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JRN > SEC Filings for JRN > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for JOURNAL COMMUNICATIONS INC


1-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements for the third quarter and three quarters ended September 29, 2013, including the notes thereto, and our Annual Report on Form 10-K for the year ended December 30, 2012.

More information regarding our business is available 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 (SEC).

Forward-Looking Statements

We make certain statements in this Quarterly Report on Form 10-Q (including the information that we incorporate by reference herein) that are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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 as well as those contained in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 30, 2012, as may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report):

changes in network affiliation agreements, including increased costs;

the availability of quality broadcast programming at competitive prices;

quality and rating of network over-the-air broadcast programs, including programs changing networks and changing competitive dynamics regarding how and when programs are made available to our viewers;

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 and printing industries, including general business issues, competitive issues and the introduction of new technologies;

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 or changes in spectrum allocation policies);

changes in advertising demand or the buying strategies of advertisers or the migration of advertising to the internet;

changes in newsprint prices and other costs of materials;

changes in legislation or customs relating to the collection, management and aggregation and use of consumer information through telemarketing and electronic communication efforts;

an other than temporary decline in operating results and enterprise value that could lead to further non-cash impairment charges due to the impairment of goodwill, broadcast licenses, other intangible assets and property, plant and equipment;

the impact of changing economic and financial market conditions and interest rates on our liquidity, on the value of our pension plan assets and on the availability of capital;

our ability to remain in compliance with the terms of our credit agreement;

changes in interest rates or statutory tax rates;

the outcome of pending or future litigation;

energy costs;

the availability and effect of acquisitions, investments, dispositions and other capital expenditures including share repurchases on our results of operations, financial condition or stock price; 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.


Index
Overview

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) broadcasting; (ii) publishing; and (iii) corporate. Our broadcasting segment, operating in 12 states, consists of 15 television stations and 35 radio stations. Results from our digital media assets are included in our broadcasting and publishing segments. Our publishing segment consists of the Milwaukee Journal Sentinel, which serves as the only major daily newspaper for the Milwaukee metropolitan area, and several community publications, primarily in southeastern Wisconsin, as well as print facilities in West Milwaukee and Waupaca, Wisconsin. Our corporate segment consists of unallocated corporate expenses and revenue eliminations.

Revenue in the broadcast industry is derived primarily from the sale of advertising time to local, national, and political and issue advertisers, retransmission fees and, to a lesser extent, from barter, digital revenue and other revenue. Our television and radio stations are attracting new local advertisers through the creation of new local content, digital products, and programs that combine television or radio with digital. Because television and radio broadcasters rely upon advertising revenue, they are subject to cyclical changes in the economy. The size of advertisers' budgets, which are affected by broad economic trends, affects the radio industry in general and the revenue of individual television stations in particular. Our broadcasting business also is affected by audience fragmentation as audiences have an increasing number of options to access news and other programming. Television advertising revenue and rates in even-numbered years typically benefit from political and issue advertising. As the demand for advertising increases on the limited available inventory, we have the opportunity to increase average unit rates we charge our customers. Even-numbered years also benefit from Olympics related advertising on our three NBC affiliates. The expected increased ratings during the Olympic time period provide us the opportunity to sell advertising at premium rates.
Therefore, a decline in revenue during the odd-numbered years is typical and expected.

We had a retransmission agreement with Time Warner Cable Inc. (Time Warner Cable) covering television stations in four of our markets - Milwaukee, WI, Green Bay, WI, Omaha, NE and Palm Springs, CA, and approximately 13% of our total Multichannel Video Programming Distributor (MVPD) subscribers. This agreement expired June 30, 2013 and was subsequently extended through July 10, 2013. Journal Broadcast Group offered an additional contract extension through July 31, 2013, though Time Warner Cable refused this extension. Time Warner Cable removed carriage of our low power television station KPSE-LP in Palm Springs, CA, and dropped carriage of our multicast signals in several markets at midnight on July 10, 2013. Under FCC retransmission consent rules, local, full-power television stations cannot be removed during a "sweeps" period. As a result, our full-power television stations continued to be carried by Time Warner Cable through July 24, 2013.

Our signals continued to be broadcast over the air and carried by other MVPDs.
However carriage by Time Warner Cable was not restored until a new agreement was reached on September 20, 2013. As a result, our markets served by Time Warner Cable experienced a loss of retransmission revenue, lower ratings, and lower advertising revenue in the third quarter of 2013.

Over the past several years, fundamentals in the newspaper industry have deteriorated. Retail and classified run-of-press (ROP) advertising have decreased from historic levels due in part to department store consolidation, weakened employment, automotive and real estate economics and a migration of advertising to the Internet and other advertising forms. Circulation volume declines and online competition have also negatively impacted newspaper industry revenues.

