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, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number 0-16914

THE E. W. SCRIPPS COMPANY

(Exact name of registrant as specified in its charter)

 

Ohio   31-1223339

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

312 Walnut Street

Cincinnati, Ohio

  45202
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (513) 977-3000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                                                  No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨                                                  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2007 there were 126,611,996 of the Registrant’s Class A Common shares outstanding and 36,568,226 of the Registrant’s Common Voting shares outstanding.

 



Table of Contents

INDEX TO THE E. W. SCRIPPS COMPANY

REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2007

 

Item No.

        Page
   PART I - FINANCIAL INFORMATION   
1   

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, 2006.

 

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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 Class A shares during the quarter ended June 30, 2007:

 

Period

  

Total

Number of

Shares

Purchased

  

Average

Price Paid

per Share

  

Total Number

of Shares Purchased

as Part of Publicly

Announced Plans

or Programs

  

Maximum Number

of Shares that May

Yet Be Purchased

Under the Plans

Or Programs

4/1/07 - 4/30/07

   130,000    $ 44.42    130,000    2,343,000

5/1/07 - 5/31/07

   143,000    $ 43.86    143,000    2,200,000

6/1/07 - 6/30/07

            2,200,000
                     

Total

   273,000    $ 44.12    273,000    2,200,000
                     

Under a share repurchase program authorized by the Board of Directors on October 28, 2004, we were authorized to repurchase up to 5.0 million Class A Common shares. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the quarter for which this report is filed.

 

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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, 2007 Annual Meeting of Shareholders:

 

Description of Matters Submitted

   In Favor   

Authority

Witheld

1. Election of Directors:

     

Class A Common Shares:

     

David A. Galloway

   110,191,115    4,364,489

Nicholas B. Paumgarten

   109,965,150    4,590,454

Ronald W. Tysoe

   102,832,335    11,723,269

Julie A. Wrigley

   109,893,503    4,662,101

Common Voting Shares:

     

William R. Burleigh

   35,593,746    770,000

John H. Burlingame

   36,363,746   

Kenneth W. Lowe

   36,363,746   

Jarl Mohn

   36,363,746   

Jeffrey Sagansky

   36,363,746   

Nackey E. Scagliotti

   36,363,746   

Edward W. Scripps

   36,363,746   

Paul K. Scripps

   36,363,746   

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

Exhibits

The information required by this item is filed as part of this Form 10-Q. See Index to Exhibits at page E-1 of this Form 10-Q.

 

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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 8, 2007     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-29

Executive Overview

   F-29

Critical Accounting Policies and Estimates

   F-31

Results of Operations

  

Consolidated Results of Operations

   F-32

Discontinued Operations

   F-32

Continuing Operations

   F-33

Business Segment Results

   F-34

Scripps Networks

   F-37

Newspapers

   F-39

Broadcast Television

   F-42

Interactive Media

   F-43

Liquidity and Capital Resources

   F-44

Quantitative and Qualitative Disclosures About Market Risk

   F-45

Controls and Procedures

   F-47

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands)

  

June 30,

2007

(Unaudited)

  

As of

December 31,

2006

  

June 30,

2006

(Unaudited)

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 18,778    $ 30,450    $ 33,733

Short-term investments

     2,064      2,872      1,110

Accounts and notes receivable (less allowances - $14,586, $15,477, $16,253)

     538,211      535,901      524,164

Programs and program licenses

     201,736      179,887      191,171

Deferred income taxes

     20,005      21,744      32,666

Assets of discontinued operations

        61,237      175,478

Miscellaneous

     34,687      43,228      36,488
                    

Total current assets

     815,481      875,319      994,810
                    

Investments

     220,639      225,349      231,399
                    

Property, plant and equipment

     528,326      511,738      475,633
                    

Goodwill and other intangible assets:

        

Goodwill

     1,955,285      1,961,051      1,940,374

Other intangible assets

     309,441      309,243      324,041
                    

Total goodwill and other intangible assets

     2,264,726      2,270,294      2,264,415
                    

Other assets:

        

Programs and program licenses (less current portion)

     272,820      249,184      189,748

Unamortized network distribution incentives

     146,004      155,578      164,303

Prepaid pension

     9,133      9,130      54,442

Miscellaneous

     45,905      47,742      45,898
                    

Total other assets

     473,862      461,634      454,391
                    

TOTAL ASSETS

   $ 4,303,034    $ 4,344,334    $ 4,420,648
                    

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share data)

  

June 30,

2007

(Unaudited)

   

As of

December 31,

2006

   

June 30,

2006

(Unaudited)

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 74,282     $ 77,945     $ 85,375  

Customer deposits and unearned revenue

     64,497       50,524       49,254  

Accrued liabilities:

      

Employee compensation and benefits

     60,491       76,744       67,221  

Network distribution incentives

     4,388       3,755       7,969  

Accrued income taxes

     31,311       36,798       10,203  

Accrued marketing and advertising costs

     14,714       19,937       16,299  

Accrued interest

     10,459       10,850       7,912  

Miscellaneous

     61,527       68,346       65,892  

Liabilities of discontinued operations

       19,719       44,964  

Other current liabilities

     32,932       34,650       30,854  
                        

Total current liabilities

     354,601       399,268       385,943  
                        

Deferred income taxes

     340,610       334,223       355,932  
                        

Long-term debt (less current portion)

     623,881       766,381       1,042,434  
                        

Other liabilities (less current portion)

     181,257       140,598       122,752  
                        

Minority interests

     114,311       122,429       97,783  
                        

Shareholders’ equity:

      

Preferred stock, $.01 par - authorized: 25,000,000 shares; none outstanding

      

Common stock, $.01 par:

      

Class A - authorized: 240,000,000 shares; issued and outstanding: 126,881,611, 126,974,721; and 126,939,429 shares

     1,269       1,270       1,269  

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

     366       366       366  
                        

Total

     1,635       1,636       1,635  

Additional paid-in capital

     461,563       431,432       395,614  

Retained earnings

     2,210,303       2,145,875       2,008,434  

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

      

Unrealized gains on securities available for sale

     9,775       10,591       4,751  

Pension liability adjustments

     (53,657 )     (54,863 )     (18,550 )

Foreign currency translation adjustment

     58,755       46,764       23,920  
                        

Total shareholders’ equity

     2,688,374       2,581,435       2,415,804  
                        

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 4,303,034     $ 4,344,334     $ 4,420,648  
                        

See notes to condensed consolidated financial statements.

 

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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)

   2007     2006     2007     2006  

Operating Revenues:

        

Advertising

   $ 459,245     $ 465,387     $ 874,434     $ 884,145  

Referral fees

     59,176       64,531       121,261       122,684  

Network affiliate fees, net

     58,672       49,247       116,524       97,533  

Circulation

     29,579       30,423       60,457       62,957  

Licensing

     17,421       17,580       35,694       36,510  

Other

     15,981       14,746       33,128       27,814  
                                

Total operating revenues

     640,074       641,914       1,241,498       1,231,643  
                                

Costs and Expenses:

        

Employee compensation and benefits

     180,711       164,284       364,656       333,456  

Production and distribution

     71,207       74,407       142,968       148,416  

Programs and program licenses

     70,209       58,249       133,054       113,727  

Marketing and advertising

     49,671       53,173       111,335       111,505  

Other costs and expenses

     71,552       70,836       141,336       136,082  
                                

Total costs and expenses

     443,350       420,949       893,349       843,186  
                                

Depreciation, Amortization, and Losses (Gains):

        

Depreciation

     20,867       18,851       39,418       36,105  

Amortization of intangible assets

     11,343       14,582       27,234       22,676  

Gain on formation of Colorado newspaper partnership

           (3,535 )

Losses on disposal of property, plant and equipment

     243       60       332       156  

Hurricane recoveries, net

       (1,750 )       (1,750 )
                                

Net depreciation, amortization and losses (gains)

     32,453       31,743       66,984       53,652  
                                

Operating income

     164,271       189,222       281,165       334,805  

Interest expense

     (10,729 )     (15,537 )     (20,930 )     (27,690 )

Equity in earnings of JOAs and other joint ventures

     18,139       14,611       25,688       25,981  

Miscellaneous, net

     2,915       1,551       3,761       3,130  
                                

Income from continuing operations before income taxes and minority interests

     174,596       189,847       289,684       336,226  

Provision for income taxes

     55,917       65,249       88,308       115,797  
                                

Income from continuing operations before minority interests

     118,679       124,598       201,376       220,429  

Minority interests

     20,988       19,726       38,968       34,075  
                                

Income from continuing operations

     97,691       104,872       162,408       186,354  

Income (loss) from discontinued operations, net of tax

     (230 )     (33,728 )     3,537       (40,145 )
                                

Net income

   $ 97,461     $ 71,144     $ 165,945     $ 146,209  
                                

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

        

Income from continuing operations

   $ .60     $ .64     $ .99     $ 1.14  

Income (loss) from discontinued operations

     .00       (.21 )     .02       (.25 )
                                

Net income per basic share of common stock

   $ .60     $ .44     $ 1.02     $ .90  
                                

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

        

Income from continuing operations

   $ .59     $ .64     $ .99     $ 1.13  

Income (loss) from discontinued operations

     .00       (.20 )     .02       (.24 )
                                

Net income per diluted share of common stock

   $ .59     $ .43     $ 1.01     $ .89  
                                
Net income per share amounts may not foot since each is calculated independently.         

