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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-7564
DOW JONES & COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-5034940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 LIBERTY STREET, NEW YORK, NEW YORK 10281
(Address of principal executive offices) (Zip Code)
(212) 416-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock on June 30, 2002: 63,205,266 shares of Common Stock and
20,865,472 shares of Class B Common Stock.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Dow Jones & Company, Inc.
=========================================================================================
Quarters Ended Six Months Ended
(in thousands, except June 30 June 30
per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
Revenues:
Advertising $245,001 $300,903 $464,869 $577,092
Information services 70,725 72,601 142,356 145,778
Circulation and other 101,298 110,622 202,690 221,124
- -----------------------------------------------------------------------------------------
Total revenues 417,024 484,126 809,915 943,994
- -----------------------------------------------------------------------------------------
Expenses:
News, operations and development 124,658 133,612 251,690 271,748
Selling, administrative and general 153,752 156,870 305,878 327,015
Newsprint 26,638 44,094 53,416 87,208
Print delivery costs 47,891 50,023 95,143 99,342
Depreciation and amortization 29,030 26,601 56,427 55,214
Restructuring 11,098 17,167 11,098 32,052
- -----------------------------------------------------------------------------------------
Operating expenses 393,067 428,367 773,652 872,579
- -----------------------------------------------------------------------------------------
Operating income 23,957 55,759 36,263 71,415
Other income (deductions):
Investment income 106 499 196 1,053
Interest expense (492) (70) (2,081) (139)
Equity in earnings (losses) of
associated companies 3,107 720 657 (10,057)
Gain on sale of businesses 44,518 197,925
Contract guarantee, net (3,041) 8,129 (6,219) 10,285
Other, net (305) 538 450 833
- -----------------------------------------------------------------------------------------
Income before income taxes and
minority interests 67,850 65,575 227,191 73,390
Income taxes 16,315 23,544 48,193 26,715
- -----------------------------------------------------------------------------------------
Income before minority interests 51,535 42,031 178,998 46,675
Minority interests 2,465 1,213 4,827 2,748
- -----------------------------------------------------------------------------------------
NET INCOME $ 54,000 $ 43,244 $183,825 $ 49,423
=========================================================================================
Per share:
Net income per share:
- Basic $.64 $.50 $2.18 $.57
- Diluted .64 .50 2.17 .57
Weighted-average shares outstanding:
- Basic 84,061 86,147 84,189 86,458
- Diluted 84,550 86,741 84,698 87,078
Cash dividends declared $.50 $.50 $.75 $.75
- -----------------------------------------------------------------------------------------
Comprehensive income $ 55,878 $ 41,206 $187,341 $ 42,044
=========================================================================================
See notes to condensed consolidated financial statements.
-2-
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Dow Jones & Company, Inc.
=========================================================================
Six Months Ended June 30
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Operating Activities:
Consolidated net income $183,825 $ 49,423
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 56,427 55,214
Gain on sale of businesses (197,925)
Changes in assets and liabilities (24,633) 21,694
Other, net 4,224 2,559
- -------------------------------------------------------------------------
Net cash provided by
operating activities 21,918 128,890
- -------------------------------------------------------------------------
Investing Activities:
Additions to plant and property (41,073) (72,071)
Funding of equity-method investments (16,143) (22,343)
Disposition of businesses and investments 247,911 1,176
Other, net (2,224) (2,269)
- -------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 188,471 (95,507)
- -------------------------------------------------------------------------
Financing Activities:
Cash dividends (42,101) (43,297)
Increase in long-term debt 49,056
Reduction of long-term debt (135,069)
Repurchase of treasury stock, net of
put premiums (49,947) (71,854)
Proceeds from sales under stock
compensation plans 12,294 10,132
Contribution from minority partner 5,737 3,930
- -------------------------------------------------------------------------
Net cash used in financing activities (209,086) (52,033)
- -------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,303 (18,650)
Cash and cash equivalents at beginning of year 21,026 49,347
- -------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 22,329 $ 30,697
=========================================================================
See notes to condensed consolidated financial statements.
-3-
CONDENSED CONSOLIDATED
BALANCE SHEETS (Unaudited)
Dow Jones & Company, Inc.
=========================================================================
June 30 December 31
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 22,329 $ 21,026
Accounts receivable-trade, net 162,713 162,559
Newsprint inventory 13,639 10,810
Deferred income taxes 10,352 10,648
Other current assets 39,556 40,916
- -------------------------------------------------------------------------
Total current assets 248,589 245,959
- -------------------------------------------------------------------------
Investments in associated companies,
at equity 91,315 78,985
Other investments 8,169 6,700
Plant and property, at cost 1,659,311 1,673,193
Less, accumulated depreciation 926,228 911,844
- -------------------------------------------------------------------------
733,083 761,349
Intangible assets, principally goodwill 57,858 81,583
Deferred income taxes 78,103 99,919
Other assets 8,102 23,845
- -------------------------------------------------------------------------
Total assets $1,225,219 $1,298,340
=========================================================================
Liabilities:
Accounts payable and accrued liabilities $ 314,672 $ 330,645
Income taxes 45,008 66,260
Unearned revenue 192,931 204,988
- -------------------------------------------------------------------------
Total current liabilities 552,611 601,893
Long-term debt 38,889 173,958
Other noncurrent liabilities 498,441 476,843
- -------------------------------------------------------------------------
Total liabilities 1,089,941 1,252,694
- -------------------------------------------------------------------------
Minority Interests in Subsidiaries 4,779 3,869
Stockholders' Equity:
Common stock 102,181 102,181
Additional paid-in capital 123,105 127,846
Retained earnings 735,570 614,863
Accumulated other comprehensive income (loss) 2,217 (1,299)
- -------------------------------------------------------------------------
963,073 843,591
Less, treasury stock, at cost 832,574 801,814
- -------------------------------------------------------------------------
Total stockholders' equity 130,499 41,777
- -------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,225,219 $1,298,340
=========================================================================
See notes to condensed consolidated financial statements.
-4-
NOTES TO FINANCIAL STATEMENTS
Dow Jones & Company, Inc.
1. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments considered necessary by management to present fairly
the company's consolidated financial position as of June 30, 2002, and the
consolidated results of operations for the three and six-month periods ended
June 30, 2002 and 2001 and consolidated cash flows for the six-month periods
then ended. In management's opinion, all adjustments necessary for a fair
presentation are reflected in the interim periods presented. The results of
operations for the respective interim period are not necessarily indicative
of the results to be expected for the full year.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the company's annual report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission.
