July 21, 2016 Last Updated 10:34 am

McClatchy earnings shows company losing nearly $15M in Q2, ad revenue down 11%

The company remains $900M in debt, with about $16M in cash on hand, but its stock has had a nice run up in value this year, as investors bet it can turn things around or sell itself off

The newspaper chain McClatchy, publisher of The Sacramento Bee and Miami Herald, today reported Q2 earnings. The company was in the red, losing $14.7 million on a GAAP basis (though this was far less than the reported loss in 2015 which include a large impairment charge).

SacBee-front-7-21Revenue fell 7.7 percent in the quarter, with advertising revenues down 11.1 percent. Digital-only advertising revenues grew 16.1 percent, however.

The company remains deeply in debt – $906.5 million in debt – with only $15.9 million in cash on hand. Its market cap is $126.92 million.

McClatchy stock is down slightly this morning on the report, but the stock has had a good run up in the past two months, and is up 60 percent this year. But investors may be kidding themselves as a sale would be difficult with so much debt still on the books.

McClatchy’s problems stem from an ill-advised acquisition of purchased Knight Ridder in the summer of 2006. The cash and stock deal was valued at $4 billion, and was described as “a dolphin swallowing a small whale.” The deal also meant that McClatchy would assume about $2 billion in debt. Well, that wouldn’t work, so the company immediately sold off many of the titles including the San Jose Mercury News and Philadelphia Inquirer.

It is safe to say that the deal was not good for anyone (except maybe the Ridder family), as the papers sold to MediaNews Group were slimmed down (meaning many newspaper professionals lost their jobs) and some of the titles are no longer printing today (including my old paper which once was part of the Lesher chain).

It was ambitious, it was brash. That’s about all one can say that might be nice.

Here is McClatchy’s second quarter earnings announcement:


SACRAMENTO, Calif. – July 21, 2016  — McClatchy today reported a net loss in the second quarter of 2016 excluding certain items (adjusted loss), of $1.5 million, a $1.6 million decline from the second quarter of 2015.

On a GAAP basis, the company reported a net loss in the second quarter of 2016 of $14.7 million, or $1.89 per share. In the second quarter of 2015, the company reported a net loss of $296.5 million, or $33.91 per share, which included a non-cash impairment of goodwill and other intangible assets of $300.4 million.

Pat Talamantes, McClatchy’s president and CEO, said, “As we look at the second quarter and first half results we see relative stability in operating cash flow and free cash flow compared to 2015 and continued success in our digital business. Our free cash flow for the trailing twelve months ending in the second quarter of 2016 was $63.4 million, an improvement over the $56.1 million for the trailing twelve months ending in the first quarter of 2016. We again reported strong digital-only results, up 16.1% in digital-only advertising in the quarter — our third consecutive quarter of double-digit growth. We expect double-digit growth in the second half of 2016 as well. Our average unique visitors to our digital platforms grew 31.1% to more than 53 million.

“Importantly, we continue to deliver on our digital transformation through innovative investments and partnerships, including being an original partner and leader in Nucleus Marketing Solutions (Nucleus). Nucleus, a marketing solutions network for national advertisers, officially launched on July 1, 2016, and is a great example of how our industry can work together to create new business models. McClatchy intends to help lead that process, whether it is through Nucleus, the Local Media Consortium or shared investments.

“We also made further progress in reducing legacy costs. In the second quarter, we announced we were moving our production operations in Wichita, Kan., and Fresno, Ca., to other McClatchy facilities and our Lexington, Ky., production operations to a third party. This type of consolidation not only allows for significant costs savings, but also allows us to unlock the value of our real estate portfolio. As a result of these moves, Wichita’s main building is now one of three properties contracted for sale and anticipated to close in 2016. In fact, our efforts to monetize our real estate assets are beginning to show results. We are in the process of working with prospective buyers on our Sacramento, CAKansas City, MO, and Columbia, SC main office buildings and printing facilities for sale-leaseback transactions, as well as working with potential interested buyers on terms for several other properties.”

Talamantes continued, “We have been pleased with the feedback received on the reverse stock split which has now been effective for more than a month. Along with the reverse stock split, the Board also approved an amendment to the share repurchase plan, increasing the total available for repurchases through 2016 from $15 million to $20 million. Under that program, we repurchased 234,000 shares of Class A stock during the quarter. Cumulatively through the second quarter of 2016, total shares repurchased reached 1.2 million at an average price of $11.99.”

Second Quarter Results

Total revenues in the second quarter of 2016 were $242.2 million, down 7.7% compared to the second quarter of 2015. Total advertising revenues were down 11.1% compared to the second quarter of 2015. The declines in advertising revenues are mainly attributable to continued softness in traditional print advertising and direct marketing.

Digital-only advertising revenues grew 16.1% in the second quarter of 2016 and total digital advertising revenues were up 4.4% compared to the same quarter last year. The growth in digital and digital-only revenues is largely attributable to the national and retail advertising categories, which have been consistent digital leaders.

Audience revenues were $90.5 million, down less than one-half percent while digital audience revenues grew 1.5% from the second quarter of 2015. Digital-only audience revenues were up 11.2%, and the number of digital-only subscribers ended the quarter at 80,000, representing an increase of 5.9% from the second quarter of 2015.