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     

Six months ended

June 30,

 

(in thousands)

   2007     2006  
    

Cash Flows from Operating Activities:

    

Net income

   $ 165,945     $ 146,209  

Loss (income) from discontinued operations

     (3,537 )     40,145  
                

Income from continuing operations

     162,408       186,354  

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

    

Programs and program licenses costs

     133,054       113,727  

Depreciation and intangible assets amortization

     66,652       58,781  

Network distribution incentive amortization

     13,715       14,897  

Equity in earnings of JOAs and other joint ventures

     (25,688 )     (25,981 )

Gain on formation of Colorado newspaper partnership

       (3,535 )

Deferred income taxes

     (666 )     3,982  

Excess tax benefits of stock compensation plans

     1,102    

Stock and deferred compensation plans

     19,973       19,034  

Minority interests in income of subsidiary companies

     38,968       34,075  

Program payments

     (176,178 )     (152,791 )

Dividends received from JOAs and other joint ventures

     31,218       38,116  

Capitalized network distribution incentives

     (5,476 )     (10,946 )

Prepaid and accrued pension expense

     7,325       11,711  

Other changes in certain working capital accounts, net

     (16,257 )     (36,204 )

Miscellaneous, net

     (438 )     4,372  
                

Net cash provided by continuing operating activities

     249,712       255,592  

Net cash provided by (used in) discontinued operating activities

     (17,082 )     656  
                

Net operating activities

     232,630       256,248  
                

Cash Flows from Investing Activities:

    

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

     (2,821 )     (396,038 )

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

       20,029  

Additions to property, plant and equipment

     (52,433 )     (29,299 )

Decrease (increase) in short-term investments

     808       11,690  

Sale of long-term investments

     1,339       2,422  

Miscellaneous, net

     69       1,750  
                

Net cash provided by (used in) continuing investing activities

     (53,038 )     (389,446 )

Net cash provided by (used in) discontinued investing activities

     60,927       14,046  
                

Net investing activities

     7,889       (375,400 )
                

Cash Flows from Financing Activities:

    

Increase in long-term debt

       216,894  

Payments on long-term debt

     (142,616 )     (50 )

Dividends paid

     (42,581 )     (37,605 )

Dividends paid to minority interests

     (47,086 )     (25,248 )

Repurchase Class A Common shares

     (30,103 )     (32,984 )

Proceeds from employee stock options

     11,776       11,501  

Excess tax benefits of stock compensation plans

     2,070       1,473  

Miscellaneous, net

     (3,751 )     (1,022 )
                

Net cash provided by (used in) continuing financing activities

     (252,291 )     132,959  

Net cash provided by (used in) discontinued financing activities

     (43 )     (106 )
                

Net financing activities

     (252,334 )     132,853  
                

Effect of exchange rate changes on cash and cash equivalents

     143       789  
                

Increase (decrease) in cash and cash equivalents

     (11,672 )     14,490  

Cash and cash equivalents:

    

Beginning of year

     30,450       19,243  
                

End of period

   $ 18,778     $ 33,733  
                

See notes to condensed consolidated financial statements.

 

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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, 2005

   $ 1,637     $ 363,416     $ 3,194     $ 1,930,994     $ (12,162 )   $ 2,287,079    

Comprehensive income:

              

Net income

           146,209         146,209     $ 71,144
                                                      

Unrealized gains (losses) on investments, net of tax of $77 and $(367)

             (144 )     (144 )     682

Adjustment for losses (gains) in income, net of tax of $6

             (11 )     (11 )  
                                                      

Change in unrealized gains (losses) on investments

             (155 )     (155 )     682

Currency translation, net of tax of $(264) and $(284)

             22,438       22,438       24,098
                                                      

Total comprehensive income

               168,492     $ 95,924
                                                      

Adoption of FAS 123-R

       3,194       (3,194 )        

Dividends: declared and paid - $.23 per share

           (37,605 )       (37,605 )  

Convert 100,000 Voting shares to Class A shares

              

Repurchase 700,000 Class A Common shares

     (7 )     (1,813 )       (31,164 )       (32,984 )  

Compensation plans, net: 619,470 shares issued; 71,611 shares repurchased; 2,816 shares forfeited

     5       28,246             28,251    

Tax benefits of compensation plans

       2,571             2,571    
                                                  

As of June 30, 2006

   $ 1,635     $ 395,614       $ 2,008,434     $ 10,121     $ 2,415,804    
                                                  

As of December 31, 2006

   $ 1,636     $ 431,432       $ 2,145,875     $ 2,492     $ 2,581,435    

Comprehensive income:

              

Net income

           165,945         165,945     $ 97,461
                                                      

Unrealized gains (losses) on investments, net of tax of $465 and $(1,004)

             (816 )     (816 )     1,765

Amortization of prior service costs, actuarial losses, and transition obligations, net of tax of $(692) and $(343)

             1,206       1,206       597

Currency translation, net of tax of $(590) and $(518)

             11,991       11,991       9,470
                                                      

Total comprehensive income

               178,326     $ 109,293
                                                      

FIN 48 transition adjustment

           (30,869 )       (30,869 )  

Dividends: declared and paid - $.26 per share

           (42,581 )       (42,581 )  

Repurchase 650,000 Class A Common shares

     (7 )     (2,029 )       (28,067 )       (30,103 )  

Compensation plans, net: 602,883 shares issued; 44,693 shares repurchased; 1,300 shares forfeited

     6       28,988             28,994    

Tax benefits of compensation plans

       3,172             3,172    
                                                  

As of June 30, 2007

   $ 1,635     $ 461,563       $ 2,210,303     $ 14,873     $ 2,688,374    
                                                  

See notes to condensed consolidated financial statements.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto included in our 2006 Annual Report on Form 10-K. In management’s opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.

Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.

Nature of Operations - We are a diverse media concern with interests in national television networks, newspaper publishing, broadcast television, interactive media, and licensing and syndication. All of our media businesses provide content and advertising services via the Internet. Our media businesses are organized into the following reportable business segments: Scripps Networks, Newspapers, Broadcast television, and Interactive media. Additional information for our business segments is presented in Note 18.

Use of Estimates - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.

Our financial statements include estimates and assumptions used in accounting for our defined benefit pension plans; the recognition of certain revenues; rebates due to customers; the periods over which long-lived assets are depreciated or amortized; the fair value of such long-lived assets; income taxes payable; estimates for uncollectible accounts receivable; and self-insured risks.

While we re-evaluate our estimates and assumptions on an ongoing basis, actual results could differ from those estimated at the time of preparation of the financial statements.

Newspaper Joint Operating Agreements (“JOA”) - We include our share of JOA earnings in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Income. The related editorial costs and expenses are included within costs and expenses in our Condensed Consolidated Statements of Income. Our residual interest in the net assets of the Denver and Albuquerque JOAs is classified as an investment in the Condensed Consolidated Balance Sheets. We do not have a residual interest in the net assets of the Cincinnati JOA.

 

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Revenue Recognition - Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. When a sales arrangement contains multiple elements, such as the sale of advertising and other services, revenue is allocated to each element based upon its relative fair value. Revenue recognition may be ceased on delinquent accounts depending upon a number of factors, including the customer’s credit history, number of days past due, and the terms of any agreements with the customer. Revenue recognition on such accounts resumes when the customer has taken actions to remove their accounts from delinquent status, at which time any associated deferred revenues would also be recognized. Revenue is reported net of our remittance of sales taxes, value added taxes and other taxes collected from our customers.

Our primary sources of revenue are from:

 

   

The sale of print, broadcast, and internet advertising.

 

   

Referral fees and commissions from retailers and service providers.

 

   

Fees for programming services (“network affiliate fees”).

 

   

The sale of newspapers.

 

   

Licensing royalties.

The revenue recognition policies for each source of revenue are described in our annual report on Form 10-K for the year ended December 31, 2006.

Production and Distribution - Production and distribution costs include costs incurred to distribute our programming to cable and satellite systems, produce and distribute our newspapers and other publications to readers, and other costs incurred to provide our products and services to consumers. These costs are expensed as incurred.

Stock-Based Compensation - We have a Long-Term Incentive Plan (the “Plan”), which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2006. The Plan provides for the award of incentive and nonqualified stock options, stock appreciation rights, restricted and unrestricted Class A Common shares and performance units to key employees and non-employee directors.

In accordance with Financial Accounting Standard No. 123-R - Share Based Payment (“FAS 123-R”), compensation cost is based on the grant-date fair value of the award. The fair value of awards that grant the employee the right to the appreciation of the underlying shares, such as stock options, is measured using a lattice-based binomial model. The fair value of awards that grant the employee the underlying shares is measured by the fair value of a Class A Common share.

Certain awards of Class A Common shares have performance conditions under which the number of shares granted is determined by the extent to which such performance conditions are met. Compensation costs for such awards are measured by the grant-date fair value of a Class A Common share and the number of shares earned. In periods prior to completion of the performance period, compensation costs are based upon estimates of the number of shares that will be earned.

 

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Compensation costs, net of estimated forfeitures due to termination of employment or failure to meet performance targets, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. However, because stock compensation grants vest upon the retirement of the employee, grants to retirement-eligible employees are expensed immediately and grants to employees who will become retirement eligible prior to the end of the stated vesting period are expensed over such shorter period. The vesting of certain awards is also accelerated if performance measures are met. If it is expected those performance measures will be met, compensation costs are expensed over the accelerated vesting period.

Compensation costs of stock options are estimated on the date of grant using a lattice-based binomial model. The weighted-average assumptions used in the model are as follows:

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2007     2006     2007     2006  

Weighted-average fair value of options granted

   $ 12.58     $ 12.29     $ 12.58     $ 12.75  

Assumptions used to determine fair value:

        

Dividend yield

     1.0 %     0.9 %     1.0 %     0.9 %

Risk-free rate of return

     4.7 %     4.6 %     4.7 %     4.6 %

Expected life of options (years)

     5.35       5.38       5.35       5.38  

Expected volatility

     20.6 %     21.3 %     20.6 %     21.3 %

Stock based compensation costs totaled $6.0 million for the second quarter of 2007 and $6.6 million for the second quarter of 2006. Year-to-date stock based compensation costs totaled $17.2 million in 2007 and $17.9 million in 2006.

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

 

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

(in thousands)

   2007    2006    2007    2006

Basic weighted-average shares outstanding

   163,184    163,244    163,291    163,331

Effect of dilutive securities:

           

Unvested restricted stock and share units held by employees

   206    218    214    225

Stock options held by employees and directors

   1,000    1,323    1,152    1,428
                   

Diluted weighted-average shares outstanding

   164,390    164,785    164,657    164,984
                   

Stock options to purchase 6,341,951 common shares were anti-dilutive as of June 30, 2007, and are therefore not included in the computation of diluted weighted-average shares outstanding.

 

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2.    ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting Changes - In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarified the accounting for tax positions recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.

In accordance with FIN 48, the benefits of tax positions will not be recorded unless it is more likely than not that the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50%-likelihood of being realized.

We adopted FIN 48 as of the beginning of our 2007 fiscal year. See Note 6 to the Condensed Consolidated Financial Statements.

Recently Issued Accounting Standards - In September 2006, the FASB issued FAS 157, Fair Value Measurements (“FAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the effect that the adoption of FAS 157 will have on our financial statements.

In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“FAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of FAS 159 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the effect that the adoption of FAS 159 will have on our financial statements.

In June 2007, the FASB ratified EITF 06-11, Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. We are currently evaluating the effect that the adoption of EITF 06-11 will have on our consolidated financial statements.

3.    ACQUISITIONS

 

2007 - In July 2007, we reached an agreement to acquire Fum Machineworks, Inc. d/b/a Recipezaar.com, a user-generated recipe and community site featuring more than 230,000 recipes, for cash consideration of approximately $25 million. We also acquired Incando Corporation d/b/a Pickle.com, a Web-site that enables users to easily organize and share photos and videos from any camera and mobile phone device, for cash consideration of approximately $4.7 million. These acquisitions are part of our broader strategy at Scripps Networks to move our online businesses beyond extensions of our networks to become multi-branded, user-centric applications that create communities of online consumers in the home, food and lifestyle categories.

