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JRN > SEC Filings for JRN > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for JOURNAL COMMUNICATIONS INC

Form 10-Q for JOURNAL COMMUNICATIONS INC


8-Aug-2014

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 second quarter ended June 29, 2014, including the notes thereto, and our Annual Report on Form 10-K for the year ended December 29, 2013.

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 29, 2013, as may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report):

? the possibility that the proposed spin and merger transactions with The E.W.
Scripps Company ("Scripps") do not close (including, but not limited to, due to the failure to satisfy the closing conditions), disruption from the proposed transactions making it more difficult to maintain our business and operational relationships, and the risk that unexpected costs will be incurred during this process;

? 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 network programs are made available to our viewers;

? changes in video programming distribution channels, including new Internet and mobile programming competitors;

? 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 the changes in spectrum allocation policies);

? effects of the loss of commercial inventory resulting from uninterrupted television news coverage and potential advertising cancellations due to war, terrorist acts, or other significant events;

? changes in advertising demand or the buying strategies of advertisers or the migration of advertising to digital platforms;

? changes in newsprint prices and other costs of materials;

? changes in legislation or customs relating to the collection, management and aggregation and use of customer 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 investments, dispositions and other capital expenditures on our results of operations, financial conditions 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 and which we undertake no duty to update.


Index
Overview

Our business segments are consistent with the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) television; (ii) radio;
(iii) publishing; and (iv) corporate. Our television segment consists of 14 television stations in 8 states that we own or provide services to. Our radio segment, operating in 8 states, consists of 35 radio stations. Results from our digital media assets are included in our television 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 television and radio industries 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 television and radio businesses are also 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 two 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 earn television revenues from retransmission consent agreements with MVPDs in our markets. The MVPDs are cable operators and satellite carriers who pay us to offer our programming to their customers. The revenue we receive is typically based on the number of subscribers the MVPD has in our local market. When we have renewed retransmission consent agreements, they have generally been at higher rates. Revenue levels in our television and radio 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 network agreements.

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. We do not expect that revenues at our publishing business will return to revenue levels reported in 2013 or prior years given the secular changes affecting the newspaper industry.

On July 30, 2014, we entered into an agreement with The E.W. Scripps Company ("Scripps") to merge our broadcast operations and spin-off and then merge our newspaper businesses, creating two separately traded public companies. The merged broadcast and digital media company, based in Cincinnati, Ohio, will retain the Scripps name. The newspaper company will be called Journal Media Group and will combine Scripps' daily newspapers, community publications and related digital products in 13 markets with Journal Communications' Milwaukee Journal Sentinel, Wisconsin community publications and affiliated digital products. The company will be headquartered in Milwaukee, Wisconsin.

In connection with the transactions, each share of our then outstanding class A and class B common stock will receive 0.5176 Scripps class A common shares and 0.1950 shares of Journal Media Group common stock, and each Scripps class A common share and common voting share then outstanding will receive 0.2500 shares of Journal Media Group common stock. Immediately following consummation of the transactions, holders of our common stock will own approximately 41.00% of the common shares of Journal Media Group and approximately 31.00% of the common shares of Scripps, in the form of Scripps class A common shares. Scripps shareholders will retain approximately 69.00% ownership in Scripps, with the Scripps family retaining its controlling interest in Scripps through its ownership of common voting shares. Scripps shareholders will own approximately 59.00% of the common shares of Journal Media Group. Journal Media Group will have one class of stock and no controlling shareholder.

The boards of directors of both companies have approved the transactions, which are subject to customary regulatory and shareholder approvals. The deal is expected to close in 2015.

Results of Operations

Second Quarter Ended June 29, 2014 compared to the Second Quarter Ended June 30, 2013

Our consolidated revenue in the second quarter of 2014 was $104.7 million, an increase of $4.9 million, or 4.9%, compared to $99.8 million in the second quarter of 2013. Our consolidated operating costs and expenses in the second quarter of 2014 were $54.1 million, a decrease of $0.3 million, or 0.4%, compared to $54.4 million in the second quarter of 2013. Our consolidated selling and administrative expenses in the second quarter of 2014 were $33.2 million, an increase of $0.8 million, or 2.1%, compared to $32.4 million in the second quarter of 2013.


