| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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: 1-31805
| JOURNAL COMMUNICATIONS, INC. |
| (Exact name of registrant as specified in its charter) |
| WISCONSIN |
20-0020198 |
| (State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
| or organization) | |
333 W. State Street, Milwaukee, Wisconsin |
53203 |
| (Address of principal executive offices) | (Zip Code) |
| 414-224-2616 |
| 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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Number of shares outstanding of each of the issuer’s classes of common stock as of May 2, 2005 (excluding 8,676,705 shares of class B common stock held by our subsidiary, The Journal Company):
| Class | Outstanding at May 2, 2005 |
| Class A Common Stock | 31,933,425 |
Class B Common Stock |
48,761,511 |
Class C Common Stock |
3,264,000 |
| Page No. | |||
Part I. |
Financial Information | ||
| Item 1. | Financial Statements | ||
| Consolidated Condensed Balance Sheets as of | |||
| March 27, 2005 (Unaudited) and December 26, 2004 | 2 | ||
| Unaudited Consolidated Condensed Statements of Earnings | |||
| for the First Quarter Ended March 27, 2005 and March 28, 2004 | 3 | ||
| Unaudited Consolidated Condensed Statement of | |||
| Shareholders' Equity for the First Quarter Ended March 27, 2005 | 4 | ||
| Unaudited Consolidated Condensed Statements of | |||
| Cash Flows for the First Quarter Ended March 27, 2005 | |||
| and March 28, 2004 | 5 | ||
| Notes to Unaudited Consolidated Condensed | |||
| Financial Statements as of March 27, 2005 | 6 | ||
| Item 2. | Management's Discussion and Analysis of Financial Condition | ||
| and Results of Operations | 12 | ||
| Item 3. | Quantitative and Qualitative Disclosure of Market Risk | 20 | |
| Item 4. | Controls and Procedures | 20 | |
Part II. |
Other Information | ||
| Item 1. | Legal Proceedings | 20 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 | |
| Item 3. | Defaults Upon Senior Securities | 21 | |
| Item 4. | Submission of Matters to a Vote of Security Holders | 21 | |
| Item 5. | Other Information | 21 | |
| Item 6. | Exhibits | 21 |
1
JOURNAL COMMUNICATIONS,
INC.
Consolidated Condensed Balance Sheets
(in thousands, except share and per share
amounts)
| March 27, 2005 |
December 26, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,571 | $ | 6,374 | ||||
| Receivables, less allowance for doubtful accounts | ||||||||
| of $7,468 and $7,210 | 82,737 | 89,690 | ||||||
| Inventories | 10,077 | 10,450 | ||||||
| Prepaid expenses | 13,050 | 13,302 | ||||||
| Deferred income taxes | 8,954 | 8,903 | ||||||
| Investment in preferred stock | 4,394 | 4,394 | ||||||
| Current assets of discontinued operations | 1,194 | 12,215 | ||||||
| TOTAL CURRENT ASSETS | 126,977 | 145,328 | ||||||
Property and equipment, at cost, less accumulated depreciation | ||||||||
| of $346,946 and $338,674 | 292,710 | 297,405 | ||||||
| Goodwill | 136,102 | 136,286 | ||||||
| Broadcast licenses | 140,046 | 140,046 | ||||||
| Other intangible assets, net | 14,419 | 14,753 | ||||||
| Prepaid pension costs | 22,452 | 23,787 | ||||||
| Other assets | 7,923 | 8,565 | ||||||
| Non-current assets of discontinued operations | 329 | 8,892 | ||||||
| TOTAL ASSETS | $ | 740,958 | $ | 775,062 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 35,094 | $ | 39,239 | ||||
| Accrued compensation | 19,126 | 22,364 | ||||||
| Accrued employee benefits | 10,624 | 10,171 | ||||||
| Deferred revenue | 20,588 | 20,536 | ||||||
| Other current liabilities | 18,917 | 12,518 | ||||||
| Current liabilities of discontinued operations | 4,052 | 6,164 | ||||||
| Current portion of long-term liabilities | 4,101 | 3,600 | ||||||
| TOTAL CURRENT LIABILITIES | 112,502 | 114,592 | ||||||
Accrued employee benefits | 18,150 | 17,839 | ||||||
| Long-term notes payable to banks | 28,890 | 70,310 | ||||||
| Deferred income taxes | 64,648 | 64,491 | ||||||
| Other long-term liabilities | 14,597 | 16,683 | ||||||
| Long-term liabilities of discontinued operations | 1,652 | 1,652 | ||||||
Shareholders' equity: | ||||||||
| Preferred stock, $0.01 par - authorized 10,000,000 shares; no shares | ||||||||
| outstanding at March 27, 2005 and at December 26, 2004 | -- | -- | ||||||
| Common stock, $0.01 par: | ||||||||
| Class C - authorized 10,000,000 shares; issued and outstanding: | ||||||||
| 3,264,000 shares at March 27, 2005 and December 26, 2004 | 33 | 33 | ||||||
| Class B-2 - authorized 60,000,000 shares; issued and outstanding: | ||||||||
| 35,036,688 shares at March 27, 2005 and 35,539,783 | ||||||||
| shares at December 26, 2004 | 393 | 399 | ||||||
| Class B-1 - authorized 60,000,000 shares; issued and outstanding: | ||||||||
| 8,447,795 shares at March 27, 2005 and 9,270,929 | ||||||||
| shares at December 26, 2004 | 129 | 136 | ||||||
| Class A - authorized 170,000,000 shares; issued and outstanding: | ||||||||
| 28,728,481 shares at March 27, 2005 and 27,417,326 | ||||||||
| shares at December 26, 2004 | 287 | 274 | ||||||
| Additional paid-in capital | 385,314 | 385,219 | ||||||
| Unearned compensation | (1,035 | ) | (104 | ) | ||||
| Retained earnings | 224,113 | 212,253 | ||||||
| Treasury stock, at cost | (108,715 | ) | (108,715 | ) | ||||
| TOTAL SHAREHOLDERS' EQUITY | 500,519 | 489,495 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 740,958 | $ | 775,062 | ||||
Note: The balance sheet at December 26, 2004 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.
See accompanying notes to unaudited consolidated condensed financial statements.
2
JOURNAL COMMUNICATIONS,
INC.
Unaudited Consolidated Condensed Statements of Earnings
(in thousands, except per
share amounts)
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Continuing Operations: | ||||||||
| Revenue: | ||||||||
| Publishing | $ | 77,914 | $ | 76,671 | ||||
| Broadcasting | 37,206 | 34,635 | ||||||
| Telecommunications | 37,455 | 35,557 | ||||||
| Printing services | 18,306 | 21,764 | ||||||
| Other | 10,547 | 10,464 | ||||||
| Total revenue | 181,428 | 179,091 | ||||||
Operating costs and expenses: | ||||||||
| Publishing | 40,504 | 38,532 | ||||||
| Broadcasting | 17,341 | 15,102 | ||||||
| Telecommunications | 22,143 | 20,406 | ||||||
| Printing services | 15,778 | 18,460 | ||||||
| Other | 8,993 | 8,551 | ||||||
| Total operating costs and expenses | 104,759 | 101,051 | ||||||
| Selling and administrative expenses | 55,372 | 52,338 | ||||||
| Total operating costs and expenses and selling | ||||||||
| and administrative expenses | 160,131 | 153,389 | ||||||
Operating earnings | 21,297 | 25,702 | ||||||
Other income and expense: | ||||||||
| Interest income and dividends | 96 | 67 | ||||||
| Interest expense | (586 | ) | (612 | ) | ||||
| Total other income and expense | (490 | ) | (545 | ) | ||||
Earnings from continuing operations before income taxes | 20,807 | 25,157 | ||||||
Provision for income taxes | 8,242 | 10,073 | ||||||
Earnings from continuing operations | 12,565 | 15,084 | ||||||
Gain from discontinued operations, net of applicable income tax | ||||||||
| expense of $3,073 and $393, respectively | 4,846 | 615 | ||||||
Net earnings | $ | 17,411 | $ | 15,699 | ||||
| Earnings available to class A and B common shareholders | $ | 16,947 | $ | 15,235 | ||||
Earnings per share: | ||||||||
| Basic: | ||||||||
| Continuing operations | $ | 0.17 | $ | 0.20 | ||||
| Discontinued operations | 0.07 | 0.01 | ||||||
| Net earnings | $ | 0.24 | $ | 0.21 | ||||
Diluted: | ||||||||
| Continuing operations | $ | 0.17 | $ | 0.19 | ||||
| Discontinued operations | 0.06 | 0.01 | ||||||
| Net earnings | $ | 0.23 | $ | 0.20 | ||||
See accompanying notes to unaudited consolidated condensed financial statements.
