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 EXCHANGE ACT OF 1934
For the quarterly period ended: September 27, 2009
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from | to |
Commission File Number: | 1-31805 |
JOURNAL COMMUNICATIONS, INC. | ||
(Exact name of registrant as specified in its charter) | ||
WISCONSIN | 20-0020198 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
333 W. State Street, Milwaukee, Wisconsin | 53203 | |
(Address of principal executive offices) | (Zip Code) | |
800-388-2291 | ||
Registrant's telephone number, including area code |
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 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) (Registrant is not yet required to provide financial disclosure in an Interactive Data File format).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer x | Non-accelerated Filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Number of shares outstanding of each of the issuer’s classes of common stock as of October 23, 2009 (excluding 8,676,705 shares of class B common stock held by our subsidiary, The Journal Company):
Class | Outstanding at October 23, 2009 |
Class A Common Stock | 41,640,929 |
Class B Common Stock | 9,865,314 |
Class C Common Stock | 3,264,000 |
JOURNAL COMMUNICATIONS, INC.
INDEX
Page No. | |||
Part I. | Financial Information | ||
Item 1. | Financial Statements | ||
2 | |||
3 | |||
4 | |||
5 | |||
6 | |||
Item 2. | 21 | ||
Item 3. | 39 | ||
Item 4. | 40 | ||
Part II. | Other Information | ||
Item 1. | 40 | ||
Item 1A. | 40 | ||
Item 2. | 40 | ||
Item 3. | 40 | ||
Item 4. | 40 | ||
Item 5. | 40 | ||
Item 6. | 40 |
PART I. | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
JOURNAL COMMUNICATIONS, INC.
Unaudited Consolidated Condensed Balance Sheets
(in thousands, except share and per share amounts)
September 27, 2009 | December 28, 2008 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,425 | $ | 4,040 | ||||
Receivables, less allowance for doubtful accounts of $4,952 and $4,734 | 61,201 | 79,418 | ||||||
Inventories, net | 3,324 | 5,935 | ||||||
Prepaid expenses and other current assets | 12,081 | 4,472 | ||||||
Syndicated programs | 10,123 | 11,088 | ||||||
Deferred income taxes | 4,398 | 4,869 | ||||||
Total Current Assets | 94,552 | 109,822 | ||||||
Property and equipment, at cost, less accumulated depreciation of $249,923 and $233,380 | 206,788 | 221,158 | ||||||
Goodwill | 9,098 | 4,285 | ||||||
Broadcast licenses | 82,920 | 101,120 | ||||||
Other intangible assets, net | 25,470 | 26,706 | ||||||
Deferred income taxes | 64,346 | 64,420 | ||||||
Syndicated programs | 4,195 | 3,091 | ||||||
Other assets | 1,598 | 11,997 | ||||||
Total Assets | $ | 488,967 | $ | 542,599 | ||||
Liabilities And Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 23,735 | $ | 23,582 | ||||
Accrued compensation | 11,417 | 15,046 | ||||||
Accrued employee benefits | 6,535 | 7,214 | ||||||
Deferred revenue | 16,218 | 15,001 | ||||||
Accrued income taxes | 134 | 43 | ||||||
Syndicated programs | 12,784 | 12,348 | ||||||
Other current liabilities | 7,930 | 6,668 | ||||||
Current portion of long-term liabilities | 575 | 1,609 | ||||||
Total Current Liabilities | 79,328 | 81,511 | ||||||
Accrued employee benefits | 62,178 | 64,620 | ||||||
Syndicated programs | 7,415 | 7,871 | ||||||
Long-term notes payable to banks | 172,225 | 215,090 | ||||||
Other long-term liabilities | 2,485 | 5,445 | ||||||
Shareholders’ equity: | ||||||||
Preferred stock, $0.01 par – authorized 10,000,000 shares; no shares outstanding at September 27, 2009 and December 28, 2008 | -- | -- | ||||||
Common stock, $0.01 par: | ||||||||
Class C – authorized 10,000,000 shares; issued and outstanding: 3,264,000 shares at September 27, 2009 and December 28, 2008 | 33 | 33 | ||||||
Class B – authorized 120,000,000 shares; issued and outstanding (excluding treasury stock): 9,903,559 shares at September 27, 2009 and 9,938,816 shares at December 28, 2008 | 176 | 183 | ||||||
Class A – authorized 170,000,000 shares; issued and outstanding: 41,598,934 shares at September 27, 2009 and 40,553,107 shares at December 28, 2008 | 416 | 406 | ||||||
Additional paid-in capital | 258,068 | 256,716 | ||||||
Accumulated other comprehensive loss | (33,152 | ) | (34,355 | ) | ||||
Retained earnings | 48,510 | 53,794 | ||||||
Treasury stock, at cost (8,676,705 class B shares) | (108,715 | ) | (108,715 | ) | ||||
Total Shareholders’ Equity | 165,336 | 168,062 | ||||||
Total Liabilities And Shareholders’ Equity | $ | 488,967 | $ | 542,599 |
See accompanying notes to unaudited consolidated condensed financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Revenue: | ||||||||||||||||
Publishing | $ | 46,479 | $ | 59,452 | $ | 144,036 | $ | 181,997 | ||||||||
Broadcasting | 42,453 | 53,994 | 125,410 | 156,790 | ||||||||||||
Printing services | 11,086 | 16,099 | 36,621 | 49,395 | ||||||||||||
Other | 5,059 | 6,725 | 15,273 | 22,443 | ||||||||||||
Total revenue | 105,077 | 136,270 | 321,340 | 410,625 | ||||||||||||
Operating costs and expenses: | ||||||||||||||||
Publishing | 27,316 | 35,405 | 86,387 | 103,454 | ||||||||||||
Broadcasting | 24,098 | 26,565 | 67,333 | 75,455 | ||||||||||||
Printing services | 9,957 | 13,396 | 32,216 | 41,027 | ||||||||||||
Other | 4,485 | 5,781 | 13,488 | 18,971 | ||||||||||||
Total operating costs and expenses | 65,856 | 81,147 | 199,424 | 238,907 | ||||||||||||
Selling and administrative expenses | 35,542 | 43,313 | 109,879 | 130,700 | ||||||||||||
Broadcast license impairment | -- | 38,762 | 18,975 | 38,762 | ||||||||||||
Total operating costs and expenses and selling and administrative expenses | 101,398 | 163,222 | 328,278 | 408,369 | ||||||||||||
Operating earnings (loss) | 3,679 | (26,952 | ) | (6,938 | ) | 2,256 | ||||||||||
Other income and (expense): | ||||||||||||||||
Interest income | -- | -- | -- | 2 | ||||||||||||
Interest expense | (645 | ) | (1,940 | ) | (2,194 | ) | (6,103 | ) | ||||||||
Total other income and (expense) | (645 | ) | (1,940 | ) | (2,194 | ) | (6,101 | ) | ||||||||
Earnings (loss) from continuing operations before income taxes | 3,034 | (28,892 | ) | (9,132 | ) | (3,845 | ) | |||||||||
Provision (benefit) for income taxes | 1,209 | (11,791 | ) | (6,246 | ) | (2,038 | ) | |||||||||
Earnings (loss) from continuing operations | 1,825 | (17,101 | ) | (2,886 | ) | (1,807 | ) | |||||||||
Gain from discontinued operations, net of $0 applicable income tax expense | -- | -- | -- | 400 | ||||||||||||
Net earnings (loss) | $ | 1,825 | $ | (17,101 | ) | $ | (2,886 | ) | $ | (1,407 | ) | |||||
Earnings (loss) per share: | ||||||||||||||||
Basic – Class A and B common stock: | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.06 | ) | |||||
Discontinued operations | -- | -- | -- | 0.01 | ||||||||||||
Net earnings (loss) | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.05 | ) | |||||
Diluted – Class A and B common stock: | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.06 | ) | |||||
Discontinued operations | -- | -- | -- | 0.01 | ||||||||||||
Net earnings (loss) | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.05 | ) | |||||
Basic and diluted – Class C common stock: | ||||||||||||||||
Continuing operations | $ | 0.17 | $ | 0.14 | $ | 0.43 | $ | 0.42 | ||||||||
Discontinued operations | -- | -- | -- | 0.01 | ||||||||||||
Net earnings | $ | 0.17 | $ | 0.14 | $ | 0.43 | $ | 0.43 |
See accompanying notes to unaudited consolidated condensed financial statements.
Journal Communications, Inc.
Unaudited Consolidated Statements of Shareholders' Equity
Three Quarters Ended September 27, 2009
(in thousands, except per share amounts)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Treasury | ||||||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-in- | Comprehensive | Retained | Stock, | |||||||||||||||||||||||||||||||
Stock | Class C | Class B | Class A | Capital | Loss | Earnings | at cost | Total | ||||||||||||||||||||||||||||
Balance at December 28, 2008 | $ | - | $ | 33 | $ | 183 | $ | 406 | $ | 256,716 | $ | (34,355 | ) | $ | 53,794 | $ | (108,715 | ) | $ | 168,062 | ||||||||||||||||
Net earnings | 121 | 121 | ||||||||||||||||||||||||||||||||||
Change in pension and postretirement (net of deferred tax expense of $962) | 1,438 | 1,438 | ||||||||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||||||
Class C ($0.142 per share) | (464 | ) | (464 | ) | ||||||||||||||||||||||||||||||||
Class B ($0.02 per share) | (200 | ) | (200 | ) | ||||||||||||||||||||||||||||||||
Class A ($0.02 per share) | (812 | ) | (812 | ) | ||||||||||||||||||||||||||||||||
Issuance of shares: | ||||||||||||||||||||||||||||||||||||
Conversion of class B to class A | (1 | ) | 1 | - | ||||||||||||||||||||||||||||||||
Stock grants | 10 | 10 | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | 1 | 209 | 210 | |||||||||||||||||||||||||||||||||
Shares withheld from employees for tax withholding | (20 | ) | (20 | ) | ||||||||||||||||||||||||||||||||
Stock-based compensation | 325 | 1 | 326 | |||||||||||||||||||||||||||||||||
Balance at March 29, 2009 | - | 33 | 183 | 407 | 257,240 | (32,917 | ) | 52,440 | (108,715 | ) | 168,671 | |||||||||||||||||||||||||
Net earnings | (4,832 | ) | (4,832 | ) | ||||||||||||||||||||||||||||||||
Change in pension and postretirement (net of deferred tax benefit of $176) | (258 | ) | (258 | ) | ||||||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||||||
Class C ($0.142 per share) | (464 | ) | (464 | ) | ||||||||||||||||||||||||||||||||
Issuance of shares: | ||||||||||||||||||||||||||||||||||||
Conversion of class B to class A | (2 | ) | 2 | - | ||||||||||||||||||||||||||||||||
Stock grants | 73 | 73 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 328 | 5 | 333 | |||||||||||||||||||||||||||||||||
Balance at June 28, 2009 | - | 33 | 181 | 409 | 257,641 | (33,175 | ) | 47,149 | (108,715 | ) | 163,523 | |||||||||||||||||||||||||
Net earnings | 1,825 | 1,825 | ||||||||||||||||||||||||||||||||||
Change in pension and postretirement (net of deferred tax expense of $16) | 23 | 23 | ||||||||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||||||
Class C ($0.142 per share) | (463 | ) | (463 | ) | ||||||||||||||||||||||||||||||||
Issuance of shares: | ||||||||||||||||||||||||||||||||||||
Conversion of class B to class A | (7 | ) | 7 | - | ||||||||||||||||||||||||||||||||
Stock grants | 21 | 21 | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | 2 | 158 | 160 | |||||||||||||||||||||||||||||||||
Stock-based compensation | 248 | (1 | ) | 247 | ||||||||||||||||||||||||||||||||
Balance at September 27, 2009 | $ | - | $ | 33 | $ | 176 | $ | 416 | $ | 258,068 | $ | (33,152 | ) | $ | 48,510 | $ | (108,715 | ) | $ | 165,336 |
See accompanying notes to unaudited consolidated condensed financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
Three Quarters Ended | ||||||||
September 27, 2009 | September 28, 2008 | |||||||
Cash flow from operating activities: | ||||||||
Net loss | $ | (2,886 | ) | $ | (1,407 | ) | ||
Less gain from discontinued operations | -- | 400 | ||||||
Loss from continuing operations | (2,886 | ) | (1,807 | ) | ||||
Adjustments for non-cash items: | ||||||||
Depreciation | 19,891 | 20,477 | ||||||
Amortization | 1,481 | 1,516 | ||||||
Broadcast license impairment | 18,975 | 38,762 | ||||||
Provision for doubtful accounts | 2,162 | 1,317 | ||||||
Deferred income taxes | (257 | ) | (4,470 | ) | ||||
Non-cash stock-based compensation | 1,005 | 1,224 | ||||||
Curtailment gains for pension plans | (353 | ) | -- | |||||
(Gain) loss from disposal of assets | (1,894 | ) | 106 | |||||
Net changes in operating assets and liabilities, excluding effect of sales and acquisitions: | ||||||||
Receivables | 16,055 | 4,079 | ||||||
Inventories | 2,611 | 795 | ||||||
Accounts payable | 153 | (5,509 | ) | |||||
Other assets and liabilities | (2,967 | ) | (10,615 | ) | ||||
Net Cash Provided By Operating Activities | 53,976 | 45,875 | ||||||
Cash flow from investing activities: | ||||||||
Capital expenditures for property and equipment | (5,536 | ) | (15,139 | ) | ||||
Insurance proceeds and proceeds from sales of assets | 1,054 | 49 | ||||||
Sale of business | 492 | -- | ||||||
Acquisition of businesses | (6,593 | ) | (18,297 | ) | ||||
Net Cash Used For Investing Activities | (10,583 | ) | (33,387 | ) | ||||
Cash flow from financing activities: | ||||||||
Proceeds from long-term notes payable to banks | 105,365 | 162,160 | ||||||
Payments on long-term notes payable to banks | (148,230 | ) | (117,895 | ) | ||||
Proceeds from issuance of common stock | 333 | 527 | ||||||
Redemption of common stock | -- | (44,833 | ) | |||||
Cash dividends | (1,476 | ) | (14,037 | ) | ||||
Net Cash Used For Financing Activties | (44,008 | ) | (14,078 | ) | ||||
Net Decrease In Cash And Cash Equivalents | (615 | ) | (1,590 | ) | ||||
Cash and cash equivalents: | ||||||||
Beginning of year | 4,040 | 6,256 | ||||||
At September 27, 2009 and September 28, 2008 | $ | 3,425 | $ | 4,666 |
See accompanying notes to unaudited consolidated condensed financial statements.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
1 | BASIS OF PRESENTATION |
The accompanying unaudited consolidated condensed financial statements have been prepared by Journal Communications, Inc. and its wholly owned subsidiaries in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and reflect normal and recurring adjustments, which we believe to be necessary for a fair presentation. As permitted by these regulations, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. However, we believe that the disclosures are adequate to make the information presented not misleading. The balance sheet at December 28, 2008 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Adjustments related to NorthStar Print Group, Inc. have been reflected as discontinued operations in our consolidated condensed financial statements for the three quarters of 2008. The operating results for the third quarter and three quarters ended September 27, 2009 are not necessarily indicative of the operating results that may be expected for the fiscal year ending December 27, 2009. You should read these unaudited consolidated condensed financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2008.
We have evaluated subsequent events through October 30, 2009, the date the accompanying financial statements were filed with the SEC. As of October 30, 2009, there were no subsequent events which required recognition in our consolidated financial statements.
2 | ACCOUNTING PERIODS |
Our fiscal year is a 52-53 week year ending on the last Sunday of December in each year. In addition, we have four quarterly reporting periods, each consisting of 13 weeks and ending on a Sunday, provided that once every six years, the fourth quarterly reporting period will be 14 weeks.
3 | NEW ACCOUNTING STANDARDS |
Future Adoptions
In December 2008, the Financial Accounting Standards Board (FASB) amended the existing guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance is effective for fiscal years ending after December 15, 2009. Upon initial application, the guidance is not required for earlier periods that are presented for comparative purposes. Earlier application of the guidance is permitted. We do not believe the effect of adopting the guidance on an employers’ disclosures will have a material impact on our consolidated financial statements.
