PAGE 1
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 30, 1998
OR
( ) 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 1-7564
DOW JONES & COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-5034940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 LIBERTY STREET, NEW YORK, NEW YORK 10281
(Address of principal executive offices) (Zip Code)
(212) 416-2000
(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
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock on September 30, 1998: 72,951,312 shares of Common Stock and
20,905,349 shares of Class B Common Stock.
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
Dow Jones & Company, Inc.
Quarters Ended Nine Months Ended
September 30 September 30
==============================================================================
(in thousands except
per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
REVENUES:
Advertising $231,457 $235,180 $ 753,166 $ 720,278
Information services 96,935 286,911 574,100 822,050
Circulation and other 115,233 114,235 338,982 340,705
- ------------------------------------------------------------------------------
Total revenues 443,625 636,326 1,666,248 1,883,033
- ------------------------------------------------------------------------------
EXPENSES:
News, operations and development 131,448 225,841 535,531 650,446
Selling, administrative
and general 161,588 223,219 599,137 657,765
Newsprint 38,510 36,485 121,393 108,145
Second class postage
and carrier delivery 28,612 27,690 86,519 83,759
Depreciation and amortization 22,577 62,097 121,436 181,735
Restructuring 16,340 16,340
- ------------------------------------------------------------------------------
Operating expenses 399,075 575,332 1,480,356 1,681,850
- ------------------------------------------------------------------------------
Operating income 44,550 60,994 185,892 201,183
OTHER INCOME (DEDUCTIONS):
Investment income 4,535 803 7,567 2,563
Interest expense (909) (4,970) (5,429) (14,922)
Equity in losses
of associated companies (4,123) (4,544) (13,628) (22,031)
(Loss) gain on disposition of
businesses and investments (120,997) 6,179
Other, net (263) (856) (3,535) (2,967)
- ------------------------------------------------------------------------------
Income before income taxes 43,790 51,427 49,870 170,005
Income taxes 17,931 24,549 41,010 82,822
- ------------------------------------------------------------------------------
Net income $ 25,859 $ 26,878 $ 8,860 $ 87,183
==============================================================================
PER SHARE:
Net income per share:
- Basic $.28 $.28 $.09 $.91
- Diluted .27 .28 .09 .90
Weighted-average shares outstanding:
- Basic 93,928 96,124 95,825 95,836
- Diluted 95,113 97,060 97,125 96,821
Cash dividends $.72 $.72
==============================================================================
Comprehensive income $13,157 $24,361 $5,866 $77,813
==============================================================================
See notes to condensed consolidated financial statements.
PAGE 3
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
Dow Jones & Company, Inc.
Nine Months Ended September 30
===========================================================================
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 8,860 $ 87,183
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 121,436 181,735
Loss (gain) on disposition of businesses
and investments 120,997 (6,179)
Changes in assets and liabilities (76,714) 62,232
Other, net 31,928 26,763
- ---------------------------------------------------------------------------
Net cash provided by operating activities 206,507 351,734
- ---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to plant and property (175,658) (246,701)
Businesses and investments acquired,
net of cash received (50,734) (55,288)
Disposition of businesses and investments 465,983 18,284
Other, net 8,429 5,799
- ---------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 248,020 (277,906)
- ---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends (69,195) (68,982)
Increase in long-term debt 32,310
Reduction of long-term debt (63,015) (41,711)
Purchase of treasury stock (201,193)
Proceeds from sales under stock compensation plans 50,874 25,774
- ---------------------------------------------------------------------------
Net cash used in financing activities (282,529) (52,609)
- ---------------------------------------------------------------------------
Effect of exchange rate changes on cash 78 (30)
- ---------------------------------------------------------------------------
Increase in cash and cash equivalents 172,076 21,189
Cash and cash equivalents at beginning of year 23,763 6,769
- ---------------------------------------------------------------------------
Cash and cash equivalents at September 30 $195,839 $ 27,958
===========================================================================
See notes to condensed consolidated financial statements.
PAGE 4
CONDENSED CONSOLIDATED
BALANCE SHEETS
Dow Jones & Company, Inc.
===========================================================================
September 30 December 31
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 195,839 $ 23,763
Accounts receivable--trade, net 217,701 295,250
Inventories 12,674 13,104
Income taxes 3,907
Investment in associated company,
held for disposal 102,789
Other current assets 44,792 71,647
- ---------------------------------------------------------------------------
Total current assets 474,913 506,553
- ---------------------------------------------------------------------------
Investments in associated companies,
at equity 40,311 46,064
Other investments 194,783 85,290
Plant and property, at cost 1,530,072 2,451,589
Less, accumulated depreciation 941,051 1,667,552
- ---------------------------------------------------------------------------
589,021 784,037
Excess of cost over net assets of
businesses acquired, less amortization 88,418 387,787
Deferred taxes 58,870 93,045
Other assets 5,497 16,958
- ---------------------------------------------------------------------------
Total assets $1,451,813 $1,919,734
===========================================================================
LIABILITIES:
Accounts payable and accrued liabilities $ 230,177 $ 360,350
Income taxes 53,895
Unearned revenue 230,162 252,832
Current maturities of long-term debt 5,318
- ---------------------------------------------------------------------------
Total current liabilities 460,339 672,395
Long-term debt 149,875 228,806
Other noncurrent liabilities 257,848 237,711
- ---------------------------------------------------------------------------
Total liabilities 868,062 1,138,912
- ---------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stocks 102,181 102,181
Additional paid-in capital 137,414 136,398
Retained earnings 647,204 707,539
Accumulated other comprehensive income (115) (6,144)
- ---------------------------------------------------------------------------
886,684 939,974
Less, treasury stock, at cost 302,933 159,152
- ---------------------------------------------------------------------------
Total stockholders' equity 583,751 780,822
- ---------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,451,813 $1,919,734
===========================================================================
See notes to condensed consolidated financial statements.