3
Journal Communications,
Inc.
Unaudited Consolidated Condensed Statement of Shareholders' Equity
For the First
Quarter Ended March 27, 2005
(dollars in thousands, except per-share amounts)
| Preferred | Common Stock |
Additional Paid-in- |
Unearned | Retained | Treasury Stock, |
Comprehensive | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Stock |
Class C |
Class B-2 |
Class B-1 |
Class A |
Capital |
Compensation |
Earnings |
at cost |
Total |
Income | |||||||||||||||||||||||||
Balance at December 26, 2004 |
$ | -- | $ | 33 | $ | 399 | $ | 136 | $ | 274 | $ | 385,219 | $ | (104 | ) | $ | 212,253 | $ | (108,715 | ) | $ | 489,495 | |||||||||||||
Net earnings and other comprehensive income | 17,411 | 17,411 | $ | 17,411 | |||||||||||||||||||||||||||||||
Dividends declared: | |||||||||||||||||||||||||||||||||||
| Class C ($0.142 per share) | (464 | ) | (464 | ) | |||||||||||||||||||||||||||||||
| Class B ($0.065 per share) | (2,873 | ) | (2,873 | ) | |||||||||||||||||||||||||||||||
| Class A ($0.065 per share) | (1,823 | ) | (1,823 | ) | |||||||||||||||||||||||||||||||
| Issuance of shares: | |||||||||||||||||||||||||||||||||||
| Conversion of class B to class A | (7 | ) | (7 | ) | 14 | -- | |||||||||||||||||||||||||||||
| Restricted stock grants | 1 | 990 | (991 | ) | -- | ||||||||||||||||||||||||||||||
| Stock grants | 25 | 25 | |||||||||||||||||||||||||||||||||
| Employee stock purchase plan | 595 | 595 | |||||||||||||||||||||||||||||||||
| Shares purchased and retired | (1 | ) | (1,515 | ) | (391 | ) | (1,907 | ) | |||||||||||||||||||||||||||
| Amortization of unearned compensation | 60 | 60 | |||||||||||||||||||||||||||||||||
Balance at March 27, 2005 | $ | -- | $ | 33 | $ | 393 | $ | 129 | $ | 287 | $ | 385,314 | $ | (1,035 | ) | $ | 224,113 | $ | (108,715 | ) | $ | 500,519 | |||||||||||||
See accompanying notes to unaudited consolidated condensed financial statements.
4
JOURNAL COMMUNICATIONS,
INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Cash flow from operating activities: | ||||||||
| Net earnings | $ | 17,411 | $ | 15,699 | ||||
| Less gain from discontinued operations | 4,846 | 615 | ||||||
| Earnings from continuing operations | 12,565 | 15,084 | ||||||
| Adjustments for non-cash items: | ||||||||
| Depreciation | 11,105 | 10,684 | ||||||
| Amortization | 334 | 491 | ||||||
| Provision for doubtful accounts | 85 | 621 | ||||||
| Deferred income taxes | 106 | 2,616 | ||||||
| Net (gain) loss from disposal of assets | (44 | ) | 37 | |||||
| Net changes in operating assets and liabilities: | ||||||||
| Receivables | 6,868 | 2,025 | ||||||
| Inventories | 373 | (178 | ) | |||||
| Accounts payable | (4,145 | ) | 1,134 | |||||
| Other assets and liabilities | 4,890 | 4,477 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 32,137 | 36,991 | ||||||
Cash flow from investing activities: | ||||||||
| Capital expenditures for property and equipment | (6,499 | ) | (5,443 | ) | ||||
| Proceeds from sales of assets | 133 | 8 | ||||||
| NET CASH USED FOR INVESTING ACTIVITIES | (6,366 | ) | (5,435 | ) | ||||
Cash flow from financing activities: | ||||||||
| Proceeds from long-term notes payable to banks | 37,065 | 36,935 | ||||||
| Payments on long-term notes payable to banks | (78,485 | ) | (64,635 | ) | ||||
| Proceeds from issuance of common stock | 595 | -- | ||||||
| Purchase and retirement of common stock | (1,907 | ) | -- | |||||
| Cash dividends | (5,160 | ) | (5,239 | ) | ||||
| NET CASH USED FOR FINANCING ACTIVTIES | (47,892 | ) | (32,939 | ) | ||||
NET CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS | 22,318 | (818 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 197 | (2,201 | ) | |||||
Cash and cash equivalents: | ||||||||
| Beginning of year | 6,374 | 8,440 | ||||||
At March 27, 2005 and March 28, 2004 | $ | 6,571 | $ | 6,239 | ||||
See accompanying notes to unaudited consolidated condensed financial statements.
5
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 1 | BASIS OF PRESENTATION |
| The accompanying unaudited consolidated condensed financial statements have been prepared by Journal Communications, Inc. and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect normal and recurring adjustments, which we believe to be necessary for a fair presentation. As permitted by these regulations, these statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. However, we believe that the disclosures are adequate to make the information presented not misleading. The operating results for the first quarter ended March 27, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2005. You should read these unaudited consolidated condensed financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 26, 2004. |
| 2 | ACCOUNTING PERIODS |
| Our fiscal year is a 52-53 week year ending on the last Sunday of December in each year. In addition, we have four quarterly reporting periods, each consisting of 13 weeks and ending on a Sunday, provided that once every six years, starting in 2006, the fourth quarterly reporting period will be 14 weeks. |
| 3 | NEW ACCOUNTING STANDARD |
| In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for Statement No. 123R. In accordance with the new rule, we will adopt Statement No. 123R in the first quarter of 2006. We do not believe the effect of adopting Statement No. 123R will have a material impact on our consolidated financial statements. |
| 4 | EARNINGS PER SHARE |
| Basic earnings per share is computed by dividing net earnings available to class A and B common shareholders by the weighted average number of class A and B shares outstanding during the period and excludes non-vested restricted stock. Diluted earnings per share is computed based upon the assumptions that the class C shares outstanding were converted into class A and B shares, common shares are purchased upon exercise of certain of our non-statutory stock options, and common shares will be outstanding upon expiration of the vesting periods for our non-vested restricted stock. |
| Basic and diluted earnings per share are computed as follows: |
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Basic earnings: | ||||||||
| Earnings from continuing operations | $ | 12,565 | $ | 15,084 | ||||
| Discontinued operations | 4,846 | 615 | ||||||
| Net earnings | 17,411 | 15,699 | ||||||
| Less dividends on class C common stock | (464 | ) | (464 | ) | ||||
| Earnings available to class A and B common shareholders | $ | 16,947 | $ | 15,235 | ||||
Weighted average class A and B shares outstanding | 72,242 | 73,457 | ||||||
Basic earnings per share: | ||||||||
| Continuing operations | $ | 0.17 | $ | 0.20 | ||||
| Discontinued operations | 0.07 | 0.01 | ||||||
| Net earnings | $ | 0.24 | $ | 0.21 | ||||
Diluted earnings: | ||||||||
| Earnings available to class A and B common shareholders | $ | 16,947 | $ | 15,235 | ||||
| Plus dividends on class C common stock | 464 | 464 | ||||||
| Net earnings | $ | 17,411 | $ | 15,699 | ||||
6
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 4 | EARNINGS PER SHARE, continued |
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Weighted average shares outstanding | 72,242 | 73,457 | ||||||
| Vesting of restricted stock | 6 | -- | ||||||
| Incremental class A and B shares for conversion of | ||||||||
| class C shares | 4,452 | 4,452 | ||||||
| Adjusted weighted average shares outstanding | 76,700 | 77,909 | ||||||
Diluted earnings per share: | ||||||||
| Continuing operations | $ | 0.17 | $ | 0.19 | ||||
| Discontinued operations | 0.06 | 0.01 | ||||||
| Net earnings | $ | 0.23 | $ | 0.20 | ||||
| Each of the 3,264,000 class C shares outstanding is convertible at any time at the option of the holder into either (i) 1.363970 class A shares (or a total of 4,451,998 class A shares) or (ii) 0.248243 class A shares (or a total of 810,265 class A shares) and 1.115727 class B shares (or a total of 3,641,733 class B shares). |
| 5 | STOCK-BASED COMPENSATION |
| We account for stock-based compensation by using the intrinsic value-based method in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, we do not recognize compensation expense for our stock options because the exercise price equals the market price of the underlying stock on the grant date. We recognize compensation expense related to restricted stock grants over the vesting period. As permitted, we have elected to adopt the disclosure only provisions of Statement No. 123, “Accounting for Stock-Based Compensation” and Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.” |
