mni2q0810-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the quarterly period ended: June
29,
2008
|
|
|
|
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:
|
1-9824
|
|
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
52-2080478
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
2100
"Q" Street, Sacramento, CA
|
|
95816
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
916-321-1846
|
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. [ X ]
Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X] Accelerated
filer [ ] Non-accelerated
filer [ ] (Do not check if smaller reporting
company) Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12-b
of the Exchange Act).
As of
August 5, 2008, the registrant had shares of common stock as listed below
outstanding:
Class
A Common Stock
|
57,384,516
|
Class
B Common Stock
|
25,050,962
|
THE
McCLATCHY COMPANY
INDEX
TO FORM 10-Q
Part
I - FINANCIAL INFORMATION
|
Page
|
|
|
Item
1 - Financial Statements (unaudited):
|
|
|
|
|
|
Consolidated
Balance Sheet – June 29, 2008 and December 30, 2007
|
1
|
|
|
|
Consolidated
Statement of Income for the three and six months ended June 29, 2008
and July 1, 2007
|
3
|
|
|
|
Consolidated
Statement of Cash Flows for the six months ended June 29, 2008 and July 1,
2007
|
4
|
|
|
|
Consolidated
Statement of Stockholders' Equity for the period December 30, 2007 to June
29, 2008
|
5
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
17
|
|
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
32
|
|
|
Item
4 - Controls and Procedures
|
32
|
|
|
Part
II - OTHER INFORMATION
|
33
|
|
|
Item
1A - Risk Factors
|
33
|
|
|
Item
4 – Submission of Matters to a Vote of Security Holders
|
34
|
|
|
Item
6 - Exhibits
|
35
|
|
|
Signatures
|
36
|
|
|
Index
of Exhibits
|
37
|
PART I - FINANCIAL
INFORMATION
Item
1 - FINANCIAL STATEMENTS
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
June
29,
|
|
|
December
30,
|
|
CURRENT
ASSETS:
|
|
2008
|
|
|
2007
|
|
Cash
and cash equivalents
|
|
$ |
9,204 |
|
|
$ |
25,816 |
|
Trade
receivables – (less allowance of
$10,321
in 2008 and $11,416 in 2007)
|
|
|
228,049 |
|
|
|
289,550 |
|
Other
receivables
|
|
|
17,049 |
|
|
|
19,677 |
|
Newsprint,
ink and other inventories
|
|
|
48,815 |
|
|
|
36,230 |
|
Deferred
income taxes
|
|
|
27,461 |
|
|
|
27,077 |
|
Prepaid
income taxes
|
|
|
25,875 |
|
|
|
60,758 |
|
Income
tax refund
|
|
|
- |
|
|
|
185,059 |
|
Land
and other assets held for sale
|
|
|
205,099 |
|
|
|
177,436 |
|
Other
current assets
|
|
|
21,278 |
|
|
|
20,636 |
|
|
|
|
582,830 |
|
|
|
842,239 |
|
PROPERTY,
PLANT AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
202,458 |
|
|
|
205,080 |
|
Building
and improvements
|
|
|
394,644 |
|
|
|
395,553 |
|
Equipment
|
|
|
820,402 |
|
|
|
846,664 |
|
Construction
in progress
|
|
|
14,808 |
|
|
|
17,183 |
|
|
|
|
1,432,312 |
|
|
|
1,464,480 |
|
Less
accumulated depreciation
|
|
|
(548,819 |
) |
|
|
(522,388 |
) |
|
|
|
883,493 |
|
|
|
942,092 |
|
INTANGIBLE
ASSETS:
|
|
|
|
|
|
|
|
|
Identifiable
intangibles - net
|
|
|
860,840 |
|
|
|
891,591 |
|
Goodwill
|
|
|
1,069,495 |
|
|
|
1,042,880 |
|
|
|
|
1,930,335 |
|
|
|
1,934,471 |
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
AND OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Investments
in unconsolidated companies
|
|
|
344,302 |
|
|
|
401,274 |
|
Other
assets
|
|
|
20,159 |
|
|
|
17,843 |
|
|
|
|
364,461 |
|
|
|
419,117 |
|
TOTAL
ASSETS
|
|
$ |
3,761,119 |
|
|
$ |
4,137,919 |
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
BALANCE SHEET (UNAUDITED) – Continued
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
June
29,
|
|
|
December
30,
|
|
CURRENT
LIABILITIES:
|
|
2008
|
|
|
2007
|
|
Accounts
payable
|
|
$ |
71,573 |
|
|
$ |
93,626 |
|
Accrued
compensation
|
|
|
110,420 |
|
|
|
104,892 |
|
Income
taxes payable
|
|
|
5,864 |
|
|
|
20,861 |
|
Unearned
revenue
|
|
|
84,608 |
|
|
|
82,461 |
|
Accrued
interest
|
|
|
24,768 |
|
|
|
28,246 |
|
Accrued
dividends
|
|
|
14,817 |
|
|
|
14,788 |
|
Other
accrued liabilities
|
|
|
48,756 |
|
|
|
44,642 |
|
|
|
|
360,806 |
|
|
|
389,516 |
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,101,635 |
|
|
|
2,471,827 |
|
Deferred
income taxes
|
|
|
555,275 |
|
|
|
555,887 |
|
Pension
and postretirement obligations
|
|
|
267,100 |
|
|
|
200,318 |
|
Other
long-term obligations
|
|
|
94,203 |
|
|
|
94,831 |
|
|
|
|
3,018,213 |
|
|
|
3,322,863 |
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock $.01 par value:
|
|
|
|
|
|
|
|
|
Class
A - authorized 200,000,000 shares, issued
|
|
|
|
|
|
|
|
|
57,266,620
in 2008 and 57,105,279 in 2007
|
|
|
573 |
|
|
|
571 |
|
Class
B - authorized 60,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
25,050,962 in 2008 and 2007
|
|
|
251 |
|
|
|
251 |
|
Additional
paid-in capital
|
|
|
2,201,008 |
|
|
|
2,197,041 |
|
Accumulated
deficit
|
|
|
(1,792,101 |
) |
|
|
(1,781,298 |
) |
Treasury
stock, 5,264 shares in 2008 and 3,029 shares in 2007 at
cost
|
|
|
(144 |
) |
|
|
(122 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(27,487 |
) |
|
|
9,097 |
|
|
|
|
382,100 |
|
|
|
425,540 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
3,761,119 |
|
|
$ |
4,137,919
$ |
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
Six
Months Ended
|
|
|
|
June
29,
|
|
|
July
1,
|
|
|
June
29,
|
|
|
July
1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REVENUES
- NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$ |
406,328 |
|
|
$ |
488,277 |
|
|
$ |
810,351 |
|
|
$ |
965,300 |
|
Circulation
|
|
|
66,055 |
|
|
|
69,707 |
|
|
|
133,919 |
|
|
|
141,587 |
|
Other
|
|
|
17,300 |
|
|
|
22,043 |
|
|
|
33,696 |
|
|
|
39,698 |
|
|
|
|
489,683 |
|
|
|
580,027 |
|
|
|
977,966 |
|
|
|
1,146,585 |
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
229,057 |
|
|
|
228,959 |
|
|
|
447,910 |
|
|
|
465,283 |
|
Newsprint
and supplements
|
|
|
64,189 |
|
|
|
72,186 |
|
|
|
124,647 |
|
|
|
147,603 |
|
Depreciation
and amortization
|
|
|
36,649 |
|
|
|
38,357 |
|
|
|
73,031 |
|
|
|
76,190 |
|
Other
operating expenses
|
|
|
116,073 |
|
|
|
123,144 |
|
|
|
231,929 |
|
|
|
252,740 |
|
|
|
|
445,968 |
|
|
|
462,646 |
|
|
|
877,517 |
|
|
|
941,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
43,715 |
|
|
|
117,381 |
|
|
|
100,449 |
|
|
|
204,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATING
(EXPENSES) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(36,668 |
) |
|
|
(49,556 |
) |
|
|
(81,945 |
) |
|
|
(103,341 |
) |
Interest
income
|
|
|
475 |
|
|
|
42 |
|
|
|
571 |
|
|
|
106 |
|
Equity
losses in unconsolidated companies, net
|
|
|
(366 |
) |
|
|
(11,198 |
) |
|
|
(13,490 |
) |
|
|
(20,947 |
) |
Impairments
related to internet investments
|
|
|
(21,515 |
) |
|
|
- |
|
|
|
(21,515 |
) |
|
|
- |
|
Gain
on sale of SP Newsprint
|
|
|
31,976 |
|
|
|
- |
|
|
|
31,976 |
|
|
|
- |
|
Gain
on extinguishment of debt
|
|
|
19,500 |
|
|
|
- |
|
|
|
19,500 |
|
|
|
- |
|
Other
- net
|
|
|
105 |
|
|
|
791 |
|
|
|
1,019 |
|
|
|
743 |
|
|
|
|
(6,493 |
) |
|
|
(59,921 |
) |
|
|
(63,884 |
) |
|
|
(123,439 |
) |
INCOME
FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE
INCOME TAX PROVISION
|
|
|
37,222 |
|
|
|
57,460 |
|
|
|
36,565 |
|
|
|
81,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
17,171 |
|
|
|
22,929 |
|
|
|
17,508 |
|
|
|
32,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
20,051 |
|
|
|
34,531 |
|
|
|
19,057 |
|
|
|
49,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS
- NET OF INCOME TAXES
|
|
|
(386 |
) |
|
|
705 |
|
|
|
(242 |
) |
|
|
(4,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
19,665 |
|
|
$ |
35,236 |
|
|
$ |
18,815 |
|
|
$ |
44,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.24 |
|
|
$ |
0.42 |
|
|
$ |
0.23 |
|
|
$ |
0.60 |
|
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
(0.06 |
) |
Net
income per share
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
|
$ |
0.23 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.24 |
|
|
$ |
0.42 |
|
|
$ |
0.23 |
|
|
$ |
0.60 |
|
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
(0.06 |
) |
Net
income per share
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
|
$ |
0.23 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES:
|
|
|
|
|
|
Basic
|
|
|
82,264 |
|
|
|
81,976 |
|
|
|
82,220 |
|
|
|
81,931 |
|
Diluted
|
|
|
82,317 |
|
|
|
82,037 |
|
|
|
82,274 |
|
|
|
82,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
(In
thousands)
|
|
|
|
Six
Months Ended
|
|
|
|
June
29,
|
|
|
July
1,
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
19,057 |
|
|
$ |
49,044 |
|
Reconciliation
to net cash provided by continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
73,031 |
|
|
|
76,190 |
|
Employee
benefit expense
|
|
|
10,286 |
|
|
|
16,956 |
|
Stock
compensation expense
|
|
|
2,362 |
|
|
|
4,292 |
|
Equity
loss in unconsolidated companies
|
|
|
13,490 |
|
|
|
20,947 |
|
Impairments
related to internet investments
|
|
|
21,751 |
|
|
|
- |
|
Gain
on sale of SP Newsprint
|
|
|
(31,976 |
) |
|
|
- |
|
Gain
on extinguishment of debt
|
|
|
(19,500 |
) |
|
|
- |
|
Write-off
of deferred financing costs
|
|
|
3,383 |
|
|
|
- |
|
Other
|
|
|
3,722 |
|
|
|
2,735 |
|
Changes
in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
61,501 |
|
|
|
40,453 |
|
Inventories
|
|
|
(12,585 |
) |
|
|
11,279 |
|
Other
assets
|
|
|
4,215 |
|
|
|
7,537 |
|
Accounts
payable
|
|
|
(22,156 |
) |
|
|
(31,340 |
) |
Accrued
compensation
|
|
|
5,528 |
|
|
|
(26,573 |
) |
Income
taxes
|
|
|
19,502 |
|
|
|
(44,580 |
) |
Other
liabilities
|
|
|
(11,748 |
) |
|
|
(8,810 |
) |
Net
cash provided by operating activities of continuing
operations
|
|
|
139,863 |
|
|
|
118,130 |
|
Proceeds
from income tax refund
|
|
|
185,059 |
|
|
|
- |
|
Other
|
|
|
(895 |
) |
|
|
3,340 |
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
184,164 |
|
|
|
3,340 |
|
Net
cash provided by operating activities
|
|
|
324,027 |
|
|
|
121,470 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(12,191 |
) |
|
|
(28,340 |
) |
Proceeds
from sale of equipment
|
|
|
548 |
|
|
|
19,356 |
|
Proceeds
from sale of SP Newsprint
|
|
|
55,266 |
|
|
|
- |
|
Equity
investments and other - net
|
|
|
(860 |
) |
|
|
(806 |
) |
Net
cash provided (used) by investing activities of continuing
operations
|
|
|
42,763 |
|
|
|
(9,790 |
) |
Proceeds
from sale of newspaper, net of transaction costs
|
|
|
- |
|
|
|
522,922 |
|
Other
|
|
|
- |
|
|
|
(4,837 |
) |
Net
cash provided by investing activities of discontinued
operations
|
|
|
- |
|
|
|
518,085 |
|
Net
cash provided by investing activities
|
|
|
42,763 |
|
|
|
508,295 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments
of term bank debt
|
|
|
- |
|
|
|
(350,000 |
) |
Net
repayments of revolving bank debt
|
|
|
(68,900 |
) |
|
|
(250,508 |
) |
Payment
of financing costs
|
|
|
(3,346 |
) |
|
|
- |
|
Extinguishment
of public notes and related expenses
|
|
|
(283,150 |
) |
|
|
- |
|
Payment
of cash dividends
|
|
|
(29,591 |
) |
|
|
(29,495 |
) |
Other
- principally stock issuances
|
|
|
1,585 |
|
|
|
5,928 |
|
Net
cash used by financing activities
|
|
|
(383,402 |
) |
|
|
(624,075 |
) |
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(16,612 |
) |
|
|
5,690 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
25,816 |
|
|
|
19,581 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
9,204 |
|
|
$ |
25,271 |
|
|
|
|
|
|
|
|
|
|
OTHER
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes (net of refunds)
|
|
$ |
(184,975 |
) |
|
$ |
82,033 |
|
Interest
(net of capitalized interest)
|
|
$ |
74,950 |
|
|
$ |
98,319 |
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
Value
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Stock
|
|
|
Total
|
|
BALANCES,
DECEMBER 30, 2007
|
|
$ |
571 |
|
|
$ |
251 |
|
|
$ |
2,197,041 |
|
|
$ |
(1,781,298 |
) |
|
$ |
9,097 |
|
|
$ |
(122 |
) |
|
$ |
425,540 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,815 |
|
|
|
|
|
|
|
|
|
|
|
18,815 |
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss and prior service costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,865 |
) |
|
|
|
|
|
|
(35,865 |
) |
Other
comprehensive loss related to investments
in unconsolidated
companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(719 |
) |
|
|
|
|
|
|
(719 |
) |
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,584 |
) |
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,769 |
) |
Dividends
declared ($.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,618 |
) |
|
|
|
|
|
|
|
|
|
|
(29,618 |
) |
Issuance
of 163,576 Class A shares under stock plans
|
|
|
2 |
|
|
|
|
|
|
|
1,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,362 |
|
Purchase
of 2,235 shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
(22 |
) |
BALANCES,
JUNE 29, 2008
|
|
$ |
573 |
|
|
$ |
251 |
|
|
$ |
2,201,008 |
|
|
$ |
(1,792,101 |
) |
|
$ |
(27,487 |
) |
|
$ |
(144 |
) |
|
$ |
382,100 |
|
|
|
See
notes to consolidated financial statements.