In the second quarter of 2007, we acquired newspaper publications in areas contiguous to our existing newspaper markets for total consideration of $2.0 million.

 

2006 - On March 16, 2006, we acquired 100% of the common stock of uSwitch Ltd. for approximately $383 million in cash. Assets acquired in the transaction included approximately $10.9 million of cash. The acquisition, financed using a combination of cash on hand and borrowing on both existing and new credit facilities, enables us to further capitalize on the increasing use and profitability of specialized Internet search businesses and to extend the reach of our interactive media businesses into essential home services and international markets.

In the first and second quarter of 2006, we acquired an additional 4% interest in our Memphis newspaper and 2% interest in our Evansville newspaper for total consideration of $22.4 million. We also acquired a newspaper publication for total consideration of $0.7 million.

In the third quarter of 2006, we acquired newspapers and other publications in areas contiguous to our existing newspaper markets for total consideration of $2.0 million.

 

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The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the dates of acquisition. The allocation of the purchase price summarized below reflects final values assigned which may differ from preliminary values reported in the financial statements for prior periods.

 

      2007    2006  

(in thousands)

   Newspapers    uSwitch     Newspapers  

Accounts receivable

      $ 9,486     $ 91  

Other current assets

        583    

Property, plant and equipment

        5,368       5  

Amortizable intangible assets

   $ 997      129,095       8,468  

Goodwill

     998      274,114       14,318  
                       

Total assets acquired

     1,995      418,646       22,882  

Current liabilities

        (13,251 )     (96 )

Deferred income taxes

        (33,238 )  

Minority interest

          2,305  
                       

Net purchase price

   $ 1,995    $ 372,157     $ 25,091  
                       

Pro forma results of operations, assuming the uSwitch acquisition had taken place at the beginning of 2006, are included in the following table. The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisition, additional depreciation and amortization of the assets acquired and excludes pre-acquisition transaction related expenses incurred by uSwitch. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the acquisition been completed at the beginning of 2006. Pro forma results are not presented for the other acquisitions completed during 2006 because the combined results of operations would not be significantly different from reported amounts.

 

(in thousands, except per share data)

  

Six months ended

June 30, 2006

Operating revenues

   $ 1,241,909

Income from continuing operations

     184,598

Income from continuing operations per share of common stock:

  

Basic

   $ 1.13

Diluted

     1.12

 

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4.    DISCONTINUED OPERATIONS

In the first quarter of 2006, we undertook a deliberate and careful assessment of strategic alternatives for Shop At Home which culminated in the sale of the operations of the Shop At Home television network and certain assets to Jewelry Television in June 2006 for approximately $17 million in cash. Jewelry Television also assumed a number of Shop At Home’s television affiliation agreements. We also reached agreement in the third quarter of 2006 to sell the five Shop At Home-affiliated broadcast television stations for cash consideration of $170 million. On December 22, 2006, we closed the sale for the three stations located in San Francisco, CA, Canton, OH and Wilson, NC. The sale of the two remaining stations located in Lawrence, MA, and Bridgeport, CT closed on April 24, 2007.

In accordance with the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of businesses held for sale or that have ceased operations are presented as discontinued operations within our results of operations. Accordingly, these businesses have also been excluded from segment results for all periods presented.

Operating results of our discontinued operations were as follows:

 

     

Three months ended

June 30,

   

Six months ended

June 30,

 

(in thousands)

   2007     2006     2007     2006  

Operating revenues

   $ 213     $ 80,232     $ 1,320     $ 164,622  
                                

Income (loss) from discontinued operations:

        

Income (loss) from operations

   $ (142 )   $ (40,465 )   $ 467     $ (50,504 )

Loss on divestiture

     (255 )     (12,054 )     (255 )     (12,054 )
                                

Income (loss) from discontinued operations, before tax

     (397 )     (52,519 )     212       (62,558 )

Income taxes (benefit)

     (167 )     (18,791 )     (3,325 )     (22,413 )
                                

Income (loss) from discontinued operations

   $ (230 )   $ (33,728 )   $ 3,537     $ (40,145 )
                                

 

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In connection with the sale of Shop At Home in the second quarter of 2006, we recognized a $6.2 million pre-tax charge to write-down assets on the Shop At Home television network, $12.3 million in costs associated with employee termination benefits, and $4.4 million in costs associated with the termination of long-term agreements. Information regarding employee benefit and long-term contract termination accruals for 2006 is as follows:

 

(in thousands)

  

Second

quarter

charges

  

Third

quarter charges

/ adjustments

   

Fourth

quarter

adjustments

   

Cash

payments

   

Balance as of

December 31,

2006

Employee termination benefits

   $ 12,327    $ 1,326       $ (13,653 )  

Other long-term agreement costs

     4,404      (1,142 )   $ (730 )     (1,419 )   $ 1,113
                                     

Total

   $ 16,731    $ 184     $ (730 )   $ (15,072 )   $ 1,113
                                     

Information regarding long-term contract termination accruals for 2007 is as follows:

 

(in thousands)

  

Balance as of

December 31,

2006

  

First

quarter

Adjustments

   

Second

quarter

Adjustments

   

Cash

payments

   

Balance as of

June 30,

2007

Other long-term agreement costs

   $ 1,113    $ (146 )   $ (759 )   $ (208 )   $ —  
                                     

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

 

     As of

(in thousands)

  

December 31,

2006

  

June 30,

2006

Assets:

     

Inventories

      $ 2,869

Property, plant and equipment

   $ 4,738      8,398

Intangible assets

     55,923      163,600

Other assets

     576      611
             

Assets of discontinued operations

   $ 61,237    $ 175,478
             

Liabilities:

     

Deferred income taxes

   $ 19,277    $ 44,402

Other liabilities

     442      562
             

Liabilities of discontinued operations

   $ 19,719    $ 44,964
             

 

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5.    OTHER CHARGES AND CREDITS

2007 - A majority of our newspapers offered voluntary separation plans to eligible employees during 2007. In connection with the acceptance of the offer by 137 employees, we accrued severance-related costs of $8.9 million in the second quarter of 2007. These costs reduced net income $5.4 million. Cash expenditures related to these separation plans were $5.3 million through the second quarter of 2007.

Due to changes in a distribution agreement at our Shopzilla business, we wrote down intangible assets during the first quarter of 2007 to reflect that certain components of the contract were not continued. This resulted in a charge to amortization of $5.2 million that reduced year-to-date net income $3.3 million.

In connection with the adoption of Financial Accounting Standards Board Interpretation No. 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the tax provision in the first quarter of 2007 increasing year-to-date net income $4.0 million.

2006 - In February 2006, we completed the formation of a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that operates certain of both companies’ newspapers in Colorado. We contributed the assets of our Boulder Daily Camera, Colorado Daily and Bloomfield Enterprise newspapers for a 50% interest in the partnership. MediaNews contributed the assets of publications they operate in Colorado. In addition, MediaNews paid us cash consideration of $20.4 million. We recognized a pre-tax gain of $3.5 million in the first quarter of 2006 upon completion of the transaction, which increased net income by $2.1 million.

Certain of our Florida operations sustained hurricane damages in 2004 and 2005. In the second quarter of 2006, we reached agreements with insurance providers and other responsible third parties on certain of our property and business interruption claims and recorded insurance recoveries of $1.8 million, which increased net income by $1.1 million.

6.    INCOME TAXES

We file a consolidated federal income tax return and separate state income tax returns for each subsidiary company. Included in our federal and state income tax returns is our proportionate share of the taxable income or loss of partnerships and incorporated limited liability companies that have elected to be treated as partnerships for tax purposes (“pass-through entities”). Our financial statements do not include any provision (benefit) for income taxes on the income (loss) of pass-through entities attributed to the non-controlling interests.

Food Network is operated under the terms of a general partnership agreement. Fine Living is a limited liability company and is treated as a partnership for tax purposes. As a result, federal and state income taxes for these pass-through entities accrue to the individual partners.

Consolidated income before income tax consisted of the following:

 

     

Three months ended

June 30,

  

Six months ended

June 30,

(in thousands)

   2007    2006    2007    2006

Income allocated to Scripps

   $ 153,657    $ 170,329    $ 250,761    $ 302,687

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

     20,939      19,518      38,923      33,539
                           

Income from continuing operations before income taxes and minority interest

   $ 174,596    $ 189,847    $ 289,684    $ 336,226
                           

 

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Effective January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income Taxes. In accordance with FIN No. 48, we recognized a $30.9 million increase in our liability for unrecognized tax benefits, interest, and penalties with a corresponding decrease to the January 1, 2007 balance of retained earnings.

Unrecognized tax benefits (all of which would impact the effective tax rate if recognized) were $47.7 million at January 1, 2007. Included in the balance of unrecognized tax benefits at January 1, 2007, is $7.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of January 1, 2007, we had $4.9 million accrued for the potential payment of interest and penalties.

As of January 1, 2007, we have settled all federal income tax years through 2001 with the Internal Revenue Service. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return.

The income tax provision for interim periods is determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period. To determine the annual effective income tax rate, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax. The actual effective income tax rate for the full year may differ from these estimates if income before income tax is greater or less than what was estimated or if the allocation of income to jurisdictions in which it is taxed is different from the estimated allocations. We review and adjust our estimated effective income tax rate for the full year each quarter based upon our most recent estimates of income before income tax for the full year and the jurisdictions in which we expect that income will be taxed.

Information regarding our expected effective income tax rate from continuing operations for the full year of 2007 and the actual effective income tax rate from continuing operations for the full year of 2006 is as follows:

 

     2007     2006  

Statutory rate

   35.0 %   35.0 %

Effect of:

    

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

   3.7     2.1  

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

   (4.2 )   (3.7 )

Adjustment of state net operating loss carryforward valuation allowance

     (0.6 )

Adjustment of tax balances (1)

   (0.6 )  

Section 199 - Production Activities Deduction

   (1.9 )   (0.8 )

Miscellaneous

   (0.1 )   (0.2 )
            

Effective income tax rate

   31.9 %   31.8 %
            

 

(1) In connection with the adoption of FIN 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the tax provision in the first quarter of 2007 increasing year-to-date net income $4.0 million.