2. Effective January 1, 2002, the company adopted the provisions of
Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and
Other Intangible Assets". SFAS 142 requires that an intangible asset
acquired either individually or with a group of other assets be initially
recognized and measured based on fair value. An intangible with a finite
life is amortized over its useful life, while an intangible asset with an
infinite life, including goodwill, is not amortized. All intangible assets,
including goodwill, are tested at least annually for impairment. As of June
30, 2002, the company had completed its transitional impairment review,
which did not result in an impairment of its intangible assets.
The following table reflects net income and basic and diluted earnings per
share assuming SFAS 142 had been adopted on January 1, 2001:
===================================================================================
Six months ended
(in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------
Net income, as reported $183,825 $49,423
Add back: goodwill amortization expense, net of tax 1,510
Adjusted net income $183,825 $50,933
Basic earnings per share:
As reported $2.18 $.57
Adjusted $2.18 $.59
Diluted earnings per share:
As reported $2.17 $.57
Adjusted $2.17 $.58
===================================================================================
3. The second quarter of 2002 included a gain of $44.5 million ($38 million
after taxes, or $.45 per diluted share) from the sale of Ottaway's Essex
County newspaper properties to Eagle-Tribune Publishing Company. The first
quarter of 2002 included a gain of $153.4 million ($126.1 million after
taxes, or $1.49 per diluted share) resulting from the sale of four of the
company's Ottaway newspapers to Community Newspapers Holdings, Inc.
4. The second quarter of 2002 included restructuring charges of $11.1
million ($6.3 million after taxes and minority interests, or $.07 per
diluted share) largely reflecting employee severance related to a workforce
reduction across the print and electronic publishing and corporate segments.
-5-
The second quarter of 2001 included restructuring charges of $17.2 million
($10.4 million after taxes and minority interests, or $.12 per diluted
share) for employee severance and for a technology asset write-down related
to WSJ.com. The first quarter of 2001 included restructuring charges of
$14.9 million ($9.1 million after taxes and minority interests, or $.10 per
diluted share) for employee severance related to a workforce reduction and
for asset write-downs associated with the company's online businesses which
were made obsolete or were redundant and abandoned as a result of the
restructuring plan.
The following table displays the activity and balances for the six months ended June 30,
2002 of the restructuring reserve account:
===================================================================================
December 31, June 30,
2001 Additional Net Cash 2002
(in thousands) Reserve Reserve Payments Reserve
- -----------------------------------------------------------------------------------
Employee severance $12,541 $10,861 $13,237 $10,165
Other exit costs 336 237 29 544
===================================================================================
As of June 30, 2002, almost all of the roughly 550 employees that were
part of the 2001 workforce reductions have been terminated. About 63% of
the 165 full-time employees that were part of the second quarter 2002
workforce reduction were terminated. The remaining separations are expected
to be completed by the end of the third quarter 2002.
5. The second quarter of 2002 included a charge of $3 million, or $.04 per
diluted share, relating to the amortization of the discount on a contract
guarantee. The first quarter of 2002 included a charge of $3.2 million, or
$.04 per diluted share, relating to this matter. In 2000, the company
established a reserve for the present value of the total estimated payments
through October 2006 in connection with Dow Jones' guarantee of certain
minimum payments for data acquired by Dow Jones' former Telerate subsidiary
from Cantor Fitzgerald Securities and Market Data Corporation (MDC). Bridge
Information Systems, Inc., which purchased Telerate in 1998, is currently in
bankruptcy but made payments for this data for the post-petition periods
through October 2001, when Telerate ceased operations, went out of business,
sold certain assets and rejected its contracts with Cantor and MDC. The
company is now in litigation with Cantor and MDC with respect to their
claims for amounts due under the contract guarantee. The company has
various substantial defenses to these claims and the litigation is
proceeding.
The second quarter of 2001 included a net gain of $8.1 million, or $.09 per
diluted share, and the first quarter of 2001 included a net gain of $2.2
million, or $.02 per diluted share, reflecting payments made by Bridge net
of amortization of the discount.
6. In the second quarter of 2002, equity in earnings of associated companies
included the company's 50% share of gains at CNBC Asia of $3.9 million ($.05
per diluted share). These gains consisted of a $2.5 million gain from the
favorable settlement of a contractual obligation and a $1.4 million gain
from the sale of an investment by CNBC Asia.
The first quarter of 2001 included a $2.4 million ($1.6 million after taxes,
or $.02 per diluted share) charge to equity in losses of associated
companies for costs related to the shut-down of Work.com, a joint venture
with Excite@Home.
-6-
7. Diluted earnings per share have been computed as follows:
=============================================================================
Quarters Ended Six Months Ended
(in thousands, except June 30 June 30
per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Net income $54,000 $43,244 $183,825 $49,423
Weighted-average shares
outstanding - basic 84,061 86,147 84,189 86,458
Stock options 315 409 343 449
Other, principally
contingent stock rights 174 185 166 171
- -----------------------------------------------------------------------------
Weighted-average shares
outstanding - diluted (1) (2) 84,550 86,741 84,698 87,078
Diluted earnings per share $.64 $.50 $2.17 $.57
=============================================================================
(1) The diluted average shares outstanding have been determined using the
treasury stock method, which assumes the proceeds from the exercise of
outstanding options are used to acquire treasury stock at the average
market value of the stock during the year.
(2) Options to purchase 5,596,000 shares in the first six months of 2002 at an
average price of $58.54 were excluded from the diluted earnings per share
calculation because the option's exercise prices were greater than the
average market price for 2002 and to include such securities would be
antidilutive. Options to purchase 3,311,000 shares in the first six months
of 2001 at an average price of $61.18 were excluded because to include such
securities would be antidilutive.