|
|
THE
McCLATCHY COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. SIGNIFICANT
ACCOUNTING POLICIES
|
|
The
McClatchy Company (the Company) is the third largest newspaper company in the
United States based upon daily circulation, with 30 daily newspapers and
approximately 50 non-dailies in 29 markets across the country. McClatchy
also operates leading local websites and direct marketing operations in each of
its markets which complement its newspapers and extend its audience reach in
each market. The Company’s newspapers include, among others, The
Miami
Herald, The
Sacramento Bee, The
(Fort Worth)
Star-Telegram, The
Kansas
City Star, The
Charlotte
Observer, and The
(Raleigh) News
& Observer. McClatchy is listed on the New York Stock
Exchange under the symbol MNI.
McClatchy
also owns a portfolio of premium digital assets, including 14.4% of
CareerBuilder LLC, the nation’s largest online job site, and 25.6% of Classified
Ventures LLC, a newspaper industry partnership that offers classified websites
such as: the auto website, cars.com: and the rental site,
apartments.com.
The
consolidated financial statements include the Company and its
subsidiaries. Significant intercompany items and transactions are
eliminated. In preparing the financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary (consisting of normal recurring
items and certain non-recurring items including, gains on sales of assets and on
a debt tender offer and certain charges related to internet investments
discussed below) to present fairly the Company's financial position, results of
operations, and cash flows for the interim periods presented. The
financial statements contained in this report are not necessarily indicative of
the results to be expected for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the period ended December 30, 2007.
Stock-based
compensation - All share-based payments to employees, including grants of
employee stock options, stock appreciation rights and restricted stock under
equity incentive plans and purchases under the employee stock purchase plan, are
recognized in the financial statements based on their fair values. At
June 29, 2008, the Company had six stock-based compensation
plans. Total stock-based compensation expense from continuing
operations was $1.0 million and $2.4 million for the three and six months ended
June 29, 2008, respectively, and was $2.2 million and $4.3 million for the three
and six months ended July 1, 2007, respectively.
Income
Taxes - The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to
reverse.
Financial
Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement 109
clarifies the accounting for uncertainty in income taxes and prescribes a
recognition threshold and measurement of a tax position taken or expected to be
taken in an enterprise’s tax returns. The Company recognizes interest
accrued related to unrecognized tax benefits in interest
expense. Penalties, if incurred, are recognized as a component of
income tax expense. As of June 29, 2008, the Company had $64.5
million in unrecognized tax benefits of which $7.1 million if
recognized,
would impact the effective tax rate and approximately $11.4 million would reduce
interest expense. Approximately $45.9 million would impact goodwill
from previous acquisitions. During the six months ended June 29,
2008, the Company recorded interest and penalties related to unrecognized tax
benefits of approximately $3.3 million. Net accrued interest and
penalties at June 29, 2008 were approximately $20.2 million.
Comprehensive
income (loss) - The Company records changes in its net assets from
non-owner sources in its Statement of Stockholders’ Equity. The
following table summarizes the composition of total comprehensive income (loss)
(in thousands):
|
|
For
the Three
Months
Ended
|
|
|
For
the Six
Months
Ended
|
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Net
income
|
|
$ |
19,665 |
|
|
$ |
35,236 |
|
|
$ |
18,815 |
|
|
$ |
44,266 |
|
Pension,
net actuarial loss and prior service costs, net of
tax
|
|
|
(35,957 |
) |
|
|
2,132 |
|
|
|
(35,865 |
) |
|
|
2,132 |
|
Other
comprehensive income (loss) related to
equity investments
|
|
|
2,101 |
|
|
|
- |
|
|
|
(719 |
) |
|
|
- |
|
Total
comprehensive income (loss)
|
|
$ |
(14,191 |
) |
|
$ |
37,368 |
|
|
$ |
(17,769 |
) |
|
$ |
46,398 |
|
Earnings
per share (EPS) - Basic EPS excludes dilution from common stock
equivalents and reflects income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS is based upon the
weighted average number of outstanding shares of common stock and dilutive
common stock equivalents in the period. Common stock equivalents
arise from dilutive stock options and restricted stock and are computed using
the treasury stock method. The weighted average anti-dilutive common
stock equivalents that could potentially dilute basic EPS in the future, but
were not included in the weighted average share calculation for three and six
months ended June 29, 2008 were 4,981,760 and 4,997,288, respectively, and were
3,830,396 and 3,778,007 for the three and six months ended July 1, 2007,
respectively.
New
Accounting Pronouncements
Fair
Value Option for Financial Assets and Financial Liabilities
In
February 2007, the FASB issued Statement No. 159 (SFAS 159), The
Fair Value Option for Financial Assets and Financial Liabilities-Including an
Amendment of FASB Statement No. 115. SFAS 159 allows entities
to voluntarily choose to measure certain financial assets and liabilities at
fair value. The fair value option may be elected on an
instrument-by-instrument basis and is irrevocable, unless a new election date
occurs. If the fair value option is elected for an instrument, SFAS
159 specifies that unrealized gains and losses for that instrument be reported
in earnings at each subsequent reporting date. SFAS 159 was effective
for the Company on December 31, 2007. The Company did not apply the
fair value option to any of the Company’s outstanding instruments and,
therefore, SFAS 159 did not have an impact on the Company’s financial position
or result of operations.
Fair
Value Measurements
In September 2006, the
FASB issued Statement No. 157 (SFAS 157), Fair
Value Measurements, which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 was effective for the Company on December 31,
2007 for all financial assets and liabilities and for nonfinancial assets and
liabilities recognized or disclosed at fair value in our consolidated financial
statements on a recurring basis (at least annually). For all other
nonfinancial assets and liabilities, SFAS 157 is effective for the Company on
December 29, 2008. As it relates to the Company’s financial assets
and liabilities and for nonfinancial assets and liabilities recognized or
disclosed at fair value in the consolidated financial statements on a recurring
basis (at least annually), the adoption of SFAS 157 did not have a material
impact on the Company’s consolidated financial statements. Management
does not expect the adoption of SFAS 157 for nonfinancial assets and liabilities
not valued on a recurring basis (at least annually) to have a material impact to
the Company’s financial position or result of operations.
Business
Combinations
In December 2007, the
FASB issued Statement
No. 141R (SFAS 141R), Business
Combinations. SFAS
141R establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statement to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for
financial statements issued for fiscal years beginning after December 15,
2008. Accordingly, any business combinations the Company engages in will
be recorded and disclosed following existing generally accepted accounting
principles until December 28, 2008. Management expects
SFAS 141R will have an impact
on our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions the Company consummates after the effective date. An
estimated $45.9 million of the $64.5 million liability for unrecognized tax
benefits as of June 29, 2008 relate to tax positions of acquired entities taken
prior to their acquisition by the Company. If such liabilities are settled
for greater or lesser amounts prior to the adoption of SFAS 141R,
the reversal of any remaining liability will affect goodwill. If such
liabilities reverse subsequent to the adoption of SFAS 141R,
such reversals will affect the income tax expense in the period of
reversal. Management is still assessing the full impact of SFAS 141R on
the consolidated financial statements.
Noncontrolling Interests
in Consolidated Financial Statements
In December 2007, the FASB
issued Statement No. 160 (SFAS 160), Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51. SFAS 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial
statements. Additionally, SFAS 160 requires expanded disclosures in
the consolidated financial statements. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. Management does
not expect the adoption of SFAS 160 to have material impact to the Company’s
financial position or results of operations.
Disclosures
about Derivative Instruments and Hedging Activities
In
March 2008, the FASB issued Statement No. 161 (SFAS 161), Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This Statement amends
and expands disclosures about an entity’s derivative and hedging activities with
the intent to provide users of financial statements with an enhanced
understanding of a) how and why an entity uses derivative instruments, b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and c) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but does not
require, comparative disclosures. The Company expects to adopt SFAS 161 on
December 29, 2008. Management does not expect the adoption of SFAS 161 to have a
material impact to the Company’s financial position or results of
operations.
Hierarchy
of Generally Accepted Accounting Principles
In May
2008, the FASB issued Statement No. 162 (SFAS 162), The
Hierarchy of Generally Accepted Accounting Principles. SFAS 162 is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. generally
accepted accounting principles for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the PCAOB amendments to AU
Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. Management does not expect the adoption of SFAS
162 to have a material impact to the Company’s financial position or results of
operations.
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FSP provides that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. The FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years. Upon adoption, a company is required to retrospectively adjust its
earnings per share data (including any amounts related to interim periods,
summaries of earnings and selected financial data) to conform with the
provisions in this FSP. Early application of this FSP is
prohibited. Management has not completed its analysis of the impact
this FSP will have, if any, on its consolidated financial
statements.
NOTE
2. DIVESTITURES
On March
5, 2007, the Company sold the (Minneapolis) Star
Tribune newspaper and other publications and websites related to the
newspaper for $530 million. The Company received an income tax
benefit of approximately $200 million related to the
sale. Approximately $15 million offset taxes payable in the first
fiscal quarter of 2008 and the Company received approximately $185 million as an
income tax refund in April 2008, which it used to reduce debt.
The
results of Star
Tribune's operations, including interest on debt incurred to purchase it,
have been recorded as discontinued operations in all periods
presented.
