, become exercisable in the third quarter of 2006.

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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15. 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 )    2006     2005  

Other changes in certain working capital accounts, net:

    

Accounts receivable

   $ (30,452 )   $ (42,537 )

Inventories

     (1,432 )     (395 )

Accounts payable

     3,758       (2,665 )

Accrued income taxes

     8,073       42,563  

Accrued employee compensation and benefits

     (14,211 )     (4,725 )

Accrued interest

     2       41  

Other accrued liabilities

     881       1,884  

Other, net

     (2,823 )     1,789  
                

Total

   $ (36,204 )   $ (4,045 )
                

16. 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.

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:

 

     Three months ended     Six months ended  
     June 30,     June 30,  
( in thousands)    2006     2005     2006     2005  

Service cost

   $ 5,112     $ 4,581     $ 10,225     $ 9,163  

Interest cost

     6,082       5,675       12,164       11,350  

Expected return on plan assets, net of expenses

     (8,167 )     (7,269 )     (16,334 )     (14,539 )

Net amortization and deferral

     1,479       777       2,958       1,553  
                                

Total for defined benefit plans

     4,506       3,764       9,013       7,527  

Multi-employer plans

     127       167       260       172  

SERP

     1,050       1,008       2,101       2,016  

Defined contribution plans

     2,073       1,868       4,210       3,653  
                                

Total

   $ 7,756     $ 6,807     $ 15,584     $ 13,368  
                                

We made required contributions of $0.2 million to our defined benefit plans in the first half of 2006. We anticipate contributing $0.1 million to meet minimum funding requirements of our defined benefit plans during the remainder of fiscal 2006.

During the first half 2006, we have also contributed $1.2 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 2006.

 

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17. 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 (See Note 1).

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, 2005.

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 equivalent 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 profits exclude 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.

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 FOX Sports Net South and joint ventures with foreign entities.

 

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Information regarding our business segments is as follows:

 

     Three months ended     Six months ended  
     June 30,     June 30,  
( in thousands )    2006     2005     2006     2005  

Segment operating revenues:

        

Scripps Networks

   $ 286,303     $ 244,299     $ 523,905     $ 446,977  
                                

Newspapers:

        

Newspapers managed solely by us

     181,894       173,630       366,096       349,466  

JOAs and newspaper partnerships

     56       100       104       150  
                                

Total

     181,950       173,730       366,200       349,616  

Boulder prior to formation of Colorado newspaper partnership

       7,066       2,189       13,402  
                                

Total newspapers

     181,950       180,796       368,389       363,018  

Broadcast television

     86,445       83,183       170,208       155,443  

Interactive media

     64,965       1,047       123,608       1,047  

Licensing and other media

     22,527       31,193       46,131       57,013  

Corporate/intercompany

     (276 )     (47 )     (598 )     (124 )
                                

Total operating revenues

   $ 641,914     $ 540,471     $ 1,231,643     $ 1,023,374  
                                

Segment profit (loss):

        

Scripps Networks

   $ 150,270     $ 123,461     $ 256,815     $ 204,402  
                                

Newspapers:

        

Newspapers managed solely by us

     52,741       51,965       103,725       107,611  

JOAs and newspaper partnerships

     2,375       9,462       1,416       16,503  
                                

Total

     55,116       61,427       105,141       124,114  

Boulder prior to formation of Colorado newspaper partnership

       1,188       (125 )     1,558  
                                

Total newspapers

     55,116       62,615       105,016       125,672  

Broadcast television

     26,417       27,074       48,904       43,353  

Interactive media

     16,463       358       30,384       358  

Licensing and other media

     3,118       6,329       6,020       11,184  

Corporate

     (14,058 )     (9,767 )     (30,951 )     (21,533 )
                                

Total segment profit

     237,326       210,070       416,188       363,436  

Depreciation and amortization of intangibles

     (33,433 )     (16,172 )     (58,781 )     (31,475 )

Gain on formation of Colorado newspaper partnership

         3,535    

Gains (losses) on disposal of property, plant and equipment

     (60 )     91       (156 )     42  

Interest expense

     (15,537 )     (7,559 )     (27,690 )     (14,931 )

Interest and dividend income

     609       374       1,151       582  

Miscellaneous, net

     942       (400 )     1,979       (67 )
                                

Income from continuing operations before income taxes and minority interests

   $ 189,847     $ 186,404     $ 336,226     $ 317,587  
                                

Depreciation:

        

Scripps Networks

   $ 4,230     $ 3,778     $ 7,917     $ 7,000  
                                

Newspapers:

        

Newspapers managed solely by us

     5,502       5,064       10,580       9,929  

JOAs and newspaper partnerships

     310       309       610       609  
                                

Total

     5,812       5,373       11,190       10,538  

Boulder prior to formation of Colorado newspaper partnership

       311       111       615  
                                

Total newspapers

     5,812       5,684       11,301       11,153  

Broadcast television

     4,507       4,600       9,132       9,157  

Interactive media

     3,839       52       6,781       52  

Licensing and other media

     154       224       322       443  

Corporate

     309       552       652       1,092  
                                

Total depreciation

   $ 18,851     $ 14,890     $ 36,105     $ 28,897  
                                

 

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     Three months ended    Six months ended
     June 30,    June 30,
( in thousands )    2006    2005    2006    2005

Amortization of intangibles:

           

Scripps Networks

   $ 917    $ 536    $ 1,680    $ 1,370
                           

Newspapers:

           

Newspapers managed solely by us

     344      76      441      161

JOAs and newspaper partnerships

        66         133
                           

Total

     344      142      441      294

Boulder prior to formation of Colorado newspaper partnership

        20      21      40
                           

Total newspapers

     344      162      462      334

Broadcast television

     282      294      560      584

Interactive media

     13,039      290      19,974      290
                           

Total amortization of intangibles

   $ 14,582    $ 1,282    $ 22,676    $ 2,578
                           

Additions to property, plant and equipment:

           

Scripps Networks

   $ 3,086    $ 1,916    $ 5,712    $ 4,772
                           

Newspapers:

           

Newspapers managed solely by us

     3,528      2,565      7,270      4,967

JOAs and newspaper partnerships

     524      568      1,028      925
                           

Total newspapers

     4,052      3,133      8,298      5,892

Broadcast television

     1,689      2,420      2,996      3,308

Interactive media

     8,320         11,098   

Licensing and other media

     169      155      276      301

Corporate

     2,041      1,146      3,273      1,606
                           

Total additions to property, plant and equipment

   $ 19,357    $ 8,770    $ 31,653    $ 15,879
                           

Business acquisitions and other additions to long-lived assets:

           

Scripps Networks

   $ 69,656    $ 56,779    $ 131,355    $ 100,922

Newspapers

           

Newspapers managed solely by us

     181      70      23,045      70

Newspapers operated pursuant to JOAs

     18      150      136      250
                           

Total newspapers

     199      220      23,181      320

Interactive media

     1,456      535,795      372,157      535,795

Corporate

     541      25      621      490
                           

Total

   $ 71,852    $ 592,819    $ 527,314    $ 637,527
                           

Assets:

           

Scripps Networks

         $ 1,228,188    $ 1,115,957
                   

Newspapers:

           

Newspapers managed solely by us

           1,076,470      1,052,221

JOAs and newspaper partnerships

           181,483      221,715
                   

Total newspapers

           1,257,953      1,273,936

Broadcast television

           482,156      491,308

Interactive media

           1,016,251      618,906

Licensing and other media

           28,904      34,016

Investments

           44,795      44,336

Corporate

           186,923      145,001
                   

Total assets of continuing operations

           4,245,170      3,723,460

Discontinued operations

           175,478      332,567
                   

Total assets

         $ 4,420,648    $ 4,056,027
                   

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 approximately one third of our international revenues, which will approximate $90 million, will be provided from each of the United Kingdom and Japan markets.

 

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Other additions to long-lived assets include investments, capitalized intangible assets and Scripps Networks capitalized programs and network launch incentives.

18. STOCK COMPENSATION PLANS

Capital Stock – Scripps’ capital structure includes Common Voting Shares and Class A Common Shares. The articles of incorporation provide that the holders of Class A Common Shares, who are not entitled to vote on any other matters except as required by Ohio law, are entitled to elect the greater of three or one-third of the directors.

Under a share repurchase program authorized by the Board of Directors on October 28, 2004, we are authorized to repurchase up to 5.0 million Class A Common Shares. A total of 1.5 million shares have been repurchased in 2005 and 2006 at prices ranging from $43 to $51 per share. The balance remaining on the authorization is 3.5 million shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of common shares under the program.

Incentive Plans – Scripps’ Long-Term Incentive Plan (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. The Plan expires in 2014, except for options then outstanding.