Advertising revenue at our publishing and broadcasting businesses reflects continued cautious behavior of both our customers and consumers. Revenue levels in our broadcasting business will continue to be affected by increased competition for audiences. In addition, recent consolidations within the television industry signal the importance of scale to the negotiation of both retransmission revenue with MVPDs and reverse compensation agreements with the networks. We do not expect that revenues at our daily newspaper will return to revenue levels reported in 2012 or prior years given the secular changes affecting the newspaper industry.

We strive to grow our traditional and digital media, make capital investments in our businesses which we expect to positively impact revenue, and look for new acquisition opportunities within broadcast. The execution of our acquisition strategy will hinge upon our ability to identify strategic candidates, negotiate definitive agreements on acceptable terms and, as necessary, secure additional financing.

Results of Operations

Third Quarter Ended September 29, 2013 compared to the Third Quarter Ended September 23, 2012

Our consolidated revenue in the third quarter of 2013 was $97.7 million, a decrease of $0.1 million, or 0.1%, compared to $97.8 million in the third quarter of 2012. Our consolidated operating costs and expenses in the third quarter of 2013 were $57.4 million, an increase of $4.3 million, or 8.2%, compared to $53.1 million in the third quarter of 2012. Our consolidated selling and administrative expenses in the third quarter of 2013 were $30.8 million, a decrease of $0.3 million, or 1.3%, compared to $31.1 million in the third quarter of 2012.


Index
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 third quarter of 2013 and the third quarter of 2012:

                                                          Percent of                     Percent of
                                                            Total                          Total
                                             2013          Revenue          2012          Revenue
                                                             (dollars in millions)

Revenue:
Broadcasting                               $    60.4             61.8 %   $    58.8             60.2 %
Publishing                                      37.7             38.6          39.2             40.1
Corporate eliminations                          (0.4 )           (0.4 )        (0.2 )           (0.3 )
Total revenue                                   97.7            100.0          97.8            100.0

Total operating costs and expenses              57.4             58.8          53.1             54.2
Selling and administrative expense              30.8             31.5          31.1             31.9
Total operating costs and expenses and
selling and administrative expenses             88.2             90.3          84.2             86.1
Total operating earnings                   $     9.5              9.7 %   $    13.6             13.9 %

Revenue from our broadcasting businesses increased $1.6 million in the third quarter of 2013 compared to the third quarter of 2012. This was primarily due to the December 2012 acquisition of Nashville NewsChannel 5 which offset lower political and Olympic revenue and the impact of the Time Warner Cable dispute.
Same-station (excluding Nashville NewsChannel5) net revenue declined $9.0 million, primarily driven by $8.6 million in political and issue advertising revenue in 2012, and $2.7 million of 2012 Olympic revenue. An increase in non-political national advertising revenue was driven by medical and automotive categories. A decrease in local advertising revenue was driven by medical and media. Total expenses from our broadcasting business increased 14.1%, in the third quarter of 2013 compared to the third quarter of 2012, primarily due to the Nashville NewsChannel 5 acquisition in December. Total expenses from same-stations increased 2.0% in the third quarter, and were primarily attributable to increases in network fees. Operating earnings from our broadcasting business decreased $4.9 million in the third quarter of 2013 compared to the third quarter of 2012 due to the $8.6 million lower political and issue advertising revenue and $2.7 million of Olympic revenue, partially offset by operating earnings related to the acquisition of Nashville NewsChannel 5 in December 2012.

In the third quarter of 2013, our publishing businesses saw an improved advertising environment, while circulation revenue and commercial distribution revenue were lower due to volume declines. Total retail advertising revenue declined $0.9 million primarily due to $1.8 million of prior year revenue from the northern Wisconsin community publications sold in December 2012 that offset daily newspaper advertising revenue increases. At our daily newspaper, retail advertising revenue increased $1.0 million in the third quarter of 2013 compared to the third quarter of 2012, primarily due to an increase in local advertising.
Classified advertising revenue decreased in the third quarter of 2013 by $0.3 million compared to the third quarter of 2012. The decline was in the employment category at the daily newspaper, combined with $0.2 million year-over-year decline from the sale of the northern Wisconsin community publications in December 2012. Publishing digital advertising revenue of $3.1 million increased 8.4%, primarily due to increases in digital retail sponsorships and other revenue, partially offset by declines in classified digital advertising revenue. National advertising revenue decreased $0.1 million in the third quarter of 2013 due to a decrease in ROP advertising in the entertainment and financial services categories. Circulation revenue at our daily newspaper decreased $0.4 million in the third quarter of 2013 compared to the third quarter of 2012 due to a decline in circulation volume. Commercial distribution revenue decreased $0.2 million in the third quarter of 2013 compared to the third quarter of 2012 due to declines in distribution volume.
Other revenue within our community newspaper group increased $0.4 million in the third quarter of 2013 compared to the third quarter of 2012 due to new commercial print contracts related to the northern Wisconsin community publications that we continue to print following the sale. Total expenses at our publishing businesses decreased $2.5 million in the third quarter of 2013 compared to the third quarter of 2012, primarily due to expense savings from the sale of the northern Wisconsin community publications, combined with savings at the daily newspaper in employee-related costs and depreciation. Operating earnings at our publishing business increased $1.0 million in the third quarter of 2013 compared to the third quarter of 2012 mainly due to revenue growth at the daily newspaper, savings in employee-related costs at the daily newspaper, ongoing expense savings initiatives, and a decrease in depreciation expense.