Revenues and income (loss)
from discontinued operations, net of income taxes, for the three and six months
ended June 29, 2008 and July 1, 2007 were as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
- |
|
|
$ |
91 |
|
|
$ |
- |
|
|
$ |
52,994 |
|
Income
(loss) from discontinued operations before income taxes (1)
|
|
|
(387 |
) |
|
|
146 |
|
|
|
(140 |
) |
|
|
(4,637 |
) |
Income
tax expense (benefit)
|
|
|
(1 |
) |
|
|
(559 |
) |
|
|
102 |
|
|
|
141 |
|
Income
(loss) from discontinued operations
|
|
$ |
(386 |
) |
|
$ |
705 |
|
|
$ |
(242 |
) |
|
$ |
(4,778 |
) |
|
|
(1) Includes
interest expense allocated to discontinued operations of $0 and $1.2
million for the three and six months ended July 1, 2007,
respectively.
|
|
NOTE
3. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The
following is the Company's ownership interest and carrying value of investments
in unconsolidated companies and joint ventures (dollars in
thousands):
Company
|
|
%
Ownership Interest
|
|
|
June
29,
2008
|
|
|
December
30,
2007
|
|
CareerBuilder,
LLC
|
|
|
14.4 |
|
|
$ |
219,569 |
|
|
$ |
224,699 |
|
Classified
Ventures, LLC
|
|
|
25.6 |
|
|
|
86,518 |
|
|
|
99,313 |
|
Ponderay
Newsprint Company (general partnership)
|
|
|
27.0 |
|
|
|
15,741 |
|
|
|
16,221 |
|
Seattle
Times Company (C-Corporation)
|
|
|
49.5 |
|
|
|
9,888 |
|
|
|
19,310 |
|
SP
Newsprint Company (general partnership)
|
|
|
- |
|
|
|
- |
|
|
|
19,455 |
|
Other
|
|
Various
|
|
|
|
12,586 |
|
|
|
22,276 |
|
|
|
|
|
|
|
$ |
344,302 |
|
|
$ |
401,274 |
|
Except in
very limited cases, the Company uses the equity method of accounting for
investments.
McClatchy
and its partners, affiliates of Cox Enterprises, Inc. and Media General, Inc.,
completed the sale of SP Newsprint Company on March 31, 2008, of which McClatchy
was a one-third owner. The Company recorded a gain on the transaction
in the second fiscal quarter of 2008 of approximately $32.0
million. The Company used the $55 million of proceeds it received
from the sale to reduce debt in the second fiscal quarter of 2008 and has $5
million recorded as a long-term receivable which is collateralized by cash in
escrow.
On June
30, 2008 (the first day of the Company’s third fiscal quarter), the Company sold
its 15.0% ownership interest in ShopLocal, LLC for $7.9 million and used the
proceeds to reduce debt. The Company expects to receive an income tax
benefit from the sale of approximately $5.6 million in the fourth quarter of
2008. The Company reduced its carrying value of ShopLocal to match
the sales price. In addition, Classified Ventures, LLC identified potential
goodwill impairment at a real estate-related reporting unit and as a result, the
Company recognized an estimated charge related to this investment in the second
quarter of 2008. The final charge will be determined in the second
half of 2008 when Classified Ventures completes its impairment
analysis. The total non-cash pre-tax charges related to impairments
of internet investments, including ShopLocal and Classified Ventures, in the
second quarter were $21.5 million.
NOTE
4. INTANGIBLE ASSETS AND GOODWILL
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets and goodwill, along with their weighted-average amortization
periods consisted of the following (in thousands):
|
|
|
June
29, 2008
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Period
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Advertiser
and subscriber lists
|
|
$ |
817,701 |
|
|
$ |
(234,753 |
) |
|
$ |
582,948 |
|
14
years
|
Other
|
|
|
26,266 |
|
|
|
(14,324 |
) |
|
|
11,942 |
|
8
years
|
Total
|
|
$ |
843,967 |
|
|
$ |
(249,077 |
) |
|
|
594,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Newspaper
mastheads
|
|
|
|
|
|
|
|
|
|
|
265,950 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
860,840 |
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
1,069,495 |
|
|
Total
intangible assets and goodwill
|
|
|
|
|
|
|
|
|
|
$ |
1,930,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
Period
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertiser
and subscriber lists
|
|
$ |
817,701 |
|
|
$ |
(205,979 |
) |
|
$ |
611,722 |
|
14
years
|
Other
|
|
|
26,261 |
|
|
|
(12,342 |
) |
|
|
13,919 |
|
8
years
|
Total
|
|
$ |
843,962 |
|
|
$ |
(218,321 |
) |
|
|
625,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Newspaper
mastheads
|
|
|
|
|
|
|
|
|
|
|
265,950 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
891,591 |
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
1,042,880 |
|
|
Total
intangible assets and goodwill
|
|
|
|
|
|
|
|
|
|
$ |
1,934,471 |
|
|
|
|
The
following is a summary of the changes in the identifiable intangible
assets and goodwill from December 30, 2007 to June 29, 2008 (in
thousands):
|
|
|
|
December
30,
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
June
29,
|
|
|
|
2007
|
|
|
Additions
|
|
|
Adjustments
|
|
|
|
|
Expense
|
|
|
2008
|
|
Intangible
assets subject
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
amortization
|
|
$ |
843,962 |
|
|
$ |
5 |
|
|
$ |
- |
|
|
|
|
$ |
- |
|
|
$ |
843,967 |
|
Accumulated
amortization
|
|
|
(218,321 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
(30,756 |
) |
|
|
(249,077 |
) |
|
|
|
625,641 |
|
|
|
5 |
|
|
|
- |
|
|
|
|
|
(30,756 |
) |
|
|
594,890 |
|
Newspaper
mastheads
|
|
|
265,950 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
- |
|
|
|
265,950 |
|
Goodwill
|
|
|
1,042,880 |
|
|
|
- |
|
|
|
26,615 |
(1) |
|
|
|
|
-
|
|
|
|
1,069,495 |
|
Total
|
|
$ |
1,934,471 |
|
|
$ |
5 |
|
|
$ |
26,615 |
|
|
|
|
$ |
(30,756 |
) |
|
$ |
1,930,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Relates
primarily to revised estimates of deferred income tax assets and
liabilities related to the Knight Ridder
acquisition.
|
|
Amortization
expense for continuing operations was $15.4 million and $30.8 million for the
three and six months ended June 29, 2008, respectively, and $15.0 million and
$30.0 million for the three and six months ended July 1, 2007,
respectively.
The
estimated amortization expense for the remainder of fiscal 2008 and the
five succeeding fiscal years is as follows (in
thousands):
|
|
|
|
|
Amortization
|
|
|
|
|
Year
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
2008 (remaining)
|
|
$
30,181
|
|
|
|
|
2009
|
|
59,312
|
|
|
|
|
2010
|
|
58,634
|
|
|
|
|
2011
|
|
57,538
|
|
|
|
|
2012
|
|
57,368
|
|
|
|
|
2013
|
|
56,228
|
|
|
NOTE
5. LONG-TERM DEBT
As of
June 29, 2008 and December 30, 2007, long-term debt consisted of the
following (in thousands):
|
|
June
29,
2008
|
|
|
December
30,
2007
|
|
Term
A bank debt, interest of 4.88% at June 29, 2008 and 6.07% at December
30, 2007
|
|
$ |
550,000 |
|
|
$ |
550,000 |
|
Revolving
bank debt, interest of 4.67% at June 29, 2008 and 6.02% at
December 30, 2007
|
|
|
439,700 |
|
|
|
508,600 |
|
Publicly
traded notes:
|
|
|
|
|
|
|
|
|
$50
million 9.875% debentures due in 2009
|
|
|
51,122 |
|
|
|
207,327 |
|
$170
million 7.125% debentures due in 2011
|
|
|
171,693 |
|
|
|
303,497 |
|
$180
million 4.625% debentures due in 2014
|
|
|
160,126 |
|
|
|
176,180 |
|
$400
million 5.750% debentures due in 2017
|
|
|
365,475 |
|
|
|
363,600 |
|
$100
million 7.150% debentures due in 2027
|
|
|
91,385 |
|
|
|
91,162 |
|
$300
million 6.875% debentures due in 2029
|
|
|
272,134 |
|
|
|
271,461 |
|
Total
long-term debt
|
|
$ |
2,101,635 |
|
|
$ |
2,471,827 |
|
The
publicly traded notes are stated net of unamortized discounts and premiums
resulting from recording such assumed liabilities at fair value as of the June
27, 2006 acquisition date of Knight-Ridder, Inc.
In May
2008, the Company purchased $300 million aggregate principal amount of
its outstanding debt securities for $282.4 million in cash obtained
from its revolving credit facility and recorded a pre-tax gain of $19.5
million. The Company purchased $150 million, $130 million and $20
million of its outstanding principal amount of debt securities maturing in 2009,
2011 and 2014, respectively. The gain includes the write-off of approximately
$2.8 million of net unamortized premiums related to these
securities.
The
Company's credit facility entered into on June 27, 2006 provided for a $3.2
billion senior unsecured credit facility (Credit Agreement) and was established
in connection with the acquisition of Knight-Ridder, Inc. (the
Acquisition). At the closing of the Acquisition, the Company’s new
Credit Agreement consisted of a $1.0 billion five-year revolving credit facility
and $2.2 billion five-year Term A loan. Both the Term A loan and the revolving
credit facility are due on June 27, 2011.
On March
28, 2008, the Company entered into an agreement to amend the Credit Agreement
giving the Company greater flexibility in its bank covenants as described
below. Pursuant to the amendment, the revolving credit facility was
reduced to $750.0 million on March 28, 2008 and was further reduced to $625.0
million in May 2008 after receipt by the Company of a tax refund attributable to
the sale of The Star Tribune Company. The revolving credit facility
is required to be further reduced to $500.0 million upon the sale of land in
Miami, Florida. The Company wrote off $3.4 million of deferred
financing costs in connection with the amendment, which was recorded in interest
expense for the quarter ended March 30, 2008.
A total
of $184.3 million was available under the revolving credit facility at June 29,
2008, all of which could be borrowed under the Company's current leverage
covenant and trailing operating cash flow (as defined in the Credit
Agreement).
Debt
under the amended Credit Agreement incurs interest at the London Interbank
Offered Rate (LIBOR) plus a spread ranging from 37.5 basis points to 200.0 basis
points. Applicable rates are based upon the Company’s ratings on its
long-term debt from Moody’s Investor Services (Moody’s) and Standard &
Poor’s (S&P) whenever the Company’s total leverage ratio is less than 4.00
to 1.00 or based on the Company’s total leverage ratio whenever the ratio is
greater than 4.00 to 1.00. A commitment fee for the unused revolving
credit ranges from 10.0 basis points to 50.0 basis points depending on the
Company’s ratings or total leverage ratio. The Company currently pays
interest on debt under the Credit Agreement based on its leverage ratio, which
as of June 29, 2008 was priced at LIBOR plus 200.0 basis points on outstanding
debt and commitment fees on the unused revolver were priced at 50.0 basis
points.
On July
11, 2008, S&P lowered the Company’s corporate credit ratings and noted that
the rating outlook was negative, citing declines in revenue and EBITDA and the
likelihood for further declines in the intermediate term. The ratings
downgrade had no impact on the interest rate and commitment fees the Company
pays under the Credit Agreement.
The
following table summarizes the ratings of the Company’s debt
instruments:
|
|
Debt
Ratings
|
|
|
|
As
of June 29,
2008
|
|
|
As
of last
rating
action
|
|
Credit
Facility:
|
|
|
|
|
|
|
S
& P
|
|
BB-
|
|
|
BB-
|
|
Moody's
|
|
Ba1
|
|
|
Ba1
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
S
& P
|
|
B- |
|
|
B- |
|
Moody's
|
|
B1 |
|
|
B1 |
|
|
|
|
|
|
|
|
|
|
Corp.
Family Rating:
|
|
|
|
|
|
|
|
|
S
& P
|
|
BB-
|
|
|
B+ |
|
Moody's
|
|
Ba3
|
|
|
Ba3
|
|
The
amended Credit Agreement contains quarterly financial covenants including a
minimum interest coverage ratio (as defined in the Credit Agreement) of 2.75 to
1.00 and a maximum leverage ratio (as defined in the Credit Agreement) of 5.00
to 1.00 through September 27, 2009; 4.75 to 1.00 from December 27, 2009 through
December 26, 2010 and 4.50 to 1.00 thereafter. The
Company is also subject to a $250 million limit on any repurchases of its
publicly traded notes with maturity dates after 2011, increases in dividends or
repurchases of its common stock so long as its total leverage ratio is equal to
or greater than 4.00 to 1.00. At June 29, 2008, the Company was in compliance
with all debt covenants.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect until the earlier of the termination of the Credit Agreement or the date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At June
29, 2008, the Company had outstanding letters of credit totaling $49.3 million
securing estimated obligations stemming from workers’ compensation claims and
other contingent claims.