PAGE 5
NOTES TO FINANCIAL STATEMENTS
Dow Jones & Company, Inc.
1. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments considered necessary by management to present fairly
the company's consolidated financial position as of September 30, 1998, and
December 31, 1997, and the consolidated results of operations for the three-
month and nine-month periods ended September 30, 1998 and 1997, and the
consolidated cash flows for the nine-month periods then ended. The results of
operations for the respective interim periods are not necessarily indicative
of the results to be expected for the full year.
2. On May 29, 1998, the company completed the sale of Telerate (formerly, Dow
Jones Markets) to Bridge Information Systems, Inc. ("Bridge"). The purchase
price consisted of $360 million in cash and $150 million of 5 year, 4%
preferred stock of Bridge. In the second quarter of 1998, the company
recorded a loss on the sale of Telerate of $136.4 million ($98 million after
taxes).
3. In the third quarter of 1998, the company recorded a restructuring charge
of $16.3 million ($9.6 million after tax) pertaining to a staff reduction plan
at the company's Ottaway Newspapers subsidiary. The charge reflects severance
and related costs for employees who had accepted the terms of the voluntary
retirement program.
4. In October 1998, the company's board of directors authorized the repurchase
of up to $500 million of the company's common stock over the next two to three
years. This is in addition to the $51 million (net of outstanding puts) that
remained as of the end of September 1998 under a prior authorization from the
company's board. In the first nine months of 1998, the company repurchased
4.3 million shares, at an aggregate cost of $204.5 million. Four million of
these shares were purchased pursuant to a privately negotiated stock
repurchase agreement with a financial institution, and are subject to a future
market price adjustment. Additionally in the second quarter of 1998 the
company sold puts covering an aggregate of one million shares of common stock.
During the third quarter, one-third of these puts expired unexercised and were
replaced. Outstanding puts could obligate the company to repurchase up to
$44.6 million of its common stock (net of cumulative put premiums received)
over the next eight months.
5. The first quarter of 1998 included a gain of 11 cents a share from the
sales of the company's interests in WBIS+ TV (eight cents a share) and
Mediatex Communications Corp., publisher of Texas Monthly magazine (three
cents a share).
PAGE 6
NOTES TO FINANCIAL STATEMENTS (cont.)
Dow Jones & Company, Inc.
6. Comprehensive income was computed as follows:
==============================================================================
Quarters ended Nine months ended
(in thousands, except September 30 September 30
per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Net income $ 25,859 $26,878 $ 8,860 $87,183
Foreign currency translation
adjustments (1,740) 8,461 (2,835)
Less: realized foreign currency
translation adjustments
included in net income (9,023)
Unrealized loss on investments (12,702) (777) (2,432) (6,535)
- ------------------------------------------------------------------------------
Comprehensive income $ 13,157 $24,361 $ 5,866 $77,813
==============================================================================
7. Diluted earnings per share have been computed as follows:
==============================================================================
Quarters ended Nine months ended
(in thousands, except September 30 September 30
per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Net income $ 25,859 $26,878 $8,860 $87,183
Weighted-average shares
outstanding - basic 93,928 96,124 95,825 95,836
Stock options 908 784 1,034 835
Other, principally
contingent stock rights 277 152 266 150
- ------------------------------------------------------------------------------
Weighted-average shares
outstanding - diluted 95,113 97,060 97,125 96,821
Diluted earnings per share $.27 $.28 $.09 $.90
==============================================================================
One million shares under puts have been excluded from diluted earnings per
share in 1998 because the price the company would be obligated to purchase
shares under puts was less than the average market price for the periods. To
include such securities would be antidilutive.
8. Certain of the 1997 amounts have been reclassified for comparative
purposes.
PAGE 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Third quarter 1998 net income was $25.9 million, or $.27 per diluted
share, compared with $26.9 million, or $.28 per diluted share, a year earlier.
For the first nine months of 1998, net income was $8.9 million, or nine cents
per diluted share, versus $87.2 million, or $.90 per diluted share, for the
like nine months of 1997.
On May 29, 1998, Dow Jones completed the sale of its Telerate subsidiary
to Bridge Information Systems, Inc. The company recorded a loss on the sale
of $136.4 million ($98 million after taxes) in 1998's second quarter. Results
exclusive of Telerate and the loss on sale ("pro forma") have been presented
on page 20 of this Form 10-Q.
Third quarter 1998 net income was $25.9 million, or $.27 per diluted
share, compared with pro forma earnings of $45.8 million, or $.47 per diluted
share, a year earlier. Third quarter 1998 results included a restructuring
charge of $16.3 million ($9.6 million after taxes) pertaining to a staff
reduction plan at the company's Ottaway Newspapers subsidiary while third
quarter 1997 results were enhanced 11 cents per share from one-time index
licensing fees. Excluding these items, 1998 earnings of $35.5 million, or
$.37 per share, were up slightly from pro forma earnings of $35.1 million, or
$.36 per share, a year ago. A reduction in television losses, improvements at
Dow Jones Interactive Publishing and community newspapers (exclusive of the
charge for the staff reductions) and a positive swing to net interest income
were largely restrained by a decline in profits of both U.S. and international
print publications.
Third quarter 1998 operating income was $44.6 million, compared with pro
forma operating income of $85.5 million in 1997's third quarter. Excluding
the restructuring charge in 1998 and the one-time fees, net of expenses, in
the 1997 period, third quarter 1998 operating income was down 9.8%. Third
quarter 1998 EBITDA was $83.5 million excluding the restructuring charge
versus pro forma EBITDA of $106.9 million a year earlier. (Pro forma third
quarter 1997 EBITDA was $89 million excluding the one-time fees).
Revenues of $443.6 million dipped $7.7 million, or 1.7%, from pro forma
revenues of $451.4 million in the third quarter of 1997. Excluding the one-
time index licensing fees in 1997, third quarter 1998 revenues grew 2.8%, as
revenue gains from electronic publishing and U.S. television were dampened by
an advertising volume decline at the U.S. Wall Street Journal and softness in
the Asian market.