We satisfy stock option exercises and vested stock awards with newly issued shares. Shares available for future stock compensation grants totaled 5.3 million as of June 30, 2006.

Stock Options – Stock options grant the recipient the right to purchase Class A Common Shares at not less than 100% of the fair market value on the date the option is granted. Stock options granted to employees generally vest over a three year period, conditioned upon the individual’s continued employment through that period. Vesting of awards is immediately accelerated upon the retirement, death or disability of the employee or upon a change in control of Scripps or in the business in which the individual is employed. Unvested awards are forfeited if employment is terminated for other reasons. Options granted to employees prior to 2005 generally expire 10 years after grant, while options granted in 2005 and later generally have 8 year terms. Stock options granted to non-employee directors generally vest over a one year-period and have a 10 year term.

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:

 

     Six months ended  
     June 30,  
     2006     2005  

Weighted-average fair value of options granted

   $ 12.75     $ 11.52  

Assumptions used to determine fair value:

    

Dividend yield

     0.9 %     0.8 %

Risk-free rate of return

     4.6 %     3.8 %

Expected life of options (years)

     5.38       5.38  

Expected volatility

     21.3 %     22.2 %

Dividend yield considers our historical dividend yield and the expected dividend yield over the life of the options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected life is an output of the valuation model, and primarily considers historical exercise patterns. Unexercised options for grants included in the historical period are assumed to be exercised at the midpoint of the current date and the full contractual term. Expected volatility is based on historical share price volatility and the implied volatility of exchange-traded options on our Class A Common A Shares. The volatility assumption considers historical volatility for the most recent period reflecting the expected life and for a long term period.

 

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The following table summarizes information about stock option transactions:

 

           Weighted     
     Number     Average    Range of
     of     Exercise    Exercise
     Shares     Price    Prices

Options outstanding at December 31, 2004

   11,158,734     $ 35.27    $ 13 - 54

Options granted during the period

   1,822,700       46.81      46 - 51

Options exercised during the period

   (624,057 )     28.86      17 - 49

Options forfeited during the period

   (68,427 )     37.82      24 - 49
                   

Options outstanding at June 30, 2005

   12,288,950     $ 37.30    $ 13 - 54
                   

Options exercisable at June 30, 2005

   8,472,046     $ 33.20    $ 13 - 54
                   

Options outstanding at December 31, 2005

   11,640,330     $ 37.89    $ 13 - 54

Options granted during the period

   2,027,664       48.45      45 - 49

Options exercised during the period

   (371,512 )     30.92      13 - 49

Options forfeited/canceled during the period

   (116,891 )     46.46      32 - 52
                   

Options outstanding at June 30, 2006

   13,179,591     $ 39.63    $ 17 - 54
                   

Options exercisable at June 30, 2006

   9,505,210     $ 36.40    $ 17 - 54
                   

The following table presents additional information about exercises of stock options:

 

     Six months ended
     June 30,

( in thousands)

 

   2006    2005

Cash received upon exercise

   $ 11,501    $ 18,027

Intrinsic value (market value on date of exercise less exercise price)

     6,363      12,970

Tax benefits realized

     2,386      4,540

Substantially all options granted prior to 2004 are exercisable. Options generally become exercisable in increments over a three year period. Information about options outstanding and options exercisable by year of grant is as follows:

 

               Options Outstanding    Options Exercisable

( dollars in millions, except per share
amounts )

 

        Average         Weighted    Aggregate         Weighted    Aggregate
   Range of    Remaining    Options    Average    Intrinsic    Options    Average    Intrinsic
   Exercise    Term    on Shares    Exercise    Value    on Shares    Exercise    Value

Year of Grant

   Prices    (in years)    Outstanding    Price    (in millions)    Exercisable    Price    (in millions)

1997 - expire in 2007

   $ 17 - 21    0.6    195,600    $ 17.65    $ 5.0    195,600    $ 17.65    $ 5.0

1998 - expire in 2008

     20 - 27    1.6    265,800      23.66      5.2    265,800      23.66      5.2

1999 - expire in 2009

     21 - 25    2.6    726,100      23.53      14.2    726,100      23.53      14.2

2000 - expire in 2010

     22 - 30    3.7    1,171,466      24.76      21.5    1,171,466      24.76      21.5

2001 - expire in 2011

     29 - 35    4.6    1,333,836      32.13      14.7    1,333,836      32.13      14.7