| Statement No. 123, as amended by Statement No. 148, establishes a fair value-based method of accounting for employee stock-based compensation plans and encourages companies to adopt that method. However, it also allows companies to continue to apply the intrinsic value-based method currently prescribed under APB No. 25. We have chosen to continue to report stock-based compensation in accordance with APB No. 25, and provide the following pro forma disclosure of the effects of applying the fair value method to all applicable awards granted. The following table illustrates the effect on net earnings and net earnings per share if we had applied the fair value recognition provisions of Statement No. 123: |
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Net earnings as reported | $ | 17,411 | $ | 15,699 | ||||
| Add compensation cost of restricted stock, net of related tax | ||||||||
| effects, included in the determination of net earnings | ||||||||
| as reported | 37 | 7 | ||||||
| Deduct stock based compensation determined under fair value- | ||||||||
| based method, net of related tax effects: | ||||||||
| Stock options | (38 | ) | (9 | ) | ||||
| Employee stock purchase plan | (40 | ) | -- | |||||
| Restricted stock | (37 | ) | (7 | ) | ||||
| Pro forma net earnings | $ | 17,333 | $ | 15,690 | ||||
Net earnings per share of common stock: | ||||||||
| Basic earnings per share: | ||||||||
| As reported | $ | 0.24 | $ | 0.21 | ||||
| Pro forma | $ | 0.23 | $ | 0.21 | ||||
Diluted earnings per share: | ||||||||
| As reported | $ | 0.23 | $ | 0.20 | ||||
| Pro forma | $ | 0.23 | $ | 0.20 | ||||
7
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 6 | INVENTORIES |
| Inventories are stated at the lower of cost (first in, first out method) or market. Inventories at March 27, 2005 and December 26, 2004 consisted of the following: |
| March 27, 2005 |
December 26, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Paper and supplies | $ | 7,109 | $ | 7,187 | ||||
| Work in process | 1,404 | 1,607 | ||||||
| Finished goods | 1,891 | 2,020 | ||||||
| Less obsolescence reserve | (327 | ) | (364 | ) | ||||
| Inventories | $ | 10,077 | $ | 10,450 | ||||
| 7 | NOTES PAYABLE TO BANKS |
| We have a $350 million unsecured revolving credit facility expiring on September 4, 2008. The interest rate on borrowings are either LIBOR plus a margin that ranges from 87.5 basis points to 150 basis points, depending on our leverage, or the “Base Rate,” which equals the higher of the prime rate set by U.S. Bank, N.A. or the Federal Funds Rate plus one percent per annum. As of March 27, 2005, we had borrowings of $28,890 under the facility at a weighted average rate of 4.09%. Fees in connection with the facility of $1,997 are being amortized over the term of the facility using the straight-line method which approximates the effective-interest method. In addition, an annual fee of $60 is being amortized using the straight line method from October 2004 through September 2005. |
| 8 | EMPLOYEE BENEFIT PLANS |
| The components of our net periodic benefit costs for our defined benefit and non-qualified pension plans and our postretirement health benefit plan are as follows: |
| Pension Benefits | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Service cost | $ | 1,361 | $ | 1,232 | ||||
| Interest cost | 2,087 | 2,068 | ||||||
| Expected return on plan assets | (2,544 | ) | (2,584 | ) | ||||
| Amortization of: | ||||||||
| Unrecognized prior service cost | (119 | ) | 64 | |||||
| Unrecognized net transition obligation | -- | 26 | ||||||
| Unrecognized net loss | 723 | 416 | ||||||
| Net periodic benefit cost included in total operating costs and | ||||||||
| expenses and selling and administrative expenses | $ | 1,508 | $ | 1,222 | ||||
| Other Postretirement Benefits | ||||||||
| March 27, 2005 |
March 28, 2004 | |||||||
| Service cost | $ | 120 | $ | 93 | ||||
| Interest cost | 502 | 515 | ||||||
| Amortization of: | ||||||||
| Unrecognized prior service cost | 58 | -- | ||||||
| Unrecognized net transition obligation | 137 | 137 | ||||||
| Unrecognized net loss | 164 | 112 | ||||||
| Net periodic benefit cost included in selling and | ||||||||
| administrative expenses | $ | 981 | $ | 857 | ||||
8
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 9 | GOODWILL AND OTHER INTANGIBLE ASSETS |
| Definite-lived Intangibles |
| Our definite-lived intangible assets consist primarily of network affiliation agreements, customer lists and non-compete agreements. We amortize the network affiliation agreements over a period of 25 years, the customer lists over a period of 5 to 40 years and the non-compete agreements over the terms of the contracts. |
| Amortization expense was $334 for the first quarter ended March 27, 2005 and $491 for the first quarter ended March 28, 2004. Estimated amortization expense for our next five fiscal years is $1,306 for 2005, $1,291 for 2006, $1,253 for 2007, $1,198 for 2008 and $912 for 2009. |
| The gross carrying amount, accumulated amortization and net carrying amount of the major classes of definite-lived intangible assets as of March 27, 2005 and December 26, 2004 are as follows: |
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| As of March 27, 2005 | |||||||||||
| Network affiliation agreements | $ | 12,142 | $ | (1,317 | ) | $ | 10,825 | ||||
| Customer lists | 19,849 | (16,304 | ) | 3,545 | |||||||
| Non-compete agreements | 23,338 | (23,289 | ) | 49 | |||||||
| Other | 2,781 | (2,781 | ) | -- | |||||||
| Total | $ | 58,110 | $ | (43,691 | ) | $ | 14,419 | ||||
As of December 26, 2004 | |||||||||||
| Network affiliation agreements | $ | 12,142 | $ | (1,198 | ) | $ | 10,944 | ||||
| Customer lists | 19,849 | (16,105 | ) | 3,744 | |||||||
| Non-compete agreements | 23,338 | (23,276 | ) | 62 | |||||||
| Other | 2,781 | (2,778 | ) | 3 | |||||||
| Total | $ | 58,110 | $ | (43,357 | ) | $ | 14,753 | ||||
| Indefinite-lived Intangibles |
| Broadcast licenses are deemed to have indefinite useful lives because we have renewed these agreements without issue in the past and we intend to renew them indefinitely in the future. Accordingly, we expect the cash flows from our broadcast licenses to continue indefinitely. There were no changes to the carrying amount of broadcast licenses in the first quarter ended March 27, 2005. |
| Goodwill |
| The change in the carrying amount of goodwill for the first quarter ended March 27, 2005 is as follows: |
| Reporting unit |
Goodwill at December 26, 2004 |
Adjustment |
Goodwill at March 27, 2005 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Daily newspaper | $ | 2,084 | $ | -- | $ | 2,084 | |||||
| Community newspapers & shoppers | 26,535 | -- | 26,535 | ||||||||
| Broadcasting | 107,069 | (184 | ) | 106,885 | |||||||
| Telecommunications | 188 | -- | 188 | ||||||||
| Direct marketing services | 410 | -- | 410 | ||||||||
| Total | $ | 136,286 | $ | (184 | ) | $ | 136,102 | ||||
| The adjustment to goodwill at our broadcasting unit represents a purchase price adjustment for goodwill associated with a two-year syndicated program acquired with the Green Bay television operations. The syndicated program’s second season was cancelled. |
9
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 10 | DISCONTINUED OPERATIONS |
| On January 25, 2005, we entered into a definitive asset sale agreement with Multi-Color Corporation pursuant to which Multi-Color Corporation acquired substantially all of the assets and certain liabilities of NorthStar Print Group, Inc., our label printing business. The purchase price, excluding certain real estate holdings, was $26,144 in cash. |
| The following table summarizes the results of operations of NorthStar Print Group, Inc. which are included in the gain from discontinued operations in the unaudited consolidated condensed statement of earnings for the first quarter ended March 27, 2005 and March 28, 2004: |
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Revenue | $ | 4,112 | $ | 13,579 | ||||