Third quarter 1998 operating expenses of $399.1 million climbed $33.2
million, or 9.1%. Roughly half of the increase was the result of the Ottaway
staff reduction charge with the remaining expense increase principally
attributable to compensation, newsprint costs and electronic publishing
marketing costs. Newsprint expense rose $2 million, or 5.6%, reflecting a 3%
increase in average prices and a 2% rise in consumption. On September 1,
1998, roughly half of the company's newsprint suppliers put through a 7% rate
hike. By July 1, 1998, newsprint prices were down about 3.5% from year-end
1997. It is uncertain whether the price increase will hold; however, assuming
the rate hike remains, newsprint prices will be approximately 4% higher than
their level in the fourth quarter of 1997.
PAGE 8
At September 30, 1998, the company employed 8,443 full-time employees,
which was down approximately 1% from a year earlier excluding Telerate. The
reductions reflect downsizing at Ottaway Newspapers, somewhat offset by
expanded staffs at The Wall Street Journal and Dow Jones Newswires.
On October 2, 1998, the company announced a voluntary separation
incentive program for certain long-time employees who will be 55 years of age
or older as of December 31, 1998 and have been employed with Dow Jones for at
least 10 years. The program, which offers eligible employees one-year's
salary plus retiree health benefits, is available to about 340 employees of
the company. The annual salary associated with these employees is roughly
$24.2 million. The amount of any charge as a result of this program will be
determined in the fourth quarter of 1998 once employee elections are
finalized.
Pro forma net income for the first nine months of 1998 was $130.2
million, or $1.34 per diluted share, an increase of 1.7% from 1997 nine-month
pro forma earnings of $128 million, or $1.32 per diluted share. 1998 results
included the Ottaway Newspapers staff-reduction charge in the third quarter
and a first-quarter 1998 after-tax gain of $10.1 million from the sales of the
company's interest in WBIS+ TV and Mediatex Communications Corp., publisher of
Texas Monthly magazine. 1997 results included one-time index licensing fees
and a first-quarter 1997 after-tax gain of $3.5 million from the sale of the
company's American Demographics subsidiary, a provider of information products
serving the marketing industry. Pro forma earnings excluding these items were
$129.6 million for the first nine months of 1998, up 15.5% versus pro forma
earnings of $112.2 million in the comparable 1997 period
First nine-month 1998 pro forma operating income of $219.1 million was
down 11.8%. Excluding the Ottaway restructuring charge in 1998 and the one-
time index-licensing fees, net of expenses, in 1997, pro forma operating
income in 1998 was up 3.5% from 1997. Gains from Dow Jones Interactive
Publishing, community newspapers and U.S. television operations largely offset
a downturn in profits from print publications. Also, operating income in 1997
included losses for the company's European television operation, which merged
with CNBC's European operation at 1997's year-end and whose 1998 results are
now included as part of Equity in Losses of Associated Companies.
SEGMENT DATA
The company realigned its operating segments in 1998's second quarter.
The company's business and financial news and information operations are
reported in the following two segments: print publishing and electronic
publishing. The results of the company's Ottaway Newspapers subsidiary, which
publishes 19 daily newspapers and 15 weekly newspapers in communities
throughout the U.S., are reported in the community newspapers segment.
PAGE 9
Print publishing includes the operations of The Wall Street Journal and
its international editions, Barron's and other periodicals, as well as U.S.
television operations. (Results of the company's international television
ventures are included in Equity in Losses of Associated Companies.) Print
publishing accounted for close to 60% of third quarter 1998 revenues.
Approximately 10% of print publishing revenues are earned by international
publications. Revenues, particularly advertising, for the print publications
are historically seasonal with the fourth quarter typically being the
strongest in terms of total volume followed by the second quarter, then the
first and finally the third quarter.
Electronic publishing includes the operations of Dow Jones Newswires,
Dow Jones Indexes and Dow Jones Interactive Publishing. Electronic publishing
comprised 22% of third quarter 1998 revenues. The community newspapers
segment accounted for 18% of third quarter 1998 revenues.
The tables on the following two pages show the company's operations by
business segment for the quarters and nine months ended September 30, 1998 and
1997.