2002 - expire in 2012

     36 - 39    5.7    1,741,684      37.67      9.5    1,741,684      37.67      9.5

2003 - expire in 2013

     40 - 46    6.7    1,921,999      40.10      5.9    1,908,300      40.08      5.9

2004 - expire in 2014

     46 - 54    7.7    1,998,700      49.28       1,443,494      49.36   

2005 - expire in 2013

     46 - 51    6.8    1,802,617      46.89       718,930      47.25   

2006 - expire in 2014

     45 - 49    7.8    2,021,789      48.45            
                                                 

Total

   $ 17 - 54    6.0    13,179,591    $ 39.63    $ 76.0    9,505,210    $ 36.40    $ 76.0
                                                 

 

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Restricted Stock – Awards of Class A Common shares (“restricted stock”) generally require no payment by the employee. Restricted stock awards generally vest over a three year period, conditioned upon the individual’s continued employment through that period. The vesting of certain awards may also be accelerated if certain performance targets are met. Vesting of awards is immediately accelerated upon the retirement, death or disability of the employee or upon a change in control of Scripps or in the business in which the individual is employed. Unvested awards are forfeited if employment is terminated for other reasons.

Awards are nontransferable during the vesting period, but the shares are entitled to all the rights of an outstanding share. There are no post-vesting restrictions on shares granted to employees and non-employee directors.

At the election of the employee, restricted stock awards may be converted to restricted stock units (“RSU”) prior to vesting. RSUs are convertible into equal number of Class A Common Shares at a specified time or times or upon the occurrence of a specified event, such as upon retirement, at the election of the employee.

In 2005 we adopted a new approach to long-term incentive compensation for senior executives. The proportion of stock options in incentive compensation was reduced and replaced with performance share awards. Performance share awards represent the right to receive a grant of restricted shares if certain performance measures are met. Each award specifies a target number of shares to be issued and the specific performance criteria that must be met. The number of shares that an employee receives may be less or more than the target number of shares depending on the extent to which the specified performance measures are met or exceeded.

Information related to restricted stock transactions is presented below:

 

    

Number

of

Shares

    Grant Date Fair Value
       Weighted    Range of
       Average    Prices

Unvested shares at December 31, 2004

   453,954     $ 39.58    $ 23 - 53

Shares awarded during the period

   3,750       48.32      48

Shares vested during the period

   (177,020 )     45.52      38 - 52

Shares forfeited during the period

   (2,500 )     47.28      47
                   

Unvested shares at June 30, 2005

   278,184     $ 41.28    $ 23 - 53
                   

Unvested shares at December 31, 2005

   249,008     $ 41.93    $ 23 - 53

Shares issued for 2005 performance share awards

   144,036       46.48      46 - 48

Shares awarded during the period

   50,500       48.98      49

Shares vested during the period

   (187,408 )     41.42      31 - 53

Shares forfeited during the period

   (2,816 )     45.59      47 - 49
                   

Unvested shares at June 30, 2006

   253,320     $ 46.52    $ 35 - 53
                   

During 2004, 40,000 restricted stock awards were converted to RSUs. The restricted stock was originally awarded in May 2003, at which time the value of a Class A Common Share was $39.44. The RSUs vest on January 1, 2007.

Performance share awards with a target of 134,250 Class A Common Shares were granted in 2006. The weighted average price of an underlying Class A Common Share on the dates of grant was $47.74. The number of shares ultimately issued depends upon the extent to which specified performance measures are met. The shares earned vest between 2007 and 2009.

The following table presents additional information about restricted stock vesting:

 

     Six months ended
     June 30,
( in thousands)    2006    2005

Fair value of shares vested

   $ 8,736    $ 8,753

Tax benefits realized

     1,718      1,480

 

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Stock Compensation Costs – Stock compensation expense recognized in 2006 and in 2005, and on a pro forma basis for 2005 assuming we had been applying the fair value provisions of FAS 123 as previously disclosed in the footnotes to our financial statements for those periods, and the effect on income and earnings per share, is as follows:

 

    

Three months ended

June 30,

  

Six months ended

June 30,

( in thousands, except per share data )    2006    2005    2006    2005

Stock-based compensation:

           

As reported:

           

Stock options

   $ 4,420    $      $ 12,936    $ 1,165

Restricted stock, RSUs and performance shares

     2,192      1,729      5,075      4,133
                           

Total stock compensation as reported

     6,612      1,729      18,011      5,298

Additional compensation to adjust intrinsic value to fair value

        4,881         11,041
                           

Total fair-value based stock compensation

   $ 6,612    $ 6,610    $ 18,011    $ 16,339
                           

Fair-value based stock compensation, net of tax:

           

As reported

   $ 4,133    $ 1,201    $ 11,257    $ 3,444

Additional compensation to adjust intrinsic value to fair value

        3,104      .      7,176
                           

Fair-value based stock compensation, net of tax

   $ 4,133    $ 4,305    $ 11,257    $ 10,620
                           

Effect of fair-value based stock-based compensation on basic and diluted earnings per share

   $ 0.03    $ 0.03    $ 0.07    $ 0.06
                           

Total stock compensation in the 2006 year-to-date period includes $6.2 million of expense related to awards granted to retiree-eligible employees.

As of June 30, 2006, $25.7 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.2 years and $9.3 million of total unrecognized compensation cost related to restricted stock, RSUs and performance shares is expected to be recognized over a weighted-average period of 2.3 years.

 

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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 contain certain forward-looking statements 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’ taste; 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 is a diverse and growing 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, Fine Living and Great American Country; daily and community newspapers in 18 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.

The company has a long-standing objective of creating shareholder value by following a disciplined strategy of investing in growing media businesses. Starting with newspapers nearly 130 years ago and continuing with our recent acquisitions of Shopzilla and uSwitch, we have stayed ahead of the ongoing migration of consumers and marketing dollars to new media marketplaces. This is evidenced by the dramatic change in our company’s profile during the last ten years. In 1994, the newspaper division contributed 50 percent of the company’s consolidated revenue. In 2006 it is contributing 30 percent. The national television networks, a business that did not exist in 1993, are contributing 43 percent to the company’s revenue in 2006 while Shopzilla and uSwitch, our newly acquired comparison shopping Internet services, are contributing 10 percent.

We expect to continue to increase shareholder value by maximizing and allocating the cash flow generated by our mature media businesses to new or existing businesses. In the past we have used cash generated by our newspapers and broadcast television stations to develop HGTV, DIY and Fine Living and to acquire Food Network, GAC, Shopzilla and uSwitch. The continued expansion of Scripps Networks, the support and development of our comparison shopping services’ rapid growth potential, and investment in new and growing media businesses are the company’s top strategic priorities.

 

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Scripps Networks continues to generate double digit increases in both revenues and segment profits due primarily to the enduring popularity of HGTV and Food Network. The appeal of our new programming has resonated with viewers and has resulted in an increasing number of younger viewers tuning in to our flagship networks. At HGTV, primetime viewership grew 12 percent during the second quarter and total day viewership grew nine percent. At Food Network, primetime viewership during the quarter was up an average of five percent compared with the second quarter of 2005 and total day viewership was up 12 percent. We are also extending our Scripps Networks brands into new media platforms and are emerging as a leader in providing content that is specifically formatted for the growing number of video-on-demand and broadband services. In 2006, we have launched high definition versions of both HGTV and Food Network and added two more broadband channels – HGTV’s Bath Design and DIY Network’s woodworking. We expect to launch similar broadband channels that will dig deep into such lifestyle topics as gardening, healthy eating and crafts. The number of people visiting HGTV’s and Food Network’s Web sites was up 10 percent year-over-year during the month of June demonstrating the appeal of our brands and the success we have had targeting consumers. Top priorities at Scripps Networks are the ratings growth at HGTV and Food, the programming and distribution of our emerging networks, developing new revenue streams for our network brands such as product licensing and retail sales, and the growth of interactive revenue.

During the second quarter of 2005, we acquired Shopzilla, which operates a product comparison shopping service that helps consumers find products offered for sale by online retailers. In the first quarter of 2006, we acquired uSwitch. 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. These acquisitions enable us to capitalize on the rapid growth and rising profitability of specialized Internet search businesses and expand our electronic media platform. On a pro-forma basis, the revenues of these businesses in the first half of 2006 have nearly doubled compared with the first half of 2005 due in part to the increasing popularity of comparison shopping sites with consumers. We have begun to leverage the cross-promotional power of all of our media businesses to brand our interactive media businesses. Specifically, we have used our media businesses to drive traffic to Shopzilla via links on virtually all of our Web sites; our lifestyle networks and TV stations have promoted Shopzilla; our newspapers have run ads and created a Shopzilla-branded, Smart Shopper column.

