Business News

McClatchy Reports Third Quarter 2010 Earnings

Thursday 21. October 2010 - -- Improving ad revenue trends continued in the quarter -- Cash operating expenses, excluding severance, down 4.2% in the quarter and down 12.3% in the nine-month period -- Expect full-year operating cash flow to grow -- Earnings from digital investments up significantly through the first nine months

The McClatchy Company (NYSE: MNI) today reported net income in the third quarter of 2010 of $12.1 million or 14 cents per share. Adjusted earnings(1) in the third quarter of 2010, excluding unusual items, were $10.6 million or 12 cents per share.
In the third quarter of 2009 the company’s earnings from continuing operations were $23.6 million or 28 cents per share. Adjusted earnings from continuing operations(1) in the third quarter of 2009, excluding unusual items, were $11.0 million or 13 cents per share.
Unusual items affecting the third quarter results in each year are discussed below.
Revenues in the third quarter of 2010 were $327.7 million, down 5.7% from revenues of $347.4 million in the third quarter of 2009. Advertising revenues were $249.1 million, down 6.4%, and circulation revenues were $66.4 million, down 3.8%.
Cash operating expenses (a non-GAAP term which is discussed below) in the third quarter, excluding severance costs, declined $10.7 million, or 4.2%, from the 2009 third quarter.
Management noted that earnings in the third quarter of 2010 benefited from the reversal of tax reserves and related interest as tax years in certain states closed.
First Nine Months Results:
Income from continuing operations in the first nine months of 2010 was $17.4 million or 20 cents per share. Adjusted earnings from continuing operations,(1) excluding several unusual items discussed below, were $23.6 million or 28 cents per share. Total net income, including discontinued operations, was $21.4 million or 25 cents per share.
Income from continuing operations for the first nine months of 2009 was $27.9 million, or 33 cents per share, and was affected by the unusual items discussed below. Adjusted earnings from continuing operations(1) were $11.0 million, or 13 cents per share, in the first nine months of 2009.
Revenues in the first nine months of 2010 were down 6.8% to $1.0 billion compared to $1.1 billion in the 2009 period. Advertising revenues in the 2010 period totaled $762.6 million, down 8.6%, and circulation revenues were $203.7 million, down 1.5%.
Management’s Comments:
Commenting on McClatchy’s third quarter results, Gary Pruitt, chairman and chief executive officer, said, “Advertising revenue trends continued to improve in the third quarter with ad revenues down year-over-year by 6.4% compared to declines of 8.2% in the second quarter and 11.2% in the first quarter of 2010. Within the quarter, advertising revenues were down 6.1% in July, down 5.8% in August and down 7.3% in September.
“Classified advertising continued to recover in the third quarter, particularly in the employment and automotive categories. Employment advertising, more than half of which is now digital, grew throughout the quarter: up 0.1% in July, up 0.2% in August and up 5.6% in September.
“We have seen improving ad revenues since the second quarter of 2009 although September went against this trend. We believe the September results reflect the uneven nature of the economic recovery. The slowdown in September occurred primarily in national advertising and, to a lesser extent, in retail. The declines were greatest at our California and Florida newspapers, where the rate of economic recovery continues to be slower than we are seeing elsewhere.
“In spite of the impact of the economy, our digital advertising revenue grew 1.6% in the quarter and represented 19.0% of our total third quarter advertising revenue. Our local online audiences continue to grow strongly, up 19.2% in the third quarter.
“Much of our digital success in classified advertising comes from Cars.com and CareerBuilder. We own more than a quarter of Cars.com and 14% of CareerBuilder, companies that provide state-of-the-art products that have boosted our digital auto and employment advertising revenues. Their earnings have also contributed significantly to our income this year. Income from all equity interests has more than doubled in the first nine months of the year to $8.2 million, with the increase coming primarily from Cars.com and CareerBuilder.
“As we have said many times, we continue to focus on becoming more efficient in our operations. Excluding severance costs, cash operating expenses were down 4.2% from the third quarter of 2009. Through the first nine months of the year, our cash expenses excluding severance costs were down 12.3% and operating cash flow grew $31.1 million, or 13.5%, to $261.2 million.
“Looking ahead to the fourth quarter our visibility on revenues is limited, but we will work to maximize results and will remain vigilant in controlling costs. We expect cash operating expenses excluding severance costs in the fourth quarter to be flat to up only slightly reflecting the impact of higher newsprint prices. As a result, we expect our full year operating cash flow to grow compared to last year.”
Pat Talamantes, McClatchy’s chief financial officer, said, “Debt at the end of the quarter was even with the second quarter at $1.8 billion, $113.4 million below year-end 2009, despite having to make the initial interest payment on our new 2017 bonds in the third quarter. Our leverage ratio at the end of the third quarter was 4.52 times trailing-12-month cash flow, down from 5.26 times at the end of 2009. Our interest coverage ratio was 2.69 times at the end of the 2010 third quarter. Both of these measurements are well within our bank covenants which require a leverage ratio of no greater than 6.75 times and interest coverage ratio of at least 1.50 times.”
(1)Adjusted Earnings From Continuing Operations and EPS:
The company entered into several transactions and reported several unusual events in the third quarters and first nine months of fiscal 2010 and 2009 that affected results:
— The company incurred a loss related to its debt refinancing and debt
repayments in the first quarter of 2010.
— Compensation in 2010 and 2009 included pre-tax severance charges
incurred in connection with the restructuring plans.
— On May 21, 2009, the company launched a private debt exchange offer for
all of its outstanding debt securities for a combination of cash and new
debt securities. The offer closed on June 25, 2009, and the company
exchanged $3.4 million in cash and $24.2 million of newly issued senior
notes for $102.8 million of debt securities. All but $375,000 of those
senior notes were retired in the company’s February 2010 debt
refinancing.
— During the second quarters of 2010 and 2009, the company recorded
accelerated depreciation on production equipment associated with the
outsourcing of printing at various newspapers.
— In 2009 the company refined its estimate of its projected effective
annual tax rate and applied the revised rate to the unusual items
resulting in a significant adjustment in the third quarter of 2009.
— Both the 2010 and 2009 third quarters included charges for certain
discrete tax items, and, in 2010, included the reversal of interest on
income taxes related to certain of those discrete tax items.