8. Comprehensive income was computed as follows:
==========================================================================
Quarters Ended Six Months Ended
June 30 June 30
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------
Net income $54,000 $43,244 $183,825 $49,423
Foreign currency
translation adjustments 2,331 (1,612) 1,246 (4,390)
Adjustments for realized loss
included in net income (246) (1,743)
Unrealized (loss) gain on
investments (453) (180) 2,270 (1,246)
- --------------------------------------------------------------------------
Comprehensive income $55,878 $41,206 $187,341 $42,044
==========================================================================
-7-
9. The company's operations by business segment were as follows:
SEGMENT INFORMATION
=============================================================================
Quarters Ended Six Months Ended
June 30 June 30
(in thousands) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Revenues:
Print publishing $261,257 $312,846 $497,305 $611,419
Electronic publishing 78,613 80,262 156,413 161,660
Community newspapers:
Continuing operations 72,046 71,703 134,023 133,574
Divested operations 5,108 19,315 22,174 37,341
-------- -------- -------- --------
Consolidated revenues $417,024 $484,126 $809,915 $943,994
- -----------------------------------------------------------------------------
Income before income taxes
and minority interests:
Print publishing $ (3,143) $ 34,949 $(11,920) $ 46,803
Electronic publishing 12,721 7,098 27,948 9,982
Community newspapers:
Continuing operations 21,751 20,032 34,036 30,356
Divested operations 1,477 5,307 5,255 9,181
Corporate (8,849) (11,627) (19,056) (24,907)
-------- -------- -------- --------
Consolidated operating income $ 23,957 $ 55,759 $ 36,263 $ 71,415
Equity in earnings (losses)
of associated companies 3,107 720 657 (10,057)
Gain on sale of businesses 44,518 197,925
Contract guarantee, net (3,041) 8,129 (6,219) 10,285
Other income, net (691) 967 (1,435) 1,747
-------- -------- -------- --------
Income before income taxes
and minority interests $ 67,850 $ 65,575 $227,191 $ 73,390
- -----------------------------------------------------------------------------
Depreciation and amortization (D&A):
Print publishing $ 19,224 $ 17,595 $ 36,240 $ 35,155
Electronic publishing 6,696 4,574 13,431 11,180
Community newspapers:
Continuing operations 2,783 3,184 5,596 6,387
Divested operations 88 960 681 1,920
Corporate 239 288 479 572
-------- -------- -------- --------
Consolidated D&A $ 29,030 $ 26,601 $ 56,427 $ 55,214
=============================================================================
Excluding restructuring charges, segment operating income was as follows:
(in thousands) Quarters Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Print publishing $ 5,167 $ 43,261 $ (3,610) $ 63,682
Electronic publishing 15,164 14,233 30,391 22,066
Community newspapers:
Continuing operations 21,751 20,032 34,036 30,677
Divested operations 1,477 5,307 5,255 9,181
Corporate (8,504) (9,907) (18,711) (22,139)
------- -------- -------- --------
Consolidated operating income $ 35,055 $ 72,926 $ 47,361 $103,467
10. Various libel actions and other legal proceedings that have arisen in
the ordinary course of business are pending against the company and its
subsidiaries. In the opinion of management, the ultimate outcome to the
company and its subsidiaries as a result of legal proceedings will not have
a material effect on the company's financial statements. In addition, the
company has insurance coverage for many of these matters.
-8-
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Second quarter 2002 results continued to reflect serious softness in global
advertising spending, particularly in the company's core financial and
technology segments. Advertising volume at all editions of The Wall Street
Journal has yet to recover and was well below prior year levels. During the
quarter, the company continued to partially mitigate this revenue pressure
with additional cost reductions, strong increases in color advertising and
solid performance at non-advertising dependent businesses. The company has
trimmed its cost base through workforce reductions and reductions in other
non-staff areas. Since the workforce reductions began in March 2001, the
company has reduced headcount by roughly 11% and comparable expenses by more
than 9%, to around 1999 expense levels.
The company also made significant strides in executing its long-range
strategic priorities during the quarter. The cornerstone of the company's
long-range plan was the completion of its $226 million four-year color print
expansion project. In April 2002, the company successfully completed the
final phase of this project with the debut of Today's Journal. Its improved
navigation and readability along with richer content and new Personal
Journal section should reinforce it as a must-read for all serious business
people as well as open its pages to new readers. Today's Journal provides
advertisers access to more color advertising pages and increased flexibility
to use the pages (such as partial color pages, gutter bleeds, multi-page
spreads and back-to-back color pages). Today's Journal has met with early
positive results from subscribers and color page advertising increased 25%
in the second quarter 2002 when compared to last year.
In the second quarter of 2002, the company completed the sale of its Essex
County newspaper properties, bringing the total number of community
newspaper properties sold to five in the first half of 2002. The company
intends to enhance the long-term growth of the Ottaway community newspaper
portfolio by divesting properties in non-strategic areas and re-investing in
more strategically located areas. The divestiture phase of this Ottaway
strategy is now complete and the company is exploring potential
acquisitions.
In July 2002, the company realigned its organizational structure, including
placing its U.S. print Journal and its international editions under a new
global structure and made other management changes. The company expects the
changes will streamline decision-making and improve operational efficiency
and cooperation across all business units. Notable changes include the
promotion of Richard Zannino to Chief Operating Officer; the appointment of
Karen House, who is the spouse of the Chief Executive Officer, to publisher
of the global print Journals; and the naming of Chris Vieth to Chief
Financial Officer. The company also established a seven-member executive
committee that will foster cross-company strategy, cooperation and
leveraging of resources.
RESULTS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net income for the second quarter of 2002 was $54 million, or $.64 per
diluted share, compared with earnings of $43.2 million, or $.50 per diluted
share, a year ago. Included in earnings per share were special items
netting to a gain of $.39 per share for the second quarter 2002 and a loss
of $.03 per share for the comparable 2001 quarter. These special items are
detailed beginning on page 16.
-9-
Revenues for the second quarter of 2002 fell $67.1 million, or 14%, to $417
million. Company-wide advertising revenue declined $55.9 million, or 19%.
Excluding Ottaway divested newspapers, advertising revenue decreased $45.7
million, or 16%, primarily due to the depressed global advertising
environment. Information services revenue decreased $1.9 million, or 2.6%,
reflecting a decline in Newswires revenue as a result of continuing
contraction in the securities industry. Circulation and other revenues
declined $9.3 million, or 8.4%. Excluding Ottaway divested newspapers,
circulation and other revenue was down 5% reflecting, in part, lower rate
circulation, as well as lower conference, commercial printing and reprint
revenues.
Second quarter 2002 operating expenses of $393.1 million were lower by $35.3
million, or 8.2%, from the second quarter of 2001. Excluding restructuring
charges, divested operations, newsprint expenses and Today's Journal costs,
operating expenses were down $20.8 million, or 5.8%, due to lower employee-
related costs and other company-wide cost control measures. Newsprint
expense, excluding divested operations, was down 38% as a result of a 31%
drop in prices coupled with a 10% reduction in newsprint consumption.
Employee compensation expense, excluding divested Ottaway newspapers, for
the second quarter of 2002 was down approximately 4%. The number of full-
time employees at June 30, 2002 was down 1,186, or 14%, from the comparable
period last year, including the reduction in headcount of about 565 full-
time employees from the sale of the five Ottaway properties.
Second quarter operating income was $24.0 million (5.7% of revenues), down
$31.8 million, or 57%, from $55.8 million (11.5% of revenues) last year.
Excluding restructuring charges and Ottaway divested operations, operating
income decreased $34 million, or 50%, from the like quarter of 2001.
Increased profitability and margins at the company's electronic publishing
and continuing community newspapers segments were more than offset by a
sharp drop-off in print publishing results.
Net income for the first half of 2002 was $183.8 million, or $2.17 per
diluted share, compared to net income of $49.4 million, or $.57 per diluted
share, in the first half of 2001. Included in earnings per share were
special items netting to a gain of $1.84 per share in 2002 and a loss of
$.13 per share in 2001. These special items are detailed beginning on page
16.
