Knight Ridder Reports Third Quarter Results

SAN JOSE, Calif., Oct. 14 /PRNewswire-FirstCall/ -- Knight Ridder earned $3.56 per diluted share for the third quarter, up $2.57, or 259.6%, from $0.99 in the third quarter of 2004. Net income of $253.2 million was up 229.3%. Included in these results are $207.9 million, or $2.92 per diluted share, from gains on the sale of our interest in Detroit Newspapers, the Detroit Free Press and the Tallahassee Democrat and $0.02 per diluted share as a result of classifying these entities as discontinued operations.

On July 31, we sold the Detroit Free Press and our 50% interest in Detroit Newspapers for cash. On Aug. 29, we acquired The (Boise) Idaho Statesman, The (Olympia, Wash.) Olympian and The Bellingham (Wash.) Herald in exchange for the Tallahassee (Fla.) Democrat and cash. Accordingly, results from Detroit for one month of the quarter and results from Tallahassee for two months are included as discontinued operations. Results from the acquired newspapers are included for September only.

Earnings per diluted share from continuing operations were $0.61, including severance costs of $0.08 per diluted share for work force reductions in Philadelphia and San Jose and $0.02 per diluted share from the favorable resolution of prior years' tax issues. This compares to $0.93 from last year's continuing operations, which included $0.11 from the favorable resolution of prior years' tax issues. These results are slightly better than previous guidance.

Total advertising revenue for the quarter was $571.5 million, up $16.8 million, or 3.0%, from $554.8 million in the third quarter of last year. Without the acquired newspapers, total advertising revenue would have been $565.0 million, up 1.8% from the third quarter in the prior year.

Total operating revenue was $723.8 million, up $15.9 million, or 2.2%. Without the acquired newspapers, total operating revenue would have been $715.6 million, up 1.1% from the third quarter in the prior year.

Commenting on the results, Knight Ridder Chairman and CEO Tony Ridder said, "While the fundamentals of this quarter were disappointing, we took important steps to position our company for a strong future in both print and online publishing, and our accomplishments were significant. We acquired three newspapers with solid business records and prospects in markets that are growing, and we exited the joint operating arrangement we had with Gannett in Detroit.

"At the corporate level, we completed a $400 million debt offering, and we announced our intention to repurchase an additional 10 million shares of Knight Ridder stock over the course of the next six to nine months. We announced in September staff reductions in two of our largest newspaper operations. At the same time, we are expanding our online operations and targeted publications.

"When you strip away the complexities associated with our asset sales and acquisitions, the story of the quarter is relatively simple: Excluding the acquired newspapers, total operating revenue was up 1.1% and costs -- in a stark aberration from our normal pattern -- were up 7.0% (or 5.5% if you exclude severance costs of $8.6 million). That level of cost increase will not be repeated in the fourth quarter.

"The primary components of the cost increases, excluding the acquired newspapers, were benefit expense, newsprint and certain promotion and volume-related expenses associated with revenue growth.

"Labor and employee benefits, without severance, were up 4.9%, but within that, a combination of pension expense and health insurance accounted for two-thirds of the increase. While pension expense is an ongoing issue, health and welfare reflects the cycling of a one-time credit from last year. Wages and salaries were up just 2.2% with FTEs virtually flat. And I say that with the important proviso that we continue to add people where they can contribute to growth: in core newspaper sales, in online and in targeted publishing.

"Newsprint, ink and supplements, up 7.2%, includes a 10.8% increase in the cost per ton of newsprint, a 3.8% drop in consumption, and a 22.3% rise in supplements (primarily associated with our targeted publications effort). Other operating costs were up 6.5%. Nearly two-thirds of it was driven by promotion and other revenue-generating expenses. In Biloxi, the impact of Hurricane Katrina on the quarter was negative by about $400,000, which is approximately the extent of our deductible.

"In the fourth quarter, excluding the acquired newspapers, we expect year-over-year cost increases to be up about 1% with depreciation playing a major role. We will begin depreciating a portion of our new plant in Kansas City in the fourth quarter. We expect other operating expenses to be below last year.

"Turning to revenue, retail and classified advertising were the softest we have seen all year -- up 1.0% and up 3.2%, respectively. National advertising was up 0.7%. We were encouraged that September ad revenues were better than August, which was one of the softest months of the year.