PAGE 10
SEGMENT INFORMATION
FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
============================================================================
% Increase
(in thousands) 1998 1997 (Decrease)
- ----------------------------------------------------------------------------
REVENUES:
Print publishing $263,604 $267,170 (1.3)
Electronic publishing (1) 98,808 103,182 (4.2)
Community newspapers 81,213 76,275 6.5
------- -------
Segment revenues 443,625 446,627 (0.7)
Divested/Joint Ventured Operations:
Print and television operations (2) 4,740 -
------- -------
Pro forma revenues 443,625 451,367 (1.7)
Telerate 184,959 -
------- -------
Consolidated revenues $443,625 $636,326 (30.3)
- ----------------------------------------------------------------------------
OPERATING INCOME:
Print publishing $ 31,435 $ 48,888 (35.7)
Electronic publishing 17,731 33,012 (46.3)
Community newspapers (3) 968 12,743 (92.4)
Corporate operating expenses (5,584) (4,997) 11.7
------- -------
Segment operating income 44,550 89,646 (50.3)
Divested/Joint Ventured Operations:
Print and television operations (4,180) -
------- -------
Pro forma operating income 44,550 85,466 (47.9)
Telerate (24,472) -
------- -------
Consolidated operating income $ 44,550 $ 60,994 (27.0)
- ----------------------------------------------------------------------------
EBITDA: (4)
Print publishing $ 43,661 $ 59,790 (27.0)
Electronic publishing 23,685 38,706 (38.8)
Community newspapers 21,705 16,951 28.0
Corporate operating expenses (5,584) (4,997) 11.7
------- -------
Segment EBITDA 83,467 110,450 (24.4)
Divested/Joint Ventured Operations:
Print and television operations (3,513) -
------- -------
Pro forma EBITDA 83,467 106,937 (21.9)
Telerate 16,154 -
------- -------
Consolidated EBITDA $ 83,467 $123,091 (32.2)
============================================================================
PAGE 11
SEGMENT INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
============================================================================
% Increase
(in thousands) 1998 1997 (Decrease)
- ----------------------------------------------------------------------------
REVENUES:
Print publishing $ 852,993 $ 820,598 3.9
Electronic publishing (1) 293,853 270,590 8.6
Community newspapers 233,500 221,305 5.5
--------- ---------
Segment revenues 1,380,346 1,312,493 5.2
Divested/Joint Ventured Operations:
Print and television operations (2) 15,418 -
--------- ---------
Pro forma revenues 1,380,346 1,327,911 3.9
Telerate 285,902 555,122 (48.5)
--------- ---------
Consolidated revenues $1,666,248 $1,883,033 (11.5)
- ----------------------------------------------------------------------------
OPERATING INCOME:
Print publishing $ 154,407 $ 178,174 (13.3)
Electronic publishing 57,389 63,374 (9.4)
Community newspapers (3) 25,190 36,467 (30.9)
Corporate operating expenses (17,867) (14,750) 21.1
--------- ---------
Segment operating income 219,119 263,265 (16.8)
Divested/Joint Ventured Operations:
Print and television operations (14,831) -
--------- ---------
Pro forma operating income 219,119 248,434 (11.8)
Telerate (33,227) (47,251) (29.7)
--------- ---------
Consolidated operating income $ 185,892 $ 201,183 (7.6)
- ----------------------------------------------------------------------------
EBITDA: (4)
Print publishing $ 191,718 $ 211,107 (9.2)
Electronic publishing 74,551 79,415 (6.1)
Community newspapers 54,595 48,639 12.2
Corporate operating expenses (17,867) (14,750) 21.1
--------- ---------
Segment EBITDA 302,997 324,411 (6.6)
Divested/Joint Ventured Operations:
Print and television operations (12,805) -
--------- ---------
Pro forma EBITDA 302,997 311,606 (2.8)
Telerate 20,671 71,312 (71.0)
--------- ---------
Consolidated EBITDA $ 323,668 $ 382,918 (15.5)
============================================================================
(1) Electronic publishing revenue in the first nine months of 1997 included $25
million in one-time fees for licensing the Dow Jones Averages,
approximately 80% of which occurred in the third quarter.
(2) Divested/Joint Ventured print and television operations includes the
results of European Business News, a television operation which merged with
CNBC Europe 12/97; Dow Jones Investor Network, a multimedia product which
was discontinued 1/97; American Demographics, Inc. (sold 3/97); and IDD
Enterprises' print publishing unit (sold 11/97).
PAGE 12
(Notes to segment tables continued)
(3) Community newspapers 1998 results include a $16.3 million restructuring
charge pertaining to a staff reduction plan.
(4) EBITDA is computed as operating income excluding depreciation and
amortization and restructuring costs.
PRINT PUBLISHING
Third quarter 1998 operating income of $31.4 million fell $17.5 million,
or 35.7%, from the comparable 1997 quarter. Segment EBITDA slipped to $43.7
million from $59.8 million in the 1997 third quarter. The segment's EBITDA
margin fell to 16.6% from 22.4% a year earlier.
Third quarter 1998 revenues of $263.6 million dipped $3.6 million, or
1.3%, largely the result of a drop-off in advertising revenue at the U.S. Wall
Street Journal and in Asia. Advertising revenue for U.S. publications of
$156.6 million fell $6.5 million, or 4%, from the third quarter of 1997.
International advertising revenue fell $1.3 million, or 7.5%, to $15.6
million. Advertising linage at the U.S. Wall Street Journal was down 6.8%,
while linage at the Asian Journal decreased 18.7%. The drop in volume-related
advertising from these publications was partially offset by a 14% linage gain
for The Wall Street Journal Europe, modest rate increases and a rise in U.S.
television revenue.
At the end of September 1998, the company experienced unanticipated
softness in advertising. Looking ahead to the fourth quarter, the Journal is
faced with difficult comparisons and an uncertain advertising market. October
1997 and the 1997 fourth quarter were the highest advertising revenue month
and quarter, respectively, in the Journal's history. Wall Street Journal
linage in October 1998, relative to October 1997, will be down at a similar
rate, based on a like number of publishing days, as the 1998 third quarter.
The impact on earnings per share of a one-percentage point change in fourth
quarter Wall Street Journal linage is approximately one cent per share,
assuming all other factors being constant. The effect of a one-percentage
point change in quarterly linage varies slightly depending on the advertising
volume of that quarter. Traditionally, the Journal's largest advertising
quarter is the fourth quarter, followed by the second, first and third
quarters.
The third quarter 1998 decline in U.S. Journal linage reflected a 10%
drop in general advertising linage, which comprised about 54% of total Journal
linage; and an 8.4% fall in financial linage, approximating 29% of Journal
linage. Classified and other Journal linage was up 8.4%. The decrease in
general linage was in part the result of a fall-off in computer hardware and
software advertising and corporate image advertising, while financial
advertising suffered from a decline in security offerings and contractions in
advertising from institutional investment and trading firms. The increase in
classified and other linage was driven by growth in real estate advertising.
PAGE 13
Third quarter 1998 segment operating expenses grew $13.9 million, or
6.4%, mainly the result of additional staffing and higher newsprint costs.
Newsprint expense was up 6.4%, reflecting an even split between average rate
increases and higher consumption. The number of full-time employees in the
print publishing segment increased about 4% from September 30, 1997, due to
the expansion of news, technology and sales staffs during the fourth quarter
of 1997 and the first half of 1998.