Revenues for the first six months of 2002 of $809.9 million were down $134.1
million, or 14%, from revenues of $944 million in the first half of 2001.
Excluding Ottaway divested newspapers, revenues were down $118.9 million, or
13%, primarily the result of the continued tough global advertising
environment.
Operating expenses for the first half of 2002 decreased $98.9 million, or
11%, from $872.6 million in 2001. Operating expenses, excluding
restructuring charges, divested operations, newsprint expenses and Today's
Journal costs were $59.9 million, or 8.2%, better than 2001 levels primarily
as a result of the company's ongoing cost control. Newsprint expense,
excluding divested operations, was down 38% as a result of a 27% drop in
prices coupled with a 15% reduction in newsprint consumption.
Operating income for the first half of 2002 was $36.3 million (4.5% of
revenues) compared to $71.4 million (7.6% of revenues) in the comparable
period last year. Excluding restructuring charges and Ottaway divested
operations, operating income of $42.1 million (5.3% of revenues) decreased
$52.2 million, or 55%, from the first half of 2001.
-10-
SEGMENT DATA
The company reports its operations in three segments: business and financial
news operations are reported in the print publishing and electronic
publishing segments and results of the company's Ottaway Newspapers
subsidiary are reported in the community newspapers segment.
Print publishing includes the operations of The Wall Street Journal and its
international editions, Barron's and other periodicals, as well as U.S.
television operations (results of the company's international television
ventures are included in equity in earnings (losses) of associated
companies). Print publishing accounted for approximately 63% of 2002's
second quarter revenues, of which approximately 10% were earned by
international publications.
Electronic publishing includes the operations of Dow Jones Newswires,
Consumer Electronic Publishing and Dow Jones Indexes/Ventures. Consumer
Electronic Publishing includes the results of WSJ.com and its related
vertical sites as well as the company's licensing/business development
businesses. Electronic publishing comprised 19% of 2002's second quarter
revenues.
Community newspapers includes the operations of Ottaway Newspapers, which
publishes 13 daily newspapers and 13 weekly newspapers in 9 states in the
U.S. Community newspapers comprised 18% of 2002's second quarter revenues.
PRINT PUBLISHING
===========================================================================
Quarters Ended Six Months Ended
June 30 June 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
U.S. Publications:
Advertising $167,552 $206,986 $315,718 $402,567
Circulation and other 68,597 70,886 135,689 143,757
International Publications:
Advertising 15,736 22,984 27,447 42,617
Circulation and other 9,372 11,990 18,451 22,478
- ---------------------------------------------------------------------------
Total revenue 261,257 312,846 497,305 611,419
Operating expenses 264,400 277,897 509,225 564,616
- ---------------------------------------------------------------------------
Operating (loss) income $ (3,143) $ 34,949 $(11,920) $ 46,803
Operating margin (1.2)% 11.2% (2.4)% 7.7%
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 8,310 $ 8,312 $ 8,310 $ 16,879
Depreciation and amortization 19,224 17,595 36,240 35,155
===========================================================================
Print publishing's second quarter 2002 revenues fell $51.6 million, or 16%,
from the like period a year ago. Advertising revenue for U.S. publications
decreased $39.4 million, or 19%, reflecting a 20.8% decline in Wall Street
Journal advertising linage as well as a 14.7% drop in Barron's national ad
pages. U.S. television revenue decreased 53%.
Advertising volume declines continued to be driven by a difficult global
advertising environment, particularly in technology and financial
advertising, which comprised about 35% of total U.S. Journal advertising
linage in the second quarter of 2002. By category, general linage, which
comprised 63.1% of total linage, fell 17.6% in the quarter. Technology
linage, which is part of general linage and comprised 16% of total linage,
decreased 28.9%. Other general linage fell 12.8% due to lower
communications, auto, professional service and travel advertising, partially
-11-
offset by slight increases in healthcare and insurance linage. Financial
linage, which comprised 18.6% of total linage, declined 37.9% in the
quarter, as it continued to be cyclically depressed. Classified and other
linage, which accounted for the remaining 18.3% of total linage, decreased
7.2% in the quarter due to declines in commercial real estate and
recruitment advertising.
Second quarter 2002 circulation and other revenues for U.S. print
publications declined $2.3 million, or 3.2%, from the second quarter of
2001, in part reflecting lower revenue producing copies. Average
circulation for The Wall Street Journal was 1,815,000 for the second quarter
of 2002, down from 1,850,000 in the like period last year. Barron's second
quarter average circulation was 302,000 in 2002, up from 294,000 in the
second quarter of 2001.
International print advertising revenues fell $7.2 million, or 31.5%, as
advertising linage at The Wall Street Journal Europe and The Asian Wall
Street Journal fell 27.9% and 31.2%, respectively. Advertising pages at The
Far Eastern Economic Review declined 36.8%.
International print circulation and other revenues for the second quarter
2002 were down $2.6 million, or 22%, from 2001. Average combined
circulation in the second quarter of 2002 for the international editions of
The Wall Street Journal was 190,000, up 2.2% from 186,000 for the same
period a year ago. Although average circulation increased, circulation
revenue declined reflecting an increase in lower rate copies. Other
international revenue was down as a result of reduced conference revenue in
the current year.
Print publishing second quarter 2002 expenses were reduced $13.5 million, or
4.9%, below second quarter 2001 levels. Excluding restructuring charges,
expenses were lower by $13.5 million, or 5%, largely as a result of lower
newsprint expense, continued cost controls and related decreased
compensation offset by additional advertising spending for Today's Journal.
Newsprint expense decreased 39% as a result of an 11% decline in consumption
coupled with a 31% drop in newsprint prices.
Print publishing operating loss for the second quarter of 2002 was $3.1
million, down $38.1 million from last year's second quarter operating income
of $34.9 million (11.2% of revenues). Excluding restructuring charges,
operating income was $5.2 million (2.0% of revenues) compared with operating
income of $43.3 million (13.8% of revenues) in the second quarter of 2001.
Print publishing U.S. revenues for the first six months of 2002 declined
$94.9 million, or 17%, from last year, reflecting a 23.5% (22.9% per-issue
basis) linage decline for The Wall Street Journal and a 19.1% (15.9% per
issue basis) decline in Barron's advertising volume. International print
revenues were down $19.2 million, or 29%, as advertising linage for The Wall
Street Journal Europe and The Asian Wall Street Journal fell 33.4% and
35.3%, respectively. Print publishing circulation and other revenues were
down $12.1 million, or 7.3%, in the first six months of 2002, when compared
with last year.
