Business News

Journal Register Company Reports Second Quarter 2008 Results

Wednesday 13. August 2008 - Journal Register Company (the "Company") (PINKSHEETS: JRCO) today reported a net loss of $174.5 million, or $(4.43) per diluted share, for the second quarter ended June 29, 2008. The net loss for the period includes a $287.0 million ($175.0 million after-tax), or $(4.44) per diluted share, noncash charge for the impairment of goodwill and indefinite-lived intangibles under the methodology prescribed by Statement of Financial Accounting Standards ("SFAS") No. 142.

This charge relates to a further write-down of the carrying value of mastheads and goodwill for the Company’s Michigan cluster and a write-down of goodwill for its Philadelphia cluster. Absent this charge, the Company would have reported net income of $0.5 million or $0.01 per diluted share as compared to net income of $5.5 million, or $0.14 per diluted share, for the prior year quarter ended July 1, 2007. The Company’s reported results for the quarter ended July 1, 2007 included an adverse net tax adjustment of approximately $1.0 million, or $0.03 per share, resulting from a New York State tax law change that was enacted in April 2007.
Total revenues for the quarter ended June 29, 2008 were $108.1 million, a decrease of 10.4 percent from the same prior year period. Advertising revenues decreased 13.1 percent to $80.5 million, as compared to $92.7 million for the same prior year period. Online revenues, which are included in advertising revenues, increased by 13.1 percent for the quarter ended June 29, 2008 as compared to the same prior year period. Online revenues were 6.6 percent of total advertising revenues for the second quarter 2008 period, compared to 5.1 percent in the same prior year period. The Company reported 4.2 million unique visitors and 30.9 million page views for its Web sites for the second quarter of 2008, increases of 16.7 percent and 1.6 percent to the same prior year period, respectively. Circulation revenues totaled $23.6 million, net of applicable discounts, for the quarter ended June 29, 2008 increasing approximately $0.6 million, or 2.7 percent, as compared to the prior year period largely due to price increases and the benefit of delivery outsourcing in the Connecticut cluster. Commercial printing and other revenues for the quarter ended June 29, 2008 decreased by approximately $1.0 million, or 20.6 percent, as compared to the same prior year period, to $4.0 million.
Advertising Revenue Performance by Category:
The following table sets forth the Company’s total advertising revenues, by category:
For the Quarter Ended
June 29, 2008 July 1, 2007 % Decrease
————- ————- ————
Local $ 46,137 $ 50,959 9.5%
Classified 31,863 37,896 15.9
National 2,537 3,804 33.3
————- ————- ————
Total advertising revenues $ 80,537 $ 92,659 13.1%
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Local
Local retail advertising revenues for the second fiscal quarter of 2008 decreased 9.5 percent as compared to the prior year quarter. Weakness in the department/discount store and financial/insurance advertising revenue categories were partially offset by an improvement in the medical/healthcare category.
Classified
Classified advertising revenues decreased 15.9 percent in the second fiscal quarter of 2008, as compared to the prior year fiscal quarter. Classified real estate advertising revenues decreased 24.4 percent in the second fiscal quarter of 2008, as compared to the same prior year period. The overall softness in the housing market continues to exacerbate a downward trend in real estate advertising in the majority of the Company’s clusters. Classified employment advertising revenues were down 22.4 percent for the quarter, as compared to the same prior year period. Classified automotive advertising revenues were down 17.9 percent for the second fiscal quarter as compared to the prior year fiscal quarter due, in large part, to the continued weak automotive market. Classified other advertising revenues rose approximately 1.7 percent in the second fiscal quarter of 2008, as compared to the prior year fiscal quarter. This category which encompasses private party, legal advertisements and obituaries has been the strongest performing category for over a year and comprised approximately 30.6 percent of the Company’s total classified advertising revenues in the second quarter of 2008.
National
National advertising revenues represented approximately 3.2 percent of the Company’s total 2008 second quarter advertising revenues. These revenues decreased 33.3 percent for the fiscal quarter ended June 29, 2008, as compared to the prior year fiscal quarter.
Operating Expenses:
The Company’s non-newsprint operating expenses for the second quarter of 2008 were down 2.2 percent, excluding the noncash impairment charge described below, compared to the same prior year period. Excluding costs related to the Company’s restructuring efforts; consisting primarily of severance and advisor fees, non-newsprint operating expenses declined 5.4 percent for the 2008 quarter, reflecting the Company’s continued commitment to cost containment efforts.