Nine-month operating income of $154.4 million was down $23.8 million, or
13.3%, from the like 1997 period. Segment EBITDA slipped 9.2%, to $191.7
million. Revenues added $32.4 million, or 3.9%, but were outpaced by an
expense increase of $56.2 million, or 8.7%. The EBITDA margin for the first
nine months of 1998 was 22.5% versus 25.7% a year earlier.
U.S. publications advertising revenue of $536.3 million gained $25.8
million, or 5%, in the first nine months of 1998, with Wall Street Journal
linage up 1.7% and Barron's national advertising pages increasing 4.8%.
Advertising revenue for the international publications slowed to $46.7 million
from $48.5 million the year before, as depressed revenues in Asia were
somewhat offset by growth in Europe.
Circulation revenue for U.S. print publications was up 0.7% versus the
first nine months of 1997, principally the result of 1998 benefiting from the
full effect of 1997 rate increases. Average circulation for The Wall Street
Journal declined about 1.6%, to 1,762,000. Barron's average circulation was
flat at 296,000. International circulation revenue slipped about 3%, largely
the result of a stronger U.S. dollar versus Asian currencies. Average
combined circulation for the Asian and European Journals rose roughly 5%, to
125,000.
Print Publishing expenses in the first nine months of 1998 were up 8.7%,
reflecting higher staffing levels, additional newsprint costs and increased
circulation marketing. Print publishing newsprint expense was up 13.9% for
the first nine months of 1998, as a result of approximately a 7% rise in
average prices and a 6% increase in tons consumed.
ELECTRONIC PUBLISHING
Electronic publishing third quarter 1998 operating income of $17.7
million rose $2.7 million, or 17.7%, from 1997 operating income of $15 million
excluding one-time index licensing fees, net of expenses. The gain largely
reflected an improvement at Dow Jones Interactive Publishing. Segment EBITDA
was $23.7 million compared with EBITDA of $38.7 million in 1997, which
includes the one-time fees. The EBITDA margin was 24.0%, compared with third
quarter 1997 EBITDA margin of 37.5% including the one-time fees, and 25.0%
exclusive of the one-time fees.
PAGE 14
Third quarter 1998 revenues of $98.8 million advanced $15.6 million, or
18.8%, from revenues of $83.2 million excluding one-time index licensing
revenue of $20 million in 1997's third quarter. Segment expenses excluding
expenses related to the one-time fees grew 19% in 1998's third quarter. Part
of the increase in both segment revenues and expenses was due to a
restructured agreement with the Associated Press (AP), which was extended
through the end of 2004. As part of the agreement the company obtained sole
sales, marketing and product development control of the joint AP/Dow Jones
overseas newswires, while the Associated Press gained a royalty stream through
2004. In 1998 and through the end of the contract period, Dow Jones will
record 100% of revenues and expenses for these newswires. Prior to 1998, the
company recorded its 50% share of both revenues and expenses from the joint
newswires.
Excluding the effect of the restructured AP agreement in 1997's third
quarter, Dow Jones Newswires revenues rose 7.1%. As of September 30, 1998,
the number of terminals displaying Dow Jones Newswires totaled 287,000, up 16%
from a year earlier. On October 10, 1998, the company entered into an
agreement with Reuters Group PLC to market Dow Jones Newswires as an optional
service to the users of Reuters terminals. Also in the third quarter, Dow
Jones signed a similar agreement with Bloomberg L.P. to market Dow Jones
Newswires to its users. Prior to the sale of the company's Telerate
subsidiary, essentially all of the international distribution of Dow Jones
Newswires' products was distributed exclusively by Telerate.
Dow Jones Interactive Publishing, which includes the results of Dow
Jones Interactive, The Wall Street Journal Interactive Edition and IDD
Enterprises' electronic business unit (IDD), posted a revenue gain of 7.3%, to
$43.1 million. (The revenue gain excluding IDD was 11.7%.) The revenue
increase was driven by strong corporate enterprise sales for Dow Jones
Interactive, and both subscription and advertising gains for The Wall Street
Journal Interactive Edition. At the end of September 1998, subscribers to the
Interactive Journal totaled approximately 256,000, up about 78% from a year
ago.
Expenses for the segment in the third quarter rose 15.5%, as the
additional expenses from the restructured agreement with the AP, a higher
staffing level and increased selling expenses outweighed savings from
restructuring IDD Enterprises in the latter part of 1997.
For the first nine months of 1998, electronic publishing operating
income was $57.4 million, compared with $63.4 million in 1997 including the
one-time fees and $42.6 million excluding one-time fees in 1997's second and
third quarters. Excluding the one-time fees, the year-over-year improvement
was mainly due to gains at Dow Jones Interactive Publishing, which benefited
in part to restructuring IDD in the latter half of 1997. Revenues were up
19.7% excluding one-time fees, 8.6% including such fees. Expenses rose 14.1%,
driven by the same factors as in the third quarter. The nine-month 1998
EBITDA margin was 25.4%, compared with 1997 EBITDA margin of 29.3%, or 23.9%
excluding one-time index licensing fees.
PAGE 15
COMMUNITY NEWSPAPERS
Community newspapers segment's third quarter 1998 operating income was
$1 million, which included a $16.3 million charge from a staff reduction plan.
Excluding the charge, community newspapers third quarter 1998 operating income
of $17.3 million was up $4.6 million, or 35.8%, from income of $12.7 million
in the 1997 third quarter. Revenue of $81.2 million advanced $4.9 million, or
6.5%, while expenses exclusive of the $16.3 million charge were held
relatively flat. Employee compensation expense was down 2.4% in the third
quarter, reflecting savings from the staff reduction plan. Advertising
revenue increased $4.1 million, or 7.7%, with a linage increase of 3.8%.
Circulation revenue gained 5%, as a result of rate increases.
