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JRN > SEC Filings for JRN > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for JOURNAL COMMUNICATIONS INC

Form 10-K for JOURNAL COMMUNICATIONS INC


10-Mar-2014

Annual Report


ITEM 7. 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 audited consolidated financial statements for the three years ended December 29, 2013, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements. See "Forward-Looking Statements" for a discussion of uncertainties, risks and assumptions associated with these statements.

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 11 states, consists of 13 television stations (excluding Palm Springs) 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 Olympics 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 three of our markets - Milwaukee, WI, Green Bay, WI and Omaha, NE and approximately 10% of our total MVPD subscribers. This agreement expired June 30, 2013 and was subsequently extended through July 10, 2013. Time Warner Cable dropped carriage of our multicast signals in several markets at midnight on July 10, 2013. Our full-power television stations continued to be carried by Time Warner Cable through July 24, 2013. Carriage by Time Warner Cable was not restored until a new agreement was reached on September 20, 2013. Our signals continued to be broadcast over the air and carried by other MVPDs.

In recent years, newspaper industry fundamentals have declined as a result of the 2009 recession and secular industry changes. 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.

Based on our results, we believe the rate of decline moderated in 2013, though 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 or community publications 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.

Annual Broadcast License Impairment Tests

Our annual impairment test on broadcast licenses was performed at individual television and radio stations as of September 30, 2013, the first day of our fiscal fourth quarter.


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For broadcast licenses at individual television and radio stations, we used the Greenfield Method, an income approach commonly used in the broadcast sector, to estimate fair value. This approach assumes the start up of a new station by an independent market participant, and incorporates assumptions that are based on past experience and judgments about future market performance. These variables include, but are not limited to: the forecasted growth rate of each market (including market population, household income and retail sales), estimated market share, profit margins and operating cash flows of an independent station within a market, estimated capital expenditures and start up costs, risk-adjusted discount rate, likely media competition within the market and expected growth rates into perpetuity to estimate terminal values. Adverse changes in significant assumptions such as an increase in discount rates, or a decrease in projected market revenues, market share or operating cash flows could result in additional non-cash impairment charges on our broadcast licenses in future periods, which could have a material impact on our financial condition and results of operations.

We based the valuation of broadcast licenses on our internal projections and industry-based assumptions:

                                                September 30, 2013       September 24, 2012       September 26, 2011

Television
Discount rate                                                 11.5 %                   11.5 %                   11.8 %
Tax rate                                                      39.0                     39.0                     39.0
Long-term growth rate                                          2.5                      2.5                      2.5

Radio
Discount rate                                                 10.5 %                   10.5 %                   10.4 %
Tax rate                                                      39.0                     39.0                     39.0
Long-term growth rate                                          2.0                      2.0                      2.5

As of December 29, 2013, if we were to increase the discount rates by 100.0 basis points and by 200.0 basis points, it would result in impairment charges of $0.7 million and $1.5 million, respectively. If we were to decrease the long-term growth rates by 50.0 basis points and by 100.0 basis points, it would result in impairment charges of $0.3 million and $0.7 million, respectively.

Interim and Annual Goodwill Impairment Tests

Our annual impairment tests on goodwill associated with our broadcasting reporting unit and our combined publishing reporting unit as of September 30, 2013, the first day of our fiscal fourth quarter, indicated there was no impairment of our goodwill.

For purposes of testing the carrying values of goodwill related to our broadcasting reporting unit, we determine fair value by using an income and a market valuation approach. The income approach uses expected cash flows of the reporting unit. The cash flows are discounted for risk and time value. In addition, the present value of the projected residual value is estimated and added to the present value of the cash flows. The market approach is based on price multiples of publicly traded stocks of comparable companies to estimate fair value. We assign a greater weight to the income approach as the market approach is deemed less reliable due to the differences in entity size and business model between our broadcasting reporting unit and the comparable companies selected. We base our fair value estimates, in large measure, on projected financial information which we believe to be reasonable. However, actual future results may differ from those projections, and those differences may be material. The valuation methodology used to estimate the fair value of our reporting unit requires inputs and assumptions (i.e., market growth, operating cash flow margins and discount rates) that reflect current market conditions as well as management judgment.