Current Adoptions
In August 2009, the FASB issued amended guidance for fair value measurements and disclosures. The guidance provides clarification for the circumstances when a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued guidance on the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance provides:
· The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;
· The circumstance under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
· The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
This guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. We adopted this guidance in the second quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
3 | NEW ACCOUNTING STANDARDS continued |
In April 2009, the FASB issued amended guidance on the disclosures about fair value of financial instruments in interim financial information. Under this amended guidance, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. This amended guidance is effective for interim periods ending after June 15, 2009. We adopted this amended guidance in the second quarter of 2009. The adoption of this amended guidance did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued guidance on how to determine the fair value of assets and liabilities when the transaction volume and level of activity for the assets and liabilities have significantly decreased and the transactions are not occurring in an orderly fashion. This guidance 1) affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction; 2) clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active; 3) eliminates the proposed presumption that all transactions are not orderly unless proven otherwise and instead requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence; 4) requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of this guidance and to quantify its effects, if practicable; and 5) applies to all fair value measurements when appropriate. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued amended guidance for the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB decided to require that entities include disclosures in the business combination footnote regarding the nature of the contingency and give an estimate of the possible loss or range of loss or state that such an estimate cannot be made. This guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2008, the FASB issued guidance for the accounting by lessees for nonrefundable maintenance deposits. This guidance requires that all nonrefundable maintenance deposits should be accounted for as a deposit. When the underlying maintenance is performed, the deposit is expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is recognized as additional expense at the time such determination is made. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued guidance for determining the useful life of intangible assets. This guidance requires that in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset, an entity shall consider its own historical experience in renewing or extending similar arrangements; however, these assumptions should be adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for the entity-specific factors. For a recognized intangible asset, an entity shall disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2008, the FASB issued guidance which delays the effective date of the guidance for fair value measurements for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
3 | NEW ACCOUNTING STANDARDS continued |
In December 2007, the FASB issued amended guidance for accounting for business combinations. This amended guidance requires that an acquiring entity recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. This guidance changed the accounting treatment for acquisition costs, non-controlling interests, contingent liabilities, in-process research and development, restructuring costs, and income taxes. In addition, it also requires a substantial number of new disclosure requirements. This guidance applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
4 | EARNINGS PER SHARE |
Basic
We apply the two-class method for calculating and presenting our basic earnings per share. As noted in the FASB’s guidance for earnings per share, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method:
(a) | Income (loss) from continuing operations (“net earnings (loss)”) is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amount of dividends that must be paid during the current period. |
(b) | The remaining earnings, which may include earnings from discontinued operations (“undistributed earnings”), are allocated to each class of common stock to the extent that each class of stock may share in earnings if all of the earnings for the period were distributed. |
(c) | The remaining losses, which may include losses from discontinued operations (“undistributed losses”), are allocated to the class A and B common stock. Undistributed losses are not allocated to the class C common stock and non-vested restricted stock because the class C shares and the non-vested restricted stock are not contractually obligated to share in the losses. |
(d) | The total earnings (loss) allocated to each class of common stock are then divided by the number of weighted average shares outstanding of the class of common stock to which the earnings (loss) are allocated to determine the earnings (loss) per share for that class of common stock. |
(e) | Basic earnings (loss) per share data are presented for class A and B common stock in the aggregate and for class C common stock. The basic earnings (loss) per share for class A and B common stock are the same; hence, these classes are reported together. |
In applying the two-class method, we have determined that undistributed earnings should be allocated equally on a per share basis among each class of common stock due to the lack of any contractual participation rights of any class to those undistributed earnings. Undistributed losses are allocated to only the class A and B common stock for the reason stated above.
We adopted guidance in the first quarter of 2009 on how to determine whether instruments granted in share-based payment transactions are participating securities and should be included in the computation of earnings per share pursuant to the two class method. Our non-vested restricted stock awards contain nonforfeitable rights to dividends and are included in the computation of earnings per share pursuant to the two-class method. The adoption of this guidance did not have a material effect on our historically reported earnings per share.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
4 | EARNINGS PER SHARE continued |
The following table sets forth the computation of basic earnings (loss) per share under the two-class method.
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Numerator for basic earnings from continuing operations for each class of common stock and non-vested restricted stock: | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 1,825 | $ | (17,101 | ) | $ | (2,886 | ) | $ | (1,807 | ) | |||||
Less dividends declared: | ||||||||||||||||
Class A and B | -- | 4,045 | 1,006 | 12,639 | ||||||||||||
Class C | 463 | 463 | 1,391 | 1,391 | ||||||||||||
Non-vested restricted stock | 1 | -- | 2 | -- | ||||||||||||
Total undistributed earnings (loss) from continuing operations | $ | 1,361 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,837 | ) | |||||
Class A and B undistributed earnings (loss) from continuing operations | $ | 1,256 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,837 | ) | |||||
Class C undistributed earnings from continuing operations | 81 | -- | -- | -- | ||||||||||||
Non-vested restricted stock undistributed earnings from continuing operations | 24 | -- | -- | -- | ||||||||||||
Total undistributed earnings (loss) from continuing operations | $ | 1,361 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,837 | ) | |||||
Numerator for basic earnings (loss) from continuing operations per class A and B common stock: | ||||||||||||||||
Dividends on class A and B | $ | -- | $ | 4,045 | $ | 1,006 | $ | 12,639 | ||||||||
Class A and B undistributed earnings (loss) | 1,256 | (21,609 | ) | (5,285 | ) | (15,837 | ) | |||||||||
Numerator for basic earnings (loss) from continuing operations per class | ||||||||||||||||
A and B common stock | $ | 1,256 | $ | (17,564 | ) | $ | (4,279 | ) | $ | (3,198 | ) | |||||
Numerator for basic earnings from continuing operations per class C common stock: | ||||||||||||||||
Dividends on class C | $ | 463 | $ | 463 | $ | 1,391 | $ | 1,391 | ||||||||
Class C undistributed earnings | 81 | -- | -- | -- | ||||||||||||
Numerator for basic earnings from continuing operations per class C common stock | $ | 544 | $ | 463 | $ | 1,391 | $ | 1,391 | ||||||||
Denominator for basic earnings (loss) from continuing operations for each class of common stock: | ||||||||||||||||
Weighted average shares outstanding - | ||||||||||||||||
Class A and B | 50,500 | 50,433 | 50,363 | 52,502 | ||||||||||||
Class C | 3,264 | 3,264 | 3,264 | 3,264 | ||||||||||||
Basic earnings (loss) per share from continuing operations | ||||||||||||||||
Class A and B | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.06 | ) | |||||
Class C | $ | 0.17 | $ | 0.14 | $ | 0.43 | $ | 0.42 |
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
4 | EARNINGS PER SHARE continued |
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Numerator for basic earnings from discontinued operations for each class of common stock and non-vested restricted stock: | ||||||||||||||||
Total undistributed earnings from from discontinued opertions | $ | -- | $ | -- | $ | -- | $ | 400 | ||||||||
Class A and B undistributed earnings from discontinued opertions | $ | -- | $ | -- | $ | -- | $ | 377 | ||||||||
Class C undistributed earnings from discontinued operations | -- | -- | -- | 23 | ||||||||||||
Non-vested restricted stock undistributed earnings from discontinued operations | -- | -- | -- | -- | ||||||||||||
Total undistributed earnings from discontinued operations | $ | -- | $ | -- | $ | -- | $ | 400 | ||||||||
Denominator for basic earnings from discontinued operations for each class of common stock: | ||||||||||||||||
Weighted average shares outstanding - | ||||||||||||||||
Class A and B | 50,500 | 50,433 | 50,363 | 52,502 | ||||||||||||
Class C | 3,264 | 3,264 | 3,264 | 3,264 | ||||||||||||
Basic earnings per share from discontinued operations | ||||||||||||||||
Class A and B | $ | -- | $ | -- | $ | -- | $ | 0.01 | ||||||||
Class C | $ | -- | $ | -- | $ | -- | $ | 0.01 | ||||||||
Numerator for basic net earnings (loss) for each class of common stock: | ||||||||||||||||
Net earnings (loss) | $ | 1,825 | $ | (17,101 | ) | $ | (2,886 | ) | $ | (1,407 | ) | |||||
Less dividends declared: | ||||||||||||||||
Class A and B | -- | 4,045 | 1,006 | 12,639 | ||||||||||||
Class C | 463 | 463 | 1,391 | 1,391 | ||||||||||||
Non-vested restricted stock | 1 | -- | 2 | -- | ||||||||||||
Total undistributed net earnings (loss) | $ | 1,361 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,437 | ) | |||||
Class A and B undistributed net earnings (loss) | $ | 1,256 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,460 | ) | |||||
Class C undistributed net earnings | 81 | -- | -- | 23 | ||||||||||||
Non-vested undistributed net earnings | 24 | -- | -- | -- | ||||||||||||
Total undistributed net earnings (loss) | $ | 1,361 | $ | (21,609 | ) | $ | (5,285 | ) | $ | (15,437 | ) | |||||
Numerator for basic net earnings (loss) per class A and B common stock: | ||||||||||||||||
Dividends declared on class A and B | $ | -- | $ | 4,045 | $ | 1,006 | $ | 12,639 | ||||||||
Class A and B undistributed net earnings (loss) | 1,256 | (21,609 | ) | (5,285 | ) | (15,460 | ) | |||||||||
Numerator for basic net earnings (loss) per class A and B common stock | $ | 1,256 | $ | (17,564 | ) | $ | (4,279 | ) | $ | (2,821 | ) | |||||
Numerator for basic net earnings per class C common stock: | ||||||||||||||||
Dividends on class C | $ | 463 | $ | 463 | $ | 1,391 | $ | 1,391 | ||||||||
Class C undistributed net earnings | 81 | -- | -- | 23 | ||||||||||||
Numerator for basic net earnings per class C common stock | $ | 544 | $ | 463 | $ | 1,391 | $ | 1,414 |
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
4 | EARNINGS PER SHARE continued |
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Denominator for basic net earnings (loss) for each class of common stock: | ||||||||||||||||
Weighted average shares outstanding - | ||||||||||||||||
Class A and B | 50,500 | 50,433 | 50,363 | 52,502 | ||||||||||||
Class C | 3,264 | 3,264 | 3,264 | 3,264 | ||||||||||||
Basic net earnings (loss) per share | ||||||||||||||||
Class A and B | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.05 | ) | |||||
Class C | $ | 0.17 | $ | 0.14 | $ | 0.43 | $ | 0.43 |
Diluted
Diluted earnings per share for the third quarter and the three quarters of 2009 is computed based upon the assumption that common shares are issued upon exercise of our non-statutory stock options or stock appreciation rights when the exercise price is less than the average market price of our common shares. Diluted earnings per share for the third quarter and the three quarters of 2008 is computed based upon the assumption that common shares are issued upon exercise of our non-statutory stock options or stock appreciation rights when the exercise price is less than the average market price of our common shares and common shares will be outstanding upon expiration of the vesting periods for our non-vested restricted stock. For the third quarter and three quarters of 2009, 552 and 412 non-vested restricted class B common shares, respectively, are not deemed to be outstanding upon expiration of the vesting periods because they are anti-dilutive. The class C shares are not converted into class A and B shares because they are anti-dilutive for all periods presented.
The following table sets forth the computation of diluted net earnings (loss) per share for class A and B common stock:
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Numerator for diluted net earnings (loss) per share: | ||||||||||||||||
Dividends on class A and B common stock | $ | -- | $ | 4,045 | $ | 1,006 | $ | 12,639 | ||||||||
Total undistributed earnings from continuing operations | 1,256 | (21,609 | ) | (5,285 | ) | (15,837 | ) | |||||||||
Total undistributed earnings from discontinued operations | -- | -- | -- | 377 | ||||||||||||
Net earnings (loss) | $ | 1,256 | $ | (17,564 | ) | $ | (4,279 | ) | $ | (2,821 | ) | |||||
Denominator for diluted net earnings (loss) per share: | ||||||||||||||||
Weighted average shares outstanding - class A and B | 50,500 | 50,433 | 50,363 | 52,502 | ||||||||||||
Impact of non-vested restricted stock | -- | 14 | -- | 17 | ||||||||||||
Adjusted weighted average shares outstanding | 50,500 | 50,447 | 50,363 | 52,519 | ||||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.06 | ) | |||||
Discontinued operations | -- | -- | -- | 0.01 | ||||||||||||
Net earnings | $ | 0.02 | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.05 | ) |
Diluted earnings (loss) per share for the class C common stock is the same as basic earnings (loss) per share for class C common stock because there are no class C common stock equivalents.
Each of the 3,264,000 class C shares outstanding is convertible at any time at the option of the holder into either (i) 1.363970 class A shares (or a total of 4,451,998 class A shares) or (ii) 0.248243 class A shares (or a total of 810,265 class A shares) and 1.115727 class B shares (or a total of 3,641,733 class B shares).
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
5 | COMPREHENSIVE INCOME (LOSS) |
The following table sets forth our comprehensive income (loss):
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Net earnings (loss) | $ | 1,825 | $ | (17,101 | ) | $ | (2,886 | ) | $ | (1,407 | ) | |||||
Change in pension and post-retirement (net of tax) | 23 | 16 | 1,203 | 48 | ||||||||||||
Comprehensive income (loss) | $ | 1,848 | $ | (17,085 | ) | $ | (1,683 | ) | $ | (1,359 | ) |
6 | STOCK-BASED COMPENSATION |
2007 Journal Communications, Inc. Omnibus Incentive Plan
The purpose of the 2007 Journal Communications, Inc. Omnibus Incentive Plan (2007 Plan) is to promote our success by linking personal interests of our employees, officers and directors to those of our shareholders, and by providing participants with an incentive for outstanding performance. The 2007 Plan is also intended to enhance our ability to attract, motivate and retain the services of employees, officers, and directors upon whose judgment, interest, and special effort the successful conduct of our operation is largely dependent.
Subject to adjustment as provided in the 2007 Plan, the aggregate number of shares of class A common stock or class B common stock reserved and available for issuance pursuant to awards granted under the 2007 Plan is 4,800,000 shares which may be awarded in the form of nonstatutory or incentive stock options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents and other stock-based awards. The 2007 Plan also provides for cash-based awards. The 2007 Plan replaced the 2003 Equity Incentive Plan (2003 Plan) and, since May 3, 2007, all equity grants have been made from the 2007 Plan. We will not grant any additional awards under the 2003 Plan. As of September 27, 2009, there are 3,156,833 shares available for issuance under the 2007 Plan.
2003 Equity Incentive Plan
Our 2003 Plan, which was replaced in May 2007 by our 2007 Plan, rewarded key employees for achieving designated corporate and individual performance goals and allowed for issuances to outside directors as part of their board compensation package. In February 2007, our board of directors approved and adopted an amendment to our 2003 Plan to provide for the inclusion of stock-settled stock appreciation rights as a permitted form of award under the Plan. Awards to outside directors could have been granted in any one or a combination of stock appreciation rights, stock grants, non-statutory stock options, performance unit grants and stock unit grants. Incentive stock options could have been granted to employees.
During the third quarter and three quarters ended September 27, 2009, we recognized $276 and $1,035, respectively, in stock-based compensation expense. Total income tax benefit recognized related to stock-based compensation for the third quarter and three quarters ended September 27, 2009 was $110 and $708, respectively. We recognize stock-based compensation expense on a straight-line basis over the service period based upon the fair value of the award on the grant date. As of September 27, 2009, total unrecognized compensation cost related to stock-based compensation awards was $1,455 net of estimated forfeitures, which we expect to recognize over a weighted average period of 1.2 years. Stock-based compensation expense is reported in selling and administrative expenses in our consolidated statements of operations.
Non-statutory stock options
The compensation committee of our board of directors has granted non-statutory stock options to employees and directors at a purchase price equal to at least the fair market value of our class B common stock on the grant date for an exercise term determined by the committee, not to exceed 10 years from the grant date. It is our policy to issue new class B common stock upon the exercise of non-statutory stock options.
In 2003 and 2004, our directors and certain of our employees were granted options to purchase class B common stock. These options are exercisable and will remain exercisable for a period of up to seven years from the grant date. There have been no options granted since 2004.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
6 | STOCK-BASED COMPENSATION continued |
A summary of stock option activity during the three quarters of 2009 is:
Weighted Average | Weighted Average Contractual | |||||||||||
Exercise | Term | |||||||||||
Options | Price | (years) | ||||||||||
Outstanding at December 28, 2008 | 47,500 | $ | 18.14 | |||||||||
Expired | (500 | ) | 19.95 | |||||||||
Outstanding and exercisable at September 27, 2009 | 47,000 | 18.12 | 1.4 |
The aggregate intrinsic value of stock options outstanding and exercisable at the end of the third quarter of 2009 is zero because the fair market value of our class B common stock on September 27, 2009 was lower than the weighted average exercise price of the options.
Stock appreciation rights
A stock appreciation right, or SAR, represents the right to receive an amount equal to the excess of the fair value of a share of our class B common stock on the exercise date over the base value of the SAR, which shall not be less than the fair value of a share of our class B common stock on the grant date. Each SAR is settled only in shares of our class B common stock. The term during which any SAR may be exercised is 10 years from the grant date, or such shorter period as determined by the compensation committee of our board of directors.
Our SARs vest over a three year graded vesting schedule and it is our policy to recognize compensation cost for awards with graded vesting on a straight-line basis over the vesting period for the entire award. We ensure the compensation cost recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. The fixed price SARs have a fixed base value equal to the closing price of our class A common stock on the date of grant. The escalating price SARs have an escalating base value that starts with the closing price of our class A common stock on the date of grant and increases by six percent per year for each year that the SARs remain outstanding, starting on the first anniversary of the grant date.
A summary of SAR activity during the three quarters of 2009 is:
Weighted Average | Weighted Average Contractual | |||||||||||
Exercise | Term | |||||||||||
SARs | Price | (years) | ||||||||||
Outstanding at December 28, 2008 | 1,331,000 | $ | 10.56 | |||||||||
Forfeited | (140,692 | ) | 10.04 | |||||||||
Outstanding at September 27, 2009 | 1,190,308 | 10.62 | 7.9 | |||||||||
Exercisable at September 27, 2009 | 590,409 | 11.51 | 7.8 |
The aggregate intrinsic value of the SARs outstanding and exercisable at the end of the third quarter of 2009 is zero because the fair market value of our class B common stock on September 27, 2009 was lower than the weighted average exercise price of the SARs.
Stock grants
The compensation committee of our board of directors has granted class B common stock to employees and directors under our 2003 Plan and our 2007 Plan. Each stock grant may have been accompanied by restrictions, or may have been made without any restrictions, as the compensation committee of our board of directors determined. Such restrictions could have included requirements that the participant remain in our continuous employment for a specified period of time, or that we or the participant meet designated performance goals. We value non-vested restricted stock grants at the closing market prices of our class A common stock on the grant date.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
6 | STOCK-BASED COMPENSATION continued |
A summary of stock grant activity during the three quarters of 2009 is:
Weighted | ||||||||
Average | ||||||||
Shares | Fair Value | |||||||
Non-vested at December 28, 2008 | 325,600 | $ | 6.09 | |||||
Granted | 794,911 | 0.96 | ||||||
Vested | (111,791 | ) | 5.34 | |||||
Forfeited | (10,920 | ) | 10.48 | |||||
Non-vested at September 27, 2009 | 997,800 | 2.04 |
Our non-vested restricted stock grants vest from one to five years from the grant date. We expect our non-vested restricted stock grants to fully vest over the weighted average remaining service period of 1.4 years. The total fair value of shares vesting during the three quarters of 2009 was $597. There was an aggregate of 101,246 unrestricted and non-vested restricted stock grants issued to our directors and employees in the three quarters of 2008 at a weighted average fair value of $6.64 per share, of which none of the non-vested restricted shares have since vested.