 

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7.    JOINT OPERATING AGREEMENTS AND NEWSPAPER PARTNERSHIPS

Three of our newspapers are operated pursuant to the terms of joint operating agreements (“JOAs”). The Newspaper Preservation Act of 1970 provides a limited exemption from anti-trust laws, permitting competing newspapers in a market to combine their sales, production and business operations in order to reduce aggregate expenses and take advantage of economies of scale, thereby allowing the continuing operation of both newspapers in that market. Each newspaper in a JOA maintains a separate and independent editorial operation.

The table below provides certain information about our JOAs.

 

Newspaper

  

Publisher of Other Newspaper

  

Year JOA

Entered Into

  

Year of JOA

Expiration

The Albuquerque Tribune

     Journal Publishing Company      1933    2022

The Cincinnati Post

     Gannett Co., Inc.      1977    2007

Denver Rocky Mountain News

     MediaNews Group, Inc.      2001    2051

The JOAs generally provide for renewals unless an advance termination notice ranging from two to five years is given to either party. Gannett Co., Inc. has notified us of its intent to terminate the Cincinnati JOA upon its expiration in December 2007. In July 2007, we announced that we will cease publication of our newspapers that participate in the Cincinnati JOA at the end of the year.

The combined sales, production and business operations of the newspapers are either jointly managed or are solely managed by one of the newspapers. The sales, production and business operations of the Denver newspapers are operated by the Denver Newspaper Agency, a limited liability partnership (the “Denver JOA”). Each newspaper owns 50% of the Denver JOA and shares management of the combined newspaper operations. We do not have management responsibilities for the combined operations of the other two JOAs.

Under the terms of a JOA, operating profits earned from the combined newspaper operations are distributed to the partners in accordance with the terms of the joint operating agreement. We receive a 50% share of the Denver JOA profits, a 40% share of the Albuquerque JOA profits, and approximately 20% to 25% of the Cincinnati JOA profits.

In February 2006, we formed a newspaper partnership with MediaNews Group, Inc. that operates certain of both companies’ newspapers in Colorado, including their editorial operations. We have a 50% interest in the partnership.

Our share of the operating profit (loss) of JOAs and newspaper partnerships are reported as “Equity in earnings of JOAs and other joint ventures” in our financial statements.

 

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8.    INVESTMENTS

Investments consisted of the following:

 

(in thousands, except share data)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Securities available for sale (at market value):

        

Time Warner (common shares - 2007, 2,008,000; 2006, 2,011,000)

   $ 42,248    $ 43,804    $ 34,794

Other available-for-sale securities

     2,195      2,130      1,967
                    

Total available-for-sale securities

     44,443      45,934      36,761

Denver JOA

     107,128      116,875      129,924

Colorado newspaper partnership

     29,706      30,157      31,635

Joint ventures

     31,752      24,953      25,443

Other equity securities

     7,610      7,430      7,636
                    

Total investments

   $ 220,639    $ 225,349    $ 231,399
                    

Unrealized gains on securities available for sale

   $ 14,893    $ 16,174    $ 7,013
                    

Investments available for sale represent securities of publicly-traded companies. Investments available for sale are recorded at fair value based upon the closing price of the security on the reporting date. As of June 30, 2007, there were no significant unrealized losses on our available-for-sale securities.

Cash distributions from the Denver JOA have exceeded earnings since the third quarter of 2005, primarily as a result of increased depreciation on assets that will be retired upon consolidation of DNA’s newspaper production facilities.

In the first quarter of 2007, we contributed our 12% interest in Fox Sports Net South for a 7.25% interest in Fox-BRV Southern Sports Holdings, LLC (“Fox-BRV”). Fox-BRV will manage and operate both the Sports South and Fox Sports Net South regional television networks.

Other equity securities include securities that do not trade in public markets, so they do not have readily determinable fair values. We estimate the fair values of the other securities approximate their carrying values at June 30, 2007. There can be no assurance we would realize the carrying values of these securities upon their sale.

9.    PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

(in thousands)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Land and improvements

   $ 77,176    $ 77,071    $ 54,463

Buildings and improvements

     268,460      258,710      252,198

Equipment

     631,111      607,896      614,312

Computer Software

     109,496      93,842      83,062
                    

Total

     1,086,243      1,037,519      1,004,035

Accumulated depreciation

     557,917      525,781      528,402
                    

Net property, plant and equipment

   $ 528,326    $ 511,738    $ 475,633
                    

 

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10.    GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following:

 

(in thousands)

  

June 30,

2007

   

As of

December 31,

2006

   

June 30,

2006

 

Goodwill

   $ 1,955,285     $ 1,961,051     $ 1,940,374  
                        

Other intangible assets:

      

Amortizable intangible assets:

      

Carrying amount:

      

Acquired network distribution

     43,415       43,415       43,415  

Broadcast television network affiliation relationships

     26,748       26,748       26,748  

Customer lists

     228,253       204,082       198,808  

Copyrights and other trade names

     53,188       34,306       32,657  

Other

     32,797       48,971       46,211  
                        

Total carrying amount

     384,401       357,522       347,839  
                        

Accumulated amortization:

      

Acquired network distribution

     (9,149 )     (7,758 )     (6,344 )

Broadcast television network affiliation relationships

     (3,027 )     (2,480 )     (1,925 )

Customer lists

     (61,762 )     (39,089 )     (24,749 )

Copyrights and other trade names

     (9,003 )     (5,427 )     (3,710 )

Other

     (17,641 )     (19,147 )     (14,875 )
                        

Total accumulated amortization

     (100,582 )     (73,901 )     (51,603 )
                        

Net amortizable intangible assets

     283,819       283,621       296,236  
                        

Other indefinite-lived intangible assets:

      

FCC licenses

     25,622       25,622       25,622  

Other

         2,087  
                        

Total other indefinite-lived intangible assets

     25,622       25,622       27,709  
                        

Pension liability adjustments

         96  
                        

Total other intangible assets

     309,441       309,243       324,041  
                        

Total goodwill and other intangible assets

   $ 2,264,726     $ 2,270,294     $ 2,264,415  
                        

 

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Activity related to goodwill, amortizable intangible assets and indefinite-lived intangible assets by business segment was as follows:

 

(in thousands)

  

Scripps

Networks

    Newspapers    

Broadcast

Television

   

Interactive

Media

   

Licensing

and Other

   Total  

Goodwill:

             

Balance as of December 31, 2005

   $ 240,502     $ 789,315     $ 216,467     $ 401,492     $ 18    $ 1,647,794  

Business acquisitions

       13,297         288,320          301,617  

Formation of Colorado newspaper partnership

       (25,731 )            (25,731 )

Foreign currency translation adjustment

           16,694          16,694  
                                               

Balance as of June 30, 2006

   $ 240,502     $ 776,881     $ 216,467     $ 706,506     $ 18    $ 1,940,374  
                                               

Balance as of December 31, 2006

   $ 240,502     $ 777,902     $ 219,367     $ 723,262     $ 18    $ 1,961,051  

Business acquisitions

       998              998  

Adjustment of purchase price allocations

           (14,703 )        (14,703 )

Foreign currency translation adjustment, inclusive of impact of purchase price adjustments

           7,939          7,939  
                                               

Balance as of June 30, 2007

   $ 240,502     $ 778,900     $ 219,367     $ 716,498     $ 18    $ 1,955,285  
                                               

Amortizable intangible assets:

             

Balance as of December 31, 2005

   $ 41,093     $ 4,305     $ 26,266     $ 128,116        $ 199,780  

Business acquisitions

       7,443         108,091          115,534  

Formation of Colorado newspaper partnership

       (2,407 )            (2,407 )

Other additions

       8              8  

Foreign currency translation adjustment

           5,997          5,997  

Amortization

     (1,680 )     (462 )     (560 )     (19,974 )        (22,676 )
                                               

Balance as of June 30, 2006

   $ 39,413     $ 8,887     $ 25,706     $ 222,230        $ 296,236  
                                               

Balance as of December 31, 2006

   $ 38,707     $ 10,075     $ 25,137     $ 209,702        $ 283,621  

Business acquisitions

       997              997  

Adjustment of purchase price allocations

           21,004          21,004  

Foreign currency translation adjustment, inclusive of impact of purchase price adjustments

           5,431          5,431  

Amortization

     (1,621 )     (916 )     (560 )     (24,137 )        (27,234 )
                                               

Balance as of June 30, 2007

   $ 37,086     $ 10,156     $ 24,577     $ 212,000        $ 283,819  
                                               

Other indefinite-lived intangible assets:

             

Balance as of December 31, 2005

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

Balance as of June 30, 2006

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

Balance as of December 31, 2006

       $ 25,622          $ 25,622  
                                               

Balance as of June 30, 2007

       $ 25,622          $ 25,622  
                                               

Goodwill of $284.9 million and amortizable intangible assets of $108.1 million were allocated to the uSwitch acquisition in the first quarter of 2006. In the first quarter of 2007, we completed an appraisal of the book and tax bases of the assets acquired and liabilities assumed in the uSwitch acquisition. Primarily due to higher values being assigned to trademarks and relationships with referral service providers, we decreased the amount assigned to goodwill by $14.7 million and increased amounts assigned to amortizable intangible assets by $21.0 million.

 

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Amortizable intangible assets acquired in the uSwitch acquisition include customer lists, technology, trade names and patents. The customer lists intangible assets are estimated to have useful lives of 5 to 20 years. The other acquired intangibles are estimated to have useful lives of 4 to 9 years.

Amortizable intangible assets acquired in the 2006 newspaper acquisitions were customer lists, which are estimated to have useful lives of 3 to 20 years.

Estimated amortization expense of intangible assets for each of the next five years is expected to be $20.3 million for the remainder of 2007, $38.1 million in 2008, $37.3 million in 2009, $33.8 million in 2010, $30.0 million in 2011, $27.2 million in 2012 and $97.1 million in later years.

11.    PROGRAMS AND PROGRAM LICENSES

Programs and program licenses consisted of the following:

 

(in thousands)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Cost of programs available for broadcast

   $ 910,506    $ 825,943    $ 878,738

Accumulated amortization

     596,736      531,376      616,395
                    

Total

     313,770      294,567      262,343

Progress payments on programs not yet available for broadcast

     160,786      134,504      118,576
                    

Total programs and program licenses

   $ 474,556    $ 429,071    $ 380,919
                    

In addition to the programs owned or licensed by us included in the table above, we have commitments to license certain programming that is not yet available for broadcast, including first-run syndicated programming. Such program licenses are recorded as assets when the programming is delivered to us and is available for broadcast. First-run syndicated programming is generally produced and delivered at or near its broadcast date. Such contracts may require progress payments or deposits prior to the program becoming available for broadcast. Remaining obligations under contracts to purchase or license programs not yet available for broadcast totaled approximately $315 million at June 30, 2007. If the programs are not produced, our commitment would generally expire without obligation.