| Income before income taxes | $ | 7,919 | $ | 1,008 | ||||
| The current and non-current assets and liabilities of discontinued operations in the consolidated condensed balance sheets at March 27, 2005 and December 26, 2004 consisted of the following: |
| March 27, 2005 |
December 26, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Cash | $ | -- | $ | 1 | ||||
| Receivables | 620 | 5,035 | ||||||
| Inventories, net | -- | 6,548 | ||||||
| Prepaid expenses | 31 | 88 | ||||||
| Deferred income taxes | 543 | 543 | ||||||
| Total current assets | $ | 1,194 | $ | 12,215 | ||||
Property and equipment | $ | 329 | $ | 6,161 | ||||
| Goodwill | -- | 2,362 | ||||||
| Prepaid pension costs | -- | 369 | ||||||
| Total non-current assets | $ | 329 | $ | 8,892 | ||||
Accounts payable | $ | 299 | $ | 2,766 | ||||
| Accrued compensation | -- | 1,661 | ||||||
| Accrued employee benefits | 664 | 701 | ||||||
| Other current liabilities | 3,089 | 1,036 | ||||||
| Total current liabilities | $ | 4,052 | $ | 6,164 | ||||
| Other non-current liabilities (deferred income taxes) | $ | 1,652 | $ | 1,652 | ||||
10
JOURNAL COMMUNICATIONS,
INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(in thousands, except
per share amounts)
| 11 | SEGMENT INFORMATION |
| We conduct our operations through four reportable segments: publishing, broadcasting, telecommunications and printing services. In addition, our direct marketing services business and certain administrative activities are aggregated and reported as “other.” All operations conduct their business in the United States. We publish the Milwaukee Journal Sentinel and more than 90 weekly shopper and community newspapers in eight states. Our broadcasting segment consists of 38 radio stations and seven television stations in 11 states, as well as the operation of one additional television station under a local marketing agreement. Our telecommunications segment consists of wholesale and business-to-business telecommunications services provided through a high speed fiber optic telecommunications network that covers more than 4,400 route miles in seven states, of which we operate about 3,800 route miles. Our printing services segment includes the operations of our printing and assembly and fulfillment business. |
| The following tables summarize revenue, operating earnings, depreciation and amortization and capital expenditures for continuing operations for the first quarter ended March 27, 2005 and March 28, 2004 and identifiable total assets at March 27, 2005 and December 26, 2004: |
| First Quarter Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 27, 2005 |
March 28, 2004 | |||||||
| Revenue | ||||||||
| Publishing | $ | 77,914 | $ | 76,671 | ||||
| Broadcasting | 37,206 | 34,635 | ||||||
| Telecommunications | 37,455 | 35,557 | ||||||
| Printing services | 18,306 | 21,764 | ||||||
| Other | 10,547 | 10,464 | ||||||
| $ | 181,428 | $ | 179,091 | |||||
Operating earnings | ||||||||
| Publishing | $ | 7,480 | $ | 9,017 | ||||
| Broadcasting | 5,384 | 6,504 | ||||||
| Telecommunications | 7,775 | 8,730 | ||||||
| Printing services | 391 | 914 | ||||||
| Other | 267 | 537 | ||||||
| $ | 21,297 | $ | 25,702 | |||||
Depreciation and amortization | ||||||||
| Publishing | $ | 3,700 | $ | 3,980 | ||||
| Broadcasting | 2,186 | 2,100 | ||||||
| Telecommunications | 4,782 | 4,310 | ||||||
| Printing services | 579 | 583 | ||||||
| Other | 192 | 202 | ||||||
| $ | 11,439 | $ | 11,175 | |||||
Capital expenditures | ||||||||
| Publishing | $ | 2,305 | $ | 1,914 | ||||
| Broadcasting | 2,223 | 1,813 | ||||||
| Telecommunications | 1,667 | 918 | ||||||
| Printing services | 222 | 429 | ||||||
| Other | 82 | 369 | ||||||
| $ | 6,499 | $ | 5,443 | |||||
| March 27, 2005 |
December 26, 2004 Audited | |||||||
Identifiable total assets | ||||||||
| Publishing | $ | 214,454 | $ | 218,806 | ||||
| Broadcasting | 357,317 | 361,872 | ||||||
| Telecommunications | 94,159 | 96,290 | ||||||
| Printing services | 24,791 | 27,011 | ||||||
| Other and discontinued operations | 50,237 | 71,083 | ||||||
| $ | 740,958 | $ | 775,062 | |||||
11
The following discussion of our financial condition and results of operations should be read together with our unaudited consolidated condensed financial statements for the first quarter ended March 27, 2005, including the notes thereto.
More information regarding us is available at our website at www.journalcommunications.com. We are not including the information contained in our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public at no charge, other than a reader’s own internet access charges, through a link appearing on our website. We provide access to such material through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We make certain statements in this Quarterly Report on Form 10-Q that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in that Act, and we are including this statement for purposes of those safe harbor provisions. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. We often use words such as “may,” “will,” “intend,” “anticipate,” “believe,” or “should” and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among such risks, uncertainties and other factors that may impact us are the following:
| • | changes in advertising demand; |
| • | changes in newsprint prices and other costs of materials; |
| • | changes in federal or state laws and regulations or their interpretations (including changes in regulations governing the number and types of broadcast and cable system properties, newspapers and licenses that a person may control in a given market or in total); |
| • | changes in legislation or customs relating to the collection, management and aggregation and use of consumer information through telemarketing and electronic communication efforts; |
| • | the availability of quality broadcast programming at competitive prices; |
| • | changes in network affiliation agreements; |
| • | quality and rating of network over-the-air broadcast programs available to our customers; |
| • | effects of the loss of commercial inventory resulting from uninterrupted television news coverage and potential advertising cancellations due to war or terrorist acts; |
| • | effects of the rapidly changing nature of the publishing, broadcasting, telecommunications, and printing industries, including general business issues, competitive issues and the introduction of new technologies; |
| • | effects of bankruptcies on customers for our telecommunications wholesale services; |
| • | the ability of regional telecommunications companies to expand service offerings to include intra-exchange services; |
| • | effects of potential acquisitions of or mergers of telecommunications companies or advertisers; |
| • | changes in interest rates; |
| • | the outcome of pending or future litigation; |
| • | energy costs; |
| • | the availability and effect of acquisitions, investments, and dispositions on our results of operations or financial condition; and |
| • | changes in general economic conditions. |
We caution you not to place undue reliance on these forward-looking statements, which we have made as of the date of this Quarterly Report on Form 10-Q.
Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) publishing; (ii) broadcasting; (iii) telecommunications; (iv) printing services; and (v) other. Our publishing segment consists of a daily newspaper, the Milwaukee Journal Sentinel, and more than 90 community newspapers and shoppers in eight states. Our broadcasting segment consists of 38 radio stations and seven television stations in 11 states, as well as the operation of one additional television station under a local marketing agreement. Our telecommunications segment consists of wholesale and business-to-business telecommunications services provided through a high speed fiber optic telecommunications network that covers more than 4,400 route miles in seven states, of which we operate about 3,800 route miles. Our printing services segment reflects the operations of our printing and assembly and fulfillment business. Our other segment consists of a direct marketing services business and corporate expenses and eliminations.
