McClatchy's Q3 net income falls 21.0% year-over-year to US$9.4M; revenues down 8.4% to US$300.2M with declines in advertising, circulation revenues yet partially offset by rise in standalone digital revenues
October 21, 2011
– The McClatchy Company today reported net income in the third quarter of 2011 of $9.4 million, or 11 cents per share. The company's earnings in the third quarter of 2010 were $11.9 million, or 14 cents per share.
Revenues in the third quarter of 2011 were $300.2 million, down 8.4% from revenues of $327.7 million in the third quarter of 2010. Advertising revenues were down 10.0% from 2010 and circulation revenues were down 3.5%.
Cash operating expenses in the third quarter, excluding restructuring costs, declined 7.9% from the 2010 third quarter. Operating cash flow, a non-GAAP measure, was $76.9 million, down 9.9% from the third quarter of 2010 (Non-GAAP measurements are discussed below).
Results in the third quarter of 2011 included the following items:
Severance charges totaling $1.1 million ($0.6 million after-tax) related to continued restructuring of the company's newspaper operations.
Non-cash impairment charges of $0.8 million ($0.5 million after-tax) recorded in other operating expenses primarily related to the value of assets sold for less than carrying value.
A favorable adjustment totaling $0.7 million ($0.4 million after-tax) primarily related to the reversal of interest accruals resulting from the expiration of open tax years.
Income in the third quarter of 2011 excluding the net impact of these items was $10.0 million compared to earnings in the third quarter of 2010 adjusted for similarly unusual items of $10.6 million. (Non-GAAP measurements are discussed below).
First Nine Months Results:
Net income in the first nine months of 2011 was $12.4 million, or 14 cents per share. Income from continuing operations in the first nine months of 2010 was $17.4 million, or 20 cents per share. Total net income, including discontinued operations, was $21.4 million or 25 cents per share in the 2010 period.
Revenues in the first nine months of 2011 were down 8.7% to $918.2 million compared to $1.0 billion in 2010. Advertising revenues in the 2011 period were down 10.1%, and circulation revenues were down 4.1%.
Results in the first nine months of 2011 included the following items:
Severance charges totaling $13.3 million ($7.2 million after-tax) related to continued restructuring of the company's newspaper operations.
Non-cash impairment charges of $11.3 million ($7.2 million after-tax) recorded in other operating expenses primarily related to the value of real estate assets sold for less than carrying value.
A loss on the extinguishment of debt totaling $2.5 million ($1.5 million after-tax) primarily reflecting the non-cash write-off of purchase accounting discounts related to bonds repurchased in the open market.
A gain of $1.9 million ($1.2 million after-tax) for additional cash received on a previously sold internet asset.
A favorable adjustment to the company's net income totaling $11.1 million for a tax settlement related primarily to state tax positions previously taken and the recognition of a loss carry-forward to reduce cash taxes due on the sale of land in Miami. The $11.1 million included a tax benefit of $8.4 million and $4.4 million ($2.7 million after-tax) of related interest expense.
Income in the first nine months of 2011 excluding the net impact of these items was $15.9 million compared to earnings in the first nine months of 2010 adjusted for similarly unusual items of $23.7 million. (Non-GAAP measurements are discussed below).
Commenting on McClatchy's third quarter results, Gary Pruitt, chairman and chief executive officer, said, "Advertising revenues were down 10.0% in the third quarter of 2011, in line with the trend so far this year. We saw some improvement in revenue trends late in the quarter: advertising revenue was down 10.4% in July, 10.8% in August and 8.7% in September.
"Our digital results include both digital sales bundled with print and digital advertising sold on a stand-alone basis. Our bundled sales have suffered with declines in print advertising causing total digital advertising to decline 0.4%, but we were pleased to see an increase of 9.2% in third quarter digital-only sales compared to the 2010 quarter. We continue to see good results from digital-only revenue initiatives, including our dealsaver(TM) group-buying product. Dealsaver(TM) offers exclusive, local daily deals to consumers, and we have launched it in all of our markets as of August 2011. In conjunction with our growing array of digital products, we are also expanding our digital-only sales forces to drive results. Digital-only revenues were helped by strong growth in national digital-only sales, which were up 20.4%; and automotive digital-only sales, which were up 24.8%. Digital advertising now represents 21.1% of our total advertising revenue compared to 19.0% in the third quarter of 2010.