Progress payments on programs not yet available for broadcast and the cost of programs and program licenses capitalized totaled $78.7 million in the second quarter of 2007 and $69.6 million in 2006. Year-to-date progress payments and capitalized programs totaled $154 million in 2007 and $131 million in 2006.

Estimated amortization of recorded program assets and program commitments for each of the next five years is as follows:

 

(in thousands)

  

Programs

Available for

Broadcast

  

Programs Not

Yet Available

for Broadcast

   Total

Remainder of 2007

   $ 92,875    $ 47,175    $ 140,050

2008

     116,774      133,463      250,237

2009

     65,083      114,084      179,167

2010

     32,919      88,351      121,270

2011

     5,929      64,897      70,826

2012

     190      24,276      24,466

Later years

        3,835      3,835
                    

Total

   $ 313,770    $ 476,081    $ 789,851
                    

Actual amortization in each of the next five years will exceed the amounts presented above as our broadcast television stations and our national television networks will continue to produce and license additional programs.

 

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12.    UNAMORTIZED NETWORK DISTRIBUTION INCENTIVES

Unamortized network distribution incentives consisted of the following:

 

(in thousands)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Network launch incentives

   $ 100,949    $ 111,380    $ 124,100

Unbilled affiliate fees

     45,055      44,198      40,203
                    

Total unamortized network distribution incentives

   $ 146,004    $ 155,578    $ 164,303
                    

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

 

     

Three months ended

June 30,

  

Six months ended

June 30,

(in thousands)

   2007    2006    2007    2006

Amortization of network distribution incentives

   $ 6,899    $ 7,188    $ 13,715    $ 14,897

Estimated amortization for the next five years is as follows:

 

Remainder of 2007

   $ 13,316

2008

     31,766

2009

     34,823

2010

     24,556

2011

     24,960

2012

     14,184

Later years

     2,399
      

Total

   $ 146,004
      

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

 

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13.    LONG-TERM DEBT

Long-term debt consisted of the following:

 

(in thousands)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Variable-rate credit facilities, including commercial paper

   $ 56,859    $ 190,461    $ 443,863

6.625% notes due in 2007

     99,996      99,989      99,982

3.75% notes due in 2008

     39,653      39,356      48,380

4.25% notes due in 2009

     86,049      86,008      99,671

4.30% notes due in 2010

     140,586      149,832      149,808

5.75% notes due in 2012

     199,373      199,310      199,248

Other notes

     1,365      1,425      1,482
                    

Total long-term debt

   $ 623,881    $ 766,381    $ 1,042,434
                    

We have Competitive Advance and Revolving Credit Facilities expiring in June 2011 (the “Revolver”) and a commercial paper program that permits aggregate borrowings up to $750 million (the “Variable-Rate Credit Facilities”). Borrowings under the Revolver are available on a committed revolving credit basis at our choice of three short-term rates or through an auction procedure at the time of each borrowing. The Revolver is primarily used as credit support for our commercial paper program in lieu of direct borrowings under the Revolver. The weighted-average interest rate on borrowings under the Variable-Rate Credit Facilities was 5.4% at June 30, 2007, 5.3% at December 31, 2006, and 5.2% at June 30, 2006.

During 2006, we repurchased $10 million principal amount of our 3.75% notes due in 2008 for $9.8 million and repurchased $13.8 million principal amount of our 4.25% notes due in 2009 for $13.3 million. In the second quarter of 2007, we repurchased $9.3 million principal amount of our 4.30% notes due in 2010 for $9.0 million.

In 2003, we entered into a receive-fixed, pay-floating interest rate swap to achieve a desired proportion of fixed-rate versus variable-rate debt. The interest rate swap was due to expire upon the maturity of the $50 million, 3.75% notes in 2008, and effectively converted those fixed-rate notes into variable-rate borrowings. The swap agreement was designated as a fair-value hedge of the underlying fixed-rate notes. Accordingly, changes in the fair value of the interest rate swap (due to movements in the benchmark interest rate) were recorded as adjustments to the carrying value of long-term debt with an offsetting adjustment to either other assets or other liabilities. The changes in the fair value of the interest rate swap and the underlying fixed-rate obligation were recorded as equal and offsetting unrealized gains and losses in the Condensed Consolidated Statements of Income. The interest rate swap was terminated in the third quarter of 2006. The difference between the fair value of the underlying notes and the face amount will be amortized to interest expense over the remaining terms of the notes.

Certain long-term debt agreements contain restrictions on the incurrence of additional indebtedness. We were in compliance with all debt covenants as of June 30, 2007.

Current maturities of long-term debt are classified as long-term to the extent they can be refinanced under existing long-term credit commitments.

As of June 30, 2007, we had outstanding letters of credit totaling $8.8 million.

 

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14.    OTHER LIABILITIES

Other liabilities consisted of the following:

 

(in thousands)

  

June 30,

2007

  

As of

December 31,

2006

  

June 30,

2006

Program rights payable

   $ 2,655    $ 3,058    $ 3,041

Employee compensation and benefits

     43,027      38,570      38,761

Liability for pension benefits

     59,660      53,627      40,856

Network distribution incentives

     8,763      10,529      11,234

Tax reserve

     49,003      16,869      10,000

Other

     18,149      17,945      18,860
                    

Other liabilities (less current portion)

   $ 181,257    $ 140,598    $ 122,752
                    

15.    MINORITY INTERESTS

Non-controlling interests hold an approximate 10% residual interest in Fine Living. The minority owners of Fine Living have the right to require us to repurchase their interests. We have an option to acquire their interests. The minority owners will receive the fair market value for their interests at the time their option is exercised. In 2006, we notified a minority owner that we intend to exercise our call option on their 3.75% interest in Fine Living. The exercise price will be determined by an independent valuation. The put options on the remaining non-controlling interests in Fine Living are currently exercisable. The call options become exercisable in 2016.

Non-controlling interests hold an approximate 30% residual interest in Food Network. The Food Network general partnership agreement is due to expire on December 31, 2012, unless amended or extended prior to that date. In the event of such termination, the assets of the partnership are to be liquidated and distributed to the partners in proportion to their partnership interests.

Minority interests include non-controlling interests of approximately 4% in the capital stock of the subsidiary company that publishes our Memphis newspaper and approximately 6% in the capital stock of the subsidiary company that publishes our Evansville newspaper. The capital stock of these companies does not provide for or require the redemption of the non-controlling interests by us.

 

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16.    SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents additional information about the change in certain working capital accounts:

 

      Six months ended
June 30,
 

(in thousands)

   2007     2006  

Other changes in certain working capital accounts, net:

    

Accounts receivable

   $ (2,013 )   $ (30,452 )

Inventories

     (1,052 )     (1,432 )

Accounts payable

     (4,429 )     3,758  

Accrued income taxes

     3,051       8,073  

Accrued employee compensation and benefits

     (14,406 )     (14,211 )

Accrued interest

     (391 )     2  

Other accrued liabilities

     1,667       881  

Other, net

     1,316       (2,823 )
                

Total

   $ (16,257 )   $ (36,204 )
                

Information regarding supplemental cash flow disclosures is as follows:

 

      Six months ended
June 30,
 

(in thousands)

   2007    2006  

Interest paid, excluding amounts capitalized

   $ 20,790    $ 27,353  
               

Income taxes paid continuing operations

   $ 82,560    $ 102,180  

Income taxes paid (refunds received) discontinued operations

     15,952      (25,023 )
               

Total income taxes paid

   $ 98,512    $ 77,157  
               

17.    EMPLOYEE BENEFIT PLANS

We sponsor defined benefit pension plans that cover substantially all non-union and certain union-represented employees. Benefits are generally based upon the employee’s compensation and years of service.

We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides defined pension benefits in addition to the defined benefit pension plan to eligible executives based on average earnings, years of service and age at retirement.

Substantially all non-union and certain union employees are also covered by a company-sponsored defined contribution plan. We match a portion of employees’ voluntary contributions to this plan.

Other union-represented employees are covered by defined benefit pension plans jointly sponsored by us and the union, or by union-sponsored multi-employer plans.

 

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We use a December 31 measurement date for our retirement plans. Retirement plans expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:

 

     

Three months ended

June 30,

   

Six months ended

June 30,

 

(in thousands)

   2007     2006     2007     2006  

Service cost

   $ 4,623     $ 5,112     $ 9,269     $ 10,225  

Interest cost

     6,737       6,082       13,485       12,164  

Expected return on plan assets, net of expenses

     (8,854 )     (8,167 )     (17,703 )     (16,334 )

Net amortization and deferral

     316       1,479       650       2,958  
                                

Total for defined benefit plans

     2,822       4,506       5,701       9,013  

Multi-employer plans

     296       127       626       260  

SERP

     1,801       1,050       3,601       2,101  

Defined contribution plans

     2,061       2,073       4,349       4,210  
                                

Total

   $ 6,980     $ 7,756     $ 14,277     $ 15,584  
                                

We contributed $1.2 million to fund current benefit payments for our non-qualified SERP plan during the first half of 2007. We anticipate contributing an additional $1.4 million to fund the SERP’s benefit payments during the remainder of fiscal 2007. During 2007, we also made required contributions of $0.4 million to our defined benefit plans. Since we have met the minimum funding requirements for our defined benefit plans, we do not anticipate making any additional contributions during the remainder of fiscal 2007.

 

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18.    SEGMENT INFORMATION

We determine our business segments based upon our management and internal reporting structure. Our reportable segments are strategic businesses that offer different products and services.

Scripps Networks includes five national television networks and their affiliated Web sites, Home & Garden Television (“HGTV”), Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities. We own approximately 70% of Food Network and approximately 90% of Fine Living. Each of our networks is distributed by cable and satellite television systems. Scripps Networks earns revenue primarily from the sale of advertising time and from affiliate fees from cable and satellite television systems.

Our newspaper business segment includes daily and community newspapers in 17 markets in the U.S. Newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers. We also have newspapers that are operated pursuant to the terms of joint operating agreements. See Note 7. Each of those newspapers maintains an independent editorial operation and receives a share of the operating profits of the combined newspaper operations.

Broadcast television includes six ABC-affiliated stations, three NBC-affiliated stations and one independent. Our television stations reach approximately 10% of the nation’s television households. Broadcast television stations earn revenue primarily from the sale of advertising time to local and national advertisers.