Salaries and employee benefits
Salaries and employee benefit expenses were 41.3 percent of the Company’s revenues for the fiscal quarter ended June 29, 2008, as compared to 38.9 percent for the fiscal quarter ended July 1, 2007. Salaries and employee benefits decreased $2.3 million, or 4.9 percent, for the fiscal quarter ended June 29, 2008 to $44.6 million, as compared to $46.9 million in the prior year period, primarily due to a 9.2 percent reduction in head count. The benefit from the reduction in headcount was partially offset by increases in medical benefit costs.
Newsprint, ink and printing charges
For the quarter ended June 29, 2008, newsprint, ink and printing charges were 9.8 percent of the Company’s revenues, as compared to 9.5 percent for the quarter ended July 1, 2007. Newsprint, ink and printing charges for the fiscal quarter ended June 29, 2008 decreased 7.0 percent as compared to the fiscal quarter ended July 1, 2007. The Company’s newsprint expense decreased for the second quarter as compared to the prior year period, due to decreases in consumption of approximately 13.0 percent, which were partially offset by an increase in newsprint prices of 6.9 percent.
Selling, general and administrative
Selling, general and administrative expenses were 18.7 percent and 15.6 percent of the Company’s revenues for the fiscal quarters ended June 29, 2008 and July 1, 2007, respectively. As compared to the prior year period, selling, general and administrative expenses for the fiscal quarter ended June 29, 2008 increased $1.3 million, or 7.1 percent, to $20.2 million, primarily due to higher professional and consulting fees related to the Company’s ongoing strategic review of its business and restructuring efforts. Costs in respect of these ongoing efforts totaled $2.4 million for the second quarter of 2008. The Company also continues to increase its investment in online products. All other major selling, general and administrative expenses showed declines for the second quarter of 2008, compared to the second quarter 2007.
Other expenses
Other expenses, primarily related to circulation and delivery costs, were 14.7 percent and 13.8 percent of the Company’s revenues for the quarters ended June 29, 2008 and July 1, 2007, respectively. These expenses decreased compared to the same prior period in 2007 by $0.7 million or 4.0 percent, as a result of declines in promotion and circulation costs, which were partially offset by higher outside delivery and gasoline costs.
Impairment charges
During the second fiscal quarter of 2008, continued negative changes in the newspaper industry, compounded by the protracted sluggish general business climate, resulted in a further decline in the Company’s projected revenue and in lower expected earnings. As a result of this interim impairment assessment, the Company determined that the carrying values of the goodwill and the mastheads of its Michigan and Philadelphia clusters were impaired and recorded a noncash charge of $287.0 million in the second quarter of 2008. There was no comparable impairment charge in the same prior year period.
Operating (loss) income
The Company incurred an operating loss of $275.0 million during the second fiscal quarter of 2008. Excluding the impairment charge previously discussed, in the section “Impairment charges,” operating income would have been $12.0 million, or 11.1 percent of the Company’s revenues, for the fiscal quarter ended June 29, 2008 as compared to $22.1 million, or 18.3 percent of the Company’s revenues, for the fiscal quarter ended July 1, 2007. The decline in operating income for the second quarter of 2008, as adjusted and compared to the same prior year period, is primarily attributable to declines in revenue and additional professional and consulting fees incurred in the second quarter of 2008.
Interest and Other Income:
Interest expense increased approximately $1.8 million, or 17.1 percent, for the fiscal quarter ended June 29, 2008 as compared to the fiscal quarter ended July 1, 2007. The Company’s weighted average interest rate on its bank debt was approximately 6.9 percent in the second fiscal quarter of 2008 compared to 6.2 percent in the second fiscal quarter of 2007.
Interest expense includes charges related to cash flow hedges totaling $1.4 million. The Company recognized an additional $0.8 million in costs related to the amortization of hedges terminated in the second quarter of 2008. The second quarter of 2007 by comparison, was favorably impacted by $1.0 million from cash flow hedges and $0.2 million of capitalized interest.
Other income, net for the second quarter of 2008 reflects a noncash $3.3 million benefit for a change in the fair market value of the Company’s derivatives (interest rate protection agreements) which were de-designated as hedges under SFAS No. 133. In prior periods, changes in the fair market value of the Company’s hedges were reflected in Accumulated Other Comprehensive Income on its Balance Sheet. The change in treatment is largely a result of amendments to the Company’s underlying debt agreement. Other income, for the second quarter of 2007 included, by comparison, a $0.4 million settlement related to an investment in PowerOne Media LLC.
Income Taxes
The Company reported a benefit from income taxes of $109.3 million in the second fiscal quarter of 2008, primarily resulting from the deferred taxes associated with the previously described impairment charge, as compared to a provision for income taxes of $6.6 million in the second fiscal quarter of 2007. Absent the impairment charge, the Company would have reported a tax provision of $2.7 million which includes interest charges on uncertain tax positions, net of recoveries. The charge for uncertain tax positions had the effect of decreasing net income by $0.01 per diluted share for the second quarter of 2008.