"Trend lines in the major revenue categories were much as they have been all year. Declines in department stores, home electronics and grocery negatively impacted retail. In national, technology and entertainment were particularly soft. Classified for the quarter was strong in employment (driven by our online services) -- and real estate, but once again, very soft in auto.

"Our digital operations continue to expand exponentially. For the quarter, excluding the acquired newspapers, online ad revenue was up 51.8%; for the year to date it is up 53.6%. Likewise, our weeklies, free dailies, shoppers and targeted print publications, in the aggregate, continue to show revenue increases in the double digits.

"Interest expense was up, reflecting both higher rates and increased borrowing. Losses from equity investments decreased, reflecting improvement in the returns from our investments in two newsprint mills, CareerBuilder and the Seattle Times Co.

"As a part of our share repurchase program, we said that half of the repurchase, or 5 million shares, would be accomplished through an accelerated share buyback (ASB). This approach has the effect of removing the shares from the company's books on the day the transaction takes place at a cost per share that ultimately approximates the average stock price for the period during which repurchases take place. We expect that the bulk of these repurchases will be made by year end.

"During the quarter, we reduced the shares outstanding by approximately 6.5 million, including the ASB, bringing to 9.5 million the total reduction in shares outstanding this year. At quarter's end, there were approximately 67.5 million shares outstanding. We will expect to make continued aggressive share repurchases during the fourth quarter."

Comment on Operations

Steve Rossi, Knight Ridder senior vice president and chief financial officer, said, "For the quarter, total advertising revenue was up 3.0%. Retail was up 2.2%. National was up 0.9%. Classified was up 4.8%. Employment advertising was up 16.1%; real estate was up 9.8%; auto was down 10.0%. Excluding the acquired newspapers, employment was up 14.7%; real estate was up 8.6%; auto was down 10.8%.

"Year to date, total ad revenue is up 2.7%. Retail is up 2.4%. National is down 0.4%. Classified is up 4.5%. Employment is up 15.4%. Real estate is up 8.1%. Auto is down 7.6%. Year to date, excluding the acquired newspapers, total ad revenue is up 2.4%. Retail is up 2.0%. National is down 0.5%. Classified is up 3.9%. Employment is up 14.9%. Real estate is up 7.7%. Auto is down 7.9%.

"Total ad revenue was up 2.1% in July, 1.2% in August, and excluding the acquired newspapers, 2.2% in September.

"For the quarter, St. Paul showed the greatest ad revenue increase, up 8.1%. San Jose and Contra Costa followed, each with an increase of 6.6%. Miami was up 5.2% and Charlotte was up 3.0%. Philadelphia was down 4.8% and Kansas City was down 2.9%. Fort Worth was flat.

"Retail was strongest in San Jose and St. Paul, up 21.4% and 7.3%, respectively. It was up 5.3% in Charlotte, 3.9% in Contra Costa and 2.0% in Fort Worth. Philadelphia, Miami and Kansas City were down 5.5%, 4.6% and 4.2%, respectively. For the quarter, general merchandise, home furnishings, drug stores, home improvement and office supplies all showed increases.

"National advertising for the quarter was up 16.9% in Contra Costa, 10.3% in Charlotte, 8.9% in St. Paul, 5.8% in San Jose, 3.2% in Fort Worth and 2.4% in Miami. It was down 10.0% in Kansas City and 9.9% in Philadelphia. Overall, modest increases in financial, pharmaceuticals and preprints were offset by declines in technology, telecommunications, airlines, entertainment and auto.

"Classified performed much as it has all year. Employment and real estate were strong pretty much across the board; auto was uniformly disappointing. Employment in the large markets was up 11.9%; in the mid-sized and smaller markets, it was up 24.5%. Real estate was up 6.8% in the larger markets; it was up 10.4% in the mid-sized and smaller markets. Auto was down low double digits in both.

"Circulation revenue, excluding the acquired newspapers, was down 2.3% for the quarter (and down 3.0% for the year to date).

"Total debt at quarter's end was $2.0 billion, up approximately $.5 billion from year end 2004. The effective tax rate from continuing operations for the quarter was 36.4%."

Certain statements contained in this report are forward-looking. They are based on management's current knowledge of factors affecting Knight Ridder's business. Actual results could differ materially from those currently anticipated, depending upon -- but not limited to -- the effects of interest rates, of national and local economies on revenue, of the evolution of the Internet, of unforeseen changes in the price of newsprint and of negotiations and relations with labor unions.