12
In the first quarter of 2005, advertising revenue was down across our publishing and television segments, including tougher comparisons due to an off-cycle year in political and issue advertising. Also, the year-over-year comparison of operating earnings at our daily newspaper was negatively impacted by about $1.5 million due to the accounting calendar in the first quarter of 2005, the timing of Easter Sunday, and an increase in vacation expense. In addition, at our daily newspaper, employment and real estate classified advertising, direct mail advertising and Journal Interactive revenue increased over last year. Revenue grew at our radio stations due in large part to increases in local advertising. At our telecommunications company, the wholesale business experienced re-pricing activity and service disconnections and the enterprise business continued to focus on the development and sales of new products and services in a very competitive market. At our printing services company, we reported modest earnings after two quarters of losses and a break-even quarter in 2004 which were due to reduced sales volume from a number of computer-related customers.
On January 25, 2005, Multi-Color Corporation acquired our label manufacturing business, NorthStar Print Group, Inc., which resulted in a gain from discontinued operations of $4.8 million, net of tax.
The first quarter of 2005 contained 91 days while the first quarter of 2004 contained 88 days.
| First Quarter Ended March 27, 2005 compared to First Quarter Ended March 28, 2004 |
| Consolidated |
Our consolidated revenue from continuing operations in the first quarter of 2005 was $181.4 million, an increase of $2.3 million, or 1.3%, compared to $179.1 million in the first quarter of 2004. Our consolidated operating costs and expenses from continuing operations in the first quarter of 2005 were $104.7 million, an increase of $3.6 million, or 3.7%, compared to $101.1 million in the first quarter of 2004. Our consolidated selling and administrative expenses from continuing operations in the first quarter of 2005 were $55.4 million, an increase of $3.1 million, or 5.8%, compared to $52.3 million in the first quarter of 2004.
The following table presents our total revenue by segment, total operating costs and expenses, selling and administrative expenses and total operating earnings as a percent of total revenue for the first quarter of 2005 and 2004:
| 2005 |
Percent of Total Revenue |
2004 |
Percent of Total Revenue | |||||||||||
| Continuing operations: | (dollars in millions) | |||||||||||||
| Revenue: | ||||||||||||||
| Publishing | $ | 77.9 | 43.0 | % | $ | 76.7 | 42.8 | % | ||||||
| Broadcasting | 37.2 | 20.5 | 34.6 | 19.3 | ||||||||||
| Telecommunications | 37.5 | 20.6 | 35.6 | 19.9 | ||||||||||
| Printing services | 18.3 | 10.1 | 21.8 | 12.2 | ||||||||||
| Other | 10.5 | 5.8 | 10.4 | 5.8 | ||||||||||
| Total revenue | 181.4 | 100.0 | 179.1 | 100.0 | ||||||||||
| Total operating costs and expenses | 104.7 | 57.8 | 101.1 | 56.4 | ||||||||||
| Selling and administrative expenses | 55.4 | 30.5 | 52.3 | 29.2 | ||||||||||
| Total operating costs and expenses and selling | ||||||||||||||
| and administrative expenses | 160.1 | 88.3 | 153.4 | 85.6 | ||||||||||
| Total operating earnings | $ | 21.3 | 11.7 | % | $ | 25.7 | 14.4 | % | ||||||
The increase in total revenue from continuing operations was due to an increase in enterprise services revenue at our telecommunications business, revenue from our Green Bay television acquisition, an increase in local advertising revenue at our radio stations, and increases in Journal Interactive, classified, and direct mail advertising revenue at our daily newspaper. These increases were partially offset by a decrease in revenue from several computer-related customers in our printing services business, a decrease in political and issue advertising at our television stations, and a decrease in wholesale telecommunications revenue due to contract re-pricings and customer disconnections.
The increase in total operating costs and expenses from continuing operations is due to the higher costs associated with the increase in telecommunications enterprise services revenue, the addition of the Green Bay television operations and an increase in news expenses at our television stations, increases in operating costs and expenses at our daily newspaper due to the three additional days in the first quarter of 2005, an increase in newsprint and other paper expense at our publishing businesses, an increase in programming expenses at our radio stations and an increase in postage expense due to the increase in direct mail advertising at our direct mail services business and our daily newspaper. These increases were offset by a decrease in operating costs and expenses at our printing services company in response to a decrease in revenue.
13
The increase in selling and administrative expenses from continuing operations is primarily due to the addition of the Green Bay television operations and increases in sales and promotional expenses at our television stations, a benefit recorded for a vacation policy change in the first quarter of 2004 and increases in payroll, sales, and marketing expenses at our daily newspaper, and an increase in payroll, sales and marketing expenses at our telecommunications business. The increase in payroll expenses was primarily due to the additional three days in the first quarter of 2005 compared to the first quarter of 2004. The increase in total selling and administrative expenses was partially offset by cost savings initiatives at our community newspapers and shoppers business and our printing services business.
Our consolidated operating earnings from continuing operations in the first quarter of 2005 were $21.3 million, a decrease of $4.4 million, or 17.1%, compared to $25.7 million in the first quarter of 2004. The following table presents our operating earnings by segment for the first quarter of 2005 and 2004:
| 2005 |
Percent of Total Operating Earnings |
2004 |
Percent of Total Operating Earnings | |||||||||||
| Continuing operations: | (dollars in millions) | |||||||||||||
| Publishing | $ | 7.5 | 35.1 | % | $ | 9.0 | 35.1 | % | ||||||
| Broadcasting | 5.4 | 25.3 | 6.5 | 25.3 | ||||||||||
| Telecommunications | 7.8 | 36.5 | 8.7 | 34.0 | ||||||||||
| Printing services | 0.4 | 1.8 | 0.9 | 3.5 | ||||||||||
| Other | 0.2 | 1.3 | 0.6 | 2.1 | ||||||||||
| Total operating earnings | $ | 21.3 | 100.0 | % | $ | 25.7 | 100.0 | % | ||||||
The decrease in total operating earnings from continuing operations was primarily due to the decrease in political and issue advertising at our television stations, the adverse impact at our daily newspaper from the additional three seasonally-light advertising days at the beginning of the quarter and Easter Sunday falling in the first quarter of 2005 compared to the second quarter of 2004, the vacation benefit recorded in the first quarter of 2004 at our daily newspaper, higher operating costs and expenses associated with the increase in enterprise services revenue at our telecommunications business and the increase in lower-margin mailing services revenue at our direct marketing services business, and the decrease in revenue at our printing services business. These decreases were partially offset by the increase in revenue at our radio stations.
Our consolidated EBITDA in the first quarter of 2005 was $32.7 million, a decrease of $4.2 million, or 11.2%, compared to $36.9 million in the first quarter of 2004. We define EBITDA as net earnings excluding gain/loss from discontinued operations, net, cumulative effect of accounting change, net, provision for income taxes, total other income and expense, depreciation and amortization. We believe the presentation of EBITDA is relevant and useful because it helps improve our investors’ ability to understand our operating performance and makes it easier to compare our results with other companies that have different financing and capital structures or tax rates. Our management uses EBITDA, among other things, to evaluate our operating performance, to value prospective acquisitions and as incentive compensation performance targets for certain management personnel. In addition, our lenders use EBITDA as one of the measures of our ability to service our debt. EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States. EBITDA should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies. In addition, EBITDA does not represent funds available for discretionary use.
The following table presents a reconciliation of our consolidated net earnings to consolidated EBITDA for the first quarter of 2005 and 2004:
| 2005 |
2004 | |||||||
| (dollars in millions) | ||||||||
| Net earnings | $ | 17.4 | $ | 15.7 | ||||
| Gain from discontinued operations, net | (4.8 | ) | (0.6 | ) | ||||
| Provision for income taxes | 8.2 | 10.1 | ||||||
| Total other expense | 0.5 | 0.5 | ||||||
| Depreciation | 11.1 | 10.7 | ||||||
| Amortization | 0.3 | 0.5 | ||||||
| EBITDA | $ | 32.7 | $ | 36.9 | ||||
The decrease in EBITDA is consistent with the decrease in operating earnings at all of our business segments.
14
| Publishing |
Revenue from publishing in the first quarter of 2005 was $77.9 million, an increase of $1.2 million, or 1.6%, compared to $76.7 million in the first quarter of 2004. Operating earnings from publishing were $7.5 million, a decrease of $1.5 million, or 17.0%, compared to $9.0 million in the first quarter of 2004.