Employee stock purchase plan
The 2003 Employee Stock Purchase Plan permits eligible employees to purchase our class B common stock at 90% of the fair market value measured as of the closing market price of our class A common stock on the day of purchase. We recognize compensation expense equal to the 10% discount of the fair market value. Subject to certain adjustments, 3,000,000 shares of our class B common stock are authorized for sale under this plan. There were 238,339 class B common shares sold to employees under this plan in the three quarters of 2009 at a weighted average fair value of $1.40. As of September 27, 2009, there are 2,404,650 shares available for sale under the plan.
7 | INCOME TAXES |
We file tax returns in the United States federal jurisdiction, as well as approximately 15 state and local jurisdictions. The statute of limitations for assessing additional taxes is three years for federal purposes and typically between three and four years for state and local purposes. Accordingly, our 2006 through 2008 tax returns are open for federal purposes, and our 2004 through 2007 tax returns remain open for state tax purposes. The statute of limitations has been extended for 2003 in the state of Wisconsin and we are currently under audit for our 2003 through 2007 tax returns.
As of September 27, 2009, our liability for unrecognized tax benefits was $948, which, if recognized, $834 would have an impact on our effective tax rate. We recognize interest income/expense and penalties related to unrecognized tax benefits in our provision for income taxes. As of September 27, 2009 we had $300 accrued for interest expense and penalties. During the three quarters of 2009, we recognized $134 in interest expense.
During the second quarter of 2009, as a result of a settlement with the Wisconsin Department of Revenue, we received a refund of $8,693 of an income and franchise tax audit payment made in 2007.
During the three quarters of 2009, our liability for unrecognized tax benefits and interest and penalties decreased by $1,530 and $924, respectively, due to a reduction for a state audit settlement and the expiration of statutes of limitations. As of September 27, 2009, it is possible for $134 of unrecognized tax benefits and related interest to be recognized within the next 12 months due to settlements with taxing authorities.
8 | INVENTORIES |
Inventories are stated at the lower of cost (first in, first out method) or market. Inventories at September 27, 2009 and December 28, 2008 consist of the following:
September 27, 2009 | December 28, 2008 | |||||||
Paper and supplies | $ | 2,742 | $ | 4,779 | ||||
Work in process | 390 | 723 | ||||||
Finished goods | 413 | 632 | ||||||
Less obsolescence reserve | (221 | ) | (199 | ) | ||||
Inventories, net | $ | 3,324 | $ | 5,935 |
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
9 | NOTES PAYABLE TO BANKS |
We have a $475,000 unsecured revolving credit facility that expires on June 2, 2011. The interest rate on borrowings is either LIBOR plus a margin that ranges from 37.5 basis points to 87.5 basis points, depending on our leverage, or the base rate, which equals the higher of the prime rate set by U.S. Bank, N.A. or the Federal Funds Rate plus 100 basis points. As of September 27, 2009 and December 28, 2008, we had borrowings of $172,225 and $215,090, respectively, under the facility at a weighted average rate of 0.93% and 2.10%, respectively. Cash provided by operating activities was used primarily to decrease our borrowings during the three quarters of 2009. Fees in connection with the facility of $1,717 are being amortized over the term of the facility using the straight-line method.
We estimate the fair value of our unsecured revolving facility at September 27, 2009 and December 28, 2008 to be $162,110 and $195,375, respectively, based on discounted cash flows using an interest rate of 4.38% and 6.00%, respectively.
The facility includes the following two financial covenants, which remain constant over the term of the agreement:
· A consolidated funded debt ratio of not greater than 4-to-1, as determined for the four fiscal quarter period preceding the date of determination. This ratio compares, for any period, our funded debt to our earnings before interest, taxes, depreciation and amortization, as adjusted for non-operational impairment charges recorded as a result of applying the FASB’s guidance for impairment testing for goodwill and other intangible assets not subject to amortization. As of September 27, 2009, we were in compliance with this financial covenant.
· An interest coverage ratio of not less than 3-to-1, as determined for the four fiscal quarter period preceding the date of determination. This ratio compares, for any period, our earnings before interest, taxes, depreciation and amortization, as adjusted for non-operational impairment charges recorded as a result of applying the FASB’s guidance for impairment testing for goodwill and other intangible assets not subject to amortization to our interest expense. As of September 27, 2009, we were in compliance with this financial covenant.
If actual operating and cash flow results over the next 12 months are lower than current projections, the margins by which we will comply with the covenants will decrease. In a recessionary economy, a significant risk to achieving our projections is meeting our revenue and earnings forecasts. To remain in compliance with the terms of our credit agreement, we could face increased pressure to reduce or delay capital expenditures, dispose of assets or operations, further reduce the size of our workforce or take other steps to revise our capital structure or our business operations. In addition, to remain in compliance with the terms of our credit agreement, we may seek to amend or replace our current credit facility with one or more capital sources on appropriate terms. We cannot assure you that we will have the ability to take any of these actions or that these actions would be successful. If it is determined we are not in compliance with these financial covenants, the lenders in our credit facility syndicate will be entitled to take certain actions, including acceleration of all amounts due under the facility. If the lenders take such action, we may be forced to amend the terms of the credit agreement, obtain a waiver or find alternative sources of capital. If we are unable to obtain alternative sources of capital, it may be necessary to significantly restructure our business.
Given the difficult economic environment, one or more of the lenders in our credit facility syndicate could fail or be unable to fund future draws thereunder or take other positions adverse to us. In such an event, our liquidity could be severely constrained with an adverse impact on our ability to operate our businesses and we may be forced to take the actions described above. We continue to monitor our current lenders and compliance with our credit agreement terms and are working on possible strategies in the event one or more of our lenders is unable or unwilling to fund future borrowing requests.
10 | GUARANTEES |
We provided a guarantee to the landlord of our former New England community newspapers and shopper business, which was sold in 2007, with respect to tenant liabilities and obligations associated with a lease which expires in December 2016. Our maximum potential obligation pursuant to the guarantee is $1,259 as of September 27, 2009. As part of the sales transaction, we received a guarantee from the buyer of our New England business that they will satisfy all the liabilities and obligations of the assigned lease. In the event that they fail to satisfy their liabilities and obligations and the landlord invokes our guarantee, we have a right to indemnification from the buyer.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
11 | EMPLOYEE BENEFIT PLANS |
The components of our net periodic benefit costs for our defined benefit and non-qualified pension plans and our postretirement health benefit plan are as follows:
Pension Benefits | ||||||||||||||||
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Service cost | $ | -- | $ | 567 | $ | 1,088 | $ | 1,703 | ||||||||
Interest cost | 2,258 | 2,062 | 6,744 | 6,183 | ||||||||||||
Expected return on plan assets | (2,625 | ) | (2,776 | ) | (7,974 | ) | (8,328 | ) | ||||||||
Amortization of: | ||||||||||||||||
Unrecognized prior service cost | (44 | ) | (55 | ) | (143 | ) | (164 | ) | ||||||||
Unrecognized net loss | -- | -- | 182 | -- | ||||||||||||
Curtailment gain | -- | -- | (353 | ) | -- | |||||||||||
Net periodic benefit (income) cost included in total operating costs and expenses, selling and and administrative expenses | $ | (411 | ) | $ | (202 | ) | $ | (456 | ) | $ | (606 | ) |
The pension plan curtailment gain was the result of an amendment to the plans adopted on March 25, 2009. The amendment suspended benefit accruals in our qualified and non-qualified plans for all active plan participants for the 18-month period beginning July 1, 2009. Due to the plan amendment, measurements of both plan assets and obligations were calculated. The obligations are based upon a 7.1% discount rate. The benefit obligation and plan assets at the end of the first quarter 2009 were $130,355 and $85,071, respectively, and the plans were underfunded by $45,284.
We fund our defined benefit pension plan at the minimum amount required by the Pension Protection Act of 2006. We do not expect to contribute to our qualified defined benefit pension plan in 2009. Based on recent estimates, we currently do not expect to contribute to our qualified defined benefit pension plan in 2010. We expect to contribute $289 and $394 to our unfunded non-qualified pension plan in 2009 and 2010, respectively.
Other Postretirement Benefits | ||||||||||||||||
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Service cost | $ | 17 | $ | 26 | $ | 52 | $ | 79 | ||||||||
Interest cost | 270 | 315 | 809 | 945 | ||||||||||||
Amortization of: | ||||||||||||||||
Unrecognized prior service cost | (54 | ) | (54 | ) | (164 | ) | (164 | ) | ||||||||
Unrecognized net transition obligation | 137 | 137 | 411 | 411 | ||||||||||||
Net periodic benefit cost included in total operating costs and expenses and selling and administrative expenses | $ | 370 | $ | 424 | $ | 1,108 | $ | 1,271 |
12 | GOODWILL AND OTHER INTANGIBLE ASSETS |
Definite-lived Intangibles
Our definite-lived intangible assets consist primarily of network affiliation agreements, customer lists, non-compete agreements and trade names. We amortize the network affiliation agreements over a period of 25 years based on our good relationships with the networks, our long history of renewing these agreements and because 25 years is deemed to be the length of time before a material modification of the underlying contract would occur. We amortize the customer lists over a period of five to 15 years, the non-compete agreements and franchise agreement fees over the terms of the contracts and the tradenames over a period of 25 years. Management determined there were no significant adverse changes in the value of these assets as of September 27, 2009.
Amortization expense was $494 and $1,481 for the third quarter and three quarters ended September 27, 2009, respectively, and $520 and $1,516 for the third quarter and three quarters ended September, 2008, respectively. Estimated amortization expense for our next five fiscal years is $1,977 for 2009, $1,937 for 2010, $1,579 for 2011, $1,496 for 2012 and $1,377 for 2013.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
12 | GOODWILL AND OTHER INTANGIBLE ASSETS continued |
The gross carrying amount, accumulated amortization and net carrying amount of the major classes of definite-lived intangible assets as of September 27, 2009 and December 28, 2008 are as follows:
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
September 27, 2009 | ||||||||||||
Network affiliation agreements | $ | 26,930 | $ | (5,729 | ) | $ | 21,201 | |||||
Customer lists | 18,206 | (15,892 | ) | 2,314 | ||||||||
Non-compete agreements | 15,351 | (15,282 | ) | 69 | ||||||||
Other | 4,884 | (2,998 | ) | 1,886 | ||||||||
Total | $ | 65,371 | $ | (39,901 | ) | $ | 25,470 | |||||
December 28, 2008 | ||||||||||||
Network affiliation agreements | $ | 26,930 | $ | (4,929 | ) | $ | 22,001 | |||||
Customer lists | 18,066 | (15,365 | ) | 2,701 | ||||||||
Non-compete agreements | 15,351 | (15,266 | ) | 85 | ||||||||
Other | 4,779 | (2,860 | ) | 1,919 | ||||||||
Total | $ | 65,126 | $ | (38,420 | ) | $ | 26,706 |
Indefinite-lived Intangibles
Broadcast licenses are deemed to have indefinite useful lives because we have renewed these agreements without issue in the past and we intend to renew them indefinitely in the future. Accordingly, we expect the cash flows from our broadcast licenses to continue indefinitely. The net carrying amount of our broadcast licenses was $82,920 and $101,120 as of September 27, 2009 and December 28, 2008, respectively. The decrease in the net carrying amount of our broadcast licenses for the three quarters ended September 27, 2009 represents the sale of KGEM-AM and KCID-AM in Boise, Idaho of $428 and the non-cash impairment charge of $18,975 partially offset by the acquisition of the broadcast license for KNIN-TV in Boise, Idaho of $1,203.
The costs incurred to renew or extend the term of our broadcast licenses and certain customer relationships are expensed as incurred.
Goodwill
The adjustment in the carrying amount of goodwill for the three quarters ended September 27, 2009 is as follows:
Goodwill at | Goodwill at | |||||||||||
December 28, 2008 | Adjustment | September 27, 2009 | ||||||||||
Reporting unit | ||||||||||||
Community newspapers and shoppers | $ | 4,285 | $ | -- | $ | 4,285 | ||||||
Broadcasting | -- | 4,813 | 4,813 | |||||||||
Total | $ | 4,285 | $ | 4,813 | $ | 9,098 |
The adjustment in the carrying amount of goodwill for the three quarters ended September 27, 2009 represents the acquisition of KNIN-TV in Boise, Idaho for $4,824, partially offset by the sale of KGEM-AM and KCID-AM in Boise, Idaho for $11.
13 | ACQUISITION & SALE |
On September 25, 2009, Journal Broadcast Group, Inc. and Journal Broadcast Corporation, our broadcasting businesses, completed the sale of KGEM-AM and KCID-AM in Boise, Idaho to Salt & Light Radio, Inc. for $950 and recorded a $312 pre-tax gain on the sale. The divestiture of KGEM-AM and KCID-AM will allow us to focus on our four remaining radio stations and two television stations in Boise, Idaho.
On April 23, 2009, Journal Broadcast Group, Inc. and Journal Broadcast Corporation completed the asset purchase of KNIN-TV from Banks Boise, Inc. for $6,593 in cash. KNIN-TV is the CW Network affiliate serving the Boise, Idaho market. The purchase of KNIN-TV builds our cross-media business in Boise, Idaho to better serve advertisers and viewers, builds a stronger community presence in Boise, Idaho, and enhances our margin with multiple media properties.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
13 | ACQUISITION & SALE continued |
The goodwill of $4,824 arising from the acquisition is attributable to the synergies expected from aligning our television and radio stations in a cluster within the Boise, Idaho market. We seek to build a unique and differentiated brand position at each station within a cluster so that we can offer distinct solutions for a variety of advertisers in any given market. This clustering strategy has allowed us to target our stations’ formats and sales efforts to better serve advertisers and listeners as well as leverage operating expenses to maximize the performance of each station and the cluster.
The recognized amounts of identifiable assets acquired and liabilities assumed for KNIN-TV are as follows:
KNIN-TV | ||||
Boise, ID | ||||
Syndicated programs | $ | 533 | ||
Property and equipment | 555 | |||
Goodwill | 4,824 | |||
Broadcast license | 1,203 | |||
Customer list | 140 | |||
Syndicated programs | (656 | ) | ||
Other current assets and liabilities | (6 | ) | ||
Total purchase price | $ | 6,593 |
We determined the useful life of the acquired customer list to be five years. The KNIN-TV broadcast license expires in 2014 and we expect to renew the license without issue. The goodwill and broadcast license which we acquired are not subject to amortization for financial reporting purposes. These intangible assets are, however, amortized and deductible for income tax purposes.
The acquisition was accounted for using the purchase method. Accordingly, the operating results and cash flows of the acquired business are included in our consolidated financial statements from the respective date of acquisition. The impact of the acquired station on our operating results for the third quarter and three quarters ended September 27, 2009 was:
Third Quarter Ended | Three Quarters Ended | |||||||
September 27, 2009 | September 27, 2009 | |||||||
Revenue | $ | 715 | $ | 1,252 | ||||
Earnings before income taxes | $ | 372 | $ | 558 |
The pro forma revenue and earnings for the third quarter and three quarters of 2008 and 2009 were immaterial to our results of operations.
14 | DISCONTINUED OPERATIONS |
In the first quarter of 2008, we recorded a gain on discontinued operations of $400 for a reduction in the reserve related to a settlement with the Environmental Protection Agency. We made payment on this settlement in the third quarter of 2008.
15 | FAIR VALUE |
The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued severance approximates fair value as of September 27, 2009 and December 28, 2008.
Interim Impairment Test
During the second quarter, management determined there was a significant adverse change in projected gross market revenues in the markets where we own television and radio stations. Therefore, interim impairment tests as of May 31, 2009 were performed on all of our broadcast licenses. Our interim impairment tests indicated seven of our television broadcast licenses and 11 of our radio broadcast licenses were impaired. In accordance with the FASB’s guidance for goodwill and intangible assets, broadcast licenses with a carrying amount of $101,120 were written down to their estimated fair value of $83,348, resulting in an $18,975 non-cash impairment charge in the second quarter of 2009. The sale of radio stations KGEM-AM and KCID-AM in Boise, Idaho in the third quarter of 2009 decreased the carrying value of our broadcast licenses to $82,920 as of September 27, 2009.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
15 | FAIR VALUE continued |
The following table presents the fair value measurement of our broadcast licenses by level of the fair value hierarchy. In accordance with the FASB’s guidance for fair value measurements, level 1 inputs are quoted prices in active markets for identical assets; level 2 inputs are significant other observable inputs; and level 3 inputs are significant unobservable inputs.
Fair Value Measurement Using | ||||||||||||||||||||
As of September 27, | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Description | 2009 | Inputs | Inputs | Inputs | Losses | |||||||||||||||
Broadcast licenses | $ | 82,920 | $ | -- | $ | -- | $ | 82,920 | $ | (18,975 | ) |
We used a market approach to estimate fair value of our barter programming assets and liabilities at our television and radio stations. This approach uses our most recent average unit rates and sellout percentages, which are applied to the number of barter programming spots available in each contract.
For broadcast licenses at individual television and radio stations, we used an income approach to estimate fair value. This approach uses the Greenfield method, which assumes the start up of a new station by an independent market participant. The fair value of the broadcast license would be the result of the cash flows, for the license only, necessary to start up and operate a station, without consideration to any goodwill or improvement to the station. The fair value estimates of our broadcast licenses contain significant assumptions incorporating variables that are based on past experiences and judgments about future performance using industry normalized information for an average station within a market with the type of signal that each subject station produces. These variables include, but are not limited to: the forecasted growth rate of each market (including market population, household income and retail sales), market share and profit margins of an average station within a market, estimated capital expenditures and start up costs, risk-adjusted discount rate, likely media competition within the market and expected growth rates into perpetuity to estimate terminal values. Adverse changes in significant assumptions such as an increase in discount rates or a decrease in projected market revenues or operating cash flows could result in additional non-cash impairment charges on our broadcast licenses and goodwill in future periods, which could have a material impact on our financial condition and results of operations.