The
following table presents the approximate annual maturities of debt, based upon
the Company's required payments, for the next five years and thereafter (in
thousands):
|
Year
|
|
Payments
|
|
|
2009
|
|
$ |
50,000 |
|
|
2010
|
|
|
- |
|
|
2011
|
|
|
1,159,700 |
|
|
2012
|
|
|
- |
|
|
2013
|
|
|
- |
|
|
Thereafter
|
|
|
980,000 |
|
|
|
|
2,189,700 |
|
|
Less
net discount
|
|
|
(88,065 |
) |
|
Total
debt
|
|
$ |
2,101,635 |
|
NOTE
6. EMPLOYEE BENEFITS
The
Company sponsors defined benefit pension plans (retirement plans), which cover a
majority of its employees. Benefits are based on years of service and
compensation. Contributions to the retirement plans are made by the
Company in amounts deemed necessary to provide the required
benefits. No contributions to the Company's retirement plans are
currently planned during fiscal 2008.
The
Company also has a limited number of supplemental retirement plans to provide
key employees with additional retirement benefits. The terms of the
plans are generally the same as those of the retirement plans, except that the
supplemental retirement plans are limited to key employees and provide an
enhanced pension benefit. These plans are funded on a pay-as-you-go
basis and the accrued pension obligation is largely included in pension and
postretirement obligations.
As of
December 31, 2007, the McClatchy and Knight-Ridder Retirement Plans merged into
one retirement plan.
In June
2008, the Company announced plans to reduce its workforce by about 10% as the
Company streamlines its operations and staff size. The announced
workforce reduction came through both voluntary and involuntary separations and
managed attrition involving about 1,400 positions. The
workforce reduction resulted in severance costs of approximately $23.0 million,
pension curtailment losses in certain defined benefit plans of $1.6 million and
a gain in a postretirement plan of $1.4 million in the second fiscal quarter of
2008, which are included in compensation expense.
The
elements of pension costs for continuing operations are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
7,992 |
|
|
$ |
10,872 |
|
|
$ |
17,102 |
|
|
$ |
18,810 |
|
Interest
cost
|
|
|
24,404 |
|
|
|
22,772 |
|
|
|
49,280 |
|
|
|
46,988 |
|
Expected
return on plan assets
|
|
|
(28,279 |
) |
|
|
(26,024 |
) |
|
|
(56,601 |
) |
|
|
(54,250 |
) |
Prior
service cost amortization
|
|
|
51 |
|
|
|
24 |
|
|
|
101 |
|
|
|
105 |
|
Actuarial
(gain) loss
|
|
|
93 |
|
|
|
(556 |
) |
|
|
183 |
|
|
|
3,453 |
|
Curtailment
loss
|
|
|
1,649 |
|
|
|
- |
|
|
|
1,649 |
|
|
|
- |
|
Net
pension expense
|
|
$ |
5,910 |
|
|
$ |
7,088 |
|
|
$ |
11,714 |
|
|
$ |
15,106 |
|
No
material contributions were made to the Company's multi-employer plans for
continuing operations for the three and six months ended June 29, 2008 and July
1, 2007.
The
Company also provides for or subsidizes postretirement healthcare and certain
life insurance benefits for employees. The elements of postretirement
benefits for continuing operations are as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
(1 |
) |
|
$ |
200 |
|
|
$ |
27 |
|
|
$ |
422 |
|
Interest
cost
|
|
|
532 |
|
|
|
426 |
|
|
|
1,116 |
|
|
|
1,434 |
|
Prior
service cost amortization
|
|
|
(313 |
) |
|
|
- |
|
|
|
(626 |
) |
|
|
- |
|
Actuarial
gain
|
|
|
(568 |
) |
|
|
(6 |
) |
|
|
(574 |
) |
|
|
(6 |
) |
Curtailment
gain
|
|
|
(1,372 |
) |
|
|
- |
|
|
|
(1,372 |
) |
|
|
- |
|
Net
postretirement expense (benefit)
|
|
$ |
(1,722 |
) |
|
$ |
620 |
|
|
$ |
(1,429 |
) |
|
$ |
1,850 |
|
NOTE
7. COMMITMENTS AND CONTINGENCIES
There are
libel and other legal actions that have arisen in the ordinary course of
business and are pending against the Company. From time to time the
Company is involved as a party in various governmental proceedings, including
environmental matters. Management believes, after reviewing such
actions with counsel, that the outcome of pending actions will not have a
material adverse effect on the Company’s consolidated financial statements taken
as a whole.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
The
McClatchy Company (the Company) is the third largest newspaper company in the
United States, with 30 daily newspapers, approximately 50 non-dailies, and
direct marketing and direct mail operations. McClatchy also operates
leading local websites in each of its markets which extend its audience
reach. The websites offer users comprehensive news and information,
advertising, e-commerce and other services. Together with its newspapers
and direct marketing products, these interactive operations make McClatchy a
leading local media company in each of its premium high growth markets.
McClatchy-owned newspapers include, among others, The
Miami
Herald, The
Sacramento Bee, The
(Fort Worth)
Star-Telegram, The
Kansas
City Star, The
Charlotte
Observer, and The
(Raleigh) News
& Observer. McClatchy is listed on the New York Stock
Exchange under the symbol MNI.
McClatchy
also owns a portfolio of premium digital assets, including 14.4% of
CareerBuilder, the United States’ largest online job site, and 25.6% of
Classified Ventures, a newspaper industry partnership that offers two of the
United States’ premier classified websites: the auto website, cars.com, and the
rental site, apartments.com.
The
Company's primary source of revenue is print and online advertising, which
accounted for 83.0% of the Company's revenue for the second fiscal quarter of
2008. While percentages vary from year to year and from newspaper to
newspaper, classified advertising has steadily decreased as a percentage of
total advertising revenues primarily in the employment and real estate
categories and to a lesser extent the automotive category. Classified
advertising as a percentage of total advertising revenues has declined to 33.3%
in the second fiscal quarter of 2008 compared to 38.5% in the second fiscal
quarter of 2007 and 40.8% in the second fiscal quarter of 2006 on a pro forma
basis, primarily as a result of the economic slowdown affecting classified
advertising and the secular shift in advertising demand to online
products.
While
revenues from retail advertising carried as a part of newspapers (run-of-press
or ROP advertising) or in advertising inserts placed in newspapers (preprint
advertising) has decreased year over year, retail advertising has steadily
increased as a percentage of total advertising up to 48.4% in the second fiscal
quarter of 2008 compared to 43.7% in the second fiscal quarter of 2007 and 42.0%
in the second fiscal quarter of 2006.
National
advertising as a percentage of total advertising revenue remained relatively
similar year over year and contributed 9.0% of total advertising revenue in the
second fiscal quarter of 2008. Direct marketing and other advertising
made up the remainder of the Company's advertising revenues in the second fiscal
quarter of 2008.
While
included in the revenues above, all categories of advertising are growing
online, with the exception of employment which has been negatively affected by
the economic downturn. Online advertising grew 12.5% in the second
fiscal quarter of 2008 and represented 11.8% of total advertising, up from 8.8%
of total advertising in 2007. Excluding employment online advertising, online
advertising grew 58.5% in the second fiscal quarter and 55.4% in the first half
of 2008.
Circulation
revenues increased to 13.5% of the Company's newspaper revenues in the second
fiscal quarter of 2008 from 12.0% in the second fiscal quarter of
2007. Most of the Company’s newspapers are delivered by independent
contractors. Circulation revenues are recorded net of direct delivery
costs.
See the
following "Results of Operations" for a discussion of the Company's revenue
performance and contribution by category for the three and six months ended June
29, 2008 and July 1, 2007.
Critical
Accounting Policies
Critical
accounting policies are those accounting policies that management believes are
important to the portrayal of the Company's financial condition and results of
operations and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The Company's Annual Report on
Form 10-K for the period ended December 30, 2007 includes a description of
certain critical accounting policies, including those with respect to revenue
recognition, allowance for doubtful accounts, acquisition accounting,
discontinued operations, goodwill and intangible impairment, pension and
postretirement benefits, income taxes, insurance and stock-based employee
compensation. In order to provide additional clarity and detail
regarding the Company’s impairment of goodwill and intangibles in 2007, the
following is an expanded discussion on the Company’s policy for goodwill and
intangible impairment:
Goodwill
and Intangible Impairment - The Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill
and Other Intangible Assets. As required by SFAS No. 142, the
Company tests for goodwill annually (at year-end) or whenever events occur or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Such indicators of
impairment may include, but are not limited to, changes in business climate such
as an economic downturn, significant operating cash flow declines related to its
newspapers or a major change in the assessment of future operations of its
newspapers, or a sustained decline in the Company’s stock price below the
per-share book value of stockholders’ equity. Due to the continuing challenging
business conditions and the resulting weakness in the Company’s stock price, the
Company analyzed the carrying value of its net assets as of September 30, 2007
and again at its normal year-end annual testing at December 30,
2007. As a result impairment charges were recorded in the third and
fourth quarters of 2007—please see additional information in Note 3 to the
Company’s consolidated financial statements filed in its Form 10-K for the year
ended December 30, 2007.
Summary
of Approach and Analysis of Impairments
The
required two-step approach to test for impairment under SFAS 142 requires the
use of accounting judgments and estimates of future operating
results. Because SFAS 142 requires that impairment testing be done at
a reporting unit level, the Company performs this testing at its newspaper
operating segments (which are considered reporting units under SFAS No. 142). An
impairment charge generally is recognized when the carrying amount of the
reporting unit’s net assets exceeds the estimated fair value of the reporting
unit. In summary the Company conducts its tests and considers the
following factors:
·
|
The
fair value of the Company’s reporting units is determined using a
discounted cash flow model. The projected cash flows are based on
estimates of revenues, newsprint expenses and other cash costs. While
these estimates are always inherently subject to risks and uncertainties,
the ability to project future operations (and in particular advertising
revenues) has become more difficult due to the unprecedented declines in
print advertising as discussed
below.
|
·
|
The
discount rate is determined using the company’s weighted average cost of
capital, adjusted for risks perceived by investors which are implicit in
the Company’s publicly traded stock
price.
|
·
|
The
amount of a goodwill impairment charge requires management to allocate the
fair value of the reporting units to all of the assets and liabilities of
that unit (including any unrecognized intangible assets), using its best
judgments and estimates in valuing the reporting unit, to determine the
implied fair value of goodwill.
|
·
|
The
resulting total fair value of the reporting units is then reconciled to
the market capitalization of the Company, giving effect to an appropriate
control premium. A goodwill impairment charge is recorded to the extent
that the implied goodwill values are below the book value of goodwill for
the reporting units.
|
Management
believes the lack of visibility in future revenue trends has affected investors’
view of the Company’s enterprise value as reflected in its stock price.
Continued declines in the Company’s revenues, which are not offset by the
Company’s cost restructuring efforts, will likely have an impact on the fair
value of the Company’s reporting units as determined by the Company’s discounted
cash flow analysis. In addition, a sustained decline in the value of
the Company’s stock price (likely the result of declining revenues not
sufficiently offset with cost savings) would be considered an indicator of
impairment and could cause the Company to perform an impairment analysis in
advance of its annual impairment testing performed at year-end.
A more
comprehensive discussion of the factors that affected the 2007 impairment
charges follows.
Factors
Affecting Fair Value Calculations for Goodwill Impairment
Fair
value is determined using an income approach, which estimates fair value based
upon future revenue, expenses and cash flows discounted to their present
value. The estimated future cash flows projected can vary within a
range of outcomes depending on the assumptions and estimates used. The estimates
and judgments that most significantly affect the fair value calculation are
assumptions related to revenue, and in particular, potential changes in future
advertising (including the impact of economic trends and the speed of conversion
of advertising and readership to online products from traditional print
products); trends in newsprint prices; and other operating expense items. The
following are trends considered by the Company in developing assumptions and
estimates for its discounted cash flow analysis:
·
|
Beginning
in mid 2006, advertising declined as the real-estate boom began to unwind
and newspapers in the states that experienced the largest run up in real
estate values experienced advertising revenue declines. The real-estate
led downturn has subsequently spread to other sectors in the economy and
across the nation. As a result, advertising declined in the newspaper
industry in 2006 and the decline worsened through 2007. The Company’s
advertising revenues in 2006 were up 0.5% but declined 8.6% in 2007 (both
years pro forma for the acquisition of Knight Ridder) and continued to
decline in 2008 at an accelerating
pace.
|
·
|
Advertising
has been moving to the internet, particularly in the employment category.