The following table presents our publishing revenue and operating earnings for the first quarter of 2005 and 2004:
| 2005 |
2004 |
|||||||||||||||||||||||||
| Daily Newspaper |
Community Newspapers & Shoppers |
Total |
Daily Newspaper |
Community Newspapers & Shoppers |
Total |
Percent Change | ||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||
Revenue |
$ | 54.9 | $ | 23.0 | $ | 77.9 | $ | 53.9 | $ | 22.8 | $ | 76.7 | 1.6 | |||||||||||||
| Operating earnings | $ | 7.2 | $ | 0.3 | $ | 7.5 | $ | 8.6 | $ | 0.4 | $ | 9.0 | (17.0 | ) | ||||||||||||
The following table presents our publishing revenue by category for the first quarter of 2005 and 2004:
| 2005 |
2004 |
|||||||||||||||||||||||||
| Daily Newspaper |
Community Newspapers & Shoppers |
Total |
Daily Newspaper |
Community Newspapers & Shoppers |
Total |
Percent Change | ||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||
| Advertising revenue: | ||||||||||||||||||||||||||
| Retail | $ | 18.4 | $ | 12.8 | $ | 31.2 | $ | 18.3 | $ | 12.7 | $ | 31.0 | 0.3 | |||||||||||||
| Classified | 15.5 | 2.0 | 17.5 | 15.1 | 2.0 | 17.1 | 2.3 | |||||||||||||||||||
| General | 2.9 | -- | 2.9 | 3.3 | -- | 3.3 | (12.4 | ) | ||||||||||||||||||
| Other | 5.3 | 0.5 | 5.8 | 4.2 | 0.6 | 4.8 | 21.4 | |||||||||||||||||||
| Total advertising revenue . | 42.1 | 15.3 | 57.4 | 40.9 | 15.3 | 56.2 | 2.0 | |||||||||||||||||||
| Circulation revenue | 10.4 | 0.7 | 11.1 | 10.5 | 0.7 | 11.2 | (0.5 | ) | ||||||||||||||||||
| Other revenue | 2.4 | 7.0 | 9.4 | 2.5 | 6.8 | 9.3 | 1.8 | |||||||||||||||||||
| Total revenue | $ | 54.9 | $ | 23.0 | $ | 77.9 | $ | 53.9 | $ | 22.8 | $ | 76.7 | 1.6 | |||||||||||||
Advertising revenue in the first quarter of 2005 accounted for 73.7% of total publishing revenue compared to 73.3% in the first quarter of 2004.
Retail advertising revenue in the first quarter of 2005 was $31.2 million, an increase of $0.2 million, or 0.3%, compared to $31.0 million in the first quarter of 2004. Retail advertising increased $0.1 million at our daily newspaper and $0.1 million at our community newspapers and shoppers in the first quarter of 2005 compared to the first quarter of 2004.
Print classified advertising revenue in the first quarter of 2005 was $17.5 million, an increase of $0.4 million, or 2.3%, compared to $17.1 million in the first quarter of 2004. At our daily newspaper, increases in employment advertising of $0.8 million and real estate advertising of $0.1 million were partially offset by decreases in automotive advertising of $0.3 million and general/other advertising of $0.2 million. Employment advertising, which accounted for 41.6% of classified advertising at our daily newspaper in the first quarter of 2005, increased 12.9% compared to the first quarter of 2004. We believe the increase in employment advertising is due to an increase in recruiting in the Milwaukee, WI market. The decrease in automotive advertising is primarily due to a decline in advertising by local automotive dealerships. Classified advertising at our community newspapers and shoppers in the first quarter of 2005 was essentially even compared to the first quarter of 2004.
General advertising revenue in the first quarter of 2005 was $2.9 million, a decrease of $0.4 million, or 12.4%, compared to $3.3 million in the first quarter of 2004. The decrease was primarily due to decreases in airline and finance/insurance ROP (run-of-press) advertising.
15
The following table presents our daily newspaper’s core newspaper advertising linage by category for the first quarter of 2005 and 2004:
| 2005 |
2004 |
Percent Change | |||||||||
| Advertising linage (inches): | |||||||||||
| Full run | |||||||||||
| Retail | 164,465 | 157,514 | 4.4 | ||||||||
| Classified | 181,814 | 200,587 | (9.4 | ) | |||||||
| General | 13,177 | 15,910 | (17.2 | ) | |||||||
| Total full run | 359,456 | 374,011 | (3.9 | ) | |||||||
| Part run | 33,871 | 25,214 | 34.3 | ||||||||
| Total advertising linage | 393,327 | 399,225 | (1.5 | ) | |||||||
Preprint pieces (in thousands) | 204,872 | 185,774 | 10.3 | ||||||||
Total advertising linage in the first quarter of 2005 decreased 1.5% compared to the first quarter of 2004. The decrease was due to a decrease in full run advertising linage partially offset by an increase in part run advertising linage. Full run advertising linage in the first quarter of 2005 decreased 3.9% compared to the first quarter of 2004 due to a 9.4% decrease in classified advertising linage and a 17.2% decrease in general advertising linage. Classified advertising linage decreased due to a decrease in automotive advertising partially offset by an increase in employment and real estate advertising. The decrease in general advertising linage was primarily due to lower general advertising in the daily edition. These decreases were partially offset by a 4.4% increase in retail advertising linage primarily in the daily edition. Part run advertising linage increased in the first quarter of 2005 due to an increase in zoned retail and automotive classified advertising. Preprint advertising pieces increased 10.3% due to an increase in furniture and department store preprint pieces and preprint pieces used in direct mail advertising.
The following table presents the full pages of advertising and revenue per page of our community newspapers and shoppers and speicalty products for the first quarter of 2005 and 2004:
| 2005 |
2004 |
Percent Change | |||||||||
| Full pages of advertising: | |||||||||||
| Community newspapers | 20,912 | 22,620 | (7.6. | ) | |||||||
| Shoppers and specialty products | 25,586 | 25,066 | 2.1 | ||||||||
| Total full pages of advertising | 46,498 | 47,686 | (2.5 | ) | |||||||
Revenue per page | $ | 289.40 | $ | 281.75 | 2.7 | ||||||
Total full pages of advertising for our community newspapers and shoppers business in the first quarter of 2005 decreased 2.5% compared to the first quarter of 2004. The decrease was due to the more efficient use of the amount of available space on each page partially offset by an increase in specialty products. Revenue per page increased 2.7% primarily due to the decrease in total full pages of advertising while increasing or maintaining the same advertising rates.
Other advertising revenue in the first quarter of 2005, consisting of revenue from direct mail and event marketing efforts, and Journal Interactive for our daily newspaper and company-sponsored event advertising for our community newspapers and shoppers, was $5.8 million, an increase of $1.0 million, or 21.4%, compared to $4.8 million in the first quarter of 2004. The increase was due to a $0.7 million increase in Journal Interactive advertising and a $0.4 million increase in direct mail advertising and printing at our daily newspaper. Other advertising revenue at our community newspapers and shoppers in the first quarter of 2005 decreased $0.1 million compared to the first quarter of 2004.
Circulation revenue in the first quarter of 2005 accounted for 14.2% of total publishing revenue compared to 14.6% in the first quarter of 2004. Circulation revenue of $11.1 million in the first quarter of 2005 decreased $0.1 million compared to $11.2 million in the first quarter of 2004.
We reported to the Audit Bureau of Circulations’ Newspaper Publisher’s Statement for the six month period ended March 31, 2005 that average net paid circulation for the daily newspaper was essentially flat for the daily edition (Monday-Saturday) and it decreased 4.4% for the Sunday edition compared to the six month period ended March 31, 2004. For the 12-month Audit ended March 31, 2005, we reported that average net paid circulation decreased approximately 1.0% for the daily edition (Monday-Saturday) and 2.4% for the Sunday edition compared to the 12-month Audit ended March 31, 2004.
We elected to make self deductions to our net paid circulation related to hawking with gift premiums at sporting events, third-party sponsored distributions at special events and certain hotel distribution programs which accounted for approximately half of the decline in the six-month Sunday circulation versus the March 2004 Publisher’s Statement. We made these deductions after consulting with the Audit Bureau of Circulations.