Liquidity and Capital Resources
Current assets were $76.8 million and current liabilities were $719.8 million as of June 29, 2008 as compared to current assets of $71.2 million and current liabilities of $80.3 as of December 30, 2007. The working capital position of the Company has been impacted by the continued classification of all of the Company’s bank debt as current debt in the second quarter of 2008. Additionally, the Company’s current liabilities at June 29, 2008 include $12.7 million for the fair value of its interest rate derivatives, which were classified as noncurrent liabilities with a fair value of $8.6 million as of December 30, 2007.
Excluding the bank debt and derivative liabilities as current liabilities, the Company’s working capital increased in the first twenty-six weeks of 2008 due to an increase in cash borrowed under the Company’s revolving credit facility in the first quarter of 2008. Other significant components of working capital changes include lower accounts receivable due to lower revenues, and lower accounts payable and accrued expenses due to cost control measures.
Cash flows from investing activities. Net cash used in investing activities of continuing operations was $1.0 million for the twenty-six weeks ended June 29, 2008 reflecting amounts used for capital expenditures of $1.9 million partially offset by the proceeds from the sale of a real estate asset of $0.9 million. Net cash used in investing activities of continuing operations on capital expenditures was $16.2 million for the twenty-six weeks ended July 1, 2007. Of these capital expenditures, $7.8 million were for costs in connection with the build-out of the Clinton Township, Michigan press and mailroom facility and $2.9 million were related to the Company’s investment in its online operations. The net proceeds from the sale of the Company’s New England newspaper operations of $78.8 million are included in net cash provided by investing activities of discontinued operations for the twenty-six week period ended July 1, 2007.
The Company reviews its capital expenditure program periodically and modifies it as required to meet current operational needs. In addition to its capital expenditure program, the Company is exploring the sale of certain non-core assets and underutilized real estate.
Cash flows from financing activities. Net cash provided by financing activities was $17.3 million for the twenty-six weeks ended June 29, 2008, and was primarily the result of borrowings under the Company’s revolving credit facility. The Company repaid $12.5 million of its outstanding term loan in the first quarter of 2008. By comparison, net cash used in financing activities was $81.2 million for the twenty-six weeks ended July 1, 2007, which included $42.5 million for optional prepayments on the Company’s term loan and $37.1 million net repayment on its revolving credit facility. The Company made $1.6 million in dividend payments in the same period in 2007. No dividend payments were made in the first twenty-six weeks in 2008.
Debt and Credit Agreements
Net debt on June 29, 2008 totaled $628.2 million, and was up slightly from net debt on March 30, 2008, and 1.2 percent above net debt on December 30, 2007. The Company’s next amortization payment is due in the second quarter of 2009. During the second quarter of 2008, the Company amended its Amended and Restated Credit Agreement dated as of January 25, 2006 (“Credit Agreement”). This amendment to the Credit Agreement relaxed certain financial covenants and modified certain additional covenants, including the acquisitions, dispositions and indebtedness covenants. The second quarter amendment also instituted certain cash management provisions; including a provision limiting the maximum cash balances that the Company may maintain in its bank accounts.
After the end of the second fiscal quarter, the Company announced that it entered into a Forbearance Agreement and Amendment No. 3 (the “Forbearance Agreement”) to its Credit Agreement. Under the Forbearance Agreement, the lenders’ commitments to make further extensions of credit, including issuing new letters of credit or making swingline loans, are suspended, although certain existing letters of credit can be renewed or replaced. During the forbearance period, certain cash management procedures also apply. In addition, certain restrictive covenants, including covenants with respect to asset sale proceeds, indebtedness, acquisitions and dispositions, were amended and made permanent. During the forbearance period, interest will continue to accrue but will not be paid by the Company. Instead, the Company will make certain payments of at least $2.0 million per month, into a cash collateral disbursement account maintained by the administrative agent. The Company will have the right to request transfers of funds from the disbursement account under certain conditions. The Lenders will forbear from exercising certain remedies with respect to the interest payments not made during the forbearance period. The terms of the Forbearance Agreement are in effect for the period from July 24, 2008 through October 31, 2008, but the period may be extended with the agreement of all parties.
As a condition to the Forbearance Agreement, the Company has appointed Robert Conway, a member of Conway, Del Genio, Gries & Co., LLC, (“CDG”) to the newly created position of Chief Restructuring Officer and engaged CDG to provide certain financial services.