This shift in advertiser preferences accelerated as the economy slowed.
While much of this advertising was captured by newspapers’ websites, low
barriers to entry and the searchable format of the internet gave rise to
many more competitors online than in print, particularly in the classified
advertising categories.
|
·
|
Newsprint
expense is the largest raw material input in the production of newspapers
and has ranged from 13.9% (in 2007) to 18.4% (in 2000) of cash operating
expenses for the Company. Newsprint producers have consolidated and
reduced capacity within the last year, and foreign demand of newsprint has
risen, causing prices to begin to rise in late 2007 and continue to
increase in 2008. However newsprint usage is at historical lows due to the
migration of some readers and advertisers to the internet. Through mid
2008 price increases have been offset
by lower newsprint usage reflecting declines in print advertising and
circulation and newspaper conservation efforts, but that may not
continue.
|
·
|
Through
2007 the Company has been in a process of downsizing its business as it
has become a hybrid print and online news and information company;
ultimately a smaller company than one primarily focused on print alone.
Compensation expenses are the largest component of the Company’s expenses
and management has reduced its workforce and restructured operations over
time by using attrition, outsourcing and consolidating functions. As
revenue declines have accelerated, the pace of restructuring has also
accelerated leading to a restructuring announced by the Company on June
16, 2008 that included a 10% workforce reduction. Other expenses have also
been targeted for reductions in the
restructuring.
|
While the
impact of these trends and anticipation of restructuring efforts were taken into
account in the Company’s discounted cash flow model as of December 30, 2007,
assumptions about their impact on future operations are subject to variability
and the ultimate outcome and specific advertising growth rates are highly
subjective for individual newspapers.
Fair
value calculations by their nature require management to make assumptions about
future operating results which can be difficult to predict with
certainty. They are influenced by management’s views of future
advertising trends in the industry, and in the markets in which it operates
newspapers. As discussed above, the variability in these trends and the
difficulty in projecting advertising growth in particular in each newspaper
market are impacted by the unprecedented declines in advertising.
Discount
Rate Considerations
In
developing an appropriate discount rate to apply in its discounted cash flow
models the Company develops an estimate of its weighted average cost of
capital. Management also reviews the capital markets and considers in
its estimates the level of interest rates and perceived market risk associated
with media companies at large and the Company’s value specifically. The ultimate
discount rate selected is influenced by the reconciliation to current market
capitalization. The Company also reviews the value of each newspaper as
calculated in the discounted cash flow model at various discount rates in
comparison to public and private market trading multiples for newspaper assets
as a reasonableness check.
Enterprise
Value and Reconciliation to Market Capitalization
The
trends discussed above, along with general economic conditions, affect the
market’s perception of McClatchy’s enterprise value. The sum of the
fair values of the reporting units is reconciled to the Company's current market
capitalization (based upon the most recent stock market price) plus an estimated
control premium, and factors in the fair value of the Company's publicly traded
debt. The estimated control premium is based in part upon multiples
achieved in sales transactions of media companies with similar dual-class stock
structures as the Company. Though there is a level of subjectivity
and variability related to the assumptions in projecting future operating
results, this reconciliation process provides observable market input into and
therefore influences the range of values ascribed to the reporting
units.
Masthead
Considerations
Newspaper
mastheads (newspaper titles and website domain names) are not subject to
amortization and are tested for impairment annually (at year-end), or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test consists of a comparison of the fair
value of each newspaper masthead with its carrying amount. The
Company uses a relief from royalty approach which utilizes a discounted cash
flow model to determine the fair value of each newspaper
masthead. Management’s judgments and estimates of future operating
results in determining the reporting unit fair values are consistently applied
to each newspaper in determining the fair value of each newspaper
masthead. The Company performed impairment tests on newspaper
mastheads as of September 30, 2007 and
December 30, 2007. See Note 3 to the consolidated financial
statements in the Company’s Annual Report on Form 10-K for the period ended
December 30, 2007 for a discussion of the impairment charges
taken.
Other
Intangible Assets Considerations
Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or change in circumstances indicate
that their carrying amounts may not be recoverable. The carrying
amount of each asset group is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use of such asset
group. The Company performed impairment tests on its long lived
assets (including intangible assets subject to amortization) as of September 30,
2007 and December 30, 2007. No impairment loss was recognized on
intangible assets subject to amortization.
Recent
Events and Trends
Disposition
Transaction:
On March
5, 2007, the Company sold the (Minneapolis) Star
Tribune newspaper and other publications and websites related to the
newspaper for $530 million. The Company received an income tax
benefit of approximately $200 million related to the
sale. Approximately $15 million offset taxes payable in the first
fiscal quarter of 2008 and the Company received approximately $185 million as an
income tax refund in April 2008, which it used to reduce debt.
The
results of Star
Tribune's operations, including interest on debt incurred in connection
with the purchase of the company, have been recorded as discontinued operations
in all periods presented. The Company used the proceeds from the sale of the
Star
Tribune to reduce debt.
Advertising
Revenues:
Advertising
revenues in the second fiscal quarter of 2008 decreased as a result of the
continuing weak economy and the secular shift in advertising to the
internet. The rate of decline in advertising revenues from comparable
periods in 2007 accelerated in the second fiscal quarter compared to the first
fiscal quarter of 2008. California and Florida account for approximately one
third of the Company’s advertising revenue and continue to be affected more than
other regions by the real estate downturn; advertising revenues declined 22.2%
in these two states in the second fiscal quarter of 2008 compared to a decline
of 14.0% in all other regions. Management believes a significant
portion of the advertising downturn reflects the current economic cycle and
expects declines to continue in the third fiscal quarter of 2008. See the
revenue discussions in management’s review of “Results of
Operations”.
Restructuring
Plan:
In June
2008, the Company announced plans to reduce its workforce by about 10% as the
Company streamlines its operations and staff size. The announced
workforce reduction came through both voluntary and involuntary separations and
managed attrition involving about 1,400 positions and is expected to result in
severance costs of approximately $30 million. The Company will retain
its strategic focus on sales, news and online operations as it realigns
operations, with decisions about the size and profile of changes differing by
newspaper operation. The announced workforce reduction resulted in
severance costs of approximately $23.0 million, pension curtailment losses on
certain defined benefit plans of $1.6 million and a gain in a postretirement
plan of $1.4 million in the second fiscal quarter of 2008. The
reduction in the workforce is expected to produce annual savings of
approximately $70 million as part of a plan to reduce overall expenses by $95
million to $100 million over the next four quarters.
Newsprint:
After a
period of declining newsprint prices through most of 2007, newsprint prices
began to increase in the fourth fiscal quarter of 2007 and continued to increase
through the second fiscal quarter of 2008. For the second fiscal
quarter of 2008, newsprint expense was 11.1% lower than in the second fiscal
quarter of 2007, primarily reflecting lower newsprint usage offset by higher
newsprint prices. Newsprint producers have announced price increases
to be implemented in the third fiscal quarter of 2008; however the Company does
not yet know whether the full amount of announced increases or the timing of the
increases will be implemented.
Newsprint
pricing is dependent on global demand and supply for
newsprint. Significant changes in newsprint prices can increase or
decrease the Company's operating expenses and therefore, directly affect the
Company’s operating results. However, because the Company has an
ownership interest in Ponderay Newsprint Co. (Ponderay), a newsprint producer,
an increase in newsprint prices, while negatively affecting the Company’s
operating expenses, would increase the earnings from its share of this
investment partially offsetting the increase in the Company’s newsprint
expense. A decline in newsprint prices would have the opposite
effect. Ponderay is also impacted by the higher cost of energy and
fiber used in the papermaking process. The impact of newsprint price
increases on the Company's financial results is discussed under "Results of
Operations".
Equity
Investments:
On March
31, 2008, the Company, along with the other general partners of SP Newsprint Co.
(SP), completed the sale of SP, of which the Company was a one-third
owner. The Company recorded a gain on the transaction in the second
fiscal quarter of 2008 of $32.0 million. The Company used the $55
million of proceeds it received from the sale to reduce debt and has $5 million
in escrow which it has recorded as a long-term asset. The Company
expects to pay approximately $20 million in taxes related to the taxable gain in
the third fiscal quarter 2008.
On June
30, 2008 (the first day of the Company’s third fiscal quarter), the Company sold
its 15.0% ownership interest in ShopLocal, LLC for $7.9 million and used the
proceeds to reduce debt. The Company expects to receive an income tax
benefit from the sale of approximately $5.6 million in the fourth fiscal quarter
of 2008. The Company reduced its carrying value of ShopLocal to match
the sales price. In addition, Classified Ventures, LLC identified potential
goodwill impairment at a real estate-related reporting unit and as a result, the
Company recognized an estimated charge related to this investment in the second
fiscal quarter of 2008. The final charge will determined in the
second half of 2008 when Classified Ventures completes its impairment analysis.
The total non-cash pre-tax charges related to impairments of internet
investments, including ShopLocal and Classified Ventures, in the second fiscal
quarter were $21.5 million.
Tender
Offer of Public Notes:
In May
2008, the Company purchased $300 million aggregate principal amount of
its outstanding debt securities for $282.4 million in cash obtained
from its revolving credit facility and recorded a pre-tax gain of $19.5
million. The Company purchased $150 million, $130 million and $20
million of its outstanding principal amount of debt securities maturing in 2009,
2011 and 2014, respectively. The gain includes the write-off of approximately
$2.8 million of net unamortized premiums related to these
securities.
RESULTS
OF OPERATIONS
Second
Fiscal Quarter of 2008 Compared to Second Fiscal Quarter of 2007
The
Company reported income from continuing operations in the second fiscal quarter
of 2008 of $20.1 million, or $0.24 per share, compared to $34.5 million, or
$0.42 per share in the second fiscal quarter of 2007. The Company’s
total net income was $19.7 million, or $0.24 per share including discontinued
operations in the second fiscal quarter of 2008, compared to $35.2 million, or
$0.43 per share in the second fiscal quarter of 2007.
Earnings
in the second fiscal quarter of 2008 were positively impacted by a net of $2.7
million in after-tax items including the impact of: a $19.4 million after-tax
gain on the sale of a one-third interest in SP Newsprint Company (SP), a $12.3
million after-tax gain on the extinguishment of debt related to a second quarter
bond tender, $13.2 million in after-tax charges related to implementing a
previously announced restructuring plan, $13.5 million in after-tax impairment
charges of certain internet investments and a $2.2 million charge for tax
expense related to certain discrete tax items. Earnings in the second
quarter of 2007 included a $4.7 million after-tax loss related to the settlement
of litigation and amendment to a Joint Operating Agreement paid by the Seattle
Times Company in which the Company is a 49.5% owner.
Revenues:
Revenues
in the second fiscal quarter of 2008 were $489.7 million, down 15.6% from
revenues of $580.0 million in the second fiscal quarter of
2007. Advertising revenues were $406.3 million, down 16.8% from
advertising in the second fiscal quarter of 2007, and circulation revenues were
$66.1 million, down 5.2%.
As
discussed in Recent Events and Trends above, the economic weakness in the United
States and particularly the declining real estate market continued to impact the
Company’s advertising revenues in the second fiscal quarter of
2008. Also, California and Florida continue to be affected more than
other regions by the real estate downturn; advertising revenues declined 22.2%
in these two states in the second fiscal quarter of 2008 compared to a decline
of 14.0% in all other regions.