Our shareholders also continue to benefit from our local media businesses. Our daily and community newspapers and broadcast television stations are the foundation for our successful growth strategy.

At our newspapers, our publishers are focused on increasing advertising market share and online revenue while publishing reader-focused newspapers and online content to build readership. To achieve advertising market share growth, our publishers look to expand our print business through start-ups or acquisitions of nontraditional and nondaily products. We believe that our online business will generate higher growth rates than our traditional print business and, as a result, are focusing heavily in that area. Our efforts here involve development of new online products which deliver local news, video and advertising to viewers as well as efforts to create new online business models which are less tied to the traditional newspaper but which serve new, underserved audiences within our local markets.

Priorities at our broadcast television stations include concentrating on the branding of our local ABC and NBC affiliates, emphasizing local news and building out non-traditional revenue opportunities that target new advertisers. Improved ratings at ABC in 2005 and the outlook for 2006 bode well not only for revenue at our ABC stations from popular shows, but also for the lead-in they provide to late news. The broadcast of the Super Bowl on ABC and NBC’s coverage of the Winter Olympics contributed to an increase in broadcast television revenues in the first half of 2006. The return of political advertising is expected to further increase our revenues in 2006.

In the second quarter of 2006, we sold the operations of the Shop At Home television network and certain of its assets to Jewelry Television. We have retained a broker and are actively seeking a buyer for the five Shop At Home-affiliated broadcast television stations. Operating results for Shop At Home are presented as discontinued operations in our financial statements for all periods presented.

 

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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 preparing financial statements 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 Condensed 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, 2005. There have been no significant changes in those accounting policies or other significant accounting policies except for the impacts from adopting FAS 123-R (See Note 2 to the Condensed Consolidated Financial Statements).

RESULTS OF OPERATIONS

The trends and underlying economic conditions affecting the operating performance and future prospects differ for each of our business segments. Accordingly, we believe the 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-37 through F-49.

On June 21, 2006, we reached agreement to sell the operations of the Shop At Home television network and certain of its assets to Jewelry Television. Under the terms of the agreement, Jewelry Television also assumed a number of Shop At Home’s television affiliation agreements.

Cash consideration received in the Shop At Home transaction totaled $17 million which encompassed the sale of fixed assets, including Shop At Home’s building and real estate, satellite uplink facilities, information technology systems, the network’s call center, Web site and production studios. Shop At Home’s second quarter results include a $12.1 million loss on the sale of assets, $16.7 million in costs associated with the termination of long-term agreements and employee termination benefits, and a $6.2 million non-cash charge to write-down assets on the Shop At Home television network.

We continue to seek a buyer for the five Shop At Home-affiliated broadcast television stations. Under the terms of the agreement with Jewelry Television, these stations will continue to air a mix of Shop At Home and Jewelry Television programming. We expect to reach an agreement to sell the stations prior to the end of 2006.

In the third quarter of 2005, we reached an agreement with Advance Publications, Inc., the publisher of the Birmingham News (“News”), to terminate the Birmingham joint operating agreement between the News and our Birmingham Post-Herald newspaper. During the third quarter of 2005, we also ceased publication of our Birmingham Post-Herald newspaper and sold certain assets to the News.

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.

 

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Consolidated Results of Continuing Operations - Consolidated results of continuing operations were as follows:

 

     Quarter Period     Year-to-Date  

( in thousands )

 

   2006     Change     2005     2006     Change     2005  

Operating revenues

   $ 641,914     18.8 %   $ 540,471     $ 1,231,643     20.4 %   $ 1,023,374  

Costs and expenses

     (420,949 )   (19.1 )%     (353,496 )     (843,186 )   (20.3 )%     (701,190 )

Depreciation and amortization of intangibles

     (33,433 )       (16,172 )     (58,781 )   (86.8 )%     (31,475 )

Gain on formation of Colorado newspaper partnership

           3,535      

Gains (losses) on disposal of property, plant and equipment

     (60 )       91       (156 )       42  

Hurricane recoveries, net

     1,750     (7.5 )%     1,892       1,750     (7.5 )%     1,892  
                                            

Operating income

     189,222     9.5 %     172,786       334,805     14.4 %     292,643  

Interest expense

     (15,537 )       (7,559 )     (27,690 )   (85.5 )%     (14,931 )