Operating expenses for the first half of 2002 were $509.2 million, down
$55.4 million, or 9.8%, from the same period last year. Excluding
restructuring charges, operating expenses decreased $46.8 million, or 8.5%,
due to lower newsprint expenses, lower compensation expense and continued
cost controls, offset somewhat by costs related to the launch of Today's
Journal.
Print publishing operating loss of $11.9 million was $58.7 million worse
than last year's operating income of $46.8 million (7.7% of revenues).
Excluding restructuring charges, operating losses were $3.6 million compared
with operating income of $63.7 million (10.4% of revenues) in the first half
of 2001.
-12-
ELECTRONIC PUBLISHING
===========================================================================
Quarters Ended Six Months Ended
June 30 June 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Dow Jones Newswires:
North America $44,838 $48,885 $ 90,647 $ 97,997
International 11,060 10,536 23,035 21,016
- ---------------------------------------------------------------------------
Total Newswires 55,898 59,421 113,682 119,013
Consumer Electronic Publishing 12,843 12,108 24,311 24,792
Dow Jones Indexes/Ventures 9,872 8,733 18,420 17,855
- ---------------------------------------------------------------------------
Total revenue 78,613 80,262 156,413 161,660
Operating expenses 65,892 73,164 128,465 151,678
- ---------------------------------------------------------------------------
Operating income $12,721 $ 7,098 $ 27,948 $ 9,982
Operating margin 16.2% 8.8% 17.9% 6.2%
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 2,443 $ 7,135 $ 2,443 $ 12,084
Depreciation and amortization 6,696 4,574 13,431 11,180
===========================================================================
Second quarter 2002 electronic publishing revenue of $78.6 million fell $1.6
million, or 2.1%, from $80.3 million in the second quarter of last year.
This lower revenue, which was caused primarily by the continued retrenchment
in the securities industry, was more than offset by continued cost
containment efforts resulting in increased profitability and operating
margins.
Dow Jones Newswires revenue decreased $3.5 million, or 5.9%, from the like
quarter in 2001, reflecting a decline of 8.3% in North America somewhat
offset by 5% growth overseas. Newswires revenue in North America was down
due to a decline in retail revenue caused by ongoing retrenchment in the
U.S. securities industry and a reduction in on-line brokerage revenue.
These declines were partially offset by revenue generated by a wholesale
agreement to deliver a selection of Dow Jones news bundled into all
Moneyline Telerate terminals worldwide. International newswires revenue
increased due to an increase in international terminals as a result of the
Moneyline terminal bundling agreement. At the end of the second quarter of
2002, there were 339,000 terminals carrying Dow Jones Newswires compared
with 333,000 for the like period a year ago. North American terminals
decreased 23,000, which was more than offset by an increase in international
newswire terminals of 29,000.
Consumer electronic publishing revenues increased $0.7 million, or 6.1%,
from last year's second quarter due to 8% growth in advertising coupled with
a 13% increase in subscriber revenues offset by a decrease in vertical
licensing and content distribution revenue. The number of Online Journal
subscribers at the end of June 2002 increased to 646,000, up 9.3% from
591,000 at the end of June 2001.
Dow Jones Indexes/Ventures revenues, which include Dow Jones Indexes,
reprints/permissions and radio businesses, were up $1.1 million, or 13%.
The increase was attributed to increases in Dow Jones Indexes revenue as
well as higher radio revenue somewhat offset by a decline in reprints
revenue.
Electronic publishing expenses were reduced $7.3 million, or 9.9%, from the
second quarter of 2001. Excluding restructuring charges, operating expenses
decreased $2.6 million, or 3.9%, primarily due to reduced compensation
expense and lower advertising expenses.
-13-
Operating income of $12.7 million (16.2% of revenues) for the second quarter
of 2002 was $5.6 million, or 79%, higher than 2001 operating income of $7.1
million (8.8% of revenues) as a result of reduced losses at consumer
electronic publishing and increased profits at Dow Jones Indexes/Ventures.
Excluding restructuring charges in both periods, electronic publishing
operating income of $15.2 million (19.3% of revenues) increased $0.9
million, or 6.5%, from profits of $14.2 million (17.7% of revenues) in the
second quarter of 2001.
Electronic publishing revenues for the first six months of 2002 fell $5.2
million, or 3.2%, compared with revenues earned in the first half of 2001,
primarily as a result of a decline in Newswires revenue. First half 2002
operating expenses of $128.5 million dropped $23.2 million, or 15%, from the
first half of 2001. Excluding restructuring charges in both periods,
operating expenses decreased $13.6 million, or 9.7%, from 2001 levels.
Operating income for the first half of 2002 was $27.9 million (17.9% of
revenues) compared with $10 million (6.2% of revenues) in the first half of
2001. Excluding restructuring charges, operating income of $30.4 million
(19.4% of revenues) was 38% better than 2001 operating income of $22.1
million (13.6% of revenues).
COMMUNITY NEWSPAPERS
===========================================================================
Quarters Ended Six Months Ended
June 30 June 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Advertising
Continuing operations $52,149 $51,717 $ 95,492 $ 94,869
Divested operations 3,691 13,871 15,707 26,403
------- ------- -------- --------
Total advertising 55,840 65,588 111,199 121,272
Circulation and other
Continuing operations 19,897 19,986 38,531 38,705
Divested operations 1,417 5,444 6,467 10,938
------- ------- -------- --------
Total circulation and other 21,314 25,430 44,998 49,643
Total revenue 77,154 91,018 156,197 170,915
- ---------------------------------------------------------------------------
Operating expenses
Continuing operations 50,295 51,671 99,987 103,218
Divested operations 3,631 14,008 16,919 28,160
------- ------- -------- --------
Total operating expenses 53,926 65,679 116,906 131,378
- ---------------------------------------------------------------------------
Operating income
Continuing operations 21,751 20,032 34,036 30,356
Divested operations 1,477 5,307 5,255 9,181
------- ------- -------- --------
Total operating income $23,228 $25,339 $ 39,291 $ 39,537
Operating margin
Continuing operations 30.2% 27.9% 25.4% 22.7%
Divested operations 28.9 27.5 23.7 24.6
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 321
Depreciation and amortization
Continuing operations $ 2,783 $ 3,184 $ 5,596 6,387
Divested operations 88 960 681 1,920
===========================================================================
-14-
During the second quarter of 2002 the company completed the sale of
Ottaway's Essex County community newspaper properties bringing the total
number of properties sold in the first half of 2002 to five. The
divestiture phase of the company's Ottaway strategy is now complete and the
company is exploring potential acquisitions. Excluding gains from these
sales, the divestiture of these businesses is expected to dilute earnings
per share by about $.08 in 2002.