The
following summarizes the Company's revenue by category, which compares the
second fiscal quarter of 2008 with the second fiscal quarter of 2007 (dollars in
thousands):
|
|
Quarter
Ended
|
|
|
|
June
29, 2008
|
|
|
July
1,
2007
|
|
|
%
Change
|
|
Advertising:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
196,497 |
|
|
$ |
213,340 |
|
|
|
( 7.9 |
) |
National
|
|
|
36,682 |
|
|
|
46,065 |
|
|
|
(20.4 |
) |
Classified:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
35,997 |
|
|
|
43,778 |
|
|
|
(17.8 |
) |
Employment
|
|
|
40,423 |
|
|
|
66,310 |
|
|
|
(39.0 |
) |
Real
estate
|
|
|
34,412 |
|
|
|
54,724 |
|
|
|
(37.1 |
) |
Other
|
|
|
24,312 |
|
|
|
23,129 |
|
|
|
5.1 |
|
Total
classified
|
|
|
135,144 |
|
|
|
187,941 |
|
|
|
(28.1 |
) |
Direct
marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other
|
|
|
38,005 |
|
|
|
40,931 |
|
|
|
( 7.1 |
) |
Total
advertising
|
|
|
406,328 |
|
|
|
488,277 |
|
|
|
(16.8 |
) |
Circulation
|
|
|
66,055 |
|
|
|
69,707 |
|
|
|
( 5.2 |
) |
Other
|
|
|
17,300 |
|
|
|
22,043 |
|
|
|
(21.5 |
) |
Total
revenues
|
|
$ |
489,683 |
|
|
$ |
580,027 |
|
|
|
(15.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
173.6 |
|
Retail
advertising decreased $16.8 million or 7.9% from the second fiscal quarter of
2007. The declines in retail advertising were largely in the
furniture and home furnishings area reflecting the real estate down turn, and in
department store advertising as consumers focus on higher gas and food
prices. Online retail advertising increased $5.3 million or 80.7%
from the second fiscal quarter of 2007 driven by banner and display
advertisements, while print ROP advertising decreased $18.5 million or 14.7%
from the second fiscal quarter of 2007. Preprint advertising
decreased $3.6 million or 4.5% from the second fiscal quarter of
2007.
National
advertising decreased $9.4 million or 20.4% from the second fiscal quarter of
2007. The declines in total national advertising were primarily in the
telecommunications and to a lesser extent in the national automotive
categories. However, online national advertising increased $2.5
million or 138.6% from the second fiscal quarter of 2007.
Classified
advertising decreased $52.8 million or 28.1% from the second fiscal quarter of
2007. Print classified advertising declined $50.4 million or 32.8%,
while online classified advertising decreased $2.4 million or 7.0% from the
second fiscal quarter of 2007. More specifically:
·
|
Real
estate advertising decreased $20.3 million or 37.1% from the second fiscal
quarter of 2007. The Company has seen dramatic declines in
California and Florida, which continue to be adversely impacted more than
other regions by the real estate downturn. In the second fiscal quarter of
2008, $11.6 million or 57.2% of the Company’s decline in real estate
advertising was in these two states. In total, print real
estate advertising declined 41.3%, while online advertising grew
19.0%.
|
·
|
Automotive
advertising decreased $7.8 million or 17.8% from the second fiscal quarter
of 2007, reflecting lower automotive sales and the consolidation of
automotive dealers. Print automotive advertising declined
27.0%, while online advertising
grew 39.7% reflecting the strength of the Company's cars.com online
products.
|
·
|
Employment
advertising decreased $25.9 million or 39.0% from the second fiscal
quarter of 2007 reflecting a national slowdown in hiring and therefore
employment advertising. The declines were reflected both in
print employment advertising, down 45.3%, and online employment
advertising, down 27.3%.
|
Online
advertising revenue, which is included in each of the advertising categories
discussed above, totaled $48.1 million in the second fiscal quarter of 2008, an
increase of 12.5% as compared to the second fiscal quarter of
2007. In particular, those areas of online advertising that are not
as strongly tied to print up-sells (advertising sold as a combined purchase of
print and online advertising), primarily retail and automotive, have shown the
strongest growth in advertising sales. Excluding employment advertising, which
has been particularly hard hit by the economic downturn, online advertising grew
58.5% in the second fiscal quarter.
Direct
marketing decreased $2.9 million or 7.1% from the second fiscal quarter of 2007
reflecting the overall slow advertising environment in 2008.
Circulation
revenues decreased $3.7 million or 5.2% from the second fiscal quarter of 2007,
primarily reflecting lower circulation volumes. The Company expects
circulation volumes to remain lower in fiscal 2008 compared to fiscal 2007
reflecting both changing readership trends and the Company’s focus on reducing
circulation programs not deemed to be valuable to its advertising
customers.
Operating
Expenses:
Operating
expenses decreased $16.7 million or 3.6% from the second fiscal quarter of 2007
and include $23.3 million in severance and benefit plan curtailment costs
related to the Company’s restructuring plan. Excluding these costs operating
expenses were down 8.6% from the 2007 quarter. Compensation costs
remained relatively unchanged from 2007 and included the restructuring charges
discussed above. Excluding the effect of the restructuring, compensation expense
was down 10.1%. Payroll was down 7.6% and fringe benefits costs declined 20.1%
reflecting a 9.4% decrease in headcount and lower retirement and medical
costs.
Newsprint
and supplement expense was down 11.1% with newsprint expense down 11.3%,
primarily reflecting lower newsprint usage. Supplement expense was
down 9.8%. Depreciation and amortization expenses were down 4.5% from
the second fiscal quarter of 2007. Other operating costs were down 5.7%,
reflecting company-wide cost controls.
Interest:
Interest
expense from continuing operations declined $12.9 million or 26.0% in the second
fiscal quarter of 2008 reflecting lower interest rates and debt
balances.
Equity
(Loss) Income:
Losses
from unconsolidated investments were $366,000 in the second fiscal quarter of
2008 compared to $11.2 million in 2007. During the second fiscal
quarter of 2007, the Seattle Times Company (STC) and Hearst entered into an
agreement to settle certain outstanding legal issues and amend their Joint
Operating Agreement relating to STC and Hearst's Seattle newspaper. As a
result, STC paid approximately $24 million to Hearst in the third fiscal
quarter of 2007. The Company expensed $7.8 million as its share
of this
payment as part of its equity losses in the second fiscal quarter of
2007. Excluding the STC legal settlement, total losses from
unconsolidated investments were $3.4 million in the second fiscal quarter of
2007 and included losses from SP Newsprint Company (SP) which was sold at the
beginning of the second quarter of 2008 as discussed
below.
The
Company sold SP at the beginning of the second fiscal quarter of 2008 and
recorded a gain on the sale $32.0 million. In addition the Company
recorded charges totaling $21.5 million related to estimated impairments of
certain internet investments. For further information, see Note 3 to
the consolidated financial statements for an expanded discussion of transactions
and events related to the Company’s less than 50% owned companies.
Gain
on Extinguishment of Debt
In the
second fiscal quarter of 2008, the Company recorded a gain on the extinguishment
of debt of $19.5 million relating to a bond tender offer. For further
information, see Note 5 to the consolidated financial statements.
Income
Taxes:
The
income tax rate from continuing operations in the second fiscal quarter of 2008
was 46.1% compared to 39.9% in 2007. The rate in the second fiscal quarter of
2008 was impacted by several discrete items including: the gain on
extinguishment of debt, the gain on the sale of SP Newsprint, impairment related
charges on certain equity investments and other discrete tax
items. The effective tax rate excluding the impact of the
transactions and other discrete items for the current fiscal year is expected to
be in the range of 43% to 44%.
First
Six Months of 2008 Compared to First Six Months of 2007
The
Company reported income from continuing operations in the first six months of
2008 of $19.1 million, or $0.23 per share, compared to $49.0 million, or $0.60
per share in 2007. In the first six months of 2007, the Company
recorded a loss from discontinued operations of $4.8 million, or $0.06 per share
relating to the results of the (Minneapolis) Star
Tribune. The Company’s net income was $18.8 million, or $0.23
per share including discontinued operations in the first six months of 2008,
compared to $44.3 million, or $0.54 per share in the first six months of
2007.
Earnings
for the first six months of 2008 were negatively impacted by a net of $978,000
in after-tax items including the impact of: a $19.4 million after-tax gain on
the sale of a one-third interest in SP Newsprint Company (SP), a $12.3 million
after-tax gain on the extinguishment of debt related to a second quarter bond
tender, $14.4 million in after-tax charges related to implementing a previously
announced restructuring plan, $13.5 million in after-tax impairment charges of
certain internet investments, the after-tax write-off of $1.9 million in
deferred financing costs and a $2.9 million charge for tax expense related to
certain discrete tax items. Earnings for the first six months of 2007
included a $4.7 million after-tax loss related to the settlement of litigation
and amendment to a Joint Operating Agreement paid by the Seattle Times Company
in which the Company is a 49.5% owner.
Revenues:
Revenues
in the first six months of 2008 were $978.0 million, down 14.7% from revenues of
$1.1 billion in 2007. Advertising revenues were $810.4 million, down
16.1% from advertising in the first six months of 2007, and circulation revenues
were $133.9 million, down 5.4%.
As
discussed in Recent Events and Trends above, the economic weakness in the United
States and particularly the declining real estate market continued to impact the
Company’s advertising revenues in the first six months of 2008. Also,
California and Florida continue to be affected more than other regions by the
real estate downturn; advertising revenues declined 22.8% in these two states in
the first six months of 2008 compared to declines of 12.4% in all other
regions.
The
following summarizes the Company's revenue by category, which compares the first
six months of 2008 with the first six months of 2007 (dollars in
thousands):
|
|
Six
Months Ended
|
|
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
%
Change
|
|
Advertising:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
387,255 |
|
|
$ |
419,529 |
|
|
|
( 7.7 |
) |
National
|
|
|
74,907 |
|
|
|
91,216 |
|
|
|
(17.9 |
) |
Classified:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
71,383 |
|
|
|
85,933 |
|
|
|
(16.9 |
) |
Employment
|
|
|
86,864 |
|
|
|
136,027 |
|
|
|
(36.1 |
) |
Real
estate
|
|
|
69,835 |
|
|
|
109,911 |
|
|
|
(36.5 |
) |
Other
|
|
|
47,273 |
|
|
|
44,741 |
|
|
|
5.7 |
|
Total
classified
|
|
|
275,355 |
|
|
|
376,612 |
|
|
|
(26.9 |
) |
Direct
marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other
|
|
|
72,834 |
|
|
|
77,943 |
|
|
|
( 6.6 |
) |
Total
advertising
|
|
|
810,351 |
|
|
|
965,300 |
|
|
|
(16.1 |
) |
Circulation
|
|
|
133,919 |
|
|
|
141,587 |
|
|
|
( 5.4 |
) |
Other
|
|
|
33,696 |
|
|
|
39,698 |
|
|
|
(15.1 |
) |
Total
revenues
|
|
$ |
977,966 |
|
|
$ |
1,146,585 |
|
|
|
(14.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
advertising decreased $32.3 million or 7.7% from the first six months of 2007
and largely reflected the factors discussed in the quarterly results
above. Online retail advertising increased $9.3 million
or 75.2% from the first six months of 2007 driven by banner and display
advertisements, while print ROP advertising decreased $32.9 million or 13.3%
from the first six months of 2007. Preprint advertising decreased
$8.7 million or 5.5% from the first six months of 2007.
National
advertising decreased $16.3 million or 17.9% from the first six months of 2007.
The declines in total national advertising were primarily in the
telecommunications and to a lesser extent in the national automotive
category. However, online national advertising increased $4.8 million
or 149.6% from the first six months of 2007.
Classified
advertising decreased $101.3 million or 26.9% from the first six months of
2007. Print classified advertising declined $96.8 million or 31.4%,
while online classified advertising decreased $4.4 million or 6.5% from the
first six months of 2007. More specifically:
·
|
Real
estate advertising decreased $40.1 million or 36.5% from the first six
months of 2007. The Company has seen dramatic declines in
California and Florida, which continue to be adversely impacted more than
other regions by the real estate downturn. In the first six months of
2008, $24.4 million or 61.0% of the Company’s decline in
real estate advertising was in these two states. In total,
print real estate advertising declined 40.1%, while online advertising
grew 13.9%.
|
·
|
Automotive
advertising decreased $14.6 million or 16.9% from the first six months of
2007, reflecting lower automotive sales and the consolidation of
automotive dealers. Print automotive advertising declined
25.7%, while online advertising grew 38.7% reflecting the strength of the
Company's cars.com online products.
|
·
|
Employment
advertising decreased $49.2 million or 36.1% from the first six months of
2007 reflecting a national slowdown in hiring and therefore employment
advertising. The declines were reflected both in print
employment advertising, down 42.0%, and online employment advertising,
down 24.6%.
|
Online
advertising revenue, which is included in each of the advertising categories
discussed above, totaled $93.7 million in the first six months of 2008, an
increase of 11.5% as compared to the first six months of 2007. In
particular, those areas of online advertising that are not as strongly tied to
print up-sells (advertising sold as a combined purchase of print and online
advertising), primarily retail and automotive, have shown the strongest growth
in advertising sales. Excluding employment advertising that has been
particularly hard hit by the economic downturn, online advertising grew 55.4% in
the first half of 2008.