Equity in earnings of JOAs and other joint ventures

     14,611     (31.1 )%     21,203       25,981     (34.0 )%     39,360  

Interest and dividend income

     609     62.8 %     374       1,151     97.8 %     582  

Miscellaneous, net

     942         (400 )     1,979         (67 )
                                            

Income from continuing operations before income taxes and minority interests

     189,847     1.8 %     186,404       336,226     5.9 %     317,587  

Provision for income taxes

     65,249     1.4 %     66,157       115,797     (2.4 )%     113,073  
                                            

Income from continuing operations before minority interests

     124,598     3.6 %     120,247       220,429     7.8 %     204,514  

Minority interests

     19,726     (14.1 )%     17,290       34,075     (19.0 )%     28,625  
                                            

Income from continuing operations

   $ 104,872     1.9 %   $ 102,957     $ 186,354     5.9 %   $ 175,889  
                                            

Income from continuing operations per diluted share of common stock

   $ .64     3.2 %   $ .62     $ 1.13     6.6 %   $ 1.06  
                                            

The increase in operating revenues was primarily due to the continued growth in advertising and network affiliate fee revenues at our national television networks, the June 2005 acquisition of Shopzilla, and the March 2006 acquisition of uSwitch. The growth in advertising revenues was primarily driven by increased demand for advertising time and higher advertising rates at our networks. The growth in affiliate fee revenues is attributed to scheduled rate increases and wider distribution of our networks. These increases in revenue were partially offset by declines at licensing and other media. Licensing and other media revenues in 2005 include the impact of renewing multi-year license agreements with the ABC Television Network for certain of our Peanuts animated specials.

Costs and expenses were impacted by the expanded hours of original programming and costs to promote our national networks, the acquisitions of Shopzilla and uSwitch, and 2005 including royalty and talent costs associated with the renewal of Peanut film licenses. In addition, we adopted the requirements of FAS 123-R, Share-Based Payments, effective January 1, 2006 and began recording compensation expense on stock options granted to employees. Stock option expense, including the costs of immediately expensed options granted to retiree eligible employees, increased our costs and expenses $4.4 million in the second quarter of 2006 and $12.9 million year-to-date. Based upon stock options issued through the second quarter, we expect stock option expense to increase our costs and expenses by approximately $8.0 million for the remainder of 2006.

Depreciation and amortization increased primarily as a result of the acquisitions of Shopzilla and uSwitch. We expect depreciation and amortization will be approximately $30 million in the third quarter of 2006.

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.

 

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Certain of our Florida operations sustained hurricane damages in 2004 and 2005. Throughout the course of 2005 and 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 in the second quarter of 2006 and $2.2 million in the second quarter of 2005. The insurance recoveries recorded in 2005 were partially offset by additional estimated losses of $0.3 million. Net income was increased by $1.1 million, $.01 per share in 2006 and $1.2 million, $.01 per share in 2005. We are still in negotiations with insurance carriers regarding property and business interruption losses sustained by our newspaper operations and are seeking additional recoveries of $0.3 million. Recoveries of unsettled claims will not be recorded until settlement agreements are reached with the insurance providers.

Interest expense includes interest incurred on our outstanding borrowings and deferred compensation and other employment agreements. Interest incurred on our outstanding borrowings increased in 2006 due to higher average debt levels attributed to the Shopzilla and uSwitch acquisitions. In connection with the June 2005 acquisition of Shopzilla, we issued $150 million in 5-year notes at a rate of 4.30%. We financed the remainder of the Shopzilla and uSwitch transactions with commercial paper. The average outstanding commercial paper balance for the year-to-date period of 2006 was $346 million at an average rate of 4.8% compared with $36 million at an average rate of 2.7% for the year-to-date period of 2005. The average outstanding commercial paper balance for the second quarter of 2006 was $490 million at an average rate of 5.0% compared with $20 million at an average rate of 3.3% for the second quarter of 2005. Interest expense is expected to be approximately $17 million in the third quarter of 2006.

In the third quarter of 2005, the management committee of the Denver Newspaper Agency (“DNA”) approved plans to consolidate DNA’s newspaper production facilities. As a result, assets used in certain of the existing facilities will be retired earlier than previously estimated. The reduction in these assets’ estimated useful lives increased DNA’s depreciation expense. The increased depreciation resulted in a $3.1 million decrease in our equity in earnings from JOAs in the second quarter of 2006 and decreased year-to-date equity in earnings from JOAs $6.3 million. Net income was decreased by $1.9 million, $.01 per share in the second quarter of 2006 and $3.9 million, $.02 per share for the year-to-date period of 2006. The increased depreciation is expected to decrease equity in earnings from JOAs approximately $3.0 million in each quarter until the second quarter of 2007. The decrease in equity in earnings of JOAs is also attributed to lower advertising sales in all three of our JOA markets.