Product enhancements, audience growth initiatives and journalistic excellence combined to attract a record 53.6 million average total unique visitors in the second quarter. Local unique visitors to the company’s online products grew to approximately 13.6 million. These results represented average growth of 31.1% in total unique visitors and 16.1% in local unique visitors in the second quarter of 2016, compared to the same quarter in 2015. Mobile users represented 52.9% of total monthly unique visitors.

Revenues excluding print newspaper advertising accounted for 70.4% of total revenues in the second quarter of 2016, an increase from 66.8% in the second quarter of 2015.

Results in the second quarter of 2016 included the following items:

  • Severance charges totaling $5.6 million ($3.4 million after-tax);
  • Accelerated depreciation charges totaling $3.8 million ($2.3 million after-tax);
  • $1.1 million non-cash loss related to the sale of the Charlotte Observer’s building and land by the company’s pension plan ($0.7 million after tax);
  • Certain other charges totaling $10.8 million ($6.8 million after-tax).

Adjusted losses excluding the items above were $1.5 million. Operating cash expenses, excluding severance and certain other charges, declined 8.1% from the second quarter of 2016 to the same quarter last year. Operating cash flow was $39.3 million in the second quarter of 2016, down 5.3% compared to the second quarter last year and was consistent with the decline in the first quarter of 2016 of 5.4% versus the same period in 2015. (Non-GAAP measurements impacting income, cash expenses and operating cash flows are discussed below.)

First Six Months Results

Total revenues for the first six months of 2016 were $480.2 million, down 7.6% compared to the first six months of 2015. Advertising revenues were $277.2 million, down 10.5% compared to the first six months of last year. Softness in print advertising negatively impacted traditional newspaper and direct marketing advertising revenues, while digital advertising revenues grew.

The adjusted loss in the first half of 2016 was $9.4 million, a $0.8 million decline from the first half of 2015.

On a GAAP basis, the company reported a net loss for the first six months of 2016 of $27.5 million, or $3.48 per share, compared to a net loss for the first six months of 2015 of $307.8 million or $35.25 a share, which included a non-cash impairment of goodwill and other intangible assets of $300.4 million.

Results for the first six months of 2016 included the following items:

  • Severance charges totaling $8.7 million ($5.3 million after-tax);
  • Accelerated depreciation charges totaling $6.6 million ($4.0 million after-tax);
  • A gain on the extinguishment of debt totaling $1.5 million ($1.0 million after-tax);
  • $1.1 million non-cash loss related to the sale of the Charlotte Observer’s building and land by the company’s pension plan ($0.7 million after tax);
  • Non-cash charges related to a write-down of an equity investment totaling $0.9 million ($0.6 million after-tax);
  • Certain other charges totaling $15.0 million ($9.4 million after-tax);
  • Net decrease in taxes totaling $0.9 million for adjustments of certain deferred tax credits related to tax positions taken in prior years.

Adjusted losses excluding the items above were $9.4 million. Operating cash expenses, excluding severance and certain other charges, declined 7.9% from the first six months of 2016 compared to the same period last year. Operating cash flow was $65.0 million for the first six months of 2016, down 5.3% compared to the first six months of 2015. (Non-GAAP measurements impacting income, cash expenses and operating cash flows are discussed below.)

Other Second Quarter Business and Financial Highlights 

Interest expense declined by $0.9 million in the second quarter of 2016 compared to the second quarter of 2015, and declined $3.0 million for the first six months of 2016 compared to the first six months of 2015.

Debt at the end of the second quarter of 2016 was $906.5 million. The company finished the quarter with $15.9 million in cash. The leverage ratio at the end of the second quarter as defined in the company’s credit agreement was 4.93 times cash flow compared to a maximum leverage covenant of 6.0 times cash flow (as defined).

The previously announced 1-for-10 reverse stock split became effective upon the opening of the market on June 7, 2016. The split reduced the outstanding Class A common shares from 52.5 million to approximately 5.2 million, and the opening price on the first day of trading after the reverse stock split was $11.50 per share.

During the second quarter of 2016, the company repurchased approximately 234 thousand shares of Class A Common stock at a weighted average price of $11.54 per share under its share repurchase program. The program, which was launched in 2015, and later revised in May of 2016, provides for $20 million of share repurchases through 2016. Under the program, total cumulative shares repurchased through the second quarter of 2016 were approximately 1.2 million shares, or $14.2 million of the total authorized repurchase program.

Outlook 

The company reaffirms the guidance provided for all of 2016. Digital-only advertising revenue is expected to grow at a double-digit rate in the second half of 2016. While the company remains committed to communicating the value of print advertising, the declining trends in direct marketing and print advertising are not anticipated to subside in the next two quarters. Management expects print advertising revenues will continue to become a smaller portion of advertising and total revenues.

Audience revenues are expected to be relatively flat for all of 2016. Management will be vigilant in reducing legacy costs and finding efficiencies and expect cash expenses to decline in the second half and full year 2016. Management will also remain focused on growing digital revenues, stabilizing operating cash flow, reducing debt and interest costs and creating shareholder value.

The company’s statistical report, which summarizes revenue performance for the second quarter and first six months of 2016, is attached.

McClatchy-Q2-16

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