Direct
marketing decreased $5.1 million or 6.6% from the first six months of 2007
reflecting the overall slow advertising environment in 2008.
Circulation
revenues decreased $7.7 million or 5.4% from the first six months of 2007,
primarily reflecting lower circulation volumes. The Company expects
circulation volumes to remain lower in fiscal 2008 compared to fiscal 2007
reflecting both changing readership trends and the Company’s focus on reducing
circulation programs not deemed to be valuable to its advertising
customers.
Operating
Expenses:
Operating
expenses decreased $64.3 million or 6.8% from the first six months of 2007, as
the Company continued to reduce costs to mitigate the impact of revenue
declines. Operating expenses include $25.4 million of severance and curtailment
charges related to the Company’s restructuring plan, and were down 9.5%
excluding these charges. Compensation costs were down 3.7% and included the
restructuring related charges discussed above. Excluding the effect of the
restructuring, compensation costs were down 9.2%, with payroll down 7.0% and
fringe benefits costs down 17.5% reflecting an 8.5% decrease in headcount and
lower retirement and medical costs.
Newsprint
and supplement expense was down 15.6% with newsprint expense down 16.4%,
primarily reflecting lower newsprint usage. Supplement expense was
down 10.3%. Depreciation and amortization expenses were down 4.1%
from the first six months of 2007. Other operating costs were down 8.2%,
reflecting company-wide cost controls.
Interest:
Interest
expense for continuing operations declined $21.4 million, or 20.7%, to $81.9
million for the first six months of 2008. Interest expense included a
$3.4 million charge related to the write-off of deferred financing costs as a
result of the amendment to the Company’s bank credit agreement on March 28,
2008. Excluding the write-off, interest expense declined $24.8
million reflecting lower interest rates and debt balances.
Equity
Income (Loss):
Losses
from unconsolidated investments were $13.5 million in the first six months of
2008 compared to $20.9 million in 2007. During the second fiscal
quarter of 2007, the Seattle Times Company (STC) and Hearst entered into an
agreement to settle certain outstanding legal issues and amend their Joint
Operating Agreement relating to STC and Hearst's Seattle newspaper. As a
result, STC paid approximately $24 million to Hearst in the third fiscal
quarter of 2007. The Company expensed $7.8 million as its share
of this payment as part of its equity losses in the second fiscal quarter of
2007. Excluding the STC legal settlement, total losses from unconsolidated
investments were $13.1 million in the first six months of 2007.
The
Company also recorded a gain on the sale of SP Newsprint of $32.0 million and
charges totaling $21.5 million related to estimated impairments of certain
internet investments. See Note 3 to the consolidated financial
statements for an expanded discussion of transactions and events related to the
Company’s less than 50% owned companies.
Gain
on Extinguishment of Debt
In the
second fiscal quarter of 2008, the Company recorded a gain on the extinguishment
of debt of $19.5 million relating to a bond tender offer. See Note 5
to the consolidated financial statements.
Income
Taxes:
The
income tax rate for the first half of 2008 from continuing operations was 47.9%
compared to 39.7% in 2007 and was impacted by those discrete items discussed in
the quarterly results above. The effective tax rate excluding the
impact of the transactions and other discrete items for the current fiscal year
is expected to be in the range of 43% to 44%.
Discontinued
Operations:
Total
losses from discontinued operations in the first six months of 2008 was $242,000
or less than $0.01 per share compared to a loss in the first six months of 2007
of $4.8 million or $0.06 per share (related to the Star
Tribune newspaper – see Note 2 to the consolidated financial
statements). $1.2 million in interest incurred on the debt used to
finance the purchase of the Star
Tribune was recorded in discontinued operations in the first six months
of fiscal 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
and Uses of Liquidity and Capital Resources:
The
Company’s cash and cash equivalents were $9.2 million as of June 29,
2008. The Company generated $139.9 million of cash from operating
activities from continuing operations in the first half of 2008 compared to
$118.1 million in 2007. The increase in cash from operating
activities primarily relates to changes in working capital. The
Company generated $184.2 million in cash from discontinued operations which was
primarily from a $185 million income tax refund related to the sale of The Star
Tribune Company. The Company used the proceeds from the refund to
repay debt.
Investing
activities provided $42.8 million in cash primarily due to the receipt of $55.3
million from the sale of SP offset by the purchase of property, plant and
equipment totaling $12.2 million. The Company used the proceeds it
received from the sale of SP to reduce debt in the second quarter of 2008 and has $5 million
recorded as a long-term receivable which is collateralized by cash in
escrow. The Company expects to pay taxes related to the gain of
approximately $20 million in the third quarter 2008.
On June
30, 2008 (the first day of the Company’s third fiscal quarter), the Company sold
its 15.0% ownership interest in ShopLocal, LLC for $7.9 million and used the
proceeds it received from the sale to reduce debt. An income tax
benefit from the sale is expected to result in cash tax savings of approximately
$5.6 million in the fourth quarter of 2008.
The
Company owns 10 acres of land in Miami which is currently under contract to
sell. As of June 29, 2008, the Company expects to consummate the sale
of its Miami land prior to December 31, 2008 for a sale price of approximately
$180 million to $190 million with after-tax net proceeds of approximately $115.0
million. Proceeds from the sale will be used to repay debt.
The
Company used $383.4 million of cash from financing sources in the first half of
2008. The Company used $283.2 million, including offering expenses, to complete
a tender for a portion of its bonds (see Note 5 to the consolidated financial
statements above) and the remainder of its financing uses were primarily for
repayment of bank debt. The Company retired $300 million of bond
notes (discussed below), repaid $68.9 million of bank debt in the first half of
2008 and paid $3.3 million in financing costs relating to amending the Credit
Agreement in the first quarter of 2008. The Company also paid $29.6
million in dividends in the first half of 2008.
Debt
and Related Matters:
In May
2008, the Company purchased $300 million aggregate principal amount of
its outstanding debt securities for $282.4 million in cash obtained
from its revolving credit facility and recorded a pre-tax gain of $19.5
million. The Company purchased $150 million, $130 million and $20
million of its outstanding principal amount of debt securities maturing in 2009,
2011 and 2014, respectively. The gain includes the write-off of approximately
$2.8 million of net unamortized premiums related to these
securities.
The
Company’s credit agreement entered into on June 27, 2006 provided for a $3.2
billion senior unsecured credit facility (Credit Agreement) and was established
in connection with the acquisition of Knight-Ridder, Inc. on June 27, 2006 (the
Acquisition). At the closing of the Acquisition, the Company’s Credit
Agreement consisted of a $1 billion five-year revolving credit facility and $2.2
billion five-year Term A loan. On March 28, 2008, the Company entered into an
agreement to amend the Credit Agreement. Pursuant to the amendment,
the revolving credit facility was reduced to $750 million on March 28, 2008 and
was further reduced to $625 million in May 2008 after receipt by the Company of
a $185 million tax refund attributable to the sale of The Star Tribune
Company. The revolving credit facility is required to be further
reduced to $500 million upon the sale of land in Miami, Florida. Both
the Term A loan and the revolver are due on June 27, 2011. As
of June 29, 2008, a total of $439.7 million and $550.0 million was outstanding
on the revolver and Term A loan, respectively.
A total
of $184.3 million was available under the revolving credit facility at June 29,
2008, all of which could be borrowed under the Company's current leverage
covenant and trailing operating cash flow (as defined in the Credit
Agreement).
Debt
under the amended Credit Agreement incurs interest at the London Interbank
Offered Rate (LIBOR) plus a spread ranging from 37.5 basis points to 200.0 basis
points. Applicable rates are based upon the Company’s ratings on its
bank debt from Moody’s Investor Services (Moody’s) and Standard &
Poor’s (S&P) whenever the Company’s total leverage ratio is less than 4.00
to 1.00 or based
on the
Company’s total leverage ratio whenever the ratio is greater than 4.00 to
1.00. A commitment fee for the unused revolving credit ranges from 10.0
basis points to 50.0 basis points depending on the Company’s ratings or total
leverage ratio. The Company currently pays interest on debt
under the Credit Agreement based on its leverage ratio, which on June 29, 2008,
was priced at LIBOR plus 200.0 basis points on outstanding debt and commitment
fees on the unused revolver were priced at 50.0 basis points.
On July
11, 2008, S&P lowered the Company’s corporate credit ratings and noted that
the rating outlook was negative, citing declines in revenue and EBITDA and the
likelihood for further declines in the intermediate term. The ratings
downgrade had no impact on the interest rate and commitment fees the Company
pays under the Credit Agreement.
The
following table summarizes the ratings of the company’s debt
instruments:
|
|
Debt
Ratings
|
|
|
|
As
of June 29,
2008
|
|
|
As
of last
rating
action
|
|
Credit
Facility:
|
|
|
|
|
|
|
S
& P
|
|
BB-
|
|
|
BB-
|
|
Moody's
|
|
Ba1
|
|
|
Ba1
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
S
& P
|
|
B- |
|
|
B- |
|
Moody's
|
|
B1 |
|
|
B1 |
|
|
|
|
|
|
|
|
|
|
Corp.
Family Rating:
|
|
|
|
|
|
|
|
|
S
& P
|
|
BB-
|
|
|
B+ |
|
Moody's
|
|
Ba3
|
|
|
Ba3
|
|
The
amended Credit Agreement contains quarterly financial covenants including a
minimum interest coverage ratio (as defined in the Credit Agreement) of 2.75 to
1.00 and a maximum leverage ratio (as defined in the Credit Agreement) of 5.00
to 1.00 through September 27, 2009; 4.75 to 1.00 from December 27, 2009 through
December 26, 2010 and 4.50 to 1.00 thereafter. The Company is also
subject to a $250 million limit on any repurchases of its publicly traded notes
with maturity dates after 2011, increases in dividends or repurchases of its
common stock so long as its total leverage ratio is equal to or greater than
4.00 to 1.00. At June 29, 2008, the Company was in compliance with all debt
covenants.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect until the earlier of the termination of the Credit Agreement or the date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At June
29, 2008, the Company had outstanding letters of credit totaling $49.3 million
securing estimated obligations stemming from workers’ compensation claims and
other contingent claims.
Contractual
Obligations:
As of
June 29, 2008, the Company has purchase obligations primarily related to capital
expenditures for property, plant and equipment expiring at various dates through
2009, totaling approximately $3.6 million.
The
Company increased its pension and postretirement obligations by approximately
$66.8 million as the qualified pension plan and certain postretirement plans
were revalued as of June 29, 2008 in connection with assessing the impact of a
curtailment of the plans pursuant to the Company’s recently announced
restructuring plan. See Note 6 to the consolidated financial statements above
for more discussion.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Debt
under the Credit Agreement bears interest at the LIBOR plus a spread ranging
from 37.5 basis points to 200.0 basis points. Applicable rates are
based upon the Company's ratings on bank debt from Moody's and S&P or the
Company’s total leverage ratio, depending on the ratio. A
hypothetical 25 basis point change in LIBOR for a fiscal year would increase or
decrease the Company’s annual net income by $1.2 million to $1.6 million based
on expected debt balances in 2008.
See the
discussion at “Recent Events and Trends - Operating Expenses” in Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
impact of market changes on the Company's newsprint and pension
costs.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls
and procedures. Our management evaluated, with the
participation of our Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a - 15(e) or 15d - 15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this Quarterly Report on Form 10-Q to ensure that information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure and that
such information is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission Rules and
Forms.