Knight Ridder is one of the nation's leading providers of news, information and advertising, in print and online. The company publishes 32 daily newspapers in 29 U.S. markets, with a readership of 8.5 million daily and 11.0 million Sunday. It has Web sites in all of its markets and a variety of investments in Internet and technology companies. It publishes a growing portfolio of targeted publications and maintains investments in two newsprint companies. The company's Internet operation, Knight Ridder Digital, develops and manages the company's online properties. It is the founder and operator of Real Cities (http://www.realcities.com/), the largest national network of city and regional Web sites in more than 110 U.S. markets. Knight Ridder and Knight Ridder Digital are headquartered in San Jose, Calif. (FR)

KNIGHT RIDDER CONSOLIDATED STATEMENT OF INCOME (Unaudited - in thousands, except per share data) Quarter Ended Three Quarters Ended Sept. 25, Sept. 26, Sept. 25, Sept. 26, 2005 2004 2005 2004 OPERATING REVENUE Advertising Retail $253,315 $247,855 $768,461 $750,325 National 87,493 86,678 275,707 276,830 Classified 230,733 220,256 681,316 652,244 Total 571,541 554,789 1,725,484 1,679,399 Circulation 130,300 131,699 392,980 403,405 Other 22,000 21,479 65,667 63,038 Total Operating Revenue 723,841 707,967 2,184,131 2,145,842 OPERATING COSTS Labor and employee benefits 312,090 286,283 917,905 886,517 Newsprint, ink and supplements 101,875 94,257 302,167 285,995 Other operating costs 189,820 177,222 554,051 525,907 Depreciation and amortization 23,806 23,731 71,148 75,652 Total Operating Costs 627,591 581,493 1,845,271 1,774,071 OPERATING INCOME 96,250 126,474 338,860 371,771 OTHER EXPENSE Interest expense (25,621) (12,619) (67,399) (40,097) Interest income 85 52 184 143 Interest expense capitalized 1,552 1,384 5,067 3,500 Interest expense, net (23,984) (11,183) (62,148) (36,454) Equity in losses, net of earnings of unconsolidated companies and joint ventures (2,274) (5,936) (14,974) (21,010) Minority interest in earnings of consolidated subsidiaries (1,738) (2,198) (5,759) (6,682) Other, net 378 (135) 927 (902) Total Other Expense (27,618) (19,452) (81,954) (65,048) Income before income taxes 68,632 107,022 256,906 306,723 Income taxes 24,995 34,774 85,259 105,030 Income from Continuing Operations 43,637 72,248 171,647 201,693 Gain on sale of discontinued Detroit and Tallahassee operations, net of income taxes 207,850 -- 207,850 -- Income from discontinued Detroit and Tallahassee operations, net of income taxes 1,710 4,631 8,595 17,386 Net Income $253,197 $76,879 $388,092 $219,079 Earnings Per Share Basic: Income from continuing operations $0.62 $0.94 $2.34 $2.58 Net gain on sale of discontinued Detroit and Tallahassee operations 2.94 -- 2.83 -- Income from discontinued Detroit and Tallahassee operations, net 0.02 0.06 0.12 0.22 Net Income $3.58 $1.00 $5.28 $2.80 Diluted: Income from continuing operations $0.61 $0.93 $2.32 $2.54 Net gain on sale of discontinued Detroit and Tallahassee operations 2.92 -- 2.81 -- Income from discontinued Detroit and Tallahassee operations, net 0.02 0.06 0.12 0.22 Net Income $3.56 $0.99 $5.25 $2.76 AVERAGE SHARES OUTSTANDING (000s) Basic 70,684 77,258 73,437 78,253 Diluted 71,080 77,936 73,963 79,354 Knight Ridder Consolidated Consolidated Income Statement (In 000s, except Share Data) Quarter Quarter Quarter Quarter 1, 2004 2, 2004 3, 2004 4, 2004 Year 2004 OPERATING REVENUE - Advertising Retail $238,468 $264,002 $247,855 $321,494 $1,071,819 National 93,333 96,819 86,678 113,982 390,812 Classified 208,900 223,088 220,256 