During the remainder of 2009, we will continue to monitor events in our businesses and the economic conditions in our markets. We cannot predict at this time when, or if, we will have another triggering event in 2009 which would cause us to test for impairment of our broadcast licenses, other identifiable intangible assets and goodwill. However, we will perform our required annual impairment test in the fourth quarter of 2009.
16 | WORKFORCE REDUCTIONS |
We continue to align our costs with our declining revenues. During the three quarters of 2009, we recorded a pre-tax charge of $5,410 for workforce separation benefits. These charges are recorded in operating costs and expenses and selling and administrative expenses in the consolidated statement of operations. Activity associated with the workforce reduction and business initiatives during the three quarters of 2009 was as follows:
Balance at | Charge for | Payments for | Balance at | |||||||||||||
December 28, | Separation | Separation | September 27, | |||||||||||||
2008 | Benefits | Benefits | 2009 | |||||||||||||
Publishing | ||||||||||||||||
Daily newspaper | $ | 557 | $ | 4,528 | $ | (3,633 | ) | $ | 1,452 | |||||||
Community newspapers and shoppers | 53 | 121 | (163 | ) | 11 | |||||||||||
Total Publishing | 610 | 4,649 | (3,796 | ) | 1,463 | |||||||||||
Broadcasting | 30 | 104 | (134 | ) | -- | |||||||||||
Printing services | -- | 541 | (387 | ) | 154 | |||||||||||
Direct marketing services | 177 | 116 | (288 | ) | 5 | |||||||||||
Total | $ | 817 | $ | 5,410 | $ | (4,605 | ) | $ | 1,622 |
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except per share amounts)
17 | SEGMENT INFORMATION |
Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) publishing; (ii) broadcasting; (iii) printing services; and (iv) other. As of September 27, 2009, our publishing segment consisted of the Milwaukee Journal Sentinel, which serves as the only major daily newspaper for the Milwaukee metropolitan area, and more than 50 community newspapers and shoppers in Wisconsin and Florida. Our broadcasting segment consists of 33 radio stations and 13 television stations in 12 states and the operation of a television station under a local marketing agreement. We also provide a wide range of commercial printing services, including printing of publications, professional journals and documentation material, through our printing services segment. Our other segment consists of a direct marketing services business and corporate expenses and eliminations.
The following tables summarize revenue, operating earnings (loss), non-cash impairment charge, depreciation and amortization and capital expenditures for the third quarter and three quarters ended September 27, 2009 and September 28, 2008 and identifiable total assets at September 27, 2009 and December 28, 2008:
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
Revenue | ||||||||||||||||
Publishing | $ | 46,479 | $ | 59,452 | $ | 144,036 | $ | 181,997 | ||||||||
Broadcasting | 42,453 | 53,994 | 125,410 | 156,790 | ||||||||||||
Printing services | 11,086 | 16,099 | 36,621 | 49,395 | ||||||||||||
Other | 5,059 | 6,725 | 15,273 | 22,443 | ||||||||||||
$ | 105,077 | $ | 136,270 | $ | 321,340 | $ | 410,625 | |||||||||
Operating earnings (loss) | ||||||||||||||||
Publishing | $ | 680 | $ | 1,139 | $ | 2,378 | $ | 11,132 | ||||||||
Broadcasting | 3,651 | (29,110 | ) | (8,190 | ) | (12,264 | ) | |||||||||
Printing services | (750 | ) | 814 | (1,157 | ) | 2,392 | ||||||||||
Other | 98 | 205 | 31 | 996 | ||||||||||||
$ | 3,679 | $ | (26,952 | ) | $ | (6,938 | ) | $ | 2,256 | |||||||
Non-cash impairment charge | ||||||||||||||||
Broadcasting | $ | -- | $ | 38,762 | $ | 18,975 | $ | 38,762 | ||||||||
$ | -- | $ | 38,762 | $ | 18,975 | $ | 38,762 | |||||||||
Depreciation and amortization | ||||||||||||||||
Publishing | $ | 3,016 | $ | 3,132 | $ | 9,094 | $ | 9,564 | ||||||||
Broadcasting | 3,253 | 3,406 | 9,955 | 10,050 | ||||||||||||
Printing services | 531 | 579 | 1,581 | 1,730 | ||||||||||||
Other | 241 | 215 | 742 | 649 | ||||||||||||
$ | 7,041 | $ | 7,332 | $ | 21,372 | $ | 21,993 | |||||||||
Capital expenditures | ||||||||||||||||
Publishing | $ | 111 | $ | 1,205 | $ | 1,205 | $ | 4,547 | ||||||||
Broadcasting | 1,396 | 5,281 | 3,725 | 9,433 | ||||||||||||
Printing services | 171 | 132 | 501 | 845 | ||||||||||||
Other | 55 | 46 | 105 | 314 | ||||||||||||
$ | 1,733 | $ | 6,664 | $ | 5,536 | $ | 15,139 |
September 27, 2009 | December 28, 2008 | |||||||
Identifiable total assets | ||||||||
Publishing | $ | 141,420 | $ | 157,440 | ||||
Broadcasting | 300,060 | 330,355 | ||||||
Printing service | 13,555 | 19,375 | ||||||
Other | 33,932 | 35,429 | ||||||
$ | 488,967 | $ | 542,599 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read together with our unaudited consolidated condensed financial statements for the third quarter and three quarters ended September 27, 2009, including the notes thereto.
More information regarding us is available at our website at www.journalcommunications.com. We are not including the information contained in our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public at no charge, other than a reader’s own internet access charges, through a link appearing on our website. We provide access to such material through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Forward-Looking Statements
We make certain statements in this Quarterly Report on Form 10-Q (including the information that we incorporate by reference herein) that are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in that Act, and we are including this statement for purposes of those safe harbor provisions. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. We often use words such as "may," "will," "intend," "anticipate," "believe," or "should" and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among such risks, uncertainties and other factors that may impact us are the following as well as those contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 28, 2008:
· | changes in advertising demand or the buying strategies of advertisers or the migration of advertising to the internet; |
· | changes in newsprint prices and other costs of materials; |
· | changes in federal or state laws and regulations or their interpretations (including changes in regulations governing the number and types of broadcast and cable system properties, newspapers and licenses that a person may control in a given market or in total); |
· | changes in legislation or customs relating to the collection, management and aggregation and use of consumer information through telemarketing and electronic communication efforts; |
· | the availability of quality broadcast programming at competitive prices; |
· | changes in network affiliation agreements; |
· | quality and rating of network over-the-air broadcast programs, including programs changing networks and changing competitive dynamics regarding how and when programs are made available to our viewers; |
· | effects of the loss of commercial inventory resulting from uninterrupted television news coverage and potential advertising cancellations due to war or terrorist acts; |
· | effects of the rapidly changing nature of the publishing, broadcasting and printing industries, including general business issues, competitive issues and the introduction of new technologies; |
· | an other than temporary decline in operating results and enterprise value that could lead to further non-cash impairment charges due to the impairment of goodwill, broadcast licenses, other intangible assets and property, plant and equipment; |
· | the impact of changing economic and financial market conditions and interest rates on our liquidity, on the value of our pension plan assets and on the availability of capital; |
· | our ability to remain in compliance with the terms of our credit agreement; |
· | changes in interest rates; |
· | the outcome of pending or future litigation; |
· | energy costs; |
· | the availability and effect of acquisitions, investments, dispositions and other capital expenditures on our results of operations, financial condition or stock price; and |
· | changes in general economic conditions. |
We caution you not to place undue reliance on these forward-looking statements, which we have made as of the date of this Quarterly Report on Form 10-Q.
Overview
Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) publishing; (ii) broadcasting; (iii) printing services; and (iv) other. Our publishing segment consists of the Milwaukee Journal Sentinel, which serves as the only major daily newspaper for the Milwaukee metropolitan area, and more than 50 community newspapers and shoppers in Wisconsin and Florida. Our broadcasting segment consists of 33 radio stations and 13 television stations in 12 states and the operation of a television station under a local marketing agreement. Our interactive media assets include approximately 120 online enterprises that are associated with our publishing and broadcasting segments. We also provide a wide range of commercial printing services, including printing of publications, professional journals and documentation material, through our printing services segment. Our other segment consists of a direct marketing services business and corporate expenses and eliminations.
Over the past few years, fundamentals in the newspaper industry have deteriorated significantly. Continuing weakness in the automobile industry has resulted in a decline in automotive advertising. Reductions in retail and classified run-of-press (ROP) advertising (due in part to department store consolidation, weakened employment and real estate economics and a migration of advertising to the internet), circulation declines and online competition have also negatively impacted newspaper industry revenues. Additionally, the continued housing market downturn has adversely impacted the newspaper industry, including real estate classified advertising as well as the home improvement, furniture and financial services advertising categories. These conditions, coupled with a weak economy, continued in the third quarter of 2009.
Our publishing businesses continued to be challenged in the third quarter of 2009 due to the difficult economic environment and the secular and cyclical influences affecting the newspaper industry. We have seen advertisers reduce their advertising spending in virtually all revenue categories. In addition, due to the changing mix of revenue categories, frequency and placement of advertising in the newspaper and customer choices to reduce or eliminate the use of color in their ads, we have seen a decrease in the average rate per inch of advertising. Classified advertising revenue, specifically for employment, real estate and automotive, decreased in the third quarter of 2009 compared to the third quarter of 2008. Retail advertising also decreased in the third quarter of 2009 compared to the third quarter of 2008 with weakness in a number of consumer-driven categories, including the automotive, furniture and furnishings, health services, finance/insurance, home improvement, dining and entertainment, communications, food and department stores categories. Interactive revenue decreased at our publishing businesses in the third quarter of 2009 compared to the third quarter of 2008. In addition to the impact of the difficult economic environment, revenue from automotive online classifieds was negatively impacted by our daily newspaper’s transition to a new franchise relationship with CarSoup.com. Our publishing businesses remained profitable in the third quarter of 2009 despite recording $3.7 million in workforce reduction charges. Notwithstanding these challenges, our publishing businesses continue to reduce their expense platforms to better align with a reduced revenue base. Total expenses decreased $12.6 million, or 21.5%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a decrease of $6.5 million in payroll-related costs and a decrease of $3.5 million in newsprint and paper costs.
Revenues in the broadcast industry are derived primarily from the sale of advertising time to local, national and political and issue advertisers and to a lesser extent from barter, digital revenues, retransmission fees, network compensation and other revenues. Because television and radio broadcasters rely upon advertising revenue, they are subject to cyclical changes in the economy. The size of advertisers’ budgets, which are affected by broad economic trends, affects the radio industry in general and the revenue of individual television stations, in particular. The broadcast industry continues to experience softness in television and radio advertising resulting from general economic pressure now impacting local and national economies, primarily in the automobile, housing and retail segments. Our broadcasting business also is affected by audience fragmentation as audiences have an increasing number of options to access news and other programming.
Revenue from broadcasting decreased in the third quarter of 2009 compared to the third quarter of 2008 due to decreases in local, national, political and issue and Olympic advertising revenue, partially offset by increases in retransmission and developmental revenue and revenue from the television stations acquired in 2008 and 2009. The difficult economic environment has negatively impacted our broadcasting advertising revenue across most categories, the most significant being our largest revenue category — automotive. The significant decline in automotive advertising negatively impacts our average unit rates even if our inventory sell-out levels are high. Our broadcasting business posted operating earnings of $3.7 million in the third quarter of 2009 compared to an operating loss of $29.1 million in the third quarter of 2008, which included a $38.8 million non-cash broadcast license impairment charge. Total expenses decreased $44.4 million, or 53.3%, in the third quarter of 2009 compared to the third quarter of 2008, primarily due to the non-cash broadcast license impairment charge in the third quarter of 2008. Our broadcasting business continues to reduce its expense platforms to reflect a reduced revenue base.
Revenue at our printing services business decreased in the third quarter of 2009 compared to the third quarter of 2008 primarily due to the effects of the difficult economic environment and the planned reduction in revenue from Dell Computer Corporation (Dell). Customers are reducing their print volumes, ceasing to print and/or are taking their printing needs out for bid in order to achieve lower pricing. Our printing services business recorded an operating loss in the third quarter of 2009 compared to operating earnings in the third quarter of 2008 primarily due to the impact from the decrease in revenue and an increase in bad debt expense, partially offset by a decrease in production and payroll-related costs. Revenue at our direct marketing services business decreased in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a decrease in mailing services and postage revenue. Our direct marketing services business posted operating losses in the third quarter of 2009 and the third quarter of 2008 primarily due to the operating earnings impact of the decrease in revenue, partially offset by a decrease in production and payroll-related costs.
For all of our advertising-based businesses, we believe that when there is an improvement in the current economic environment, advertising revenue will begin to stabilize and eventually increase from its current level. We do not expect, however, that revenues at our daily newspaper will return to revenue levels reported in the last five years given the secular changes affecting the newspaper industry.
As we enter the fourth quarter of 2009, we expect our revenue will be down compared to the fourth quarter of 2008. We will continue to reduce costs and to pay down our debt.
Results of Operations
Third Quarter Ended September 27, 2009 compared to the Third Quarter Ended September 28, 2008
Our consolidated revenue in the third quarter of 2009 was $105.1 million, a decrease of $31.2 million, or 22.9%, compared to $136.3 million in the third quarter of 2008. Our consolidated operating costs and expenses in the third quarter of 2009 were $65.9 million, a decrease of $15.3 million, or 18.8%, compared to $81.2 million in the third quarter of 2008. Our consolidated selling and administrative expenses in the third quarter of 2009 were $35.5 million, a decrease of $7.8 million, or 17.9%, compared to $43.3 million in the third quarter of 2008. Broadcast license impairment was $38.8 million in the third quarter of 2008.
The following table presents our total revenue by segment, total operating costs and expenses, selling and administrative expenses, broadcast license impairment and total operating earnings (loss) as a percent of total revenue for the third quarter of 2009 and the third quarter of 2008:
Percent of | Percent of | |||||||||||||||
Total | Total | |||||||||||||||
2009 | Revenue | 2008 | Revenue | |||||||||||||
(dollars in millions) | ||||||||||||||||
Revenue: | ||||||||||||||||
Publishing | $ | 46.5 | 44.2 | % | $ | 59.5 | 43.6 | % | ||||||||
Broadcasting | 42.4 | 40.4 | 54.0 | 39.6 | ||||||||||||
Printing services | 11.1 | 10.6 | 16.1 | 11.8 | ||||||||||||
Other | 5.1 | 4.8 | 6.7 | 5.0 | ||||||||||||
Total revenue | 105.1 | 100.0 | 136.3 | 100.0 | ||||||||||||
Total operating costs and expenses | 65.9 | 62.7 | 81.2 | 59.6 | ||||||||||||
Selling and administrative expenses | 35.5 | 33.8 | 43.3 | 31.8 | ||||||||||||
Broadcast license impairment | -- | -- | 38.8 | 28.4 | ||||||||||||
Total operating costs and expenses and selling and administrative expenses | 101.4 | 96.5 | 163.3 | 119.8 | ||||||||||||
Total operating earnings (loss) | $ | 3.7 | 3.5 | % | $ | (27.0 | ) | (19.8 | )% |
In addition to the secular influences affecting the newspaper industry discussed above, the difficult economic environment negatively impacted our publishing, broadcasting and direct marketing services advertising revenue and commercial printing revenue in the third quarter of 2009.
In the newspaper industry, classified advertising has historically been the most sensitive to economic cycles because it is driven by the demand for employment, real estate transactions and automotive sales. Newspaper classified advertising also has been the most impacted by secular changes affecting the newspaper industry. Classified advertising continues to move away from printed products to online products. While we offer online products and seek to retain classified advertising, we face increasing competition for this business and are losing the benefit of a strong base of print classified advertising against which we can upsell online advertisements. Our publishing businesses experienced a 44.0% decrease in classified advertising revenue in the third quarter of 2009 compared to the third quarter of 2008. Retail advertising revenue decreased 21.1% in the third quarter of 2009 compared to the third quarter of 2008, primarily in consumer-driven categories. As consumers have less discretionary income, our advertisers are decreasing their spending on advertising. The most significant decreases were in the automotive, furniture and furnishings, health services, finance/insurance, home improvement, dining and entertainment, communications, food and department stores categories. Because of secular changes and the difficult economic environment affecting the newspaper industry, we are aligning our cost structure in the face of decreasing revenues.
At our broadcasting business, advertising revenue decreased in the third quarter across most categories, the most significant being our largest revenue category — automotive. Automotive advertising revenue decreased $4.3 million, or 41.4%, in the third quarter of 2009 compared to the third quarter of 2008 as the domestic automobile industry is experiencing an unprecedented decrease in automotive sales. 2009 is generally considered to be a non-election year and, while there will be some political and issue advertising revenue in 2009, we will experience a significant decrease in the political and issue advertising revenue category throughout the year in our comparisons to 2008. In the third quarter of 2009, political and issue advertising revenue decreased $2.9 million compared to the third quarter of 2008. This is part of the normal two-year advertising cycle which affects our television stations in particular. Olympic advertising revenue decreased $2.3 million due to the broadcast of the 2008 Summer Olympics on our NBC affiliates in the third quarter of 2008. Partially offsetting the decrease in advertising revenue, retransmission revenue increased $0.8 million in the third quarter of 2009 compared to the third quarter of 2008. These contracts will continue to generate incremental revenue through the remainder of 2009 and into the next several years. Developmental revenue increased $0.6 million in the third quarter of 2009 compared to the third quarter of 2008.
The decrease in printing services revenue was primarily due to the effects of the difficult economic environment. Revenue from printing publications and revenue from Dell and other computer-related customers decreased in the third quarter of 2009 compared to the third quarter of 2008. At our direct marketing services business, revenue from mailing services and postage decreased in the third quarter of 2009 compared to the third quarter of 2008 as the demand for direct marketing advertising continues to decrease.