Changes in internal control over
financial reporting. There was no change in our internal
control over financial reporting that occurred during the second fiscal quarter
of 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1A. RISK FACTORS
Forward-Looking
Information:
Statements
in this quarterly report on Form 10-Q regarding future financial and operating
results, including revenues, operating expenses, cash flows, debt levels, as
well as future opportunities for the Company and any other statements about
management’s future expectations, beliefs, goals, plans or prospects constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Any statements that are not statements
of historical fact (including statements containing the words “believes,”
“plans,” “anticipates,” “expects,” estimates and similar expressions) should
also be considered to be forward-looking statements. There are a
number of important risks and uncertainties that could cause actual results or
events to differ materially from those indicated by such forward-looking
statements, including: anticipated savings from cost restructuring
efforts may not materialize in the amount or timing anticipated by
management; the duration and depth of an economic recession in
markets where McClatchy operates its newspapers may reduce its income and cash
flow more than expected; McClatchy may not consummate contemplated transactions,
including but not limited to the pending sale of the real estate in Miami, which
may enable debt reduction on anticipated terms or at all; McClatchy may do harm
to its operations in attempting to achieve its cost reduction targets;
McClatchy’s operations have been, and will likely continue to be, adversely
affected by competition, including competition from internet publishing and
advertising platforms; McClatchy’s expense and income levels could be adversely
affected by changes in the cost of newsprint and McClatchy’s operations could be
negatively affected by any deterioration in its labor relations, as well as the
other risks detailed from time to time in the Company’s publicly filed
documents, including the Company’s Annual Report on Form 10-K for the year ended
December 30, 2007, filed with the U.S. Securities and Exchange Commission.
McClatchy disclaims any intention and assumes no obligation to update the
forward-looking information contained in this quarterly report.
See
McClatchy’s 2007 Form 10-K filed with the Securities and Exchange Commission
on
February
28, 2008 for further discussion of risk factors that could affect operating
results.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The
Company held its annual shareholders’ meeting on May 13, 2008 to vote on
six proposals. Shareholders approved all of the proposals by voting as
follows:
|
|
|
|
|
|
|
1.
|
|
Election
of Directors of the Board
|
|
|
|
|
|
|
VOTES
|
|
|
|
|
FOR
|
|
WITHHELD
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
|
|
|
|
|
|
|
|
Elizabeth
Ballantine
|
|
4,059,389
|
|
147,493
|
|
|
Kathleen
Foley Feldstein
|
|
4,059,353
|
|
147,530
|
|
|
S.
Donley Ritchey
|
|
4,008,399
|
|
198,483
|
|
|
Frederick
R. Ruiz
|
|
4,057,836
|
|
149,046
|
|
|
|
|
|
|
Class
B Common Stock
|
|
|
|
|
|
|
|
|
|
|
Leroy
Barnes, Jr.
|
|
23,258,962
|
|
-0-
|
|
|
William
K. Coblentz
|
|
23,258,962
|
|
-0-
|
|
|
Molly
Maloney Evangelisti
|
|
23,258,962
|
|
-0-
|
|
|
Larry
Jinks
|
|
23,258,962
|
|
-0-
|
|
|
Joan
F. Lane
|
|
23,258,962
|
|
-0-
|
|
|
Brown
McClatchy Maloney
|
|
23,258,962
|
|
-0-
|
|
|
William
B. McClatchy
|
|
23,258,962
|
|
-0-
|
|
|
Kevin
S. McClatchy
|
|
23,258,962
|
|
-0-
|
|
|
Theodore
R. Mitchell
|
|
23,258,962
|
|
-0-
|
|
|
Gary
B. Pruitt
|
|
23,258,962
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
2.
|
|
Approval
of the Amended and Restated 2004 Stock Incentive Plan
|
|
24,489,335
|
|
2,344,597
|
|
133,609
|
|
498,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
3.
|
|
Approval
of an amendment to the Amended and Restated Long-Term Incentive
Plan
|
|
27,158,345
|
|
188,892
|
|
118,608
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
4.
|
|
Approval
of the Amended and Restated CEO Bonus Plan
|
|
27,075,632
|
|
255,718
|
|
134,495
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
5.
|
|
Approval
of the Amended and Restated Employee Stock Purchase Plan
|
|
26,355,383
|
|
494,500
|
|
117,658
|
|
498,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
6.
|
|
Ratification
of Deloitte & Touche LLP as independent auditors for
2008
|
|
27,384,360
|
|
64,164
|
|
17,321
|
|
-0-
|
Exhibits
filed as part of this Report as listed in the Index of Exhibits, on page 37
hereof.
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.
|
The
McClatchy Company
|
|
August
6, 2008
|
|
By: /s/
Gary B. Pruitt
|
Date
|
Gary
B. Pruitt
Chief
Executive Officer
|
August
6, 2008
|
|
By: /s/
Patrick J. Talamantes
|
Date
|
|
Patrick
J. Talamantes
Chief
Financial Officer
|
|
TABLE
OF EXHIBITS
|
|
|
Exhibit
|
Description
|
|
|
2.1*
|
Agreement
and Plan of Merger, dated March 12, 2006, between the Company and
Knight-Ridder, Inc., included as Exhibit 2.1 in the Company’s Current
Report on Form 8-K filed March 12, 2006.
|
|
|
3.1*
|
The
Company's Restated Certificate of Incorporation dated June 26, 2006,
included as Exhibit 3.1 in the Company's Quarterly Report on Form 10-Q for
the quarter ended
June
25, 2006.
|
|
|
3.2*
|
The
Company's Bylaws as amended and restated effective July 23, 2008, included
as Exhibit 3.2 in the Company's Current Report on Form 8-K filed July 28,
2008.
|
|
|
4.1*
|
Form
of Physical Note for Commercial Paper Program included as Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 27,
2004.
|
|
|
10.1*
|
Credit
Agreement dated June 27, 2006 by and among the Company, lenders party
thereto, Bank of America, N.A. as Administrative Agent, Swing Line Lender
and Letter of Credit Issuer, JPMorgan Chase Bank as Syndication Agent and
Banc of America Securities LLC and JPMorgan Securities Inc. as Joint Lead
Arrangers and Joint Book Managers, included as Exhibit 10.2 in the
Company's Quarterly Report on Form 10-Q filed for the quarter ending on
June 25, 2006.
|
|
|
10.2*
|
Amendment
No. 1 to Credit Agreement dated March 28, 2007 by and between The
McClatchy Company and Bank of America, N.A., as Administrative Agent,
included as Exhibit 99.1 in the Company's Current Report on Form 8-K filed
April 2, 2007.
|
|
|
10.3*
|
Amendment
No. 2 to Credit Agreement dated July 30, 2007 by and between The McClatchy
Company and Bank of America, N.A., as Administrative Agent, included as
Exhibit 10.1 in the Company's Current Report on Form 8-K filed July 31,
2007.
|
|
|
10.4*
|
Amendment
No. 3 to Credit Agreement dated March 28, 2008 by and between The
McClatchy Company and Bank of America, N.A., as Administrative Agent,
included as Exhibit 10.1 in the Company’s Current Report on Form 8-K filed
March 31, 2008.
|
|
|
10.5*
|
General
Continuing Guaranty dated May 4, 2007 by each Material
Subsidiary in favor of the Lenders party to the Credit Agreement
dated June 27, 2006 by and between The McClatchy Company, the
Lenders and Bank of America, N.A., as Administrative Agent, included as
Exhibit 10.3 in the Company’s Quarterly Report on Form 10-Q for the
quarter ending on April 1, 2007.
|
|
|
10.6*
|
Second
Supplemental Indenture dated June 27, 2006, between the Company and
Knight-Ridder, Inc. included as Exhibit 10.3 in the Company's Current
Report on Form 10-Q filed for the quarter ending on June 25,
2006.
|
|
|
10.7*
|
Fourth
Supplemental Indenture dated June 27, 2006, between the Company and
Knight-Ridder, Inc. included as Exhibit 10.4 in the Company's Quarterly
Report on Form 10-Q filed for the quarter ending on June 25,
2006.
|
|
|
**10.8*
|
The
McClatchy Company Management by Objective Plan Description included as
Exhibit 10.4 in the Company's Report filed on Form 10-K for the Year
ending December 30, 2000.
|
|
|
**10.9*
|
The
Company’s Amended and Restated Long-Term Incentive Plan included as
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed May 23,
2005.
|
Exhibit
|
Description
|
|
|
**10.10*
|
Amended
and Restated Supplemental Executive Retirement Plan included as Exhibit
10.4 to the Company's 2002 Report on Form 10-K.
|
|
|
**10.11*
|
The
Company's Amended and Restated 1990 Directors' Stock Option Plan dated
February 1, 1998 included as Exhibit 10.12 to the Company's 1997 Report on
Form 10-K.
|
|
|
**10.12*
|
Amended
and Restated 1994 Stock Option Plan included as Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q filed for the Quarter Ending on
July 1, 2001.
|
|
|
**10.13*
|
Form
of 2004 Stock Incentive Plan Nonqualified Stock Option Agreement included
as Exhibit 99.1 to the Company's Current Report on Form 8-K filed December
16, 2004.
|
|
|
**10.14*
|
Form
of Restricted Stock Agreement related to the Company's 2004 Stock
Incentive Plan, included as Exhibit 99.1 to the Company's Current Report
on Form 8-K dated January 28, 2005.
|
|
|
**10.15*
|
Amended
and Restated Employment Agreement between the Company and Gary B. Pruitt
dated October 22, 2003, included as Exhibit 10.10 to the Company's 2003
Form 10-K.
|
|
|
10.16*
|
Form
of Indemnification Agreement between the Company and each of its officers
and directors, included as Exhibit 99.1 to the Company's Current Report on
Form 8-K filed on May 23, 2005.
|
|
|
**10.17*
|
Amended
and Restated 1997 Stock Option Plan included as Exhibit 10.7 to the
Company's 2002 Report on Form 10-K.
|
|
|
**10.18*
|
Amendment
1 to The McClatchy Company 1997 Stock Option Plan dated January 23, 2007
included as Exhibit 10.16 to the Company's 2006 Report on Form
10-K.
|
|
|
**10.19*
|
The
Company's Amended and Restated 2001 Director Stock Option Plan, included
as Exhibit 10.13 to the Company's 2005 Report on Form
10-K.
|
|
|
**10.20*
|
Amendment
1 to The McClatchy Company 2001 Director Option Plan dated January 23,
2007 included as Exhibit 10.18 to the Company's 2006 Report on Form
10-K.
|
|
|
10.21*
|
Stock
Purchase Agreement by and between The McClatchy Company and Snowboard
Acquisition Corporation, dated December 26, 2006, included as Exhibit 2.1
to the Company's Current Report on Form 8-K filed December 26,
2006.
|
|
|
10.22*
|
Contract
for Purchase and Sale of Real Property by and between The Miami Herald
Publishing Company and Richmond, Inc. and Knight Ridder, Inc. and
Citisquare Group, LLC, dated March 3, 2005, included as Exhibit 10.23 in
the Company's Quarterly Report on Form 10Q filed for the quarter ending
July 1, 2007.
|
|
|
10.23*
|
Amendment
to Contract for Purchase and Sale of Real Property by and between The
Miami Herald Publishing Company and Richmond, Inc. and Knight Ridder, Inc.
and Citisquare Group, LLC, dated March 3, 2005, included as Exhibit 10.24
in the Company's Quarterly Report on Form 10Q filed for the quarter ending
July 1, 2007.
|
|
|
**10.24*
|
Form
of Chief Executive Stock Appreciation Rights Agreement related to the
Company's 2004 Stock Incentive Plan included as Exhibit 10.25 in the
Company’s 2007 Report on Form 10-K.
|
|
|
**10.25
|
The
Company’s 2004 Stock Incentive Plan, as amended and
restated.
|
|
|
Exhibit
|
Description
|
|
|
**10.26
|
Amendment
No. 1 to the Company’s Amended and Restated Long-Term Incentive
Plan.
|
|
|
**10.27
|
The
Company’s Amended and Restated CEO Bonus Plan.
|
|
|
**10.28
|
The
Company’s Amended and Restated Employee Stock Purchase
Plan.
|
|
|
21*
|
Subsidiaries
of the Company.
|
|
|
31.1
|
Certification
of the Chief Executive Officer of The McClatchy Company pursuant to Rule
13a-14(a) under the Exchange Act.
|
|
|
31.2
|
Certification
of the Chief Financial Officer of The McClatchy Company pursuant to Rule
13a-14(a) under the Exchange Act.
|
|
|
32.1
|
Certification
of the Chief Executive Officer of The McClatchy Company pursuant to 18
U.S.C. Section 1350.
|
|
|
32.2
|
Certification
of the Chief Financial Officer of The McClatchy Company pursuant to 18
U.S.C. Section 1350.
|
|
|
*
|
Incorporated
by reference
|
**
|
Compensation
plans or arrangements for the Company's executive officers and
directors
|