Community newspapers' second quarter 2002 revenues declined 15% from the
second quarter of 2001. Excluding divested newspapers, revenues increased
$0.3 million, or 0.5%, from a year ago. Advertising revenue, excluding
divested newspapers, rose 0.8% as a 2.2% decline in overall advertising
linage was more than offset by rate increases and higher preprint
advertising revenue. Circulation and other revenue, excluding divested
newspapers, was slightly worse than the second quarter of 2001, with
circulation revenue up 2.9%, primarily due to rate increases, more than
offset by a decrease in commercial printing revenue. Average circulation
excluding divested properties for the dailies was 385,000 for the second
quarter of 2002 versus 383,000 for the same period last year.
Operating expenses for the second quarter of 2002 improved $11.8 million, or
18%, over last year's level. Excluding divested newspapers, operating
expenses decreased $1.4 million, or 2.7%, as lower newsprint costs were
partially offset by higher employee fringes. Newsprint expenses, excluding
divested operations, were down 34% reflecting a 29% decline in average
newsprint prices coupled with a 6.7% reduction in consumption.
Operating income of $23.2 million (30.1% of revenues) decreased $2.1
million, or 8.3%, from income of $25.3 million (27.8% of revenues) for the
second quarter of 2001. Excluding divested operations, operating income was
$21.8 million (30.2% of revenues) compared with operating income of $20
million (27.9% of revenues) in the second quarter of 2001.
Revenues for the first half of 2002 of $156.2 million were $14.7 million, or
8.6%, lower than revenues of $170.9 million in 2001. Excluding divested
newspapers, revenues of $134 million were $0.4 million, or 0.3%, better than
2001. Operating expenses for the first six months of 2002 were $14.5
million, or 11%, lower than levels last year of $131.4 million. Excluding
divested operations, operating expenses were $3.2 million, or 3.1%, better
than the like period a year earlier. Operating income of $39.3 million
(25.2% of revenues) for the first half of 2002 was slightly worse than
2001's operating income of $39.5 million (23.1% of revenues). Excluding
divested operations and 2001 restructuring charges of $0.3 million,
operating income of $34 million (25.4% of revenues) was 11% better than
income of $30.7 million (23% of revenues) in the first half of 2001.
-15-
SPECIAL ITEMS
The following table summarizes special items for the second quarter and the
six months ended June 30, 2002 and 2001. The term "special items," as used
throughout management's discussion and analysis, refers to those items
within the table.
Summary of Special Items
(in millions, except per share amounts)
2002 2001
----------------------- ---------------------
Pre-tax Net EPS Pre-tax Net EPS
------- --- --- ------- --- ---
QUARTERS ENDED JUNE 30
- ----------------------
Included in operating income:
Restructuring charges ($ 11.1) ($ 6.3) ($ .07) ($17.2) ($10.4) ($.12)
Included in other income:
Reserve for contract guarantee, net (3.0) (3.0) (.04) 8.1 8.1 .09
CNBC Asia 3.9 3.9 .05
Gains on sale of ONI properties 44.5 38.0 .45
------ ------ ----- ----- ----- ----
TOTAL $ 34.3 $ 32.6 $ .39 ($ 9.1) ($ 2.3) ($.03)
SIX MONTHS ENDED JUNE 30
- ------------------------
Included in operating income:
Restructuring charges ($ 11.1) ($ 6.3) ($ .07) ($32.1) ($19.5) ($.22)
Included in other income:
Reserve for contract guarantee, net (6.2) (6.2) (.08) 10.3 10.3 .11
Shut-down of Work.com (2.4) (1.6) (.02)
CNBC Asia 3.9 3.9 .05
Gains on sale of ONI properties 197.9 164.1 1.94
------ ------ ----- ----- ----- -----
TOTAL $184.5 $155.5 $1.84 ($24.2) ($10.8) ($.13)
2002 SPECIAL ITEMS
Second quarter 2002 pre-tax income included a net gain of $34.3 million.
After taxes and minority interests, special items netted to a gain of $32.6
million, or $.39 per share. The first six months of 2002 included a net
gain of $184.5 million ($155.5 million after taxes and minority interests,
or $1.84 per diluted share), as follows:
Sale of Five Ottaway Newspaper Properties
The second quarter of 2002 included a gain of $44.5 million ($38 million
after taxes, or $.45 per diluted share) from the sale of Ottaway's Essex
County newspaper properties to Eagle-Tribune Publishing Company.
During the first quarter of 2002 the company sold four of its Ottaway
newspapers to Community Newspapers Holdings, Inc., resulting in a gain of
$153.4 million ($126.1 million after taxes, or $1.49 per diluted share).
Contract Guarantee
The second quarter of 2002 included a charge of $3 million, or $.04 per
diluted share, relating to the amortization of the discount on a contract
guarantee. The first quarter of 2002 included a charge of $3.2 million, or
$.04 per diluted share, relating to this matter. In 2000, the company
established a reserve for the present value of the total estimated payments
-16-
through October 2006 in connection with Dow Jones' guarantee of certain
minimum payments for data acquired by Dow Jones' former Telerate subsidiary
from Cantor Fitzgerald Securities and Market Data Corporation (MDC). Bridge
Information Systems, Inc., which purchased Telerate in 1998, is currently in
bankruptcy but made payments for this data for the post-petition periods
through October 2001, when Telerate ceased operations, went out of business,
sold certain assets and rejected its contracts with Cantor and MDC. The
company is now in litigation with Cantor and MDC with respect to their
claims for amounts due under the contract guarantee. The company has
various substantial defenses to these claims and the litigation is
proceeding.
Restructuring Charges
The second quarter of 2002 included restructuring charges of $11.1 million
($6.3 million after taxes and minority interests, or $.07 per diluted share)
largely reflecting employee severance related to a workforce reduction
across the print and electronic publishing and corporate segments. The
restructuring in 2002 included the termination of 165 full-time employees,
or roughly 2% of the company's workforce. The annualized cost savings
associated with the workforce reduction is expected to be about $15 million.
See Note 4 on page 5 of this Form 10-Q for additional information on 2002
restructuring charges.
Special Items in Equity Investments - CNBC Asia
The second quarter of 2002 included gains recorded in equity in earnings of
associated companies for CNBC Asia of $3.9 million ($.05 per diluted share).
These gains consisted of a $2.5 million gain from the favorable settlement
of a contractual obligation and a $1.4 million gain from the sale of an
investment by CNBC Asia.
2001 SPECIAL ITEMS
The second quarter of 2001 included special items totaling a loss of $9.1
million ($2.3 million after taxes and minority interests, or $.03 per
share), and the first six months of 2001 included a loss of $24.2 million
($10.8 million after taxes and minority interests, or $.13 per share) as
follows:
Restructuring charges
The second quarter of 2001 included restructuring charges of $17.2 million
($10.4 million after taxes and minority interests, or $.12 per diluted
share) which included $14.7 million ($8.9 million after taxes and minority
interests, or $.10 per diluted share) for employee severance related to a
general workforce reduction. The remainder of the charges was for an asset
write-down related to WSJ.com for assets that were made obsolete or
redundant and abandoned.