Interactive media includes our online comparison shopping services, Shopzilla and uSwitch. Shopzilla operates a product comparison shopping service that helps consumers find products offered for sale on the Web by online retailers. We acquired uSwitch on March 16, 2006. uSwitch operates an online comparison service that helps consumers compare prices and arrange for the purchase of a range of essential home services including gas, electricity, home phone, broadband providers and personal finance products, primarily in the United Kingdom. Our interactive media businesses earn revenue primarily from referral fees and commissions paid by participating online retailers and service providers.

Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.

The accounting policies of each of our business segments are those described in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2006.

Each of our segments may provide advertising, programming or other services to our other business segments. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits, and other shared services, are allocated to our business segments. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the business segment. Corporate assets are primarily cash, cash equivalents and other short-term investments, property and equipment primarily used for corporate purposes, and deferred income taxes.

Our chief operating decision maker (as defined by FAS 131 – Segment Reporting) evaluates the operating performance of our business segments and makes decisions about the allocation of resources to our business segments using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities (including our proportionate share of JOA restructuring activities), investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

As discussed in Note 1, we account for our share of the earnings of JOAs and newspaper partnerships using the equity method of accounting. Our equity in earnings of JOAs and newspaper partnerships is included in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Income. Newspaper segment profits include equity in earnings of JOAs and newspaper partnerships. Scripps Networks segment profits include equity in earnings of joint ventures.

 

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Information regarding our business segments is as follows:

 

     

Three months ended

June 30,

   

Six months ended

June 30,

 

(in thousands)

   2007     2006     2007     2006  

Segment operating revenues:

        

Scripps Networks

   $ 308,148     $ 286,303     $ 577,627     $ 523,905  
                                

Newspapers:

        

Newspapers managed solely by us

     165,723       181,894       335,474       366,096  

JOAs and newspaper partnerships

     48       56       106       104  
                                

Total

     165,771       181,950       335,580       366,200  

Boulder prior to formation of Colorado newspaper partnership

           2,189  
                                

Total newspapers

     165,771       181,950       335,580       368,389  

Broadcast television

     84,539       86,445       161,047       170,208  

Interactive media

     59,022       64,965       121,956       123,608  

Licensing and other media

     22,381       22,527       45,581       46,131  

Corporate

     799       237       1,226       442  

Intersegment eliminations

     (586 )     (513 )     (1,519 )     (1,040 )
                                

Total operating revenues

   $ 640,074     $ 641,914     $ 1,241,498     $ 1,231,643  
                                

Segment profit (loss):

        

Scripps Networks

   $ 164,136     $ 150,270     $ 291,636     $ 256,815  
                                

Newspapers:

        

Newspapers managed solely by us

     29,256       52,741       65,947       103,725  

JOAs and newspaper partnerships

     3,953       2,375       (1,091 )     1,416  
                                

Total

     33,209       55,116       64,856       105,141  

Boulder prior to formation of Colorado newspaper partnership

           (125 )
                                

Total newspapers

     33,209       55,116       64,856       105,016  

Broadcast television

     23,496       26,417       39,875       48,904  

Interactive media

     6,757       16,463       6,376       30,384  

Licensing and other media

     2,578       3,118       5,556       6,020  

Corporate

     (15,319 )     (14,058 )     (34,273 )     (30,951 )

Intersegment eliminations

     6         (189 )  

Depreciation and amortization of intangibles

     (32,210 )     (33,433 )     (66,652 )     (58,781 )

Gain on formation of Colorado newspaper partnership

           3,535  

Losses on disposal of PP&E

     (243 )     (60 )     (332 )     (156 )

Interest expense

     (10,729 )     (15,537 )     (20,930 )     (27,690 )

Miscellaneous, net

     2,915       1,551       3,761       3,130  
                                

Income from continuing operations before income taxes and minority interests

   $ 174,596     $ 189,847     $ 289,684     $ 336,226  
                                

Depreciation:

        

Scripps Networks

   $ 4,876     $ 4,230     $ 9,480     $ 7,917  
                                

Newspapers:

        

Newspapers managed solely by us

     5,623       5,502       10,960       10,580  

JOAs and newspaper partnerships

     333       310       666       610  
                                

Total

     5,956       5,812       11,626       11,190  

Boulder prior to formation of Colorado newspaper partnership

           111  
                                

Total newspapers

     5,956       5,812       11,626       11,301  

Broadcast television

     4,119       4,507       8,442       9,132  

Interactive media

     5,359       3,839       8,820       6,781  

Licensing and other media

     121       154       235       322  

Corporate

     436       309       815       652  
                                

Total depreciation

   $ 20,867     $ 18,851     $ 39,418     $ 36,105  
                                

 

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      Three months ended
June 30,
  

Six months ended

June 30,

(in thousands)

   2007    2006    2007    2006

Amortization of intangibles:

           

Scripps Networks

   $ 815    $ 917    $ 1,621    $ 1,680
                           

Newspapers:

           

Newspapers managed solely by us

     461      344      916      441

JOAs and newspaper partnerships

           
                           

Total

     461      344      916      441

Boulder prior to formation of Colorado newspaper partnership

              21
                           

Total newspapers

     461      344      916      462

Broadcast television

     282      282      560      560

Interactive media

     9,785      13,039      24,137      19,974
                           

Total amortization of intangibles

   $ 11,343    $ 14,582    $ 27,234    $ 22,676
                           

Additions to property, plant and equipment:

           

Scripps Networks

   $ 5,092    $ 3,086    $ 10,137    $ 5,712
                           

Newspapers:

           

Newspapers managed solely by us

     5,598      3,528      11,211      7,270

JOAs and newspaper partnerships

     113      524      202      1,028
                           

Total newspapers

     5,711      4,052      11,413      8,298

Broadcast television

     6,218      1,689      8,594      2,996

Interactive media

     13,073      8,320      19,491      11,098

Licensing and other media

     1,052      169      2,132      276

Corporate

     647      2,041      1,881      3,273
                           

Total additions to property, plant and equipment

   $ 31,793    $ 19,357    $ 53,648    $ 31,653
                           

Business acquisitions and other additions to long-lived assets:

           

Scripps Networks

   $ 78,725    $ 69,656    $ 153,953    $ 131,355

Newspapers:

           

Newspapers managed solely by us

     1,995      181      1,995      23,045

JOAs and newspaper partnerships

     92      18      104      136
                           

Total newspapers

     2,087      199      2,099      23,181

Interactive media

        1,456         372,157

Corporate

        541      632      621
                           

Total

   $ 80,812    $ 71,852    $ 156,684    $ 527,314
                           

Assets:

           

Scripps Networks

         $ 1,350,469    $ 1,228,188
                   

Newspapers:

           

Newspapers managed solely by us

           1,100,704      1,076,470

JOAs and newspaper partnerships

           150,161      181,483
                   

Total newspapers

           1,250,865      1,257,953

Broadcast television

           483,081      482,156

Interactive media

           1,030,876      1,016,251

Licensing and other media

           27,408      28,904

Investments

           51,983      44,795

Corporate

           108,352      186,923
                   

Total assets of continuing operations

           4,303,034      4,245,170

Discontinued operations

              175,478
                   

Total assets

         $ 4,303,034    $ 4,420,648
                   

No single customer provides more than 10% of our revenue. We earn international revenues from our uSwitch business that operates primarily in the United Kingdom. We also earn international revenues from the licensing of comic characters and HGTV and Food Network programming in international markets. We anticipate that about 75% of our international revenues, which will approximate $110 million, will be provided from the United Kingdom and Japanese markets.

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations is based upon the condensed consolidated financial statements and the condensed notes to the consolidated financial statements. You should read this discussion in conjunction with those financial statements.

FORWARD-LOOKING STATEMENTS

This discussion and the information contained in the condensed notes to the consolidated financial statements 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’ tastes; newsprint prices; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty. We undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.

EXECUTIVE OVERVIEW

The E. W. Scripps Company 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 (“DIY”), Fine Living and Great American Country (“GAC”); daily and community newspapers in 17 markets and the Washington-based Scripps Media Center, home to the Scripps Howard News Service; 10 broadcast television stations, including six ABC-affiliated stations, three NBC affiliates and one independent; Interactive media, our online comparison shopping services comprising our Shopzilla and uSwitch businesses; and United Media, a leading worldwide licensing and syndication company that is the home of PEANUTS, DILBERT and approximately 150 other features and comics.

The company has a long-standing objective of creating shareholder value by following a disciplined strategy of investing in growing media businesses with a focus on building solid, sustainable media businesses for the long term. 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 over the last ten years. In 1997, the newspaper division contributed 50 percent of the company’s consolidated revenue. In the second quarter of 2007, it contributed 26 percent. The national television networks, a business that contributed five percent to revenues in 1997, represented 48 percent of the company’s revenue in the second quarter of 2007, while our Interactive media businesses added nine percent.

We have a track record of increasing shareholder value by maximizing and allocating the cash flow generated by our mature media businesses to new or existing businesses, and we expect to continue this trend. Additionally, we maintain a focus on investing strategically in our mature businesses to generate new revenue streams and create additional value within those businesses. The company’s top strategic priorities are to continue to drive ratings at Scripps Networks through the development of popular programming; continue to expand Scripps Networks into new and growing media outlets; continue the geographic expansion of Shopzilla and expansion in service offerings of uSwitch to capitalize on the growth potential of the businesses; and identify and invest in new and growing media businesses.

 

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Scripps Networks continued to demonstrate solid performance during the second quarter of 2007. HGTV and Food Network each delivered revenue growth of approximately seven percent compared to the same period a year ago. This represented a slightly slower pace of growth in comparison to recent periods and was largely due to weakness in daytime ratings at the networks. We responded quickly to this phenomenon by making programming changes at both networks in an effort to improve total-day viewership going forward. While advertising revenue increased at a slower pace during the second quarter, affiliate fee revenue jumped by 19 percent compared to the prior year as a result of rate increases and the growth in distribution at DIY Network, Fine Living and Great American Country. Primetime viewership at HGTV and Food Network continues to be solid as the networks have proven to be successful in developing new programming that is popular with a broad demographic group. Color Splash, hosted by last year’s winner of the HGTV Design Star competition, is showing early signs of being a hit, and the popular series, the Next Food Network Star, recently achieved the highest viewership in the history of the network for one of its episodes. DIY’s ratings are showing steady improvement thanks in part to the addition of programming such as Bob Vila, This Old House and New Yankee Workshop.

Our interactive initiatives at Scripps Networks continued their success during the second quarter as online revenue grew 26 percent over the prior year period. We continue to add content to our Web sites to drive unique visitors, and our sites have proven to be popular with consumers and advertisers alike. Additionally, our acquisition of Recipezaar.com in July 2007 should provide additional traffic, which will allow us to grow in the online food and recipe category. The focus at Scripps Networks is to continue to drive ratings growth at HGTV and Food Network through the development of popular programming, expand the distribution of our emerging networks, increase the offerings and revenue associated with Internet-based services, and develop additional revenue streams utilizing the recognition of our brands.