We based the valuation of goodwill related to our broadcasting reporting unit on our internal projections and industry-based assumptions:

                                               September 30, 2013       September 24, 2012       September 26, 2011
Television
Discount rate                                                 10.5 %                   10.5 %                   10.8 %
Tax rate                                                      39.0                     39.0                     39.0
Long-term growth rate                                          2.5                      2.5                      2.5

Radio
Discount rate                                                  9.0 %                    9.0 %                   11.0 %
Tax rate                                                      39.0                     39.0                     39.0
Long-term growth rate                                          2.0                      2.0                      2.5

As of December 29, 2013, if we were to increase the discount rates by 200.0 basis points or decrease the long term growth rates by 100.0 basis points, step two of the goodwill impairment test would not be triggered.


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In 2013, we combined our community publishing and daily newspaper reporting units since we determined they had similar economic characteristics. For purposes of testing the carrying value of goodwill related to our combined publishing reporting unit, we determine fair value using an income and a market valuation approach. The income approach uses expected cash flows of the reporting unit. The cash flows are discounted for risk and time value. In addition, the present value of the projected residual value is estimated and added to the present value of the cash flows. The market approach is based on price multiples of publicly traded stocks of comparable companies to estimate fair value. Each approach estimated a fair value exceeding carrying value. We assign a greater weight to the income approach as the market approach is deemed less reliable due to the differences in entity size and business model between our combined publishing reporting unit and the comparable companies selected. We base our fair value estimates on various assumptions about our projected operating results, including continuing declines in publishing revenues as well as an expectation that we will achieve cash flow benefits from our continuing cost cutting measures. The valuation methodology used to estimate the fair value of our reporting unit requires inputs and assumptions (i.e., market growth, operating cash flow margins and discount rates) that reflect current market conditions as well as management judgment. These assumptions may change due to changes in market conditions and such changes may result in an impairment of our goodwill.

We based the valuation of goodwill related to our publishing reporting unit on our internal projections and industry-based assumptions:

                                              September 30, 2013    (1)     September 24, 2012       September 26, 2011
Discount rate                                                12.0 %                        12.0 %                   13.5 %
Tax rate                                                     39.0                          39.0                     39.0
Long-term growth rate                                        (1.5 )                        (1.5 )                      -

(1) In 2013, we combined our community publishing and daily newspaper reporting units.

As of December 29, 2013, if we were to increase the discount rates by 200.0 basis points or decrease the long-term growth rates by 100.0 basis points, step two of the goodwill impairment test would not be triggered.

Results of Operations

2013 (52 weeks) Compared to 2012 (53 weeks)

Results include the operations of the NewsChannel 5 Network, LLC, television station whose assets were acquired on December 6, 2012. Also, 2013 contained 52 weeks compared to 53 weeks in 2012. We estimate the revenue impact to be $6.0 million and the operating earnings impact to be $1.2 million.

Our consolidated revenue in 2013 was $397.3 million, an increase of $4.2 million, or 1.1%, compared to $393.1 million in 2012. Our consolidated operating costs and expenses in 2013 were $219.3 million, an increase of $14.0 million, or 6.8%, compared to $205.3 million in 2012. Our consolidated selling and administrative expenses in 2013 were $126.7 million, a decrease of $2.4 million, or 8.2%, compared to $129.1 million in 2012. We recorded a $1.6 million non-cash broadcast license impairment charge in 2012.

The following table presents our total revenue by segment, total operating costs and expenses, selling and administrative expenses, broadcast license impairment and total operating earnings as a percent of total revenue for 2013 and 2012:

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

Revenue:
Broadcasting                        $   243.4             61.3 %   $   228.7             58.2 %
Publishing                              154.6             38.9         164.9             41.9
Corporate                                (0.7 )           (0.2 )        (0.5 )           (0.1 )
Total revenue                           397.3            100.0         393.1            100.0

Total operating costs and
expenses                                219.3             55.2         205.3             52.2
Selling and administrative
expense                                 126.7             31.9         129.1             32.8
Total operating costs and
expenses and selling and
administrative expenses                 346.0             87.1         334.4             85.0
Total operating earnings            $    51.3             12.9 %   $    58.7             14.9 %


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At our broadcasting businesses, advertising revenue increased in 2013 compared to 2012 primarily due to a $30.5 million increase in local advertising revenue, a $11.7 million decrease in retransmission revenue; $9.0 million increase in national revenue, partially offset by a $34.1 million decrease in political and issue advertising revenue, $2.3 million decrease in Olympics advertising revenue, and a $0.1 million decrease in other advertising revenue.