The decrease in total operating costs and expenses was primarily due to the decrease in revenue, a decrease in payroll-related costs reflecting the savings from workforce reduction initiatives, a decrease in newsprint and paper costs and other production materials, and overall cost reduction initiatives. The decrease in selling and administrative expenses is primarily due to decreases in payroll-related costs reflecting the savings from workforce reduction initiatives, a decrease in bad debt expense, a gain on the sale of radio stations KGEM-AM and KCID-AM in Boise, Idaho and overall cost reduction initiatives as our businesses continue to reduce expense platforms in response to the decrease in revenue. We recorded total workforce reduction charges of $4.2 million the third quarter of 2009 compared to $3.9 million in the third quarter of 2008.
Our consolidated operating earnings in the third quarter of 2009 were $3.7 million compared to an operating loss of $27.0 million in the third quarter of 2008. The following table presents our operating earnings (loss) by segment for the third quarter of 2009 and the third quarter 2008:
Percent of | Percent of | |||||||||||||||
Total | Total | |||||||||||||||
Operating | Operating | |||||||||||||||
2009 | Earnings | 2008 | Loss | |||||||||||||
(dollars in millions) | ||||||||||||||||
Publishing | $ | 0.7 | 18.5 | % | $ | 1.1 | (4.2 | )% | ||||||||
Broadcasting | 3.7 | 99.2 | (29.1 | ) | 108.0 | |||||||||||
Printing services | (0.8 | ) | (20.4 | ) | 0.8 | (3.0 | ) | |||||||||
Other | 0.1 | 2.7 | 0.2 | (0.8 | ) | |||||||||||
Total operating earnings (loss) | $ | 3.7 | 100.0 | % | $ | (27.0 | ) | 100.0 | % |
The increase in total operating earnings was primarily due to the $38.8 million non-cash broadcast license impairment charge in the third quarter of 2008 and decreases in total operating costs and expenses and selling and administrative expenses, partially offset by the decrease in revenue at our publishing, broadcasting, printing services and direct marketing services businesses.
Publishing
Revenue from publishing in the third quarter of 2009 was $46.5 million, a decrease of $13.0 million, or 21.8%, compared to $59.5 million in the third quarter of 2008. Operating earnings from publishing in the third quarter of 2009 were $0.7 million, a decrease of $0.4 million, or 40.3%, compared to $1.1 million in the third quarter of 2008.
The following table presents our publishing revenue by category and operating earnings for the third quarter of 2009 and the third quarter of 2008:
2009 | 2008 | |||||||||||||||||||||||||||
Community | Community | |||||||||||||||||||||||||||
Daily | Newspapers | Daily | Newspapers | Percent | ||||||||||||||||||||||||
Newspaper | & Shoppers | Total | Newspaper | & Shoppers | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Advertising revenue: | ||||||||||||||||||||||||||||
Retail | $ | 15.6 | $ | 5.5 | $ | 21.1 | $ | 20.2 | $ | 6.6 | $ | 26.8 | (21.1 | ) | ||||||||||||||
Classified | 5.7 | 1.4 | 7.1 | 11.1 | 1.5 | 12.6 | (44.0 | ) | ||||||||||||||||||||
National | 1.0 | -- | 1.0 | 1.7 | -- | 1.7 | (43.1 | ) | ||||||||||||||||||||
Direct Marketing | 0.1 | -- | 0.1 | 0.7 | -- | 0.7 | (88.2 | ) | ||||||||||||||||||||
Other | -- | -- | -- | -- | 0.1 | 0.1 | (58.0 | ) | ||||||||||||||||||||
Total advertising revenue | 22.4 | 6.9 | 29.3 | 33.7 | 8.2 | 41.9 | (30.1 | ) | ||||||||||||||||||||
Circulation revenue | 12.9 | 0.5 | 13.4 | 12.9 | 0.3 | 13.2 | 1.8 | |||||||||||||||||||||
Other revenue | 3.1 | 0.7 | 3.8 | 3.5 | 0.9 | 4.4 | (14.0 | ) | ||||||||||||||||||||
Total revenue | $ | 38.4 | $ | 8.1 | $ | 46.5 | $ | 50.1 | $ | 9.4 | $ | 59.5 | (21.8 | ) | ||||||||||||||
Operating earnings | $ | 0.1 | $ | 0.6 | $ | 0.7 | $ | 0.9 | $ | 0.2 | $ | 1.1 | (40.3 | ) |
Advertising revenue accounted for 63.0% of total publishing revenue in the third quarter of 2009 compared to 70.5% in the third quarter of 2008. The difficult economic environment and ongoing secular changes in the newspaper industry have caused advertisers to decrease their advertising spending across all of our advertising revenue categories. In addition, due to the changing mix of revenue categories, frequency and placement of advertising in the newspaper and customer choices to reduce or eliminate the use of color in their ads, we have seen a decrease in the average rate per inch of advertising.
Retail advertising revenue in the third quarter of 2009 was $21.1 million, a decrease of $5.7 million, or 21.1%, compared to $26.8 million in the third quarter of 2008. The $4.6 million decrease at our daily newspaper was primarily due to a decrease in ROP and preprint advertising in consumer-driven categories. As consumers have less discretionary income, advertisers are decreasing their spending. The most significant decreases were in the automotive, furniture and furnishings, health services, finance/insurance, home improvement, dining and entertainment, communications, food and department stores categories. The same trends persisted in our community newspapers and shoppers business. A $1.7 million decrease in revenue at our community newspapers and shoppers, excluding revenue from acquisitions, was primarily due to decreases in automotive, small-retailers and real estate advertising, partially offset by $0.6 million in revenue from publications acquired in Northern Wisconsin and Florida in late 2008.
Classified advertising has historically been the most sensitive to economic cycles because it is driven by the demand of employment, real estate transactions and automotive sales. As a result of the difficult economic environment and the ongoing secular trend of classified advertising transitioning to the internet, our publishing businesses experienced a significant decrease in classified advertising revenue in the third quarter of 2009 compared to the third quarter of 2008. Classified advertising revenue in the third quarter of 2009 was $7.1 million, a decrease of $5.5 million, or 44.0%, compared to $12.6 million in the third quarter of 2008. At our daily newspaper, print and online classified advertising revenue decreased by 48.7% from the third quarter of 2008, which is a smaller decrease against the comparable prior period than experienced in the first and second quarters of 2009. Specifically, the employment category decreased $2.8 million, or 65.0%; automotive decreased $1.3 million, or 53.9%; real estate decreased $1.0 million, or 41.0% and other decreased $0.3 million, or 15.5%. The average rate per inch of classified advertising has decreased primarily due to the significant decrease in employment classified revenue which, historically, has been at a higher rate than other categories. The same trends persisted in our community newspapers and shoppers business. At our community newspapers and shoppers business, a decrease in automotive, employment and real estate classified advertising revenue was partially offset by an increase in classified advertising revenue from newly acquired publications in Northern Wisconsin and Florida in late 2008 and an increase in legal classified advertising in Florida due to an increase in foreclosure notices.
The total decrease in retail and classified automotive advertising at our daily newspaper in the third quarter of 2009 was $1.8 million, or 53.2%, compared to the third quarter of 2008. The decrease was due to a decline in demand for advertising from local dealers and regional dealer associations. Consumers have decreased their purchases of new automobiles and, in response, local dealers and regional dealer associations are reducing their costs, including advertising costs.
Interactive advertising revenue is reported in the various advertising revenue categories. Total retail and classified interactive advertising revenue at our publishing businesses was $2.5 million in the third quarter of 2009, a decrease of $1.4 million, or 35.7%, compared to $3.9 million in the third quarter of 2008. Interactive classified advertising revenue at the daily newspaper was $1.1 million in the third quarter of 2009, a decrease of $1.3 million, or 55.3%, compared to $2.4 million in the third quarter of 2008. The $1.4 million decrease was primarily due to decreases in automotive classified advertising of $0.8 million, or 80.2%, and employment classified advertising of $0.6 million, or 48.5%. The difficult economic environment has negatively impacted automotive and employment online advertising revenue. In the third quarter of 2009 compared to the third quarter of 2008, revenue from automotive online classified advertising at our daily newspaper was also negatively impacted by the transition to a new franchise relationship with CarSoup.com.
National advertising revenue in the third quarter of 2009 was $1.0 million, a decrease of $0.7 million, or 43.1%, compared to $1.7 million in the third quarter of 2008. The decrease was primarily due to a decrease in ROP and preprint advertising in the business services, dining and entertainment, food and airline and travel categories, which are predominantly consumer-driven. Partially offsetting these decreases were increases in the finance/insurance and health services categories.
Direct marketing revenue, consisting of revenue from the sale of direct mail products of our daily newspaper, was $0.1 million in the third quarter of 2009, a decrease of $0.6 million, or 88.2%, compared to $0.7 million in the third quarter of 2008 due to the cessation of operations of our Milwaukee-area direct marketing facility. We are now focusing our direct marketing efforts on our total market coverage (TMC) product, which is more cost effective for us to produce. We began our transition from a mail-delivered product to a carrier-delivered product in the second quarter of 2009 and we completed the transition by the end of the third quarter of 2009
Other advertising revenue, consisting of revenue from company-sponsored event advertising at our community newspapers and shoppers, decreased $0.1 million in the third quarter of 2009 compared to the third quarter of 2008.
Circulation revenue in the third quarter of 2009 accounted for 28.8% of total publishing revenue compared to 22.1% in the third quarter of 2008. The increase as a percentage of total revenue is due to the decrease in advertising revenue and the overall decline in total revenue. Circulation revenue of $13.4 million in the third quarter of 2009 increased $0.2 million, or 1.8%, compared to $13.2 million in the third quarter of 2008. At our daily newspaper, circulation revenue in the third quarter of 2009 was essentially even compared to circulation revenue in the third quarter of 2008. An increase in daily single copy revenue, following a price increase to 75 cents per daily paper in the Milwaukee-metro market in January 2009, helped offset decreases in daily and Sunday home delivery revenue. We believe this increase in revenue demonstrates that readers value our newspaper. The Milwaukee Journal Sentinel ranks number one among newspapers in the top 50 markets in the United States for “integrated” newspaper audience, showing strength in print and online, according to the Scarborough Reports. At our community newspapers and shoppers business, circulation revenue increased due to the publications acquired in Northern Wisconsin and Florida in late 2008 and due to an increase in the rates of certain Milwaukee-area community newspapers.
Other revenue, which consists of revenue from promotional and commercial distribution and commercial printing revenue at our daily newspaper and commercial printing at the printing plants for our community newspapers and shoppers, accounted for 8.2% of total publishing revenue in the third quarter of 2009 compared to 7.4% in the third quarter of 2008. The increase as a percentage of total revenue is due to the decrease in advertising revenue and the overall decline in total revenue. Other revenue in the third quarter of 2009 was $3.8 million, a decrease of $0.6 million, or 14.0%, compared to $4.4 million in the third quarter of 2008. The $0.4 million decrease at our daily newspaper was primarily due to a decrease in commercial printing revenue due to volume declines as certain customers reduced page counts and number of copies and a decrease in newsprint prices, which is passed along to certain customers. This decrease was partially offset by an increase in commercial delivery revenue from additional routes for USA Today. The $0.2 million decrease at our community newspapers and shoppers business was primarily due to the loss of certain print customers.
In September 2009, our daily newspaper signed a three-year commercial printing contract to print all of the Pioneer Press Publications, which consist of 39 weekly newspapers serving Northeastern Illinois communities. The Pioneer Press Publications are owned by Sun Times Media Group, which expects to print about 156,000 weekly copies at our production facility. In July 2009, our daily newspaper signed a commercial printing contract with The Kenosha News, a seven-day newspaper located north of the Illinois and Wisconsin border. This is the first newspaper that has completely outsourced all of its printing and packaging to our production facility. Our daily newspaper is printing 26,000 daily and 29,000 Sunday copies, plus weekly and community products.
Publishing operating earnings in the third quarter of 2009 were $0.7 million, a decrease of $0.4 million, or 40.3%, compared to operating earnings of $1.1 million in the third quarter of 2008. The decrease in operating earnings was primarily due to the decrease in advertising revenue. Our publishing businesses continue to reduce their expense platforms to align them with the reduced revenue base. Total expenses decreased $12.6 million, or 21.5%, in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a decrease of $6.5 million in payroll-related costs. The charges for workforce reductions were $3.7 million in both the third quarter of 2009 and the third quarter of 2008. Since the end of 2007, our full-time employee count for our publishing businesses has decreased by 30.1%. Excluding payroll-related costs, operating costs and expenses decreased $5.4 million in the third quarter of 2009 compared to the third quarter of 2008, the most significant of which was newsprint and paper costs and online fees at our daily newspaper. Total newsprint and paper costs for our publishing businesses in the third quarter of 2009 were $3.5 million, a decrease of $3.5 million, or 50.0%, compared to $7.0 million in the third quarter of 2008 due to a 35.5% decrease in average newsprint pricing per metric ton and a 24.9% decrease in newsprint consumption. Consumption of metric tonnes of newsprint in the third quarter of 2009 decreased primarily due to decreases in average net paid circulation, ROP advertising and editorial pages and waste. Online fees at our daily newspaper decreased by $0.5 million in the third quarter of 2009 compared to the third quarter of 2008 primarily due to the transition to a new franchise relationship with CarSoup.com and due to the decrease in interactive employment classified advertising. Bad debt expense decreased by $0.5 million in the third quarter of 2009 compared to the third quarter of 2008 primarily due to the reversal of a bankruptcy reserve for a pre-petition receivable at the daily newspaper, which has been paid in full after a customer’s emergence from bankruptcy. Partially offsetting the expense decreases were additional expenses from publications acquired by our community newspapers and shoppers business in 2008 and a $0.8 million increase in its sales and use tax reserve at the daily newspaper in the third quarter of 2009.
Broadcasting
Revenue from broadcasting in the third quarter of 2009 was $42.4 million, a decrease of $11.6 million, or 21.4%, compared to $54.0 million in the third quarter of 2008. Operating earnings from broadcasting in the third quarter of 2009 were $3.7 million compared to an operating loss of $29.1 million in the third quarter of 2008, which included a $38.8 million non-cash broadcast license impairment charge.
The following table presents our broadcasting revenue, broadcast license impairment and operating earnings (loss) for the third quarter of 2009 and the third quarter of 2008:
2009 | 2008 | Percent | ||||||||||||||||||||||||||
Television | Radio | Total | Television | Radio | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Revenue | $ | 24.5 | $ | 17.9 | $ | 42.4 | $ | 32.3 | $ | 21.7 | $ | 54.0 | (21.4 | ) | ||||||||||||||
Broadcast license impairment | $ | -- | $ | -- | $ | -- | $ | 21.1 | $ | 17.7 | $ | 38.8 | (100.0 | ) | ||||||||||||||
Operating earnings (loss) | $ | -- | $ | 3.7 | $ | 3.7 | $ | (17.0 | ) | $ | (12.1 | ) | $ | (29.1 | ) | NA |
Revenue from our television stations in the third quarter of 2009 was $24.5 million, a decrease of $7.8 million, or 24.1%, compared to $32.3 million in the third quarter of 2008. The revenue decrease was experienced across all of our television markets, partially offset by revenue of $0.7 million from the acquisition of KNIN-TV in Boise, Idaho in the third quarter of 2009. Compared to the third quarter of 2008, political and issue advertising revenue decreased $2.6 million, or 83.7%; Olympic advertising revenue decreased $2.3 million, or 100.0%, due to the broadcast of the 2008 Summer Olympics on our NBC affiliates in the third quarter of 2008; local advertising revenue decreased $2.0 million, or 10.1%; and national advertising revenue decreased $1.7 million, or 25.7%. 2009 is generally considered to be a non-election year and, while there will be some political and issue advertising revenue in 2009, we will experience a significant decrease in the political and issue advertising revenue category throughout the year in our comparisons to 2008. Television advertising revenue and rates in even-numbered years benefit from political and issue advertising because there is more pressure on inventory as advertising increases, which drives rates upward. We have television stations in a number of states with competitive political races in 2010.
The difficult economic environment has negatively impacted our advertising revenue across most categories, the most significant being our largest revenue category — automotive, which represented 14.4% of television advertising revenue in the third quarter of 2009 compared to 19.7% in the third quarter of 2008. Automotive advertising revenue decreased $2.8 million in the third quarter of 2009 compared to the third quarter of 2008 as the automobile industry is experiencing an unprecedented decrease in automotive sales. We believe the “cash for clunkers” program provided a temporary boost in automotive advertising revenue in the third quarter of 2009 and weekly automotive advertising revenue increased towards the end of the third quarter of 2009. In comparing revenue trends, automotive advertising revenue increased 2.5% compared to the second quarter of 2009. The lack of automotive advertising had a negative impact on the average unit rate we charge our advertisers. National automotive revenue is heavily placed in prime time, which helps drive average unit rates among other advertisers. When that placement doesn’t occur in prime time, it negatively impacts the rate we can charge our advertisers even when the sell-out levels are high, which they were in the third quarter of 2009. The other consumer-driven categories that felt the impact of the difficult economic environment and caused revenue decreases included communications, furniture and electronics, medical, restaurants, retail, travel, entertainment and home improvement. In an effort to overcome the decrease in automotive and other consumer-driven advertising revenue, our television stations are working to replace this lost revenue with developmental revenue. Developmental revenue refers to non-transactional revenue that targets non-traditional advertisers. Developmental revenue was $3.5 million in the third quarter of 2009, an increase of $0.1 million, or 2.9%, compared to $3.4 million in the third quarter of 2008 and it increased as a percentage of total revenue from our television stations to 14.3%, up from 10.5% in the third quarter of 2008. Interactive revenue was $0.3 million in the third quarter of 2009, a decrease of $0.2 million, or 32.5%, compared to $0.5 million in the third quarter of 2008. Both interactive and developmental revenue are reported in local advertising revenue. Partially offsetting the revenue decreases was an increase in retransmission revenue and local revenue in the financial, media and professional services categories. Retransmission revenue increased $0.8 million in the third quarter of 2009 to $1.2 million, compared to $0.4 million in the third quarter of 2008. We finalized retransmission contracts covering about 98% of the subscribers in our markets. These contracts will continue to generate incremental revenue through the remainder of 2009 and into the next several years.