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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 second quarter of 2014 and the second quarter of 2013:

                                                          Percent of                     Percent of
                                                            Total                          Total
                                             2014          Revenue          2013          Revenue
                                                             (dollars in millions)

Revenue:
Television                                 $    47.0             44.9 %   $    41.6             41.7 %
Radio                                           20.2             19.3          19.9             19.9
Publishing                                      37.6             35.9          38.4             38.5
Corporate eliminations                          (0.1 )           (0.1 )        (0.1 )           (0.1 )
Total revenue                                  104.7            100.0          99.8            100.0

Total operating costs and expenses              54.1             51.6          54.4             54.5
Selling and administrative expense              33.2             31.6          32.4             32.5
Total operating costs and expenses and
selling and
administrative expenses                         87.3             83.2          86.8             87.0
Total operating earnings                   $    17.4             16.8 %   $    13.0             13.0 %

Revenue from our television business increased $5.4 million in the second quarter of 2014 compared to the second quarter of 2013. The increase was primarily due to $4.4 million in retransmission revenue and $1.3 million of political and issue revenue, partially offset by a decrease in local revenue of $0.2 million and a decrease in national revenue of $0.1 million. Total expenses from our television business increased 2.9% in the second quarter of 2014 compared to the second quarter of 2013, primarily due to increases in network fees. Operating earnings from our television business increased $4.3 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to increased retransmission and political and issue advertising revenue.

Revenue from our radio business increased $0.3 million in the second quarter of 2014 compared to the second quarter of 2013. The increase was due primarily to increases in local advertising revenue. Total expenses from our radio business increased 0.5% in the second quarter of 2014 compared to the second quarter of 2013 primarily due to increases in programming rights fees. Operating earnings from our radio business increased $0.3 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to increased local and political and issue advertising revenue.

In the second quarter of 2014, our publishing advertising and circulation revenue were down due to volume declines. Total advertising revenue was $20.3 million in the second quarter of 2014 and $20.9 million in the second quarter of 2013. Retail advertising revenue decreased $0.3 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to a decrease in advertising from a large advertiser. Classified advertising revenue decreased in the second quarter of 2014 by $0.2 million compared to the second quarter of 2013. The declines were in the real estate, rentals and employment categories. Publishing digital advertising revenue of $3.5 million increased 5.1%, primarily due to increases in digital retail sponsorships and other revenue, partially offset by declines in classified digital employment revenue. National advertising revenue decreased $0.1 million in the second quarter of 2014 due to declines in preprint revenue. Circulation revenue at our daily newspaper decreased $0.4 million in the second quarter of 2014 compared to the second quarter of 2013 primarily due to a decline in circulation volume. Commercial distribution revenue increased $0.1 million in the second quarter of 2014 compared to the second quarter of 2013 due to increases in distribution volume. Commercial print revenue was essentially flat compared to the second quarter of 2013. Total expenses at our publishing businesses decreased $0.3 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to expense savings from materials, delivery expenses, and other cost saving efforts. Operating earnings at our publishing business decreased $0.5 million in the second quarter of 2014 compared to the second quarter of 2013 mainly due to decreased circulation and retail advertising revenue.

The decrease in total operating costs and expenses for the company in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to employee-related costs. The increase in selling and administrative expenses was primarily due to an increase in employee-related costs.


Index
Our consolidated operating earnings were $17.4 million in the second quarter of 2014, an increase of $4.4 million, or 34.4%, compared to $13.0 million in the second quarter of 2013. The following table presents our operating earnings by segment for the second quarter of 2014 and the second quarter of 2013:

                              2014             2013
                              (dollars in millions)

Television                 $     12.7       $      8.4
Radio                             4.1              3.8
Publishing                        2.6              3.1
Corporate                        (2.0 )           (2.3 )
Total operating earnings   $     17.4       $     13.0

The increase in total operating earnings was primarily due to the increase in retransmission revenue at our television business.

EBITDA in the second quarter of 2014 was $22.9 million, an increase of $4.3 million, or 22.9%, compared to $18.6 million in the second quarter of 2013. 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 second quarter of 2014 and the second quarter of 2013:

                                                 2014             2013
                                                 (dollars in millions)

Net earnings from continuing operations (1)   $     10.4       $      6.5
Provision for income taxes                           5.4              4.4
Total other expense, net                             1.6              2.1
Depreciation                                         4.8              4.9
Amortization                                         0.7              0.7
EBITDA                                        $     22.9       $     18.6

(1) Included in net earnings for the second quarter of 2014 are workforce reduction charges of $0.6 million and transaction related costs of $0.3 million. Included in net earnings for the second quarter of 2013 are pre-tax charges for transaction and integration related costs of $0.8 million and workforce reduction charges of $0.7 million.

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

Television

Revenue from television in the second quarter of 2014 was $47.0 million, an increase of $5.4 million, or 12.8%, compared to $41.6 million in the second quarter of 2013. Operating earnings from television in the second quarter of 2014 were $12.7 million, an increase of $4.3 million, or 52.0%, compared to $8.4 million in the second quarter of 2013.