In the first quarter of 2001 the company initiated a workforce reduction.
Severance and other exit costs related to this reduction, which occurred in
every business segment, amounted to $12.7 million. Also included in the
first quarter 2001 restructuring charges were $2.2 million of asset write-
downs associated with online businesses that were made obsolete or redundant
and abandoned as a result of the restructuring plan. See Note 4 on page 5
of this Form 10-Q for additional information on 2001 restructuring charges.
-17-
Contract Guarantee
The second quarter of 2001 included a net gain of $8.1 million, or $.09 per
diluted share, reflecting payments made by Bridge net of amortization of the
discount on the contract guarantee. The first quarter of 2001, included a
net gain of $2.2 million relating to the same matter (see further
explanation above in 2002 special items).
Special Items in Equity Investments
The first quarter of 2001 included a $2.4 million charge in equity in losses
of associated companies for costs related to the shut-down of Work.com, a
joint venture with Excite@Home.
OTHER INCOME/DEDUCTIONS
Interest expense, net was $0.4 million compared with investment income, net
of $0.4 million a year prior. The negative swing largely reflected a
reduction in capitalized interest as a result of the completion of the
Journal color expansion and WSJ.com redesign projects. Long-term debt
outstanding at June 30, 2002 of $38.9 million was down $161 million from the
like period a year ago.
The company's share of equity in earnings of associated companies was $3.1
million, an improvement of $2.4 million from the $0.7 million earnings in
the second quarter of 2001. Excluding special gains at CNBC Asia, second
quarter 2002 equity in losses of associated companies was $0.8 million,
compared with income of $0.7 million in the second quarter of 2001. Reduced
losses at SmartMoney and CNBC International were more than offset by lower
income at F.F. Soucy, the company's newsprint affiliate, and Handelsblatt, a
German business daily.
For the first six months of 2002, equity earnings in associated companies of
$0.7 million was $10.7 million better than 2001's equity in losses of
associated companies. Excluding Work.com shut-down costs in 2001 and the
special gains in 2002, equity losses improved $4.4 million, reflecting
improved results from SmartMoney and CNBC International, and a favorable
comparison as the first quarter of 2001 included $2.7 million of losses from
Work.com operations. These gains were partially offset by lower income at
F.F. Soucy.
INCOME TAXES
The following table presents the effective income tax rates:
==============================================================================
Quarters Ended Six Months ended
June 30 June 30
2002 2001 2002 2001
- ------------------------------------------------------------------------------
Effective income tax rate
(net of minority interests) 23.2% 35.3% 20.8% 35.1%
Effective income tax rate (net of minority
interests), excluding special items 40.0% 40.0% 40.0% 40.0%
==============================================================================
-18-
The effective income tax rate inclusive of special items was lower in part
by the utilization of capital loss carryforwards on the Ottaway paper sales.
As of June 30, 2002, the company had available approximately $451 million of
capital loss carryforward (a deferred tax asset of $174 million, which was
fully reserved through a valuation allowance). The company may utilize $296
million of these carryforwards through 2003 and $155 million through 2006.
In addition, the company has recorded an unrecognized capital loss
carryforward of $259 million (a deferred tax asset of $99 million which is
fully reserved) that will be available for use for five years from the year
it is recognized for tax purposes.
FINANCIAL POSITION
During the first six months of 2002, the company repurchased 887,600 shares
of its common stock for $49.9 million. As of June 30, 2002, approximately
$441 million remained under board authorization for share repurchases.
Cash provided by operations in the first six months 2002 was $21.9 million
compared to $128.9 million from the like period a year earlier. The decline
was due to a drop in operating profits as well as a negative swing in
working capital, in part the result of the deferral of federal income tax
payments into 2002. The company's federal income taxes that were normally
due on September 15, and December 15, 2001 were deferred to January 15, 2002
as the Internal Revenue Service offered relief of these payments for
taxpayers that were affected by the September 11 terrorist attacks on the
World Trade Center. These negative swings in cash from operations were
somewhat offset by the receipt of $16 million from insurance providers as an
advance on the company's property damage claim at its World Financial Center
offices as a result of the September 11 terrorist attacks.
The first half of 2002 included proceeds of about $248 million from the sale
of the five Ottaway properties. In addition to the repurchase of the
company's stock in the first six months of 2002, the company paid down debt
by $135.1 million, paid dividends of $42.1 million and made capital
expenditures of $41.1 million.
As of June 30, 2002, the company had borrowings of $38.9 million through the
issuance of commercial paper, which is classified as long-term, as it is the
company's intent to refinance such obligations on a long-term basis. In
June 2002, the company renewed its revolving credit agreements with a
consortium of banks. Under these agreements, the company can borrow up to
$400 million, $130 million through June 23, 2003 and $270 million through
June 24, 2006. The terms are essentially the same as the prior agreement.
In 2000, the company established a reserve for the present value of the
total estimated payments through October 2006 in connection with Dow Jones'
guarantee of certain minimum payments for data acquired by Dow Jones' former
Telerate subsidiary from Cantor Fitzgerald Securities and Market Data
Corporation (MDC). Bridge Information Systems, Inc., which purchased
Telerate in 1998, is currently in bankruptcy but made payments for this data
for the post-petition periods through October 2001, when Telerate ceased
operations, went out of business, sold certain assets and rejected its
contracts with Cantor and MDC. The company is now in litigation with Cantor
and MDC with respect to their claims for amounts due under the contract
guarantee. The company has various substantial defenses to these claims and
the litigation is proceeding.
-19-
As of June 30, 2002, the balance of the reserve for the contract guarantee
was $239 million. Due to the stage of the lawsuit at June 30, 2002, it is
not possible to determine whether the court will find that any obligation
under the guarantee may be dismissed or reduced. Accordingly, the company
believes the balance of the reserve continues to be appropriate. Also
included in accounts payable and accrued liabilities are other reserves
related to the sale of Telerate to Bridge in 1998. The company expects the
latter to be resolved in bankruptcy court proceedings this year.
MARKET RISK
In January 2002, the company entered into forward foreign currency exchange
contracts to exchange $22.4 million for 15.6 million British pounds and to
exchange $20.7 million for 23.4 million euro. These contracts, which expire
ratably over 2002, are designated as cash flow hedges of anticipated
operating expenses that are denominated in these foreign currencies.
Revenues of the company are largely collected in U.S. dollars. The company
has not entered into any new forward foreign currency exchange contracts in
the second quarter of 2002.