Operating results from our television stations in the third quarter of 2009 were essentially breakeven compared to an operating loss of $17.0 million in the third quarter of 2008, which included a non-cash broadcast license impairment charge of $21.1 million. The increase in operating earnings was primarily due to the non-cash broadcast license impairment charge recorded in the third quarter of 2008, partially offset by the impact of the decrease in advertising revenue. Total television expenses in the third quarter of 2009 were $24.5 million, a decrease of $24.8 million compared to $49.3 million in the third quarter of 2008. The decrease in total television expenses was primarily due to the $21.1 non-cash broadcast license impairment charge in the third quarter of 2008, a decrease of $2.2 million in payroll-related costs, a decrease in programming expenses, a decrease in agency commissions, a decrease in bad debt expense and various other expense reductions. Our television stations continue to reduce their expense platform to align with a reduced revenue base. Partially offsetting these expense decreases was $0.3 million in incremental expenses from television stations acquired in 2009.
Revenue from our radio stations in the third quarter of 2009 was $17.9 million, a decrease of $3.8 million, or 17.3%, compared to $21.7 million in the third quarter of 2008. The revenue decrease was experienced across all of our radio markets. Compared to the third quarter of 2008, local advertising revenue decreased $3.1 million, or 16.3%; national advertising revenue decreased $0.4 million or 23.9% and political and issue advertising revenue decreased $0.3 million, or 81.2%. 2009 is generally considered a non-election year, and therefore, we will experience a decrease in the political and issue advertising revenue category throughout the remainder of the year in our comparisons to 2008. The difficult economic environment has negatively impacted our advertising revenue across most categories, the most significant being our largest revenue category — automotive, which represented 14.2% of radio advertising revenue in the third quarter of 2009 compared to 18.4% in the third quarter of 2008. Automotive advertising revenue decreased $1.5 million in the third quarter of 2009 compared to the third quarter of 2008 as the domestic automobile industry is experiencing an unprecedented decrease in automotive sales. In comparing revenue trends, automotive advertising revenue increased 14.5% compared to the second quarter of 2009. The other consumer-driven categories that felt the impact of the economic recession and caused revenue decreases included medical, home improvement, entertainment, communications and restaurants partially offset by increases in the beverages and financial categories. In an effort to overcome the decrease in automotive and other consumer-driven advertising revenue, our radio stations are focused on selling developmental revenue. Developmental revenue was $3.6 million in the third quarter of 2009, an increase of $0.5 million, or 16.5%, compared to $3.1 million in the third quarter of 2008 and it increased as a percentage of total revenue from our radio stations to 19.8%, up from 14.0% in the third quarter of 2008. Interactive revenue was $0.4 million in the third quarter of 2009, a decrease of $0.1 million, or 22.0%, compared to $0.5 million in the third quarter of 2008. Both interactive and developmental revenue are reported in local advertising revenue.
Operating earnings from our radio stations in the third quarter of 2009 were $3.7 million compared to an operating loss of $12.1 million in the third quarter of 2008, which included a $17.7 million non-cash broadcast license impairment charge. The increase in operating earnings was primarily due to the non-cash broadcast license impairment charge recorded in the third quarter of 2008, partially offset by the impact of the decrease in advertising revenue and an increase in sports rights fees. Partially offsetting the decrease in operating earnings was a decrease of $1.2 million in payroll-related costs, a $0.3 million gain on the sale of the radio stations KGEM-AM and KCID-AM in Boise, Idaho and various other expense reductions. Our radio stations continue to reduce their expense platform to align with a reduced revenue base.
Printing Services
Revenue from printing services in the third quarter of 2009 was $11.1 million, a decrease of $5.0 million, or 31.1%, compared to $16.1 million in the third quarter of 2008. The operating loss from printing services in the third quarter of 2009 was $0.8 million compared to operating earnings of $0.8 million in the third quarter of 2008.
The decrease in printing services revenue was primarily due to the effects of the difficult economic environment. Revenue from printing publications and revenue from Dell and other computer-related customers decreased in the third quarter of 2009 compared to the third quarter of 2008. Our printing services’ customers continue to reduce their print volumes, cease to print and/or take their printing needs out for bid in order to achieve lower pricing. We expect these trends to continue throughout 2009. We believe our revenue from Dell, which was $0.2 million in the third quarter of 2009, will cease by the mid-2010.
The decrease in printing services operating earnings was primarily due to the impact from the decrease in revenue. Total expenses decreased $3.4 million, or 22.6%, in the third quarter of 2009 compared to the third quarter of 2008. The decrease in total expenses was primarily due to a decrease of $2.5 million in materials costs, a decrease of $1.2 million in payroll-related costs, partially offset by a workforce reduction charge of $0.4 million and an increase of $0.4 million in bad debt expense. Due to the difficult economic environment, our printing services business is encountering an increase in slow-paying customers as well as customers who have filed bankruptcy.
Other
Other revenue in the third quarter of 2009 was $5.1 million, a decrease of $1.6 million, or 24.8%, compared to $6.7 million in the third quarter of 2008. Other operating earnings in the third quarter of 2009 were $0.1 million, a decrease of $0.1 million, or 52.2%, compared to $0.2 million in the third quarter of 2008.
The following table presents our other revenue and operating earnings (loss) for the third quarter of 2009 and the third quarter of 2008:
2009 | 2008 | |||||||||||||||||||||||||||
Direct | Corporate | Direct | Corporate | |||||||||||||||||||||||||
Marketing | and | Marketing | and | Percent | ||||||||||||||||||||||||
Services | Eliminations | Total | Services | Eliminations | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Revenue | $ | 5.2 | $ | (0.1 | ) | $ | 5.1 | $ | 6.8 | $ | (0.1 | ) | $ | 6.7 | (24.8 | ) | ||||||||||||
Operating earnings (loss) | $ | (0.4 | ) | $ | 0.5 | $ | 0.1 | $ | (0.3 | ) | $ | 0.5 | $ | 0.2 | (52.2 | ) |
The decrease in direct marketing services revenue was primarily due to the effects of the difficult economic environment. Revenue from mailing services and postage decreased in the third quarter of 2009 compared to the third quarter of 2008 as the demand for direct marketing advertising continues to decrease and customers change from first-class mailings to bulk mailings or third-class mailings. This decrease was partially offset by an increase in laser printing revenue. Included in revenue and operating costs and expenses from our direct marketing services business is $2.9 million and $3.9 million of postage amounts billed to customers in the third quarter 2009 and the third quarter of 2008, respectively.
The decrease in operating earnings at our “other” segment was primarily due to the operating earnings impact of the decrease in revenue at our direct marketing services business, partially offset by a decrease in payroll-related costs at corporate and at our direct marketing services business.
Other Income and Expense and Taxes
Interest expense was $0.6 million in the third quarter of 2009 compared to $1.9 million in the third quarter of 2008. The decrease is due to a decrease in both the average borrowings during the quarter and the interest rate on our borrowings. Amortization of deferred financing costs was $0.1 million in the third quarter of 2009 and the third quarter of 2008.
Our effective tax provision rate was 39.8% in the third quarter of 2009 compared to an effective tax benefit rate of 40.8% in the third quarter of 2008.
Discontinued Operations
There were no results from discontinued operations in the third quarter 2009 and the third quarter of 2008.
Net Earnings (Loss)
Our net income in the third quarter of 2009 was $1.8 million compared to a net loss of $17.1 million in the third quarter of 2008. The increase was due to the increase in operating earnings from continuing operations for the reasons described above and the decrease in interest expense.
Earnings (Loss) per Share for Class A and B Common Stock
In the third quarter of 2009, basic and diluted net earnings per share of class A and B common stock were $0.02 for both. This compared to net loss per share of $0.35 for both in the third quarter of 2008. Basic and diluted earnings per share of class A and B common stock from continuing operations were $0.02 for both in the third quarter of 2009 compared to a loss per share of $0.35 for both in the third quarter of 2008. There were no basic and diluted earnings per share of class A and B common stock from discontinued operations in the third quarter of 2009 and in the third quarter of 2008.
Three Quarters Ended September 27, 2009 compared to the Three Quarters Ended September 28, 2008
Our consolidated revenue in the three quarters of 2009 was $321.3 million, a decrease of $89.3 million, or 21.7%, compared to $410.6 million in the three quarters of 2008. Our consolidated operating costs and expenses in the three quarters of 2009 were $199.4 million, a decrease of $39.4 million, or 16.5%, compared to $238.8 million in the three quarters of 2008. Our consolidated selling and administrative expenses in the three quarters of 2009 were $109.8 million, a decrease of $20.9 million, or 15.9%, compared to $130.7 million in the three quarters of 2008. Broadcast license impairment was $19.0 million in the three quarters of 2009 compared to $38.8 million in the three quarters of 2008.
The following table presents our total revenue by segment, total operating costs and expenses, selling and administrative expenses, broadcast license impairment and total operating earnings (loss) as a percent of total revenue for the three quarters of 2009 and the three quarters of 2008:
Percent of | Percent of | |||||||||||||||
Total | Total | |||||||||||||||
2009 | Revenue | 2008 | Revenue | |||||||||||||
(dollars in millions) | ||||||||||||||||
Revenue: | ||||||||||||||||
Publishing | $ | 144.0 | 44.8 | % | $ | 182.0 | 44.3 | % | ||||||||
Broadcasting | 125.4 | 39.0 | 156.8 | 38.2 | ||||||||||||
Printing services | 36.6 | 11.4 | 49.4 | 12.0 | ||||||||||||
Other | 15.3 | 4.8 | 22.4 | 5.5 | ||||||||||||
Total revenue | 321.3 | 100.0 | 410.6 | 100.0 | ||||||||||||
Total operating costs and expenses | 199.4 | 62.1 | 238.8 | 58.2 | ||||||||||||
Selling and administrative expenses | 109.8 | 34.2 | 130.7 | 31.8 | ||||||||||||
Broadcast license impairment | 19.0 | 5.9 | 38.8 | 9.5 | ||||||||||||
Total operating costs and expenses and selling and administrative expenses | 328.2 | 102.2 | 408.3 | 99.5 | ||||||||||||
Total operating earnings (loss) | $ | (6.9 | ) | (2.2 | )% | $ | 2.3 | 0.5 | % |
In addition to the secular influences affecting the newspaper industry discussed above, the difficult economic environment negatively impacted our publishing, broadcasting and direct marketing services advertising revenue and commercial printing revenue in the three quarters of 2009.
In the newspaper industry, classified advertising has historically been the most sensitive to economic cycles because it is driven by the demand of employment, real estate transactions and automotive sales. Newspaper classified advertising also has been the most impacted by secular changes affecting the newspaper industry. Classified advertising continues to move away from printed products to online products. While we offer online products and seek to retain classified advertising, we face increasing competition for this business and are losing the benefit of a strong base of print classified advertising against which we can upsell online advertisements. Our publishing business experienced a 46.7% decrease in classified advertising revenue in the three quarters of 2009 compared to the three quarters of 2008. Retail advertising revenue decreased 20.1% in the three quarters of 2009 compared to the three quarters of 2008 primarily in consumer-driven categories. As consumers have less discretionary income, our advertisers are decreasing their spending on advertising. The most significant decreases were in the furniture and furnishings, finance/insurance, dining and entertainment, home improvement, automotive, health services, small-retailers, department stores, food, real estate, business services, communications and airline and travel categories. Secular changes affecting the newspaper industry also are resulting in pressure to reduce costs and align our cost structure in the face of decreasing revenues.
At our broadcasting business, advertising revenue decreased in the three quarters across most categories, the most significant being our largest revenue category — automotive. Automotive advertising revenue decreased $14.0 million, or 45.2%, in the three quarters of 2009 compared to the three quarters of 2008 as the domestic automobile industry is experiencing an unprecedented decrease in automotive sales. In the three quarters of 2009, political and issue advertising revenue decreased $4.8 million compared to the three quarters of 2008. This is part of the normal two-year advertising cycle which affects our television stations in particular. Olympic advertising revenue decreased $2.3 million due to the broadcast of the 2008 Summer Olympics on our NBC affiliates in the three quarters of 2008. Partially offsetting the decrease in advertising revenue, retransmission revenue increased $2.5 million in the three quarters of 2009 compared to the three quarters of 2008. These contracts will continue to generate incremental revenue through the remainder of 2009 and into the next several years.
The decrease in printing services revenue was primarily due to the effects of the difficult economic environment. Revenue from printing publications and revenue from Dell and other computer-related customers decreased in the three quarters of 2009 compared to the three quarters of 2008. At our direct marketing services business, revenue from mailing and list services, postage and offset printing decreased in the three quarters of 2009 compared to the three quarters of 2008 as the demand for direct marketing advertising continues to decrease.
The decrease in total operating costs and expenses was primarily due to the decrease in revenue, a decrease in payroll-related costs reflecting the savings from workforce reduction initiatives, a decrease in newsprint and paper costs, a $1.7 million gain related to insurance proceeds from our tower replacement in Wichita, Kansas and a decrease in programming expenses. The decrease in selling and administrative expenses is primarily due to decreases in payroll-related costs reflecting the savings from workforce reduction initiatives and overall cost reduction initiatives as our businesses continue to reduce expense platforms in response to the decrease in revenue. These expense decreases were partially offset by an increase in bad debt expense at all of our businesses as each are encountering an increase in slow-paying customers as well as customers who have filed bankruptcy. We recorded a $19.0 million non-cash broadcast license impairment charge in the three quarters of 2009 compared to a $38.8 million non-cash broadcast license in impairment charge in the three quarters of 2008. We recorded total workforce reduction charges of $5.4 million in the three quarters of 2009 compared to $4.0 million in the three quarters of 2008.
Our consolidated operating loss in the three quarters of 2009 was $6.9 million compared to operating earnings of $2.3 million in the three quarters of 2008. The following table presents our operating earnings (loss) by segment for the three quarters of 2009 and the three quarters 2008:
Percent of | Percent of | |||||||||||||||
Total | Total | |||||||||||||||
Operating | Operating | |||||||||||||||
2009 | Loss | 2008 | Earnings | |||||||||||||
(dollars in millions) | ||||||||||||||||
Publishing | $ | 2.4 | (34.3 | )% | $ | 11.1 | 493.4 | % | ||||||||
Broadcasting | (8.2 | ) | 118.0 | (12.2 | ) | (543.6 | ) | |||||||||
Printing services | (1.2 | ) | 16.7 | 2.4 | 106.0 | |||||||||||
Other | 0.1 | (0.4 | ) | 1.0 | 44.2 | |||||||||||
Total operating earnings (loss) | $ | (6.9 | ) | 100.0 | % | $ | 2.3 | 100.0 | % |
The decrease in total operating earnings was primarily due to the decrease in revenue at our publishing, broadcasting, printing services and direct marketing services businesses.
Publishing
Revenue from publishing in the three quarters of 2009 was $144.0 million, a decrease of $38.0 million, or 20.9%, compared to $182.0 million in the three quarters of 2008. Operating earnings from publishing in the three quarters of 2009 were $2.4 million, a decrease of $8.7 million, or 78.6%, compared to $11.1 million in the three quarters of 2008.
The following table presents our publishing revenue by category and operating earnings for the three quarters of 2009 and the three quarters of 2008:
2009 | 2008 | |||||||||||||||||||||||||||
Community | Community | |||||||||||||||||||||||||||
Daily | Newspapers | Daily | Newspapers | Percent | ||||||||||||||||||||||||
Newspaper | & Shoppers | Total | Newspaper | & Shoppers | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Advertising revenue: | ||||||||||||||||||||||||||||
Retail | $ | 47.6 | $ | 18.0 | $ | 65.6 | $ | 61.3 | $ | 20.7 | $ | 82.0 | (20.1 | ) | ||||||||||||||
Classified | 17.1 | 4.1 | 21.2 | 35.5 | 4.3 | 39.8 | (46.7 | ) | ||||||||||||||||||||
National | 3.6 | -- | 3.6 | 5.3 | -- | 5.3 | (31.8 | ) | ||||||||||||||||||||
Direct Marketing | 0.5 | -- | 0.5 | 2.3 | -- | 2.3 | (76.7 | ) | ||||||||||||||||||||
Other | -- | 0.2 | 0.2 | -- | 0.3 | 0.3 | (35.3 | ) | ||||||||||||||||||||
Total advertising revenue | 68.8 | 22.3 | 91.1 | 104.4 | 25.3 | 129.7 | (29.8 | ) | ||||||||||||||||||||
Circulation revenue | 38.2 | 1.5 | 39.7 | 37.7 | 0.8 | 38.5 | 3.2 | |||||||||||||||||||||
Other revenue | 10.9 | 2.3 | 13.2 | 11.3 | 2.5 | 13.8 | (4.3 | ) | ||||||||||||||||||||
Total revenue | $ | 117.9 | $ | 26.1 | $ | 144.0 | $ | 153.4 | $ | 28.6 | $ | 182.0 | (20.9 | ) | ||||||||||||||
Operating earnings | $ | 1.6 | $ | 0.8 | $ | 2.4 | $ | 10.9 | $ | 0.2 | $ | 11.1 | (78.6 | ) |
Advertising revenue accounted for 63.2% of total publishing revenue in the three quarters of 2009 compared to 71.2% in the three quarters of 2008. The difficult economic environment and ongoing secular changes in the newspaper industry have caused advertisers to decrease their advertising spending across all of our advertising revenue categories. In addition, due to the changing mix of revenue categories, frequency and placement of advertising in the newspaper and customer choices to reduce or eliminate the use of color in their ads, we have seen a decrease in the average rate per inch of advertising. This rapid decline in advertising revenue has been partially offset by an increase in circulation revenue and commercial delivery revenue.