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The following table presents our television revenue and operating earnings for the second quarter of 2014 and the second quarter of 2013:

                           Second Quarter              Percent
                         2014            2013       Change Total
                       (dollars in millions)

Revenue $ 47.0 $ 41.6 12.8 %

Operating earnings $ 12.7 $ 8.4 52.0 %

Revenue increased in all nine of our television markets. On a consolidated basis, political and issue advertising revenue increased $1.3 million, or 520.0%, retransmission revenue increased $4.4 million, or 80.7%, each compared to the second quarter of 2013. The increase in retransmission revenue was due to rate increases resulting from negotiated contracts with MVPDs. Partially offsetting these revenue increases were decreases in national advertising revenue of $0.2 million, or 0.7%, and local revenue of $0.1 million, or 2.0%, each compared to the second quarter of 2013. Television advertising revenue and rates in even-numbered years typically benefit from political and issue and Olympics 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 the political and issue, communications and automotive categories, partially offset by decreases in the media, building & hardware and other professional services categories. On a consolidated basis, automotive advertising revenue represented 19.4% of total television revenue in the second quarter of 2014 compared to 20.9% in the second quarter of 2013. Automotive advertising revenue was $9.1 million in the second quarter of 2014, an increase of $0.1 million, or 5.1%, compared to $9.0 million in the second quarter of 2013. 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 $1.1 million in the second quarter of 2014, an increase of 24.9%, compared to $0.9 million in the second quarter of 2013. Digital revenue is reported in local advertising revenue.


Index
The increase in operating earnings was primarily due to a $4.4 million increase in retransmission revenue and political and issue advertising revenue. Total television expenses in the second quarter of 2014 increased $1.0 million, or 2.9%, compared to the second quarter of 2013, primarily due to increased network fees and employee-related expenses.

Radio

Revenue from radio in the second quarter of 2014 was $20.2 million, an increase of $0.3 million, or 1.6%, compared to $19.9 million in the second quarter of 2013. Operating earnings from radio in the second quarter of 2014 were $4.1 million, an increase of $0.3 million, or 6.2%, compared to $3.8 million in the second quarter of 2013.

The following table presents our radio revenue and operating earnings for the second quarter of 2014 and the second quarter of 2013:

                           Second Quarter              Percent
                         2014            2013       Change Total
                       (dollars in millions)

Revenue $ 20.2 $ 19.9 1.6 %

Operating earnings $ 4.1 $ 3.8 6.2 %

Revenue decreased in five of our eight radio markets. On a consolidated basis, local advertising revenue increased $0.4 million, or 2.3% compared to the second quarter of 2013. Partially offsetting this revenue increase was a decrease in national revenue of $0.1 million, or 6.3% compared to the second quarter of 2013.

Our radio stations experienced advertising revenue increases in a number of categories, specifically in the home products, supermarkets and other professional services categories, partially offset by decreases in the pharmaceuticals and restaurants categories. On a consolidated basis, automotive advertising represented 15.5% of total radio revenue in the second quarter of 2014 compared to 15.8% in the second quarter of 2013. Automotive advertising revenue was $3.1 million in both the second quarter of 2014 and the second quarter of 2013. 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 grew 14.1% and was $0.8 million in the second quarter of 2014 and $0.7 million in the second quarter of 2013. Digital revenue is reported in local advertising revenue.

The increase in operating earnings was primarily due to the increase in local advertising revenue. Total radio expenses in the second quarter of 2014 increased $0.1 million, or 0.5%, compared to the second quarter of 2013, primarily due to increases in programming rights fees.

Publishing

Revenue from publishing in the second quarter of 2014 was $37.6 million, a decrease of $0.8 million, or 2.0%, compared to $38.4 million in the second quarter of 2013. Operating earnings from publishing were $2.6 million in the second quarter of 2014, a decrease of $0.5 million, or 14.1%, compared to $3.1 million in the second quarter of 2013.

The following table presents our publishing revenue by category and operating earnings for the second quarter of 2014 and the second quarter of 2013:

                              Second Quarter
                                                     Percent Change
                              2014        2013           Total
Advertising revenue:
  Retail                    $   16.1     $ 16.4                 (1.8 )%
  Classified                     3.6        3.8                 (6.5 )
  National                       0.6        0.7                (15.7 )
Total advertising revenue       20.3       20.9                 (3.1 )
Circulation revenue             11.8       12.2                 (2.6 )
Other revenue                    5.5        5.3                  3.9
Total revenue               $   37.6     $ 38.4                 (2.0 )%

Operating earnings          $    2.6     $  3.1                (14.1 )%

. . .
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