Our publishing businesses experienced an 8.7% decrease in retail advertising revenue in 2013 compared to 2012. Adjusting for the sale of the northern Wisconsin publications in December 2012 and the extra week, retail advertising revenue increased 0.5%. Classified advertising revenue decreased 11.4% in 2013 compared to 2012 primarily due to the sale of the northern Wisconsin publications, the extra week, and lower employment advertising. Publishing circulation revenue decreased $2.9 million in 2013 compared to 2012 driven by lower volume and the extra week. Publishing other revenue, which primarily includes commercial printing and delivery revenue increased $1.2 million or 5.4% in 2013 compared to 2012, driven by increased commercial printing volume which offset commercial delivery declines.

The increase in total operating costs and expenses in 2013 compared to 2012 was primarily due to costs related to the NewsChannel 5 Network, LLC acquisition in December 2012, increased employee-related expenses and network affiliation fees, partially offset by a decrease in newsprint and paper costs. The decrease in selling and administrative expenses was primarily due to lower acquisition and integration-related costs, impairment expenses, publishing workforce reduction charges and the extra week.

Our consolidated operating earnings were $51.3 million in 2013, a decrease of $7.4 million, or 12.6%, compared to $58.7 million in 2012. The following table presents our operating earnings (loss) by segment for 2013 and 2012:

                              2013             2012
                              (dollars in millions)

Broadcasting               $     45.4       $     54.9
Publishing                       13.8             11.6
Corporate                        (7.9 )           (7.8 )
Total operating earnings   $     51.3       $     58.7

The decrease in total operating earnings was primarily due to the decrease in political and Olympics revenue, partially off-set by the acquisition of NewsChannel 5 Network, LLC in Nashville, Tennessee in December 2012 and increased retransmission revenue, net of related expenses.

EBITDA in 2013 was $74.2 million, a decrease of $6.5 million, or 8.1%, compared to $80.8 million in 2012. We define EBITDA as net earnings excluding 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 2013 and 2012:

                                2013             2012
                                (dollars in millions)

Net earnings(1)              $     26.3       $     32.6
Provision for income taxes         17.2             21.7
Total other expense, net            7.9              4.5
Depreciation                       20.0             20.6
Amortization                        2.8              1.4
EBITDA                       $     74.2       $     80.8

(1) Included in net earnings for 2013 are pre-tax charges for impairment of long-lived assets, acquisition and integration related costs, and workforce reduction charges of $0.2 million, $1.6 million, and $0.9 million, respectively. Included in net earnings for 2012 are pre-tax charges for impairment of long-lived assets, impairment of intangible assets, acquisition and integration related costs, and workforce reduction charges of $0.5 million, $1.6 million, $3.1 million, and $1.7 million, respectively.

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


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Broadcasting

Revenue from broadcasting in 2013 was $243.4 million, an increase of $14.7 million, or 6.4%, compared to $228.7 million in 2012. Operating earnings from broadcasting in 2013 were $45.4 million, a decrease of $9.5 million, or 17.3%, compared to $54.9 million in 2012. We recorded a $1.6 million non-cash broadcast license impairment charge in 2012.

The following table presents our broadcasting revenue and operating earnings for 2013 and 2012:

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

Revenue        $      166.6     $    76.8     $   243.4     $      152.5     $    76.2     $   228.7            6.4 %

Operating
earnings       $       31.4     $    14.0     $    45.4     $       41.0     $    13.9     $    54.9          (17.3 )%

Revenue from our television stations in 2013 was $166.6 million, an increase of $14.1 million, or 9.2%, compared to $152.5 million in 2012. We experienced revenue increases in two of our nine television markets. Compared to 2012, on a same station basis excluding Nashville NewsChannel 5 Network, LLC., political and issue advertising revenue decreased $32.9 million, or 96.8%; and national advertising revenue increased $0.9 million, or 3.4%; retransmission revenue increased $6.4 million, or 62.7%; local advertising revenue increased $1.8 million, or 2.4%; other revenue decreased $1.0 million, or 38.9%; and Olympics revenue decreased $2.3 million. Political and issue advertising revenue decreased in 2013 compared to 2012 primarily due to 2013 being a non-election year. Television advertising revenue and rates in even-numbered years typically benefit from political and issue advertising because there tends to be more pressure on available inventory as the demand for advertising increases and we have the opportunity to increase the average unit rates we charge our customers.