On June 29, 1998, as part of a plan to increase this segment's margins,
the company's Ottaway Newspapers subsidiary initiated a voluntary retirement
plan for its employees. Approximately 240 employees accepted the early
retirement plan. The number of acceptances was higher than the company
targeted and some of the staff reductions as a result of the plan will have to
be replaced. Of the $16.3 million charge, just over half reflected an
increase in pension and other postretirement-related costs with the remainder
principally attributable to paid severance. The number of full-time employees
at this segment was down about ten percent from year-ago and year-end 1997
levels.
Community newspapers operating income for the first nine months of 1998
was $25.2 million, compared with $36.5 million earned in the like 1997 period.
Revenues were up $12.2 million, or 5.5%, largely from advertising. Operating
expenses rose $23.5 million, or 12.7%, as a result of the staff-reduction
charge and a 6% rise in newsprint expense. Excluding the staff-reduction
charge, operating income was up 13.9% and operating expenses grew 3.9%.
OTHER INCOME / DEDUCTIONS
Net interest income of $3.6 million was $7.8 million better than net
interest expense of $4.2 million in 1997's third quarter. For the first nine
months, net interest income of $2.1 million was an improvement of $14.5
million from net interest expense of $12.4 million in the comparable 1997
period. The positive swing reflected a reduced debt level and an increase in
interest income resulting from proceeds from asset sales. Long-term debt
outstanding at September 30, 1998 was $149.9 million, compared with $328.3
million a year earlier and $234.1 at December 31, 1997.
The company's share of losses from associated companies in the 1998
third quarter was slightly better at $4.1 million, compared with a loss of
$4.5 million in the 1997 quarter. For the first nine months of 1998, the
company's share of losses from associated companies totaled $13.6 million,
compared with a loss of $22 million in 1997. The reduction in year-to-date
losses in 1998 versus 1997 was largely due to stronger results from the
company's newsprint mill partnership in Canada, as well as a favorable
comparison as 1997 included losses from WBIS+ TV and DJA Partners. The
company's share of losses from its European business television partnership
with CNBC partially offset these improvements.
PAGE 16
TELEVISION
Total pretax losses from television ventures, which include income from
U.S. television operations reported in the print publishing segment and losses
from international television reported in equity results, was $2.8 million in
the third quarter of 1998, compared with $9.3 million in the third quarter of
1997. For the first nine months of 1998, pretax television losses were $17.9
million, down $22.5 million from the like period a year earlier. 1998's
television results have benefited from the company's worldwide alliance with
CNBC, while the first half of 1997 was negatively affected by start-up losses
from WBIS+ TV.
INCOME TAXES
The effective income tax rate in the third quarter of 1998 was 40.9%,
versus a pro forma third quarter 1997 rate of 40.5% and 47.7% including
Telerate operations. The higher 47.7% rate was due to a higher amount of
nondeductible goodwill amortization. For the first nine months of 1998,
including the Telerate operating losses and loss on sale, the company recorded
income tax expense of $41 million on pretax income of $49.9 million. The
effective income tax rate on a pro forma basis for the first nine months of
1998 was 41.3% versus 41.9% in 1997.
As a result of the sale of Telerate, the company has available up to
$600 million of capital loss tax carryforwards over the next five years.
These income tax carryforwards are not reflected in the company's financial
statements.
FINANCIAL POSITION
As previously mentioned, the company completed the sale of Telerate
during 1998's second quarter. The purchase price consisted of $150 million of
5 year, 4% preferred stock of Bridge, which is included in other noncurrent
investments, and $360 million in cash. Under the terms of the sales
agreement, the purchase price is subject to possible post-closing adjustments,
including working capital changes and indemnification, which at this time the
company believes will be immaterial.
As mentioned in Note 4 on page 5 of this Form 10-Q, in October 1998 the
company's board of directors authorized the repurchase of up to $500 million
of the company's common stock over the next two to three years. This is in
addition to the $51 million that remained as of the end of September 1998
under a prior authorization from the company's board. During the third
quarter of 1998 the company repurchased 258,000 shares of its common stock at
an aggregate price of $12.4 million, bringing to 4.3 million the number of
shares repurchased in 1998.
Funds provided by operations for the first nine months of 1998 was
$206.5 million, compared with $351.7 million in the first nine months of 1997.
The decline in cash provided by operations, relative to a year ago, was
primarily due to changes in working capital, principally due to the timing of
collections of trade accounts receivable of Telerate and payments of accounts
payable and accrued liabilities, which included the pay-out of restructuring
charges accrued at year-end 1997. In 1998, in addition to cash provided by
operations the company received a total $466 million in cash principally from
the disposition of Telerate, WBIS+ and Mediatex Communications Corp. The
company also received $50.9 million from sales under employee stock
compensation plans.
PAGE 17
Through September 1998, the company funded capital expenditures of
$175.7 million, repurchased 4.3 million shares of its stock, paid down debt by
$63 million, paid dividends of $69.2 million and funded $50.7 million into
various business ventures. Cash and cash equivalents, which include highly-
liquid investments with a maturity of three months or less, was $195.8 million
at September 30, 1998, versus $23.8 million at the end of 1997.
THREE-YEAR PLAN
In September 1998, the company completed a planning process covering the
1999-2001 period. As part of that planning process, the company developed
corporate objectives, the most significant of which include: to grow earnings
per share at a compound rate of at least 10% over the long-term, and
eventually achieve a corporate EBITDA margin of 26%, with segment EBITDA
margins of 25% for print publishing, 27% for electronic publishing, and 27%
for community newspapers. A further objective is to migrate toward a 50/50
profit mix between print publishing versus community newspapers and electronic
publishing, combined. Given this objective, it is expected that electronic
publishing and community newspapers will achieve higher growth rates than
print publishing during the plan period and they will contribute a significant
amount to earnings growth. Over the 1988-1997 period, the average EBITDA
margin for both print publishing and community newspapers was 20%. Over the
1995-1997 period, the average EBITDA margin for electronic publishing,
excluding one-time fees, was 27%.