The increase in total operating costs and expenses for the company in the third quarter of 2013 compared to the third quarter of 2012 was primarily due to increases in employee-related costs, network expenses, affiliation fee amortization, and commercial printing expenses, partially offset by $2.0 million of expense savings from the sale of the northern Wisconsin community publications. The decrease in selling and administrative expenses was primarily due to a decrease in employee-related costs.


Index
Our consolidated operating earnings were $9.5 million in the third quarter of 2013, a decrease of $4.1 million, or 29.7%, compared to $13.6 million in the third quarter of 2012. The following table presents our operating earnings by segment for the third quarter of 2013 and the third quarter of 2012:

                              2013             2012
                              (dollars in millions)

Broadcasting               $      8.1       $     13.0
Publishing                        3.2              2.2
Corporate                        (1.8 )           (1.6 )
Total operating earnings   $      9.5       $     13.6

The decrease in total operating earnings was primarily due to the decrease in political and issue revenue and Olympic revenue, the increase in same-station operating expenses at our broadcasting business and a decrease in selling and administrative expenses that offset operating earnings contributed by the Nashville NewsChannel 5 acquisition.

EBITDA in the third quarter of 2013 was $15.4 million, a decrease of $3.8 million, or 19.6%, compared to $19.2 million in the third quarter of 2012. We define EBITDA as net earnings excluding earnings from discontinued operations, net, provision for income taxes, total other expense, net (which is comprised of interest income and expense), depreciation and amortization. Management primarily uses EBITDA, among other things, to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management, helps to improve their 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. EBITDA is also a primary measure used externally by our investors and our peers in our industry for purposes of valuation and comparing our operating performance to other companies in the industry. EBITDA is not a measure of performance or liquidity 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.

The following table presents a reconciliation of our consolidated net earnings to EBITDA for the third quarter of 2013 and the third quarter of 2012:

                                2013             2012
                                (dollars in millions)

Net earnings (1)             $      4.5       $      7.7
Provision for income taxes          3.1              4.9
Total other expense, net            1.9              1.0
Depreciation                        5.1              5.2
Amortization                        0.8              0.4
EBITDA                       $     15.4       $     19.2

(1) Included in net earnings for the third quarter of 2013 are pre-tax charges for acquisition, divestiture and integration-related costs of $0.1 million and workforce reduction charges of $0.1 million. Included in net earnings for the third quarter of 2012 are pre-tax charges for impairment of long-lived assets, acquisition and integration related costs, and workforce reduction charges of $0.5 million, $0.6 million, and $0.6 million, respectively.

The decrease in our EBITDA was consistent with the decrease in our operating earnings for the reasons described above.

Broadcasting

Revenue from broadcasting in the third quarter of 2013 was $60.4 million, an increase of $1.6 million, or 2.7%, compared to $58.8 million in the third quarter of 2012. Operating earnings from broadcasting in the third quarter of 2013 were $8.1 million, a decrease of $4.9 million, or 37.6%, compared to $13.0 million in the third quarter of 2012.


Index
The following table presents our broadcasting revenue and operating earnings for the third quarter of 2013 and the third quarter of 2012:

                                2013                                        2012                        Percent Change
               Television        Radio         Total       Television        Radio         Total            Total
                                              (dollars in millions)

Revenue        $      39.8     $    20.6     $    60.4     $      38.9     $    19.9     $    58.8                  2.7 %

Operating
earnings       $       4.6     $     3.5     $     8.1     $      10.0     $     3.0     $    13.0                (37.6 )%