At our Interactive media businesses, second quarter referral fee revenue was lower than the prior year period due to changing market conditions. Lower energy costs in the United Kingdom have resulted in a softer switching market at uSwitch. We continue to push the expansion of uSwitch into other service categories, including personal finance and insurance. The vigorous competition for keywords in the search engine marketplace continued in the second quarter and resulted in modestly lower referral fee revenue at Shopzilla compared to the same period a year ago. We continue to focus on improving the online search and comparison shopping experience for consumers and merchants. Despite the changing market conditions we are currently facing, we continue to invest in our Interactive media businesses to capitalize on the expanding markets in which they operate. The strategic initiatives are to continue to build the Shopzilla and uSwitch brands, implement improvements to the Web sites to continually enhance the customer experience, and diversify our product offerings at uSwitch into other services, such as auto insurance and personal finance, to tap the significant potential of the business model in other areas.

We continue efforts to strengthen the position of our newspaper businesses. The industry-wide weakness in advertising has created a difficult economic environment, and we are focused on operating the businesses as efficiently as possible. During the second quarter of 2007, a majority of our newspapers offered voluntary separation plans to eligible employees. Acceptance of the offers by one hundred thirty-seven employees resulted in a three percent reduction in our newspaper segment’s headcount. Newspaper revenues declined nine percent compared to the prior year period largely as a result of lower local and classified advertising, including particularly weak real estate advertising in Florida. Segment expenses were down one percent, excluding the one-time costs associated with the separation plans. We continue to focus on the Web sites associated with our newspapers, and have seen positive results with online revenue from newspapers increasing 25 percent over the prior year to $10.7 million.

At our broadcast television stations, second quarter revenue declined slightly compared to the prior year primarily due to the relative absence of political advertising compared with the same period a year ago.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to 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, 2006.

There have been no significant changes in those accounting policies or other significant accounting policies except for the impacts of adopting FIN 48. (See Notes 2 and 6 to the Condensed Consolidated Financial Statements).

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-34 through F-43.

 

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

 

     Quarter Period     Year-to-date  

(in thousands, except per share data)

   2007     Change     2006     2007     Change     2006  

Operating revenues

   $ 640,074     (0.3 )%   $ 641,914     $ 1,241,498     0.8 %   $ 1,231,643  

Costs and expenses

     (443,350 )   5.3 %     (420,949 )     (893,349 )   5.9 %     (843,186 )

Depreciation and amortization of intangibles

     (32,210 )   (3.7 )%     (33,433 )     (66,652 )   13.4 %     (58,781 )

Gain on formation of Colorado newspaper partnership

               3,535  

Losses on disposal of PP&E

     (243 )       (60 )     (332 )       (156 )

Hurricane recoveries, net

         1,750           1,750  
                                            

Operating income

     164,271     (13.2 )%     189,222       281,165     (16.0 )%     334,805  

Interest expense

     (10,729 )   (30.9 )%     (15,537 )     (20,930 )   (24.4 )%     (27,690 )

Equity in earnings of JOAs and other joint ventures

     18,139     24.1 %     14,611       25,688     (1.1 )%     25,981  

Miscellaneous, net

     2,915     87.9 %     1,551       3,761     20.2 %     3,130  
                                            

Income from continuing operations before income taxes and minority interests

     174,596     (8.0 )%     189,847       289,684     (13.8 )%     336,226  

Provision for income taxes

     (55,917 )   (14.3 )%     (65,249 )     (88,308 )   (23.7 )%     (115,797 )
                                            

Income from continuing operations before minority interests

     118,679     (4.8 )%     124,598       201,376     (8.6 )%     220,429  

Minority interests

     (20,988 )   6.4 %     (19,726 )     (38,968 )   14.4 %     (34,075 )
                                            

Income from continuing operations

     97,691     (6.8 )%     104,872       162,408     (12.8 )%     186,354  

Income (loss) from discontinued operations, net of tax

     (230 )   (99.3 )%     (33,728 )     3,537         (40,145 )
                                            

Net income

   $ 97,461     37.0 %   $ 71,144     $ 165,945     13.5 %   $ 146,209  
                                            

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

            

Income from continuing operations

   $ .59       $ .64     $ .99       $ 1.13  

Income (loss) from discontinued operations

     .00         (.20 )     .02         (.24 )
                                            

Net income per diluted share of common stock

   $ .59       $ .43     $ 1.01       $ .89  
                                            

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

Discontinued Operations - Discontinued operations include the Shop At Home television network and the five Shop At Home-affiliated broadcast television stations (See Note 4 to the Condensed Consolidated Financial Statements). In accordance with the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of businesses held for sale or that have ceased operations are presented as discontinued operations.

Operating results for our discontinued operations were as follows:

 

     Quarter Period     Year-to-date  

(in thousands)

   2007     2006     2007     2006  

Operating revenues

   $ 213     $ 80,232     $ 1,320     $ 164,622  
                                

Income (loss) from discontinued operations:

        

Income (loss) from operations

   $ (142 )   $ (40,465 )   $ 467     $ (50,504 )

Loss on divestiture

     (255 )     (12,054 )     (255 )     (12,054 )
                                

Income (loss) from discontinued operations, before tax

     (397 )     (52,519 )     212       (62,558 )

Income taxes (benefit)

     (167 )     (18,791 )     (3,325 )     (22,413 )
                                

Income (loss) from discontinued operations

   $ (230 )   $ (33,728 )   $ 3,537     $ (40,145 )
                                

We sold the Shop At Home television network to Jewelry Television on June 21, 2006. The three Shop At Home-affiliated broadcast television stations located in San Francisco, CA, Canton, OH and Wilson, NC were sold on December 22, 2006 and the stations located in Lawrence, MA, and Bridgeport, CT were sold on April 24, 2007. The transactions impact the year-over-year comparability of our discontinued operations results.

 

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The tax benefit that was recognized in 2007 is primarily attributed to differences that were identified between our prior year tax provision and tax returns.

In connection with the sale of the Shop At Home television network in the second quarter of 2006, the loss from operations includes $22.9 million of costs associated with employee termination benefits, the termination of long-term agreements and charges to write-down certain assets of the network. The loss on divestiture in 2006 represents losses on the sale of property and other assets to Jewelry Television.

Continuing Operations - Operating revenues were up slightly in 2007 compared with the year-to-date period of 2006. Increases in revenues at Scripps Networks were partially offset by decreases in revenues at our newspapers and broadcast television stations. Increases in advertising sales, both on television and the Internet, and higher affiliate fee revenue contributed to the increase in revenues at Scripps Networks. The decline in revenues at our newspapers was attributed to a weak newspaper advertising environment, particularly in the Florida real estate market. Significant revenues generated in the first quarter of 2006 from the broadcast of the Super Bowl on ABC and NBC’s coverage of the Winter Olympics contributed to the decrease in revenue at our broadcast television stations.

Costs and expenses for the 2007 year-to-date period were primarily impacted by the expanded hours of original programming and costs to promote our national networks, severance costs related to voluntary separation offers that have been accepted by 137 employees at our newspapers, costs related to the leadership transition at Shopzilla and costs incurred during the quarter to build brand awareness for uSwitch in the United Kingdom.

In the first quarter of 2007, we wrote down intangible assets $5.2 million as a result of changes to the terms of a distribution agreement at our Shopzilla business. This charge to amortization contributed to the increase in depreciation and amortization.

In the first quarter of 2006, we completed the formation of a newspaper partnership with MediaNews Group, Inc. In conjunction with the transaction, we recognized a pre-tax gain of $3.5 million. Net income was increased by $2.1 million, $.01 per share.

Certain of our Florida operations sustained hurricane damages in 2004 and 2005. In the second quarter of 2006, we reached agreements with insurance providers and other responsible third parties on certain of our property and business interruption claims and recorded insurance recoveries of $1.8 million, which increased net income by $1.1 million, $.01 per share.

Interest expense includes interest incurred on our outstanding borrowings and deferred compensation and other employment agreements. Interest incurred on our outstanding borrowings decreased in 2007 due to lower average debt levels. The average outstanding balance of variable-interest bearing obligations for the year-to-date period of 2007 was $136 million at an average rate of 5.3% compared with $346 million at an average rate of 4.8% for 2006. The average outstanding balance of variable-interest bearing obligations for the second quarter of 2007 was $116 million at an average rate of 5.3% compared with $490 million at an average rate of 5.0% for the second quarter of 2006. Interest expense for the full year of 2007 is expected to be approximately $37 million.

The income tax provision for interim periods is determined by applying the expected effective income tax rate for the full year to year-to-date income before income tax. Tax provisions are separately provided for certain discrete transactions in interim periods. To determine the annual effective income tax rate for the full-year period, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax.

Our effective income tax rate is affected by the growing profitability of Food Network. Food Network is operated pursuant to the terms of a general partnership, in which we own an approximate 70% residual interest. Income taxes on partnership income accrue to the individual partners. While the income before income tax reported in our financial statements includes all of the income before tax of the partnership, our income tax provision does not include income taxes on the portion of Food Network income that is attributable to the non-controlling interest.

 

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Information regarding our effective tax rate, and the impact of the Food Network partnership on our effective income tax rate, is as follows:

 

     Quarter Period     Year-to-date  

(in thousands)

   2007     2006     2007     2006  

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

   $ 174,596     $ 189,847     $ 289,684     $ 336,226  

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

     20,939       19,518       38,923       33,539  
                                

Income allocated to Scripps

   $ 153,657     $ 170,329     $ 250,761     $ 302,687  
                                

Provision for income taxes

   $ 55,917     $ 65,249     $ 88,308     $ 115,797  
                                

Effective income tax rate as reported

     32.0 %     34.4 %     30.5 %     34.4 %

Effective income tax rate on income allocated to Scripps

     36.4 %     38.3 %     35.2 %     38.3 %
                                

In connection with the adoption of Financial Accounting Standards Board Interpretation No. 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the year-to-date tax provision $4.0 million.

Minority interest increased in the second quarter and year-to-date periods of 2007 primarily due to the increased profitability of the Food Network. Food Network’s profits are allocated in proportion to each partner’s residual interests in the partnership, of which we own approximately 70%.