Retail advertising revenue in the three quarters of 2009 was $65.6 million, a decrease of $16.4 million, or 20.1%, compared to $82.0 million in the three quarters of 2008. The $13.7 million decrease at our daily newspaper was primarily due to a decrease in ROP and preprint advertising in consumer-driven categories. As consumers have less discretionary income, advertisers are decreasing their spending. The most significant decreases were in the furniture and furnishings, finance/insurance, dining and entertainment, home improvement, automotive, health services, small-retailers, department stores, food, real estate, business services, communications and airline and travel. The same trends persisted in our community newspapers and shoppers business. A $4.5 million decrease in revenue at our community newspapers and shoppers, excluding revenue from acquisitions, was primarily due to decreases in automotive and real estate advertising, partially offset by $1.8 million in revenue from publications acquired in Northern Wisconsin and Florida in late 2008.
Classified advertising is generally the most sensitive to economic cycles because it is driven by the demand of employment, real estate transactions and automotive sales. As a result of the difficult economic environment and the ongoing secular trend of classified advertising transitioning to the internet, our publishing businesses experienced a significant decrease in classified advertising revenue in the three quarters of 2009 compared to the three quarters of 2008. Classified advertising revenue in the three quarters of 2009 was $21.2 million, a decrease of $18.6 million, or 46.7%, compared to $39.8 million in the three quarters of 2008. At our daily newspaper, print and online classified advertising revenue decreased by 51.8% from the three quarters of 2008. Specifically, the employment category decreased $9.7 million, or 67.3%; automotive decreased $4.2 million, or 57.0%; real estate decreased $3.7 million, or 46.3% and other decreased $0.8 million, or 13.7%. The average rate per inch of classified advertising has decreased primarily due to the significant decrease in employment classified revenue which, historically, has been at a higher rate than other categories. The same trends persisted in our community newspapers and shoppers business. At our community newspapers and shoppers business, a decrease in automotive, employment and real estate classified advertising revenue was partially offset by an increase in classified advertising revenue from newly acquired publications in Northern Wisconsin and Florida in late 2008 and an increase in legal classified advertising in Florida due to an increase in foreclosure notices.
The total decrease in retail and classified automotive advertising at our daily newspaper in the three quarters of 2009 was $5.2 million, or 53.6%, compared to the three quarters of 2008. The decrease was due to a decline in demand for advertising from local dealers and regional dealer associations. Consumers have decreased their purchases of new automobiles and, in response, local dealers and regional dealer associations are reducing their costs, including advertising costs.
Interactive advertising revenue is reported in the various advertising revenue categories. Total retail and classified interactive advertising revenue at our publishing businesses was $7.1 million in the three quarters of 2009, a decrease of $4.2 million, or 37.3%, compared to $11.3 million in the three quarters of 2008. Interactive classified advertising revenue at the daily newspaper was $3.0 million in the three quarters of 2009, a decrease of $3.9 million, or 56.6%, compared to $6.9 million in the three quarters of 2008. The $3.9 million decrease was primarily due to decreases in automotive classified advertising of $2.1 million, or 81.3%, and employment classified advertising of $1.8 million, or 51.1%. The difficult economic environment has negatively impacted automotive and employment online advertising revenue. In the three quarters of 2009, revenue from automotive online classified advertising at our daily newspaper was negatively impacted by the transition to a new franchise relationship with CarSoup.com.
National advertising revenue in the three quarters of 2009 was $3.6 million, a decrease of $1.7 million, or 31.8%, compared to $5.3 million in the three quarters of 2008. The decrease was primarily due to a decrease in ROP and preprint advertising in the business services, dining and entertainment, airline and travel, small-retailers and food categories, which are predominantly consumer-driven. Partially offsetting these decreases was an increase in the finance/insurance and communications categories.
Direct marketing revenue, consisting of revenue from the sale of direct mail products of our daily newspaper, was $0.5 million in the three quarters of 2009, a decrease of $1.8 million, or 76.7%, compared to $2.3 million in the three quarters of 2008. This revenue category was also negatively impacted by the difficult economic environment as the demand for direct marketing advertising decreased. In May 2009, we shut down the operations of our Milwaukee-area direct marketing facility. The near-term and long-term business prospects did not support continuing this product offering. We are now focusing our direct marketing efforts on our TMC product, which is more cost effective for us to produce.
Other advertising revenue, consisting of revenue from company-sponsored event advertising at our community newspapers and shoppers, was $0.2 million in the three quarters of 2009 compared to $0.3 million in the three quarters of 2008.
Circulation revenue in the three quarters of 2009 accounted for 27.6% of total publishing revenue compared to 21.2% in the three quarters of 2008. The increase as a percentage of total revenue is due to the decrease in advertising revenue and the overall decline in total revenue. Circulation revenue of $39.7 million in the three quarters of 2009 increased $1.2 million, or 3.2%, compared to $38.5 million in the three quarters of 2008. At our daily newspaper, circulation revenue increased due to an increase in daily single copy revenue, following a price increase to 75 cents per daily paper in the Milwaukee-metro market in January 2009 and a price increase in home delivery rates in June 2009. Circulation average rates for the daily and Sunday editions increased on the strength of pricing gains that more than offset a decrease in home delivery. At our community newspapers and shoppers business, circulation revenue increased due to the publications acquired in Northern Wisconsin and Florida in late 2008.
Other revenue, which consists of revenue from promotional and commercial distribution and commercial printing revenue at our daily newspaper and commercial printing at the printing plants for our community newspapers and shoppers, accounted for 9.2% of total publishing revenue in the three quarters of 2009 compared to 7.6% in the three quarters of 2008. The increase as a percentage of total revenue is due to the decrease in advertising revenue and the overall decline in total revenue. Other revenue was $13.2 million in the three quarters of 2009, a decrease of $0.6 million, or 4.3%, compared to $13.8 million in the three quarters of 2008. The $0.4 million decrease at our daily newspaper was primarily due to a decrease in commercial and brokered printing revenue due to volume declines as certain customers reduced page counts and number of copies and the loss of certain customers partially offset by an increase in commercial delivery revenue from additional routes for USA Today. The $0.2 million decrease at our community newspapers and shoppers was due to the loss of certain customers.
In September 2009, our daily newspaper signed a three-year commercial printing contract to print all of the Pioneer Press Publications, which consist of 39 weekly newspapers serving Northeastern Illinois communities. The Pioneer Press Publications are owned by Sun Times Media Group, which expects to print about 156,000 weekly copies. In July 2009, our daily newspaper signed a commercial printing contract with The Kenosha News, a seven-day newspaper located north of the Illinois and Wisconsin border. This is the first newspaper that has completely outsourced all of its printing and packaging to our production plant. Our daily newspaper is printing 26,000 daily and 29,000 Sunday copies, plus weekly and community products. Some capacity is available at our daily newspaper’s production facility to allow for printing during certain shifts/days of the week.
Publishing operating earnings in the three quarters of 2009 were $2.4 million, a decrease of $8.7 million, or 78.6%, compared to $11.1 million in the three quarters of 2008. The decrease in operating earnings was due to the impact of the decrease in advertising revenue. Our publishing businesses continue to reduce their expense platforms to align them with the reduced revenue base. Total expenses decreased $29.3 million, or 17.1%, in the three quarters of 2009 compared to the three quarters of 2008 primarily due to a decrease of $15.9 million in payroll-related costs. The charges for workforce reductions were $4.6 million and $3.8 million in the three quarters of 2009 and 2008, respectively. Since the end of 2007, our full-time employee count for our publishing businesses has decreased by 30.1%. Excluding payroll-related costs, operating costs and expenses decreased $10.7 million in the three quarters of 2009 compared to the three quarters of 2008, the most significant of which was newsprint and paper costs, online fees and costs related to the total market coverage and direct mail advertising products at our daily newspaper. Total newsprint and paper costs for our publishing businesses in the three quarters of 2009 were $13.3 million, a decrease of $6.4 million, or 32.4%, compared to $19.7 million in the three quarters of 2008 due to a 26.4% decrease in newsprint consumption a 8.8% decrease in average newsprint pricing per metric ton. Consumption of metric tonnes of newsprint in the three quarters of 2009 decreased primarily due to decreases in ROP advertising and editorial pages, average net paid circulation and waste. Online fees at our daily newspaper decreased by $1.6 million in the three quarters of 2009 compared to the three quarters of 2008 primarily due to the daily newspaper’s transition to a new franchise relationship with CarSoup.com and due to the decrease in interactive employment classified advertising. Legal fees decreased by $0.5 million in the three quarters of 2009 compared to the three quarters of 2008 due to a $0.4 million contract termination charge in the three quarters of 2008. Costs associated with our TMC product decreased by $0.5 million in the three quarters of 2009 compared to the three quarters of 2008 due to transitioning this product from mail delivery to carrier delivery. Partially offsetting the expense decreases, the daily newspaper increased its sales and use tax reserve by $0.8 million in the third quarter of 2009.
Broadcasting
Revenue from broadcasting in the three quarters of 2009 was $125.4 million, a decrease of $31.4 million, or 20.0%, compared to $156.8 million in the three quarters of 2008. Operating loss from broadcasting in the three quarters of 2009 was $8.2 million, including a $19.0 million non-cash broadcast license impairment charge and a $1.7 million gain related to insurance proceeds from our tower replacement in Wichita, Kansas. This compared to an operating loss of $12.2 million in the three quarters of 2008 including a $38.8 million non-cash broadcast license impairment charge.
The following table presents our broadcasting revenue, broadcast license impairment and operating earnings (loss) for the three quarters of 2009 and the three quarters of 2008:
2009 | 2008 | Percent | ||||||||||||||||||||||||||
Television | Radio | Total | Television | Radio | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Revenue | $ | 77.1 | $ | 48.3 | $ | 125.4 | $ | 97.2 | $ | 59.6 | $ | 156.8 | (20.0 | ) | ||||||||||||||
Broadcast license impairment | $ | 14.9 | $ | 4.1 | $ | 19.0 | $ | 21.1 | $ | 17.7 | $ | 38.8 | (51.0 | ) | ||||||||||||||
Operating earnings (loss) | $ | (13.3 | ) | $ | 5.1 | $ | (8.2 | ) | $ | (8.8 | ) | $ | (3.4 | ) | $ | (12.2 | ) | 33.2 |
Revenue from our television stations in the three quarters of 2009 was $77.1 million, a decrease of $20.1 million, or 20.7%, compared to $97.2 million in the three quarters of 2008. The revenue decrease was experienced across all of our television markets, partially offset by incremental revenue of $3.8 million from the 2008 acquisitions of KPSE-TV in Palm Springs, California and KWBA-TV in Sierra Vista, Arizona (Tucson market) and the acquisition of KNIN-TV in Boise, Idaho in 2009. Compared to the three quarters of 2008, local advertising revenue decreased $9.2 million, or 14.0%; national advertising revenue decreased $6.5 million or 29.8%; political and issue advertising revenue decreased $4.5 million, or 83.0%; and Olympic advertising revenue decreased $2.3 million, or 100.0% due to the broadcast of the 2008 Summer Olympics on our NBC affiliates in the third quarter of 2008. In the three quarters of 2009, we recorded higher than expected political and issue advertising revenue due the current national debate on health care reform. Television advertising revenue and rates in even-numbered years benefit from political and issue advertising because there is more pressure on inventory as advertising increases, which drives rates upward. We have television stations in a number of states with competitive political races in 2010.
The difficult economic environment has negatively impacted our advertising revenue across most categories, the most significant being our largest revenue category — automotive, which represented 13.7% of television advertising revenue in the three quarters of 2009 compared to 21.7% in the three quarters of 2008. Automotive advertising revenue decreased $10.5 million in the three quarters of 2009 compared to the three quarters of 2008 as the automobile industry is experiencing an unprecedented decrease in automotive sales. The other consumer-driven categories that felt the impact of the economic recession and caused revenue decreases included furniture and electronics, communications, medical, restaurants, retail, professional services, home improvement, entertainment, home products, travel, beverages and health and leisure. In an effort to overcome the decrease in automotive and other consumer-driven advertising revenue, our television stations are selling developmental revenue. While developmental revenue decreased $0.3 million in the three quarters of 2009 compared to the three quarters of 2008, it increased as a percentage of total revenue from our television stations to 14.2%, up from 11.5%. Interactive revenue was $1.1 million in the three quarters of 2009, a decrease of $0.3 million, or 22.9%, compared to $1.4 million in the three quarters of 2008. Both interactive and developmental revenue are reported in local advertising revenue. Partially offsetting the revenue decreases was an increase in retransmission revenue and local revenue in the media, financial and supermarkets categories. Retransmission revenue increased $2.5 million in the three quarters of 2009 to $3.6 million, compared to $1.1 million in the three quarters of 2008. We finalized retransmission contracts covering about 98% of the subscribers in our markets. These contracts will continue to generate incremental revenue through the remainder of 2009 and into the next several years.
Operating loss from our television stations in the three quarters of 2009 was $13.3 million, a decrease of $4.5 million, or 51.1%, compared to $8.8 million in the three quarters of 2008. The decrease in operating earnings was primarily due to the impact of the decrease in advertising revenue. Total television expenses in the three quarters of 2009 were $90.4 million, a decrease of $15.6 million, or 14.7%, compared to $106.0 million in the three quarters of 2008. The decrease in total television expenses was primarily due to a decrease of $6.7 million in payroll-related costs, a decrease of $6.2 million in non-cash broadcast license impairment charges, a decrease in programming expenses, a decrease in advertising and promotion expenses, a decrease in agency commissions, a decrease in syndicated programming expenses and a decrease in bad debt expense. Our television stations continue to reduce their expense platforms to align with a reduced revenue base. Partially offsetting these expense decreases was $2.5 million in incremental expenses from television stations acquired in 2008 and 2009 and an increase of $0.6 million in legal fees.
Revenue from our radio stations in the three quarters of 2009 was $48.3 million, a decrease of $11.3 million, or 18.9%, compared to $59.6 million in the three quarters of 2008. The revenue decrease was experienced across all of our radio markets. Compared to the three quarters of 2008, local advertising revenue decreased $9.6 million, or 18.3%, national advertising revenue decreased $1.4 million, or 27.8% and political and issued revenue decreased $0.3 million, or 49.7%. The difficult economic environment has negatively impacted our advertising revenue across most categories, the most significant being our largest revenue category — automotive, which represented 13.3% of radio advertising revenue in the three quarters of 2009 compared to 16.8% in the three quarters of 2008. Automotive advertising revenue decreased $3.5 million in the three quarters of 2009 compared to the three quarters of 2008 as the domestic automobile industry is experiencing an unprecedented decrease in automotive sales. The other consumer-driven categories that felt the impact of the economic recession and caused revenue decreases included medical, communications, home improvement, restaurants, media, retail, hotel and gambling, furniture and electronics and education. In an effort to overcome the decrease in automotive and other consumer-driven advertising revenue, our radio stations are working to replace this lost revenue with developmental revenue. While developmental revenue decreased $0.2 million in the three quarters of 2009 compared to the three quarters of 2008, it actually increased as a percentage of total revenue from our radio stations to 19.4%, up from 16.0%. Interactive revenue was $1.3 million in the three quarters of 2009, a decrease of $0.1 million, or 7.7%, compared to $1.4 million in the three quarters of 2008. Both interactive and developmental revenue are reported in local advertising revenue.
Operating earnings from our radio stations in the three quarters of 2009 were $5.1 million compared to an operating loss of $3.4 million in the three quarters of 2008. The increase in operating earnings was due to a decrease of $13.6 million in non-cash broadcast license impairment charges, a decrease of $3.5 million in payroll-related costs, a $1.7 million gain related to insurance proceeds from our tower replacement in Wichita, Kansas that was destroyed in an ice storm, a decrease in advertising and promotion expenses, a $0.3 million gain on the sale of radio stations KGEM-AM and KCID-AM in Boise, Idaho and various other expense reductions. Our radio stations continue to reduce their expense platforms to align them with a reduced revenue base. Partially offsetting these expense decreases was an increase in sports rights fees and an increase in bad debt expense.
Printing Services
Revenue from printing services in the three quarters of 2009 was $36.6 million, a decrease of $12.8 million, or 25.9%, compared to $49.4 million in the three quarters of 2008. Operating loss from printing services in the three quarters of 2009 was $1.2 million compared to operating earnings of $2.4 million in the three quarters of 2008.
The decrease in printing services revenue was primarily due to the effects of the difficult economic environment. Revenue from printing publications and revenue from Dell and other computer-related customers decreased in the three quarters of 2009 compared to the three quarters of 2008. Our printing services’ customers continue to reduce their print volumes, cease to print and/or take their printing needs out for bid in order to achieve lower pricing. We expect these trends to continue throughout 2009. We believe our revenue from Dell, which was $1.5 million in the three quarters of 2009, will cease by mid-2010.
The decrease in printing services operating earnings was primarily due to the impact from the decrease in revenue. Total expenses decreased $9.2 million, or 19.6%, in the three quarters of 2009 compared to the three quarters of 2008. The decrease in total expenses was primarily due to a decrease of $5.6 million in materials costs, a decrease of $4.2 million in payroll-related costs, partially offset by workforce reduction charges of $0.5 million, an increase in bad debt expense of $0.7 million and an increase of $0.6 million in postage and freight expense. Due to the difficult economic environment, our printing services business is encountering an increase in slow-paying customers as well as customers who have filed bankruptcy.
Other
Other revenue in the three quarters of 2009 was $15.3 million, a decrease of $7.1 million, or 31.9%, compared to $22.4 million in the three quarters of 2008. Other operating earnings in the three quarters of 2009 were $0.1 million, a decrease of $0.9 million, or 96.9%, compared to $1.0 million in the three quarters of 2008.