"Audience trends are improving. Daily circulation declined 4.3% and Sunday circulation grew 2.0%. Sunday circulation is particularly significant as it drives much more advertising revenue than any other day of the week. Our Sunday newspapers are important to our readers in light of the in-depth news and analysis they include, and the value they provide in coupons and other advertising information that consumers need. Our digital traffic also continues to grow with daily average local unique visitors to our websites up 6.4% in the first nine months of 2011.
"Still, with advertising revenues down we remain vigilant in controlling costs. Cash expenses, excluding restructuring costs, were down 7.9% in the third quarter compared to a year ago, despite higher newsprint prices.
"Our valuable equity investments continued to prosper. Our share of income from all equity interests was $8.6 million in the third quarter and $21.3 million in the first nine months of 2011--up more than 60% from the third quarter 2010 and more than double their results in the first nine months of 2010. Much of the improvement in equity earnings came from our digital investments, including CareerBuilder and Classified Ventures. Classified Ventures operates two of the nation's premier classified websites: the auto website Cars.com and the rental site Apartments.com, both of which are profitable and growing internet businesses.
"As we look to the fourth quarter, we recognize that we have some pretty tough comparisons in October and November. But we expect our new digital initiatives to continue to pay off in the quarter and we will begin to cycle over the decline in national advertising that hit in December 2010 and persisted throughout 2011. Advertising revenue trends so far in October are in the same high single-digit range as September. We remain focused on controlling costs and expect to again reduce cash expenses in the fourth quarter in the high-single digits."
Pat Talamantes, McClatchy's chief financial officer, said, "We've completed several successful financial transactions this year that have allowed us to pay down debt while preserving cash flows. Our debt reduction efforts have been focused on the nearest-term maturities, including our 2014 bonds and our qualified defined benefit pension liability. The principal amount of our nearest debt maturity, the 2014 bonds, is now only $92.5 million, an amount that is quite manageable using internally generated cash flows. In fact, we reduced debt by nearly $115 million in the first nine months of 2011 to $1.660 billion and our leverage ratio at the end of the quarter was 4.7 times cash flow. We had approximately $17.2 million in cash on hand at the end of the quarter and coupled with the availability under our undrawn revolving credit facility we had $95.1 million of liquidity at the end of the quarter. We believe we have the runway to weather this stormy economic climate, even if it doesn't improve in the near term, and we will continue to focus on debt reduction to maintain our financial position."
Non-GAAP Financial Measures:
In addition to the results reported in accordance with accounting principles generally accepted in the United States ("GAAP") included in this press release, the company has provided information regarding operating income, non-operating expenses and income, income taxes, and net income excluding certain items described in an attached schedule. In addition the company has presented operating cash flows (defined as operating income plus depreciation and amortization, restructuring related charges and other non-cash impairments) along with operating cash flow margins (operating cash flow divided by net revenues) that are reconciled to GAAP measures in the attached schedule. Management believes these non-GAAP measures, when read in conjunction with the company's GAAP financials, provide useful information to investors by offering:
the ability to make more meaningful period-to-period comparisons of the company's on-going operating results;
the ability to better identify trends in the company's underlying business;
a better understanding of how management plans and measures the company's underlying business; and
An easier way to compare the company's most recent operating results against investor and analyst financial models.
Operating income, non-operating expenses and income, income taxes, and net income excluding certain items should not be considered a substitute or an alternative to these computations calculated in accordance with and required by GAAP. Nor are operating cash flow and operating cash flow margins to be considered replacements for cash provided by operating activities as shown in the company's statement of cash flows included in our financial statements.
In addition, the company's statistical report, which summarizes revenue performance for the third fiscal quarter and first nine months of 2011, follows.
At noon, Eastern time, today, McClatchy will review its results in a conference call (877-278-1205 pass code 81674386) and webcast ( www.mcclatchy.com ). The webcast will be archived at McClatchy's website.
The McClatchy Company is a leading news and information provider, offering a wide array of print and digital products in each of the markets it serves. As the third largest newspaper company in the country, McClatchy's operations include 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. The company's largest newspapers include The Miami Herald, The Sacramento Bee, Fort Worth Star-Telegram, The Kansas City Star, The Charlotte Observer and The News & Observer in Raleigh, N.C. McClatchy is listed on the New York Stock Exchange under the symbol MNI.