The foregoing targets, goals and objectives are based on current
information and certain assumptions about the future and accordingly, are not
forecasts or predictions of actual future results. Information relating to
such forward-looking statements is contained on page 19 of this Form 10-Q.
MANAGEMENT AND BOARD OF DIRECTOR CHANGES
On October 21, 1998, Kenneth L. Burenga announced he would retire as the
company's president and chief operating officer and as a member of the board
of directors at the end of 1998. At this time, the company will not name a
successor to the post of president or chief operating officer.
As part of a realignment of senior executive responsibilities, Jerome E.
Bailey, senior vice president and chief financial officer, was promoted to
executive vice president and chief financial officer; Peter G. Skinner, senior
vice president and general counsel, was promoted to executive vice president
and general counsel; and L. Gordon Crovitz, vice president/planning and
development was promoted to senior vice president/electronic publishing.
Roy A. Hammer, a partner in the Boston law firm of Hemenway & Barnes and
a trustee of numerous Bancroft family trusts, has been elected to the Dow
Jones board of directors, effective with the board's November 1998 meeting.
He will serve until the annual meeting of shareholders in the year 2000.
PAGE 18
YEAR 2000
The Year 2000 problem is essentially the inability of computer programs,
whether to operate properly after January 1, 2000, as a result of the software
programs using two digits rather than four digits to identify a year. The
software could recognize "00" to be the year "1900" rather than year
"2000", which could cause interruptions of normal business operations.
The company has completed its assessment of its Year 2000 problem. The
company expects its efforts to modify existing software and the replacement of
certain systems will be completed so as not to interrupt ongoing operations.
Costs over the 1997-1999 period to modify the company's systems are expected
to total between $13 million and $20 million. Of this total, approximately
$10 million has been incurred and expensed from the beginning of 1997 through
September 1998.
In 1996, Dow Jones established a project team responsible for
identifying and resolving Year 2000 issues. These efforts include, but are
not limited to, identification and review of internal operating systems and
applications, and customer products and services, as well as formal
discussions with information providers and other key suppliers to the
business.
Through September 1998, approximately one-third of the compliance
surveys sent to the company's lessors and product/service providers have been
returned. The company is in the process of determining which lessors or
providers require follow-up action.
The company has identified existing computer applications and
categorized them into three categories: (1) Applications to be modified, (2)
Applications to be replaced by Year 2000 compliant systems, and (3)
Applications initially reported as Year 2000 compliant that have to be tested
to confirm their readiness. Through September 1998, over one-third of the
applications requiring modification have been certified, roughly one-third of
applications requiring replacement have been certified, and three-quarters of
initially reported Year 2000 compliant applications have been confirmed.
The company expects to have a majority of its applications Year 2000
compliant by December 31, 1998, with remaining applications compliant by mid-
1999. In the first half of 1999, the company plans to perform "end-to-end"
testing of its systems, excluding replacement systems which will be tested
upon installation. During the fourth quarter of 1998, the company will begin
contingency planning.
While the company expects its Year 2000 efforts will be successful, if
the modifications and replaced systems are not made compliant in a timely
manner, it could result in a material effect on the company. Additionally,
the company's products and services as well as the tools that Dow Jones uses
to conduct its Year 2000 evaluation are dependent on technological components,
equipment and software that were developed by third parties and that may not
be Year 2000 compliant. Failure of such third party components, equipment or
software to operate properly with regard to the Year 2000 could interrupt
ongoing operations or require the company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the
company's business and operating results.
PAGE 19
METEOROID STORM
The production of The Wall Street Journal uses satellite transmission of
page images to outlying printing plants. In November 1998 and November 1999,
there is expected to be a meteoroid storm that may damage satellites in orbit
around the earth. The last major meteoroid storm occurred in the 1960s when
there were few satellites in orbit. While the damage to satellites is
expected to be minimal, the company has developed a contingency plan that it
expects will ensure the continuous production of its print publications.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis, including the section entitled
"THREE-YEAR PLAN," and other sections of this Form 10-Q include forward-
looking statements that reflect the company's current expectations or beliefs
concerning future results and events. The words "expects," "intends,"
"plans," "believes," "anticipates," "likely," "will," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results and
events to differ materially from those anticipated in the forward-looking
statements. Some important factors that might cause such a difference
include, but are not limited to, global economic and stock market conditions,
and their impact on advertising sales and sales of the company's products and
services; the inability to expand newspaper page capacity and/or production
and service capacity for electronic publishing products on a timely basis to
satisfy customer demands; the extent to which the company is able to achieve
increased revenues/earnings from distribution of its Newswires services; the
extent to which the company is able to achieve and maintain a more diversified
advertising base for its print publications; cost of newsprint and labor;
rapid technological changes and frequent new product introductions prevalent
in electronic publishing; product obsolescence due to advances in technology
and shifts in market demand; any damage to or technical failure of the
company's computer infrastructure or software that causes interruptions of
operations; increased competition in the markets for financial news and
information and advertising resulting from the rise in popularity of the
Internet, financial television programming and other new media; business
conditions (growth or consolidation) in the financial services industry;
adverse verdicts in legal proceedings, including libel actions; risks
associated with the development of television channels in competitive foreign
markets, including the ability to produce or obtain desired programming, to
sell advertising time at desired rates, to achieve sufficient distribution and
to attract audiences; risks associated with foreign operations, including
currency and political risks; the cost of resolving the company's Year 2000
software issues or untimely resolution of its Year 2000 issues that results in
business interruption or shutdown, financial loss, reputation loss, and/or
legal liability; and such other risk factors as may have been or may be
included from time to time in the company's reports filed with the Securities
and Exchange Commission.
PAGE 20
PART II. OTHER INFORMATION
ITEM 5.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME *
Dow Jones & Company, Inc.