Revenue from our television stations in the third quarter of 2013 was $39.8 million, an increase of $0.9 million, or 2.2%, compared to $38.9 million in the third quarter of 2012. Revenue increased in three of the nine television markets we operated during both periods. On a consolidated basis, local advertising revenue increased $7.1 million, or 40.9%; retransmission revenue increased $2.8 million, or 105.0%; and national advertising revenue increased $2.3 million, or 35.1%, each compared to the third quarter of 2012. The increase in retransmission revenue was due to the Nashville NewsChannel 5 acquisition in December 2012 as well as rate increases resulting from recently negotiated contracts with MVPDs. Partially offsetting the revenue increases on a consolidated basis were decreases in political and issue revenue of $8.3 million, or 96.5%; Olympic revenue of $2.7 million, or 100%; and other revenue of $0.4 million, or 36.0% compared to the third quarter of 2012. On a same-station basis, local advertising revenue increased $0.4 million, or 2.0%, retransmission revenue increased $1.4 million, or 51.7%, and national advertising revenue increased $0.1 million, or 1.0%, compared to the third quarter of 2012. Partially offsetting these revenue increases on a same-station basis were decreases in political and issue advertising revenue of $8.3 million, or 97.4%; Olympic revenue of $2.7 million, or 100%; and other revenue of $0.4 million, or 37.1%, each compared to the third quarter of 2012. The decrease in political and issue advertising revenue is due to 2013 being primarily a non-political and issue advertising year. Television advertising revenue and rates in even-numbered years typically benefit from political and issue advertising. In those years, as the demand for advertising increases on the limited available inventory, we have the opportunity to increase the average unit rates we charge our customers.

Our television stations experienced advertising revenue increases in a number of categories, specifically automotive, packaged goods and supermarkets, partially offset by decreases in the charity, furniture & electronics, medical and political categories. On a consolidated basis, automotive advertising revenue represented 24.0% of total television revenue in the third quarter of 2013 compared to 16.2% in the third quarter of 2012. Automotive advertising revenue was $9.6 million in the third quarter of 2013, an increase of $3.2 million, or 51.2%, compared to $6.3 million in the third quarter of 2012. Our television stations are working to grow their local customer base by creating new local content, digital products and programs that combine television with digital platforms. On a consolidated basis, digital revenue was $0.9 million in the third quarter of 2013, an increase of 61.4%, compared to $0.5 million in the third quarter of 2012. On a same-station basis, digital revenue was $0.6 million in the third quarter of 2013, an increase of 9.0%, compared to $0.5 million in the third quarter of 2012. Digital revenue is reported in local advertising revenue.

Operating earnings from our television stations in the third quarter of 2013 were $4.6 million, a decrease of $5.4 million, or 53.8%, compared to $10.0 million in the third quarter of 2012. The decrease in operating earnings was primarily due to a $5.0 million decrease in political and issue revenue, which offset an operating earnings increase from the Nashville NewsChannel 5 acquisition. Total television expenses in the third quarter of 2013 increased $6.2 million, or 21.5%, compared to the third quarter of 2012, primarily due to expenses from the Nashville NewsChannel 5 acquisition in December 2012 as well as increases in employee-related expenses and network expenses. On a same-station basis, operating earnings decreased $10.3 million, or 98.8%, and total television expenses increased $0.7 million, or 2.4%, compared to the third quarter of 2012.

Revenue from our radio stations in the third quarter of 2013 was $20.6 million, an increase of $0.7 million, or 3.5%, compared to $19.9 million in the third quarter of 2012. Revenue increased in six of our eight radio markets. On a consolidated basis, local advertising revenue increased $0.7 million, or 4.3%, and other revenue increased $0.3 million, or 43.3%, each compared to the third quarter of 2012. Partially offsetting these revenue increases were decreases in national advertising revenue of $0.1 million, or 4.9%, and political and issue advertising revenue of $0.3 million, or 80.1%, each compared to the third quarter of 2012.

Our radio stations experienced advertising revenue increases in a number of categories, specifically in the retail, medical and supermarket categories, partially offset by decreases in the furniture & electronics, travel, restaurants and political categories. On a consolidated basis, automotive advertising represented 15.3% of total radio revenue in the third quarter of 2013 compared to 15.9% in the third quarter of 2012. Automotive advertising revenue was $3.1 million in both quarters. Our radio stations are working to grow their local customer base by creating new local content, digital products and programs that combine radio with digital platforms. Digital revenue was $0.6 million in both the third quarter of 2013 and the third quarter of 2012.
Digital revenue is reported in local advertising revenue.

Operating earnings from our radio stations in the third quarter of 2013 were $3.5 million, an increase of $0.5 million, or 16.3%, compared to $3.0 million in the third quarter of 2012. The increase in operating earnings was primarily due to the increase in advertising revenue. Total radio expenses in the third quarter of 2013 increased $0.2 million, or 1.3%, compared to the third quarter of 2012, primarily due to increases in employee-related costs and programming rights fees. Throughout 2013, we are selectively adding back expense to invest in our employees, programming, and promotion of our products.

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