Information regarding our effective tax rate is a follows:

 

     Quarter Period     Year-to-Date  
( in thousands )    2006     Change     2005     2006     Change     2005  

Income from continuing operations before income taxes and minority interests as reported

   $ 189,847     1.8 %   $ 186,404     $ 336,226     5.9 %   $ 317,587  

Income allocated to non-controlling interests

     19,518     30.0 %     15,012       33,539     30.3 %     25,730  
                                            

Income allocated to Scripps

   $ 170,329     (0.6 )%   $ 171,392     $ 302,687     3.7 %   $ 291,857  
                                            

Provision for income taxes

   $ 65,249     1.4 %   $ 66,157     $ 115,797     (2.4 )%   $ 113,073  
                                            

Effective income tax rate as reported

     34.4 %       35.5 %     34.4 %       35.6 %

Effective income tax rate on income allocated to Scripps

     38.3 %       38.6 %     38.3 %       38.7 %
                                    

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.

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.

 

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Minority interest increased in the second quarter and year-to-date period of 2006 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 17 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 profits. Segment profits exclude 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 profits 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 for the current period based upon current economic conditions and decisions made by the managers of those business segments in the current period.

In February of 2006, we formed a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that will operate 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. 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 operating results, the results of the contributed publications prior to the formation of the partnership are reported separately in our segment results.

 

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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:

 

     Quarter Period     Year-to-Date  
( in thousands )    2006     Change     2005     2006     Change     2005  

Segment operating revenues:

            

Scripps Networks

   $ 286,303     17.2 %   $ 244,299     $ 523,905     17.2 %   $ 446,977  
                                            

Newspapers:

            

Newspapers managed solely by us

     181,894     4.8 %     173,630       366,096     4.8 %     349,466  

JOAs and newspaper partnerships

     56     (44.0 )%     100       104     (30.7 )%     150  
                                            

Total

     181,950     4.7 %     173,730       366,200     4.7 %     349,616  

Boulder prior to formation of Colorado newspaper partnership

         7,066       2,189     (83.7 )%     13,402  
                                            

Total newspapers

     181,950     0.6 %     180,796       368,389     1.5 %     363,018  

Broadcast television

     86,445     3.9 %     83,183       170,208     9.5 %     155,443  

Interactive media

     64,965         1,047       123,608         1,047  

Licensing and other media

     22,527     (27.8 )%     31,193       46,131     (19.1 )%     57,013  

Corporate/intercompany

     (276 )       (47 )     (598 )       (124 )
                                            

Total operating revenues

   $ 641,914     18.8 %   $ 540,471     $ 1,231,643     20.4 %   $ 1,023,374  
                                            

Segment profit (loss):

            

Scripps Networks

   $ 150,270     21.7 %   $ 123,461     $ 256,815     25.6 %   $ 204,402  
                                            

Newspapers:

            

Newspapers managed solely by us

     52,741     1.5 %     51,965       103,725     (3.6 )%     107,611  

JOAs and newspaper partnerships

     2,375     (74.9 )%     9,462       1,416     (91.4 )%     16,503  
                                            

Total

     55,116     (10.3 )%     61,427       105,141     (15.3 )%     124,114  

Boulder prior to formation of Colorado newspaper partnership

         1,188       (125 )       1,558  
                                            

Total newspapers

     55,116     (12.0 )%     62,615       105,016     (16.4 )%     125,672  

Broadcast television

     26,417     (2.4 )%     27,074       48,904     12.8 %     43,353  

Interactive media

     16,463         358       30,384         358  

Licensing and other media

     3,118     (50.7 )%     6,329       6,020     (46.2 )%     11,184  

Corporate

     (14,058 )   (43.9 )%     (9,767 )     (30,951 )   (43.7 )%     (21,533 )
                                            

Total segment profit

     237,326     13.0 %     210,070       416,188     14.5 %     363,436  

Depreciation and amortization of intangibles

     (33,433 )       (16,172 )     (58,781 )   (86.8 )%     (31,475 )

Gain on formation of Colorado newspaper partnership

           3,535      

Gains (losses) on disposal of property, plant and equipment

     (60 )       91       <