Our television stations experienced revenue increases in a number of categories, specifically entertainment, automotive, media and packaged goods, partially offset by decreases in the pharmaceuticals, travel and political categories. Automotive advertising revenue represented 21.6% of television advertising revenue in 2013 compared to 15.9% in 2012. Automotive advertising revenue was $37.2 million in 2013, an increase of $11.9 million, or 49.9%, compared to $25.4 million in 2012. Our television stations are working to grow their local customer base by creating new local content and programs that combine television with digital platforms. Digital revenue was $3.7 million in 2013 compared to $2.1 million in 2012. Digital revenue is reported in local advertising revenue.

Operating earnings from our television stations in 2013 were $31.4 million, a decrease of $9.6 million, or 23.4%, compared to $41.0 million in 2012. The decrease in operating earnings was primarily due to lower political and Olympics revenue partially offset by operating earnings of NewsChannel 5 Network, LLC. Total television expenses in 2013 increased $24.0 million, or 21.5%, compared to 2012 primarily due to the acquisition of NewsChannel 5 Network, LLC, an increase in employee-related expenses, sales commissions, network programming expenses, acquisition and integration-related costs, and expenses related to the new Green Bay Packers preseason network agreement. Throughout 2013, we selectively added back expense to invest in our employees, programming, and promotion of our products.

Revenue from our radio stations in 2013 was $76.8 million, an increase of $0.6 million, or 0.7%, compared to $76.2 million in 2012. We experienced revenue increases in three of our eight radio markets. Compared to 2012, local advertising revenue increased $1.7 million, or 2.7%; political and issue advertising revenue decreased $1.3 million, or 79.1%; other advertising revenue increased $0.8 million, or 30.2%; and national advertising revenue decreased $0.7 million, or 9.3%.

Our radio stations experienced revenue increases in a number of categories, specifically retail, medical and packaged goods, partially offset by decreases in the automotive, political, media and communications categories. Automotive advertising represented 14.7% of radio advertising revenue in 2013 compared to 15.3% in 2012. Automotive advertising revenue was $11.3 million in 2013, a decrease of $0.3 million, or 2.8%, compared to $11.6 million in 2012. Our radio stations are working to grow their local customer base by creating new local content and programs that combine radio with digital platforms. Digital revenue was $2.7 million in 2013 compared to $2.2 million in 2012. Digital revenue is reported in local advertising revenue.

Operating earnings from our radio stations in 2013 were $14.0 million, an increase of $0.1 million, or 0.4%, compared to $13.9 million in 2012. The increase in operating earnings was primarily due to an increase in total revenue. Total radio expenses increased $0.5 million, or 0.8%, in 2013 compared to 2012 primarily due to credits received in 2012 related to our radio music license fees, increases in employee-related expenses, partially offset by impairment charges and acquisitions and integration related expenses recorded in 2012. Throughout 2013, we selectively added back expense to invest in our employees, programming, and promotion of our products.


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Publishing

Revenue from publishing in 2013 was $154.5 million, a decrease of $10.4 million,
or 6.3%, compared to $164.9 million in 2012.  Operating earnings from publishing
were $13.8 million in 2013, an increase of $2.2 million, or 18.6%, compared to
$11.6 million in 2012.

The following table presents our publishing revenue by category and operating
earnings for 2013 and 2012:

                                   2013                                       2012

                    Daily        Community                     Daily        Community                   Percent
                  Newspaper     Publications      Total      Newspaper     Publications      Total      Change
                                                (dollars in millions)
Advertising
revenue:
Retail              $   57.9       $      6.2     $  64.1      $   56.6       $     13.5     $  70.1        (8.7 )%
Classified              12.9              1.8        14.7          14.0              2.7        16.7       (11.4 )
. . .
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