The following table presents our other revenue and operating earnings (loss) for the three quarters of 2009 and the three quarters of 2008:
2009 | 2008 | |||||||||||||||||||||||||||
Direct | Corporate | Direct | Corporate | |||||||||||||||||||||||||
Marketing | and | Marketing | and | Percent | ||||||||||||||||||||||||
Services | Eliminations | Total | Services | Eliminations | Total | Change | ||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Revenue | $ | 15.6 | $ | (0.3 | ) | $ | 15.3 | $ | 22.7 | $ | (0.3 | ) | $ | 22.4 | (31.9 | ) | ||||||||||||
Operating earnings (loss) | $ | (1.3 | ) | $ | 1.4 | $ | 0.1 | $ | (0.2 | ) | $ | 1.2 | $ | 1.0 | (96.9 | ) |
The decrease in direct marketing services revenue was primarily due to the effects of the difficult economic environment. Revenue from mailing and list services, postage and offset printing decreased in the three quarters of 2009 compared to the three quarters of 2008 as the demand for direct marketing advertising continues to decrease and customers change from first-class mailings to bulk mailings or third-class mailings. This decrease was partially offset by an increase in laser printing revenue. Included in revenue and operating costs and expenses from our direct marketing services business is $8.7 million and $13.0 million of postage amounts billed to customers in the three quarters of 2009 and the three quarters of 2008, respectively.
The decrease in operating earnings at our “other” segment was primarily due to the operating earnings impact of the decrease in revenue at our direct marketing services business, partially offset by a decrease in payroll-related costs at corporate and at our direct marketing services business.
Other Income and Expense and Taxes
Interest expense was $2.2 million in the three quarters of 2009 compared to $6.1 million in the three quarters of 2008. The decrease is due to a decrease in both the average borrowings during the quarter and the interest rate on our borrowings. Amortization of deferred financing costs was $0.3 million in the three quarters of 2009 and the three quarters of 2008.
Our effective tax benefit rate was 68.4% in the three quarters of 2009 compared to 53.0% in the three quarters of 2008. The effective tax rate was impacted by the operating loss created by the non-cash impairment charge, a settlement with the Wisconsin Department of Revenue (WDR) and a favorable adjustment to our income tax reserve due to the lapsing of certain open tax years. In connection with the settlement with the WDR, we received an $8.7 million refund in the three quarters of 2009 from the deposit we made in 2007.
Discontinued Operations
There were no results from discontinued operations in the three quarters 2009. In the three quarters of 2008, we recorded a gain on discontinued operations of $0.4 million for a reduction in the reserve related to a settlement between the Environmental Protection Agency and NorthStar Print Group, Inc.
Net Earnings (Loss)
Our net loss in the three quarters of 2009 was $2.9 million compared to $1.4 million in the three quarters of 2008. The decrease was due to the decrease in operating earnings from continuing operations for the reasons described above and the decrease in gain from discontinued operations, partially offset by the decrease in interest expense and the increase in the income tax benefit.
Earnings (Loss) per Share for Class A and B Common Stock
In the three quarters of 2009, basic and diluted net loss per share of class A and B common stock were $0.08 for both. This compared to net loss per share of $0.05 for both in the three quarters of 2008. Basic and diluted loss per share of class A and B common stock from continuing operations were $0.08 for both in the three quarters of 2009 compared to earnings per share of $0.06 for both in the three quarters of 2008. There were no basic and diluted earnings per share of class A and B common stock from discontinued operations in the three quarters of 2009 compared to $0.01 for both in the three quarters of 2008.
Liquidity and Capital Resources
Cash balances were $3.4 million at September 27, 2009. We believe our expected cash flows from operations and borrowings available under our credit facility will meet our needs for the next twelve months.
We have a $475.0 million unsecured revolving credit facility that expires on June 2, 2011. The interest rate on borrowings is either LIBOR plus a margin that ranges from 37.5 basis points to 87.5 basis points, depending on our leverage, or the base rate, which equals the higher of the prime rate set by U.S. Bank, N.A. or the Federal Funds Rate plus 100 basis points. As of September 27, 2009 and December 28, 2008, we had borrowings of $172.2 million and $215.1 million, respectively, under the facility at a weighted average rate of 0.93% and 2.10%, respectively. Cash provided by operating activities was used primarily to decrease our borrowings during the three quarters of 2009. Fees in connection with the facility of $1.7 million are being amortized over the term of the facility using the straight-line method. The facility includes the following two financial covenants, which remain constant over the term of the agreement:
· A consolidated funded debt ratio of not greater than 4-to-1, as determined for the four fiscal quarter period preceding the date of determination. This ratio compares, for any period, our funded debt to our earnings before interest, taxes, depreciation and amortization, as adjusted for non-operational impairment charges recorded as a result of applying the FASB’s guidance for impairment testing for goodwill and other intangible assets not subject to amortization. As of September 27, 2009, our consolidated funded debt ratio was 3.30-to-1, resulting in a current maximum borrowing capacity of $209.0 million. Our future borrowing capacity is subject to change due to changes in our future operating results.
· An interest coverage ratio of not less than 3-to-1, as determined for the four fiscal quarter period preceding the date of determination. This ratio compares, for any period, our earnings before interest, taxes, depreciation and amortization, as adjusted for non-operational impairment charges recorded as a result of applying the FASB’s guidance for impairment testing for goodwill and other intangible assets not subject to amortization to our interest expense. As of September 27, 2009, our interest coverage ratio was 12.27–to-1.
We define adjusted EBITDA as net earnings (loss) excluding gain from discontinued operations, net, provision (benefit) for income taxes, total other expense, net (which is entirely comprised of interest income and expense), depreciation and amortization and, if any, non-cash impairment charges. This calculation of adjusted EBITDA, as defined in our credit facility, is used in our two financial covenants. Management primarily uses adjusted EBITDA to monitor our borrowing capacity, a key component to our overall liquidity. Management also uses adjusted EBITDA, among other things, to evaluate our operating performance compared to our operating plans and/or prior years and its impact on our borrowing capacity and to value prospective acquisitions. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management and our lenders, helps to improve their ability to understand our operating performance and our borrowing capacity and makes it easier to compare our results with other companies that have different financing and capital structures or tax rates. Adjusted EBITDA is also a primary measure used externally by our investors and our peers in our industry for purposes of valuation and comparing our operating performance to other companies in the industry. Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with accounting principles generally accepted in the United States. Adjusted EBITDA should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Adjusted EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies.
Our consolidated adjusted EBITDA in the third quarter of 2009 was $10.7 million, a decrease of $8.4 million, or 44.0%, compared to $19.1 million in the third quarter of 2008. Our consolidated adjusted EBITDA in the three quarters of 2009 was $33.4 million, a decrease of $29.6 million, or 47.0%, compared to $63.0 million in the three quarters of 2008.
The following table presents a reconciliation of our consolidated net earnings to consolidated adjusted EBITDA for the third quarter and three quarters of 2009 and the third quarter and three quarters of 2008:
Third Quarter Ended | Three Quarters Ended | |||||||||||||||
September 27, 2009 | September 28, 2008 | September 27, 2009 | September 28, 2008 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Net earnings (loss) | $ | 1.8 | $ | (17.1 | ) | $ | (2.9 | ) | $ | (1.4 | ) | |||||
Gain from discontinued operations, net | -- | -- | -- | (0.4 | ) | |||||||||||
Provision (benefit) for income taxes | 1.2 | (11.8 | ) | (6.3 | ) | (2.0 | ) | |||||||||
Total other expense, net | 0.6 | 1.9 | 2.2 | 6.1 | ||||||||||||
Depreciation | 6.6 | 6.8 | 19.9 | 20.4 | ||||||||||||
Amortization | 0.5 | 0.5 | 1.5 | 1.5 | ||||||||||||
Broadcast license impairment | -- | 38.8 | 19.0 | 38.8 | ||||||||||||
Adjusted EBITDA | $ | 10.7 | $ | 19.1 | $ | 33.4 | $ | 63.0 |
Adjusted EBITDA for the four fiscal quarter period proceeding September 27, 2009 was $52.2 million. We expect to be able to continue to pay down debt over the next 12 months and to stay within our debt covenants.
Our ability to remain in compliance with these financial covenants may be impacted by a number of factors, including our ability to continue to generate sufficient revenues and cash flows, as well as interest rates and other risks and uncertainties set forth in Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K. If it is determined we are not in compliance with these financial covenants, the lenders in our credit facility syndicate will be entitled to take certain actions, including acceleration of all amounts due under the facility. If actual operating and cash flow results over the next 12 months are lower than current projections, the margins by which we will comply with the covenants will decrease. In such case, we may seek to amend or replace our current credit facility with one or more capital sources on appropriate terms. If we were unable to remain in compliance with these covenants or to amend or replace our current facility on appropriate terms, we could face increased pressure to reduce or delay capital expenditures, dispose of assets or operations, further reduce the size of our workforce or take other steps to revise our capital structure or our business operations. We cannot assure you that we will have the ability to take any of these actions or that these actions would be successful.
Given the difficult economic environment, one or more of the lenders in our credit facility syndicate could fail or be unable to fund future draws thereunder or take other positions adverse to us. In such an event, our liquidity could be severely constrained with an adverse impact on our ability to operate our businesses and we may be forced to take the actions described above. We continue to monitor our current lenders and compliance with our credit agreement terms and are working on possible strategies in the event one or more of our lenders is unable or unwilling to fund future demands.
We have $1.0 million of standby letters of credit for business insurance purposes.
In February 2009, we suspended our matching contribution to our 401(k) plan through the remainder of 2009. In March 2009, our board of directors approved an amendment to our 401(k) plan to suspend the annual employer contribution for all active employees for 18 months beginning July 1, 2009. In April 2009, a 6% employee-wage reduction program was initiated for most full-time employees for the remainder of 2009. Collectively, we expect these actions to save $3.0 million in cash, net of taxes, in 2009. These actions, along with our workforce reduction initiatives, were taken in order to offset decreases in revenue and to help maintain financial flexibility in this difficult economic environment. In the three quarters of 2009, we have paid down our debt by $42.9 million.
Dividends
Our board of directors made a decision to reduce our first quarter 2009 dividend on our class A and class B shares to $0.02 per share from $0.08 per shares in each quarter of 2008. The quarterly dividend on our class C shares remained at its historical level for the first quarter of 2009. In April 2009, our board of directors suspended dividends on our class A and class B shares given the challenging economic environment. Our board of directors also suspended the payment of the cumulative dividend on our class C shares. The accumulated class C dividend of approximately $0.14 per share must be paid prior to the payment of any future dividends on our class A and class B shares. As of the end of the third quarter 2009, we have $0.9 million accrued for class C dividends. Our board of directors consistently reviews our dividend payment policy, as well as our ability to pay cash dividends, at each quarterly board of directors meeting.
Acquisition
On April 23, 2009, Journal Broadcast Group, Inc. and Journal Broadcast Corporation, our broadcasting businesses, completed the asset purchase of KNIN-TV from Banks Boise, Inc. for $6.6 million. KNIN-TV is the CW Network affiliate serving the Boise, Idaho market. We also own KIVI-TV, the ABC affiliate, and four radio stations in Boise, Idaho. The purchase of KNIN-TV builds our cross-media business in Boise, Idaho to better serve advertisers and viewers, builds a stronger community presence in Boise, Idaho, and enhances our margin with multiple media properties.
Sale
On September 25, 2009, Journal Broadcast Group, Inc. and Journal Broadcast Corporation, our broadcasting businesses, completed the asset sale of KGEM-AM and KCID-AM in Boise, Idaho to Salt & Light Radio, Inc., an Idaho non-profit corporation, for $1.0 million. We recorded a $0.3 million gain on the sale of these assets.
Cash Flow
Continuing Operations
Cash provided by operating activities was $54.0 million in the three quarters of 2009 compared to $45.9 million in the three quarters of 2008. The increase was primarily due to cash provided by changes in working capital and an $8.7 million refund of an income and franchise tax audit payment due to a settlement with the WDR.
Cash used for investing activities was $10.6 million in the three quarters of 2009 compared to $33.4 million in the three quarters of 2008. Capital expenditures were $5.5 million in the three quarters of 2009 compared to $15.1 million in the three quarters of 2008. Our capital expenditures at our daily newspaper in the three quarters of 2009 related primarily to building improvements and software upgrades for production equipment. Our capital expenditures in our broadcasting segment in the three quarters of 2009 related primarily to technology upgrades, including investments in television and radio digital infrastructure and building improvements. We believe these expenditures will help us to better serve our advertisers and viewers and will help to facilitate our cost control initiatives. In 2009, our capital expenditures are expected to be significantly less than the amount of capital expenditures in 2008. During the three quarters of 2009, we acquired KNIN-TV in Boise, Idaho for $6.6 million and we received $0.5 million for the sale of KGEM-AM and KCID-AM. During the three quarters of 2008, we acquired two television stations for $16.7 million and three community newspapers and three community shoppers for $1.6 million. In the three quarters of 2009, we received $1.0 million in insurance proceeds for our tower replacement in Wichita, Kansas that was destroyed in an ice storm. We expect to receive an additional $1.0 million in insurance proceeds by the end of 2009.
Cash used for financing activities was $44.0 million in the three quarters of 2009 compared to $14.1 million in the three quarters of 2008. Borrowings under our credit facility in the first quarter of 2009 were $105.3 million and we made payments of $148.2 million, reflecting a $42.9 million decrease in our debt outstanding compared to borrowings of $162.2 million and payments of $117.9 million in the three quarters of 2008. The increase in borrowings in the three quarters of 2008 was used to finance the repurchase our class A common stock for $44.8 million. We paid cash dividends of $1.5 million and $14.0 million in the three quarters of 2009 and the three quarters of 2008, respectively.
New Accounting Standards
Future Adoptions
In December 2008, the Financial Accounting Standards Board (FASB) amended the existing guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance is effective for fiscal years ending after December 15, 2009. Upon initial application, the guidance is not required for earlier periods that are presented for comparative purposes. Earlier application of the guidance is permitted. We do not believe the effect of adopting the guidance on an employers’ disclosures will have a material impact on our consolidated financial statements.
Current Adoptions
In August 2009, the FASB issued amended guidance for fair value measurements and disclosures. The guidance provides clarification for the circumstances when a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued guidance on the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance provides:
· The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;
· The circumstance under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
· The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
This guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. We adopted this guidance in the second quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued amended guidance on the disclosures about fair value of financial instruments in interim financial information. Under this amended guidance, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. This amended guidance is effective for interim periods ending after June 15, 2009. We adopted this amended guidance in the second quarter of 2009. The adoption of this amended guidance did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued guidance on how to determine the fair value of assets and liabilities when the transaction volume and level of activity for the assets and liabilities have significantly decreased and the transactions are not occurring in an orderly fashion. This guidance 1) affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction; 2) clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active; 3) eliminates the proposed presumption that all transactions are not orderly unless proven otherwise and instead requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence; 4) requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of this guidance and to quantify its effects, if practicable; and 5) applies to all fair value measurements when appropriate. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued amended guidance for the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB decided to require that entities include disclosures in the business combination footnote regarding the nature of the contingency and give an estimate of the possible loss or range of loss or state that such an estimate cannot be made. This guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2008, the FASB issued guidance for the accounting by lessees for nonrefundable maintenance deposits. This guidance requires that all nonrefundable maintenance deposits should be accounted for as a deposit. When the underlying maintenance is performed, the deposit is expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is recognized as additional expense at the time such determination is made. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued guidance for determining the useful life of intangible assets. This guidance requires that in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset, an entity shall consider its own historical experience in renewing or extending similar arrangements; however, these assumptions should be adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for the entity-specific factors. For a recognized intangible asset, an entity shall disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2008, the FASB issued guidance which delays the effective date of the guidance for fair value measurements for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In December 2007, the FASB issued amended guidance for accounting for business combinations. This amended guidance requires that an acquiring entity recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. This guidance changed the accounting treatment for acquisition costs, non-controlling interests, contingent liabilities, in-process research and development, restructuring costs, and income taxes. In addition, it also requires a substantial number of new disclosure requirements. This guidance applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance in the first quarter of 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Critical Accounting Policies
There are no material changes to the disclosures regarding critical accounting policies made in our Annual Report on Form 10-K for the year ended December 28, 2008.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK |
There are no material changes to the disclosures regarding interest rate risk and foreign currency exchange risk made in our Annual Report on Form 10-K for the year ended December 28, 2008.
ITEM 4. | CONTROLS AND PROCEDURES |
We carried out an evaluation, under the supervision and with the participation of our Disclosure Committee, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934, as amended, Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our Securitites Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to them to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
None.
ITEM 1A. | RISK FACTORS |
There are no material changes to the disclosures regarding risk factors made in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 28, 2008.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no share repurchases during the third quarter ended September 27, 2009.
We publicly announced a share repurchase program on May 1, 2008, and commenced our repurchases on May 12, 2008, pursuant to which our board of directors authorized the repurchase of up to 5,000,000 class A shares over the following 18 months. After repurchasing 2,629,500 class A shares pursuant to the authorization, we suspended our share repurchase program in October 2008 given the current difficult economic environment. On October 31, 2009, the May 1, 2008 share repurchase programs will expire.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 5. | OTHER INFORMATION |
None.
EXHIBITS |
(a) | Exhibits |
Exhibit No. | Description |
Certification by Steven J. Smith, Chairman and Chief Executive Officer of Journal Communications, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Certification by Andre J. Fernandez, Executive Vice President, Finance & Strategy and Chief Financial Officer of Journal Communications, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Certification of Steven J. Smith, Chairman and Chief Executive Officer and Andre J. Fernandez, Executive Vice President, Finance & Strategy and Chief Financial Officer of Journal Communications, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JOURNAL COMMUNICATIONS, INC. | |
Registrant | |
Date: October 30, 2009 | /s/ Steven J. Smith |
Steven J. Smith, Chairman and Chief Executive Officer | |
Date: October 30, 2009 | /s/ Andre J. Fernandez |
Andre J. Fernandez, Executive Vice President, Finance & Strategy | |
and Chief Financial Officer |
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