16
Other revenue, which consists of revenue from commercial printing opportunities at the printing plants for our community newspapers and shoppers and promotional, distribution and commercial printing revenue at our daily newspaper, accounted for 12.1% of total publishing revenue in both the first quarter of 2005 and the first quarter of 2004. Other revenue of $9.4 million in the first quarter of 2005 was essentially even compared to $9.3 million in the first quarter of 2004.
Publishing operating earnings in the first quarter of 2005 were $7.5 million, a decrease of $1.5 million, or 17.0%, compared to $9.0 million in the first quarter of 2004. The decrease was primarily from our daily newspaper and was due to the nearly $0.9 million adverse impact from the addition of three seasonally-light advertising days at the beginning of the quarter, an increase of $0.7 million in vacation expense due to a policy change benefit we recorded in the first quarter of 2004, and a $0.5 million adverse impact from light advertising on Easter Sunday which fell in the first quarter of 2005 compared to the second quarter of 2004. Total newsprint and other paper expense in the first quarter of 2005 was $10.4 million, an increase of $0.6 million, or 6.2%, compared to $9.8 million in the first quarter of 2004. The increase in newsprint and other paper expense was primarily attributed to a 10.7% increase in the average price per metric ton. These operating earnings decreases were partially offet by the increase in revenue and $0.4 million of cost savings initiatives at our community newspapers and shoppers.
| Broadcasting |
Revenue from broadcasting in the first quarter of 2005 was $37.2 million, an increase of $2.6 million, or 7.4%, compared to $34.6 million in the first quarter of 2004. Operating earnings from broadcasting in the first quarter of 2005 were $5.4 million, a decrease of $1.1 million, or 17.2%, compared to $6.5 million in the first quarter of 2004.
The following table presents our broadcasting revenue and operating earnings for the first quarter of 2005 and 2004:
| 2005 |
2004 |
Percent | |||||||||||||||||||||
| Radio |
Television |
Total |
Radio |
Television |
Total |
Change | |||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
Revenue |
$ | 18.2 | $ | 19.0 | $ | 37.2 | $ | 16.7 | $ | 17.9 | $ | 34.6 | 7.4 | ||||||||||
| Operating earnings | $ | 3.8 | $ | 1.6 | $ | 5.4 | $ | 3.1 | $ | 3.4 | $ | 6.5 | (17.2 | ) | |||||||||
Revenue from our radio stations in the first quarter of 2005 was $18.2 million, an increase of $1.5 million, or 9.2%, compared to $16.7 million in the first quarter of 2004. The increase was primarily attributed to a $1.3 million increase in local advertising revenue and a $0.3 million increase in national advertising revenue partially offset by a $0.1 million decrease in political and issue advertising.
Operating earnings from our radio stations in the first quarter of 2005 were $3.8 million, an increase of $0.7 million, or 22.6%, compared to $3.1 million in the first quarter of 2004. The increase was primarily attributed to the increase in revenue partially offset by increases in programming, sales and technology expenses.
Revenue from our television stations in the first quarter of 2005 was $19.0 million, an increase of $1.1 million, or 5.8%, compared to $17.9 million in the first quarter of 2004. Revenue from our Green Bay television operations, which were acquired in October 2004, was $2.1 million. Excluding the Green Bay acquisition, revenue in the first quarter of 2005 decreased $1.0 million or 5.9% compared to the first quarter of 2004 due to a $1.4 million decrease in political and issue advertising offset by a $0.4 million increase in national advertising.
Operating earnings from our television stations in the first quarter of 2005 were $1.6 million, a decrease of $1.8 million, or 52.9%, compared to $3.4 million in the first quarter of 2004. The decrease was primarily due to the decrease in political and issue advertising revenue, increases in news, administrative, and technology expenses partially offset by a decrease in programming expenses. Operating results from our Green Bay television operations were essentially “break-even” in the first quarter of 2005.
| Telecommunications |
Revenue from telecommunications in the first quarter of 2005 was $37.5 million, an increase of $1.9 million, or 5.3%, compared to $35.6 million in the first quarter of 2004. Operating earnings from telecommunications in the first quarter of 2005 were $7.8 million, a decrease of $0.9 million, or 10.9%, compared to $8.7 million in the first quarter of 2004.
Wholesale telecommunication services provide network transmission solutions for other service providers by offering bulk transmission capacity. Revenue from wholesale services in the first quarter of 2005 was $20.4 million, a decrease of $0.2 million, or 1.0%, compared to $20.6 million in the first quarter of 2004. The decrease was primarily due to lower pricing on customer contract renewals and service disconnections. Monthly recurring revenue from wholesale services at the end of the first quarter of 2005 was $6.3 million compared to $6.4 million at the beginning of 2005 and $6.8 million at the end of the first quarter of 2004. During the first quarter of 2005, new circuit connections of $0.2 million in monthly recurring revenue were more than offset by service disconnections and re-pricings.
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We have substantial business relationships with a few large customers, including major long distance carriers. Our top 10 customers accounted for 35.3% and 37.8% of our telecommunications revenue in the first quarter of 2005 and 2004, respectively. In February 2005, we signed a new five-year contract extension with MCI whereby they remain a significant customer. The new contract includes reduced prices for current services being provided to MCI and provisions for higher capacity circuits to replace specific existing circuits being disconnected. The effect of the pricing provisions will occur at various times throughout 2005.
Enterprise telecommunication services provide advanced data communications and long distance service to small and medium sized businesses in the Upper Midwest, principally in Wisconsin, Michigan, Indiana, Minnesota and Illinois. Revenue from enterprise services in the first quarter of 2005 was $17.1 million, an increase of $2.1 million, or 14.0%, compared to $15.0 million in 2004. The increase was primarily attributed to our newly acquired infrastructure business and an increase in the services utilized by our existing customers. Monthly recurring revenue from enterprise advanced data services was $3.4 million at the end of the first quarter of 2005, at the beginning of 2005, and at the end of the first quarter of 2004.
The decrease in operating earnings from telecommunications was primarily due to higher operating costs and expenses associated with the higher mix of enterprise services revenue and increases in sales and marketing expenses.
We do not expect that the three major national telecommunications mergers currently under review will have an impact on our telecommunications business in 2005.
| Printing Services |
Revenue from printing services in the first quarter of 2005 was $18.3 million, a decrease of $3.5 million, or 15.9%, compared to $21.8 million in the first quarter of 2004. Operating earnings from printing services in the first quarter of 2005 was $0.4 million, a decrease of $0.5 million, or 57.2%, compared to $0.9 million in the first quarter of 2004.
The decrease in printing services revenue was primarily attributed to the decrease in revenue from our largest customer, Dell Computer Corporation, and from other computer-related customers as we transition back to our core printing business. Dell Computer Corporation accounted for 20.8% and 27.1% of our printing services revenue in the first quarter of 2005 and 2004, respectively. We anticipate our revenue from Dell to continue to decline in 2005.
The decrease in printing services operating earnings was primarily attributed to the decrease in sales volume partially offset by lower production costs due to the decrease in sales volume and cost reduction initiatives.
| Other |
Other revenue in the first quarter of 2005 was $10.5 million, an increase of $0.1 million, or 0.8%, compared to $10.4 million in the first quarter of 2004. Other operating earnings in the first quarter of 2005 were $0.2 million, a decrease of $0.4 million, or 50.3%, compared to operating earnings of $0.6 million in the first quarter of 2004.
The following table presents our other revenue and operating earnings for the first quarter of 2005 and 2004:
| 2005 |
2004 |
||||||||||||||||||||||
| Direct Marketing Services |
Corporate and Eliminations |
Total |
Direct Marketing Services |
Corporate and Eliminations |
Total |
Percent Change | |||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
Revenue |
$ | 11.5 | $ | (1.0 | ) | $ | 10.5 | $ | 11.3 | $ | (0.9 | ) | $ | 10.4 | 0.8 | ||||||||
| Operating earnings | $ | -- | $ | 0.2 | $ | 0.2 | $ | 0.6 | $ | -- | $ | 0.6 | (50.3 | ) | |||||||||
The increase in other revenue in the first quarter of 2005 compared to the first quarter of 2004 was primarily attributed to an increase in postage amounts billed to customers partially offset by a decrease in list and printing services. Included in revenue and operating costs and expenses is $6.8 million and $6.2 million of postage amounts billed to customers in the first quarter of 2005 and 2004, respectively.