Quarters Ended Nine Months Ended
September 30 September 30
==============================================================================
(in thousands except
per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
REVENUES:
Advertising $231,457 $235,180 $ 753,166 $ 720,278
Information services 96,935 101,952 288,198 266,928
Circulation and other 115,233 114,235 338,982 340,705
- ------------------------------------------------------------------------------
Total revenues 443,625 451,367 1,380,346 1,327,911
- ------------------------------------------------------------------------------
EXPENSES:
News, operations and development 131,448 126,877 383,689 371,920
Selling, administrative
and general 161,588 153,378 485,748 452,481
Newsprint 38,510 36,485 121,393 108,145
Second class postage
and carrier delivery 28,612 27,690 86,519 83,759
Depreciation and amortization 22,577 21,471 67,538 63,172
Restructuring 16,340 16,340
- ------------------------------------------------------------------------------
Operating expenses 399,075 365,901 1,161,227 1,079,477
- ------------------------------------------------------------------------------
Operating income 44,550 85,466 219,119 248,434
OTHER INCOME (DEDUCTIONS):
Investment income 4,535 143 6,631 489
Interest expense (909) (4,424) (4,506) (13,026)
Equity in losses
of associated companies (4,123) (4,544) (13,628) (22,031)
Gain on disposition of
businesses and investments 15,390 6,179
Other, net (263) 298 (1,181) 215
- ------------------------------------------------------------------------------
Income before income taxes 43,790 76,939 221,825 220,260
Income taxes 17,931 31,160 91,618 92,223
- ------------------------------------------------------------------------------
Net income $ 25,859 $ 45,779 $ 130,207 $ 128,037
==============================================================================
PER SHARE:
Net income per share:
- Basic $.28 $.48 $1.36 $1.34
- Diluted .27 .47 1.34 1.32
Weighted-average shares outstanding:
- Basic 93,928 96,124 95,825 95,836
- Diluted 95,113 97,060 97,125 96,821
==============================================================================
* Pro forma statements of income exclude Telerate results of operations and
the loss on its sale. Dow Jones completed the sale of Telerate on May 29,
1998.
PAGE 21
The following tables have been presented for informational purposes only.
EBITDA RETURN ON NET ASSETS
(in thousands)
September December December
Net Assets: (1) 1998 1997 1996
- ---------- ---- ---- ----
Print publishing $246,698 $ 202,848 $ 146,938
Electronic publishing 125,219 92,498 90,544
Community newspapers (2) 188,624 189,052 193,511
------- --------- ---------
Segment net assets 560,541 484,398 430,993
Cash and investments (3) 430,933 218,824 275,240
Divested/Joint Ventured
operations (4) - 544,117 1,452,193
------- --------- ---------
Consolidated $991,474 $1,247,339 $2,158,426
======= ========= =========
Nine Months Nine Months
EBITDA: 1998 1997 1997 1996
- ------ ---- ---- ---- ----
Print publishing $191,718 $211,107 $303,837 $225,328
Electronic publishing 74,551 79,415 101,285 81,167
Community newspapers 54,595 48,639 67,138 59,645
Corporate expenses (17,867) (14,750) (18,189) (22,052)
------- ------- ------- -------
Segment EBITDA 302,997 324,411 454,071 344,088
Divested/Joint Ventured
operations 20,671 58,507 55,952 210,648
------- ------- ------- -------
Consolidated EBITDA $323,668 $382,918 $510,023 $554,736
======= ======= ======= =======
Pretax (EBITDA) Return Nine Months Nine Months
on Net Assets (RONA): (5) 1998 1997 (6) 1997 1996
- ---------------------- ----- ---- ---- ----
Print publishing 77.7% 120.7% 149.8% 153.3%
Electronic publishing (7) 59.5% 86.8% 109.5% 89.6%
Community newspapers 28.9% 25.4% 35.5% 30.8%
All Segments 54.1% 70.9% 93.7% 79.8%
(1) Net assets are computed as total assets net of current liabilities.
(2) Net assets for community newspapers, relative to print publishing and
electronic publishing, reflect higher excess of cost over net assets acquired
(goodwill). Also, community newspapers relative to print publishing includes
a lower amount of unearned subscription revenue, which is categorized as a
current liability.
(3) Cash and investments are excluded from segment level net assets because
income or losses from these assets are not reported as part of operating
income.
(4) Divested/Joint Ventured operations include Telerate, European Business
News, IDD Enterprises' print business and American Demographics, Inc.
PAGE 22
(5) The annualization of nine-month returns is not indicative of twelve-month
returns.
(6) An average of the net assets as of December 31, 1997 and 1996 was used to
determine return on net assets for the first nine months of 1997.
(7) Electronic publishing return on net assets in 1997 includes one-time index
licensing fees.
REVENUES BY SEGMENT*
1997-1988
(in thousands)
Print Electronic Community
Year Publishing Publishing Newspapers
- ---- ---------- ---------- ----------
1997 $1,143,395 $363,232 $300,611
1996 1,044,261 312,561 287,511
1995 902,312 287,983 272,901
1994 857,398 240,762 252,168
1993 820,893 212,164 244,591
1992 769,506 187,572 234,730
1991 732,010 181,366 227,114
1990 745,049 180,922 234,704
1989 749,231 177,635 238,605
1988 754,312 173,197 231,744
* Excludes divested operations.
PAGE 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits filed:
Exhibit
Number Document
- ------- --------
* 27 Financial Data Schedule
* Securities and Exchange Commission and New York Stock Exchange copies
only.
(b) Reports on Form 8-K:
On a Form 8-K, filed July 17, 1998, under Item 5. Other Events and
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits, Dow Jones filed a copy of a press release that the company had
issued on July 9, 1998.
PAGE 24
SIGNATURE
- ---------
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.
DOW JONES & COMPANY, INC.
-------------------------
(Registrant)
Date: November 5, 1998 By /s/ Thomas G. Hetzel
------------------------
Thomas G. Hetzel
Vice President/Finance and Comptroller
(Chief Accounting Officer)