204,208 856,452 Total 540,701 583,909 554,789 639,685 2,319,084 Circulation 137,236 134,470 131,699 132,664 536,069 Other Revenue 20,523 21,036 21,479 23,123 86,161 Total Operating Revenue 698,460 739,415 707,967 795,472 2,941,314 OPERATING COSTS - Labor & Employee Benefits 302,531 297,703 286,283 307,397 1,193,914 Newsprint, Ink & Supplements 93,884 97,854 94,257 105,903 391,898 Other Operating Costs 171,857 176,828 177,222 189,481 715,388 Depreciation & Amortization 26,083 25,838 23,731 24,127 99,779 Total Operating Costs 594,355 598,223 581,493 626,908 2,400,979 OPERATING PROFIT 104,105 141,192 126,474 168,564 540,335 OTHER INCOME (EXPENSE) Interest Expense (14,196) (13,282) (12,619) (14,500) (54,597) Capitalized interest exp 974 1,142 1,384 1,246 4,746 Interest Income 53 38 52 87 230 Interest Expense, Net (13,169) (12,102) (11,183) (13,167) (49,621) Losses from Equity Investment (8,067) (7,007) (5,936) (2,873) (23,883) Minority Interest Expense (1,912) (2,572) (2,198) (3,229) (9,911) Other, net (239) (528) (135) 370 (533) Pretax Income 80,718 118,983 107,022 149,665 456,388 Income Taxes 29,051 41,205 34,774 52,687 157,717 Net Income from Cont Ops 51,667 77,778 72,248 96,978 298,671 Discontinued operations 4,270 8,485 4,631 10,186 27,572 Net Income after disc ops $55,937 $86,263 $76,879 $107,164 $326,243 Diluted: Shares (in 000's) 80,338 79,789 77,936 77,737 78,950 EPS GAAP - as reported $0.70 $1.08 $0.99 $1.38 $4.13 Discontinued operations 0.05 0.11 0.06 0.13 0.35 Gain on sale of Detroit Gain on sale of Tallahassee EPS from continuing operations 0.64 0.97 0.93 1.25 3.78 One-time items Settlement of prior years' tax issues 0.00 0.06 0.11 0.09 0.26 Severance Adjusted EPS $0.64 $0.91 $0.81 $1.16 $3.52 Knight Ridder Consolidated Consolidated Income Statement (In 000s, except Share Data) Three Quarters ended Quarter Quarter Quarter September 1, 2005 2, 2005 3, 2005 25, 2005 OPERATING REVENUE - Advertising Retail $245,462 $269,684 $253,315 $768,461 National 95,059 93,155 87,493 275,707 Classified 217,558 233,025 230,733 681,316 Total 558,079 595,864 571,541 1,725,484 Circulation 132,270 130,410 130,300 392,980 Other Revenue 21,426 22,241 22,000 65,667 Total Operating Revenue 711,775 748,515 723,841 2,184,131 OPERATING COSTS - Labor & Employee Benefits 307,090 298,725 312,090 917,905 Newsprint, Ink & Supplements 96,393 103,899 101,875 302,167 Other Operating Costs 179,529 184,702 189,820 554,051 Depreciation & Amortization 23,660 23,682 23,806 71,148 Total Operating Costs 606,672 611,008 627,591 1,845,271 OPERATING PROFIT 105,103 137,507 96,250 338,860 OTHER INCOME (EXPENSE) Interest Expense (18,889) (22,889) (25,621) (67,399) Capitalized interest exp 1,679 1,836 1,552 5,067 Interest Income 43 56 85 184 Interest Expense, Net (17,167) (20,997) (23,984) (62,148) Losses from Equity Investment (9,132) (3,568) (2,274) (14,974) Minority Interest Expense (1,710) (2,311) (1,738) (5,759) Other, net 632 (83) 378 927 Pretax Income 77,726 110,548 68,632 256,906 Income Taxes 20,648 39,616 24,995 85,259 Net Income from Cont Ops 57,078 70,932 43,637 171,647 Discontinued operations 3,421 3,464 209,560 216,445 Net Income after disc ops $60,499 $74,396 $253,197 $388,092 Diluted: Shares (in 000's) 76,279 74,530 71,080 73,963 EPS GAAP - as reported $0.79 $1.00 $3.56 $5.25 Discontinued operations 0.05 0.05 0.02 0.12 Gain on sale of Detroit 1.60 1.54 Gain on sale of Tallahassee 1.32 1.27 EPS from continuing operations 0.75 0.95 0.61 2.32 One-time items Settlement of prior years' tax issues 0.10 0.03 0.02 0.16 Severance (0.08) (0.09) Adjusted EPS $0.65 $0.92 $0.67 $2.25