The decrease in operating earnings was primarily due to higher operating costs and expenses associated with the higher mix of lower-margin mailing services revenue.
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| Non-Operating Income and Taxes |
Interest income and dividends were $0.5 million in the first quarter of 2005 and 2004. Interest expense, representing gross interest expense from borrowings under our credit agreement, was $0.5 million in both the first quarter of 2005 and 2004. Amortization of deferred financing costs was $0.1 million in both the first quarter of 2005 and 2004.
The effective tax rate for continuing operations was 39.6% in the first quarter of 2005 and 40.0% in the first quarter of 2004. The decrease in the effective tax rate is primarily due to the anticipated deduction in 2005 for domestic production activities from the recently enacted Section 199 of the Internal Revenue Code.
| Earnings per Share |
Our basic and diluted earnings per share from continuing operations were $0.17 for the first quarter of 2005, compared to basic and diluted earnings per share from continuing operations of $0.20 and $0.19, respectively, for the first quarter of 2004. Our basic and diluted earnings per share from discontinued operations were $0.07 and $0.06, respectively, for the first quarter of 2005 compared to basic and diluted earnings per share from discontinued operations of $0.01 for the first quarter of 2004.
| Discontinued Operations |
On January 25, 2005, we entered into a definitive asset sale agreement with Multi-Color Corporation pursuant to which Multi-Color Corporation acquired substantially all of the assets and certain liabilities of our label printing business, NorthStar Print Group, Inc. The label printing business was part of the “Other” reportable segment and the operations have been reflected as discontinued operations in our unaudited consolidated condensed financial statements and, accordingly, prior periods have been restated to reflect this treatment.
Revenue from discontinued operations in the first quarter of 2005 was $4.1 million, a decrease of $9.5 million, or 69.7%, compared to $13.6 million in the first quarter of 2004. Net liabilities of discontinued operations at March 27, 2005 were $4.2 million and net assets of discontinued operations were $13.3 million at December 26, 2004. Gain from discontinued operations, net of income taxes, in the first quarter of 2005 was $4.8 million compared to $0.6 million in the first quarter of 2004. Applicable income tax expense was $3.1 million and $0.4 million in the first quarter of 2005 and 2004, respectively.
We have a $350 million unsecured revolving credit facility expiring on September 4, 2008. The interest rate on borrowings is either LIBOR plus a margin that ranges from 87.5 basis points to 150 basis points, depending on our leverage, or the “Base Rate,” which equals the higher of the prime rate set by U.S. Bank, N.A. or the Federal Funds Rate plus one percent per annum. As of March 27, 2005, we had borrowings outstanding of $28.9 million under the facility at a weighted average interest rate of 4.09%. Fees of $2.0 million in connection with the facility are being amortized over the term of the facility using the straight-line method which approximates the effective-interest method. In addition, an annual fee of $0.1 million is being amortized using the straight line method from October 2004 through September 2005. The financial covenants of this agreement include the following:
| • | A consolidated funded debt ratio as determined for the four fiscal quarter period preceding the date of determination. |
| • | A fixed charge coverage ratio as determined for the four fiscal quarter period preceding the date of determination. |
| • | A consolidated tangible net worth as of the end of any quarter. |
| • | Consolidated capital expenditures during any fiscal year. |
| • | A consolidated rent expense during any fiscal year. |
As of March 27, 2005, we are in compliance with all of our financial covenants.
Cash balances were $6.6 million at March 27, 2005. We believe our expected cash flows from operations and borrowings available under our credit facility will adequately meet our needs for the foreseeable future. In January 2005, the proceeds from the sale of our label printing business reduced our $350 million unsecured revolving credit facility. In February 2005, we announced a stock repurchase program of up to 5 million shares of our class A common stock over a term to expire in August 2006 and we purchased 114,200 class A common shares at a weighted average price per share of $16.70 in the first quarter of 2005. In April 2005, we received $4.4 million for the redemption of our investment in preferred stock.
Cash provided by operating activities was $32.1 million in the first quarter of 2005 compared to $37.0 million in the first quarter of 2004. The decrease was primarily due to a decrease in earnings from continuing operations and a decrease in deferred income tax expense.
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Cash used for investing activities was $6.4 million in the first quarter of 2005 compared to $5.4 million in the first quarter of 2004. Capital expenditures for property and equipment were $6.5 million in the first quarter of 2005 compared to $5.4 million in the first quarter of 2004.
Cash used for financing activities was $47.9 million in the first quarter of 2005 compared to $32.9 million in the first quarter of 2004. Borrowings under our new credit facility during the first quarter of 2005 were $37.1 million and we made payments of $78.5 million compared to borrowings of $36.9 million and payments of $64.6 million in the first quarter of 2004. In the first quarter of 2005, we paid $1.9 million to purchase our class A common stock under our stock repurchase program and we received $0.6 million in proceeds from the issuance of our class B common stock to our employees under our Employee Stock Purchase Plan. We paid cash dividends of $5.2 million in both the first quarter of 2005 and 2004.
Cash provided by discontinued operations was $22.3 million in the first quarter of 2005 due to the proceeds received from the sale of NorthStar Print Group, Inc. Cash used for discontinued operations was $0.8 million in the first quarter of 2004.
There are no material changes to the disclosures regarding critical accounting policies made in our Annual Report on Form 10-K for the year ended December 26, 2004.
There are no material changes to the disclosures regarding interest rate risk and foreign currency exchange risk made in our Annual Report on Form 10-K for the year ended December 26, 2004.
We carried out an evaluation, under the supervision and with the participation of our Disclosure Committee, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to them to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On April 25, 2005, a lawsuit was filed against Journal Sentinel, Inc., a subsidiary of Journal Communications, Inc., in Milwaukee County Circuit Court. The plaintiff, Shorewest Realtors, seeks to bring a class action lawsuit on behalf of Milwaukee Journal Sentinel advertisers, alleging that the newspaper improperly inflated its circulation numbers from 1996 on. Shorewest is seeking disgorgement or restitution by Journal Sentinel of alleged improperly collected charges (with interest), plus an unspecified amount of damages. We believe the lawsuit is without merit and intend to defend the action vigorously. Accordingly, no litigation reserve has been recorded for this matter.
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In February 2005, we announced a stock repurchase program of up to 5,000,000 of our class A common stock over a term to expire in August 2006. The following table provides information about our repurchases of our class A common stock in the first quarter ended March 27, 2005:
| (a) |
(b) |
(c) |
(d) | |
| Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans Or Programs (1) |
Maximum Number Of Shares that May Yet Be Purchased Under the Plans or Programs |
| December 27, 2004 to January 23, 2005 | 0 | n/a | n/a | n/a |
| January 24 to February 20, 2005 | 0 | n/a | n/a | n/a |
| Februay 21 to March 27, 2005 | 114,200 | $16.70 | 114,200 | 4,885,800 |
| (1) | All shares of class A common stock purchased by us were purchased pursuant to a repurchase program publicly announced on February 10, 2005 and commenced on March 14, 2005, pursuant to which our board of directors authorized the repurchase of up to 5,000,000 shares. These shares will remain authorized but unissued. The repurchase program is expected to expire in August 2006. |
None.
None.
None.
(a) Exhibits
| Exhibit No. | Description |
| (31.1) | Certification by Steven J. Smith, Chairman and Chief Executive Officer of Journal Communications, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (31.2) | Certification by Paul M. Bonaiuto, Executive Vice President and Chief Financial Officer of Journal Communications, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (32) | Certification of Steven J. Smith, Chairman and Chief Executive Officer and Paul M. Bonaiuto, Executive Vice President and Chief Financial Officer of Journal Communications, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| JOURNAL COMMUNICATIONS, INC. | |
| Registrant | |
Date: May 3, 2005 |
/s/ Steven J. Smith |
| Steven J. Smith, Chairman and Chief Executive Officer | |
Date: May 3, 2005 |
/s/ Paul M. Bonaiuto |
| Paul M. Bonaiuto, Executive Vice President and Chief Financial Officer |
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