Business Segment Results - As discussed in Note 18 to the Condensed Consolidated Financial Statements our chief operating decision maker (as defined by FAS 131 - Segment Reporting) evaluates the operating performance of our business segments using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from our business segment performance measure enables us to evaluate business segment operating performance 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 2006, we formed a newspaper partnership with MediaNews Group, Inc. (“MediaNews”) that operates certain of both companies’ newspapers in Colorado (See Note 5 to the Condensed Consolidated Financial Statements). Our share of the operating profit (loss) of the partnership is recorded as “Equity in earnings of JOAs and other joint ventures” in our financial statements. To enhance comparability of year-over-year 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)

   2007     Change     2006     2007     Change     2006  

Segment operating revenues:

            

Scripps Networks

   $ 308,148     7.6 %   $ 286,303     $ 577,627     10.3 %   $ 523,905  
                                            

Newspapers:

            

Newspapers managed solely by us

     165,723     (8.9 )%     181,894       335,474     (8.4 )%     366,096  

JOAs and newspaper partnerships

     48     (14.3 )%     56       106     1.9 %     104  
                                            

Total

     165,771     (8.9 )%     181,950       335,580     (8.4 )%     366,200  

Boulder prior to formation of Colorado newspaper partnership

               2,189  
                                            

Total newspapers

     165,771     (8.9 )%     181,950       335,580     (8.9 )%     368,389  

Broadcast television

     84,539     (2.2 )%     86,445       161,047     (5.4 )%     170,208  

Interactive media

     59,022     (9.1 )%     64,965       121,956     (1.3 )%     123,608  

Licensing and other media

     22,381     (0.6 )%     22,527       45,581     (1.2 )%     46,131  

Corporate

     799         237       1,226         442  

Intersegment eliminations

     (586 )   14.2 %     (513 )     (1,519 )   46.1 %     (1,040 )
                                            

Total operating revenues

   $ 640,074     (0.3 )%   $ 641,914     $ 1,241,498     0.8 %   $ 1,231,643  
                                            

Segment profit (loss):

            

Scripps Networks

   $ 164,136     9.2 %   $ 150,270     $ 291,636     13.6 %   $ 256,815  
                                            

Newspapers:

            

Newspapers managed solely by us

     29,256     (44.5 )%     52,741       65,947     (36.4 )%     103,725  

JOAs and newspaper partnerships

     3,953     66.4 %     2,375       (1,091 )       1,416  
                                            

Total

     33,209     (39.7 )%     55,116       64,856     (38.3 )%     105,141  

Boulder prior to formation of Colorado newspaper partnership

               (125 )
                                            

Total newspapers

     33,209     (39.7 )%     55,116       64,856     (38.2 )%     105,016  

Broadcast television

     23,496     (11.1 )%     26,417       39,875     (18.5 )%     48,904  

Interactive media

     6,757     (59.0 )%     16,463       6,376     (79.0 )%     30,384  

Licensing and other media

     2,578     (17.3 )%     3,118       5,556     (7.7 )%     6,020  

Corporate

     (15,319 )   9.0 %     (14,058 )     (34,273 )   10.7 %     (30,951 )

Intersegment eliminations

     6           (189 )    

Depreciation and amortization of intangibles

     (32,210 )   (3.7 )%     (33,433 )     (66,652 )   13.4 %     (58,781 )

Gain on formation of Colorado newspaper partnership

               3,535  

Losses on disposal of PP&E

     (243 )       (60 )     (332 )       (156 )

Interest expense

     (10,729 )   (30.9 )%     (15,537 )     (20,930 )   (24.4 )%     (27,690 )

Miscellaneous, net

     2,915     87.9 %     1,551       3,761     20.2 %     3,130  
                                            

Income from continuing operations before income taxes and minority interests

   $ 174,596     (8.0 )%   $ 189,847     $ 289,684     (13.8 )%   $ 336,226  
                                            

Discussions of the operating performance of each of our reportable business segments begin on page F-37.

Corporate expenses are expected to be about $15 million in the third quarter of 2007.

 

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Segment profit includes our share of the earnings of JOAs and certain other investments included in our consolidated operating results using the equity method of accounting. A reconciliation of our equity in earnings of JOAs and other joint ventures included in segment profit to the amounts reported in our Condensed Consolidated Statements of Income is as follows:

 

      Quarter Period    Year-to-date

(in thousands)

   2007    2006    2007    2006

Scripps Networks:

           

Equity in earnings of joint ventures

   $ 4,552    $ 3,532    $ 8,522    $ 6,696

Newspapers:

           

Equity in earnings of JOAs and newspaper partnerships

     13,587      11,079      17,166      19,285
                           

Total equity in earnings of JOAs and other joint ventures

   $ 18,139    $ 14,611    $ 25,688    $ 25,981
                           

Certain items required to reconcile segment profitability to consolidated results of operations determined in accordance with accounting principles generally accepted in the United States of America are attributed to particular business segments.

Significant reconciling items attributable to each business segment are as follows:

 

      Quarter Period     Year-to-date  

(in thousands)

   2007     2006     2007     2006  

Depreciation and amortization:

        

Scripps Networks

   $ 5,691     $ 5,147     $ 11,101     $ 9,597  
                                

Newspapers:

        

Newspapers managed solely by us

     6,084       5,846       11,876       11,021  

JOAs and newspaper partnerships

     333       310       666       610  
                                

Total

     6,417       6,156       12,542       11,631  

Boulder prior to formation of Colorado newspaper partnership

           132  
                                

Total newspapers

     6,417       6,156       12,542       11,763  

Broadcast television

     4,401       4,789       9,002       9,692  

Interactive media

     15,144       16,878       32,957       26,755  

Licensing and other media

     121       154       235       322  

Corporate

     436       309       815       652  
                                

Total

   $ 32,210     $ 33,433     $ 66,652     $ 58,781  
                                

Losses on disposal of PP&E:

        

Scripps Networks

     $ (9 )   $ (68 )   $ (94 )
                                

Newspapers:

        

Newspapers managed solely by us

   $ (33 )     (39 )     (41 )     (35 )

JOAs and newspaper partnerships

     (2 )     8       (1 )     8  
                                

Total newspapers

     (35 )     (31 )     (42 )     (27 )

Broadcast television

     (12 )     (20 )     (26 )     (35 )

Interactive media

     (196 )       (196 )  
                                

Losses on disposal of PP&E

   $ (243 )   $ (60 )   $ (332 )   $ (156 )
                                

Gain on formation of Colorado newspaper partnership

         $ 3,535  
                                

 

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Table of Contents

Scripps Networks - Scripps Networks includes five national television networks and their affiliated Websites, HGTV, Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, LLC which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities.

Advertising and network affiliate fees provide substantially all of each network’s operating revenues and employee costs and programming costs are the primary expenses. The demand for national television advertising is the primary economic factor that impacts the operating performance of our networks.

Operating results for Scripps Networks were as follows:

 

     Quarter Period    Year-to-date

(in thousands)

   2007    Change     2006    2007    Change     2006

Segment operating revenues:

               

Advertising

   $ 244,529    4.8 %   $ 233,240    $ 450,277    7.2 %   $ 420,076

Network affiliate fees, net

     58,672    19.1 %     49,247      116,524    19.5 %     97,533

Other

     4,947    29.6 %     3,816      10,826    72.0 %     6,296
                                       

Total segment operating revenues

     308,148    7.6 %     286,303      577,627    10.3 %     523,905
                                       

Segment costs and expenses:

               

Employee compensation and benefits

     36,483    16.6 %     31,292      72,340    17.9 %     61,364

Programs and program licenses

     58,383    24.5 %     46,893      109,329    20.3 %     90,888

Production and distribution

     14,089    (3.9 )%     14,668      26,660    (1.1 )%     26,960

Other segment costs and expenses

     39,609    (15.2 )%     46,712      86,184    (8.9 )%     94,574
                                       

Total segment costs and expenses

     148,564    6.4 %     139,565      294,513    7.6 %     273,786
                                       

Segment profit before joint ventures

     159,584    8.8 %     146,738      283,114    13.2 %     250,119

Equity in income of joint ventures

     4,552    28.9 %     3,532      8,522    27.3 %     6,696
                                       

Segment profit

   $ 164,136    9.2 %   $ 150,270    $ 291,636    13.6 %   $ 256,815
                                       

Supplemental Information:

               

Billed network affiliate fees

   $ 63,662      $ 52,486    $ 126,513      $ 104,574

Program payments

     78,957        65,382      152,223        130,385

Depreciation and amortization

     5,691        5,147      11,101        9,597

Capital expenditures

     5,092        3,086      10,137        5,712

Business acquisitions and other additions to long-lived assets, primarily program assets

     78,725        69,656      153,953        131,355
                                       

Advertising revenues increased due primarily to an increased demand for advertising time and higher advertising rates at our networks. However, softness in total-day ratings among key demographics at HGTV and Food Network held back advertising revenue growth during the quarter.

Distribution agreements with cable and satellite television systems currently in force require the payment of affiliate fees over the terms of the agreements. The increase in network affiliate fees is primarily attributed to rate increases and the growth in distribution at DIY, Fine Living and GAC.

As of December 31, 2006, HGTV’s affiliation agreements with Time Warner and Comcast expired. These affiliation agreements provide distribution to approximately 42% of HGTV’s subscribers. During the third quarter of 2007, we entered into a new long-term affiliation agreement with Comcast. We are currently operating under a short-term extension to the expired agreement with Time Warner until a new agreement can be reached.

We continue to successfully develop our network brands on the Internet and through merchandise sales. Our Internet sites had revenues of approximately $19.4 million in the second quarter of 2007 compared with $15.4 million in the second quarter of 2006. Year-to-date Internet revenues were $34.6 million in 2007 compared with $26.4 million in 2006. In 2006, we entered into a licensing agreement with Kohl’s department stores to develop a Food Network branded line of home goods. We expect that Kohl’s will begin carrying the line by the third quarter of 2007.

 

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We expect total operating revenues at Scripps Networks to increase approximately 8% to 10% year-over-year in the third quarter of 2007. We expect operating revenues will be up about 10% for the full year of 2007.

Employee compensation and benefits increased primarily due to the hiring of additional employees to support the growth of Scripps Networks.

Programs and program licenses and other costs and expenses increased due to the improved quality and variety of programming, expanded programming hours and continued efforts to promote the programming in order to attract a larger audience.

The continued investment in our portfolio of Web-based business and building viewership across all five networks is expected to increase total segment expenses about 8% year-over-year in the third quarter of 2007.

Supplemental financial information for Scripps Networks is as follows:

 

     Quarter Period    Year-to-date

(in thousands)

   2007    Change     2006    2007    Change     2006

Operating revenues:

               

HGTV

   $ 152,198    7.1 %   $ 142,142    $ 286,051    9.4 %   $ 261,501

Food Network

     120,874    6.8 %     113,142      228,663    10.5 %     207,016

DIY

     15,117    4.3 %     14,492   <