These contracts are entered into to protect against the risk that such
expenses will be adversely affected by changes in exchange rates. Such
losses could be significant if a major devaluation were to occur. By using
these derivative instruments the company is exposed to the adverse effect
that a change in currency has on the value of a financial instrument. The
company manages this market risk by establishing and monitoring limits as to
the degree of risk that may be undertaken. The company's derivative
activities are monitored by its treasury and finance functions. Realized
gains or losses on foreign currency forward contracts are recognized
currently through income and generally offset the transaction losses or
gains on the foreign currency cash flows which they are intended to hedge.
SECOND-HALF 2002 OUTLOOK
The company expects advertising linage trends to modestly improve at The
Wall Street Journal in the third quarter of 2002, with linage estimated to
be down 8% to 12%. This decline together with expected softness in
advertising at International Print, U.S. Television and Barron's, lost
revenue of approximately $19 million as a result of the Ottaway sales and
relative stability elsewhere in the portfolio, derives an 8% to 10% revenue
decline in the third quarter of 2002. As a result, the company currently
expects earnings per share in the third quarter 2002 to be in the upper
single digits per share, not factoring in any special items that may result
in the quarter. The company will not be issuing fourth quarter 2002
guidance at this time.
CRITICAL ACCOUNTING POLICIES
The company's discussion and analysis of its financial condition and results
of operations are based upon the company's consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires the company's management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The company's accounting policies affect
its more significant judgments and estimates used in the preparation of its
financial statements. Actual results could differ from these estimates.
-20-
The following are significant accounting policies of the company:
Advertising revenue, net of commissions, is recognized in the period in
which the advertisement is displayed. The company's advertising rate card
reflects certain volume-based discounts, which require management to make
certain estimates regarding future advertising volume. These estimated
rebates are recorded as a reduction of revenue in the period the
advertisement is displayed and are revised as necessary based on actual
volume realized. Online related advertising revenue based on a minimum
number of "impressions" is recognized as impressions occur.
Revenue recognition from subscriptions to the company's print publications
and information services is recognized in income as earned, pro rata on a
per-issue basis, over the subscription period. Circulation revenue includes
sales to retail outlets/newsstands, which are subject to returns. The
company records these retail sales upon delivery, net of estimated returns.
These estimated returns are based on historical return rates and are revised
as necessary based on actual returns realized. Costs in connection with the
procurement of subscriptions are charged to expense as incurred. Revenue
from licensing the Dow Jones Averages includes both upfront one-time fees
and ongoing revenue. Both upfront fees and ongoing licensing revenue are
recognized in income as earned over the license period.
Accounts receivable includes an allowance for doubtful accounts, which is an
estimate of amounts that may not be collectible. This estimated allowance
is based on historical trends, review of aging categories and the specific
identification of certain customers that are at risk of not paying. Actual
write-offs of bad debt have historically been insignificant, less than 0.5%
of revenues.
Certain costs and related obligations of the company are based on actuarial
assumptions, the most significant of which includes the cost of the
company's postretirement medical plan, which provides lifetime healthcare
benefits to retirees who meet specified length of service and age
requirements. These benefit costs are expensed over the employee's expected
employment period. At December 31, 2001, the company's postretirement
benefit obligation was $163.6 million. In determining the cost of retiree
medical costs, some factors that management must consider include the
expected increase in health care costs, discount rates and turnover and
mortality rates. The discount rate is based on the yield of high quality,
15-year, corporate bonds at December 31, while other assumptions are updated
periodically based on recent actual trends. The majority of the company's
employees who meet specific length of service requirements are covered by
defined contribution retirement plans. Substantially all employees who are
not covered by these plans are covered by noncontributory defined benefit
pension plans. The defined benefit plans are not material with respect to
the company's financial statements.
Management must use its judgment in assessing whether the carrying value of
certain long-lived assets, cost-method investments, identifiable intangibles
and goodwill is impaired and if the asset is impaired, the extent of any
such loss. Certain events or changes in circumstances may indicate that the
carrying value may not be recoverable and require an impairment review.
Based on that review, if the carrying value of these assets exceeds fair
value and is determined to not be recoverable, an impairment loss
representing the amount of excess over its fair value would be recognized in
income. Fair value estimates are based on quoted market values in active
markets, if available. If quoted market prices are not available, the
estimate of fair value is based on various valuation techniques, including
discounted value of estimated future cash flows.
-21-
Management also exercises judgment in determining the estimated useful life
of long lived assets, specifically plant and property and certain intangible
assets with a finite life. The company depreciates the cost of buildings
over 40 years; improvements to the buildings over 10 years; software over 3
to 5 years and machinery and equipment over 3 to 25 years. The 25-year life
is applicable to the company's press equipment. The cost of leasehold
improvements is depreciated over the lesser of the useful lives or the terms
of the respective leases. Management bases its judgment on estimated lives
of these assets based on actual experienced length of service of similar
assets and expert opinions.
The company maintains a stock incentive plan under the Dow Jones 2001 Long-
Term Incentive Plan. This plan provides for the grant of contingent stock
rights, stock options, restricted stock, restricted stock units and other
stock-based awards. The company accounts for its stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25 (APB 25) and
its related interpretations. Under APB 25, stock-based compensation charged
to income was $5.6 million in 2001. Had the company's stock-based
compensation been determined by the fair value based method of SFAS 123,
"Accounting for Stock-Based Compensation," the company's net income for 2001
would have been reduced by $13.7 million.
The company records a tax valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.
Currently, the company maintains a valuation allowance on deferred tax
assets related to capital loss carryforwards. The company has considered
ongoing prudent and feasible tax planning strategies in assessing the need
for a valuation allowance. In the event the company were to determine that
it would be able to realize all or a portion of its net deferred tax assets,
an adjustment to the deferred tax asset would increase income in the period
such determination was made. Likewise, should the company determine that it
would not be able to realize all or a portion of its net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
those anticipated. Such risks and uncertainties include, but are not limited
to: the cyclical nature of the company's business and the strong negative
impact of economic downturns on advertising revenues; the possibility that
the current weak advertising market, particularly in the financial and
technology segments, will not improve or will improve more slowly than
anticipated, and if it does improve, the possibility that the company will
be unable to capitalize on the improvement in the face of competition for
the advertising revenues from other publications and services; the company's
ability to limit and manage expense growth, especially in light of its new
planned growth initiatives, without harming its growth prospects; the extent
to which the company is required to perform under the guarantee to Cantor
Fitzgerald Securities and Market Data Corporation, and other uncertainties
relating to liability under this guarantee; the intense competition the
company's existing products and services face in the markets for financial
news and information and advertising revenues from newspapers, specialized
magazines, free and paid Internet publications and services, financial
television programming and other new media, and the impact this will have on
the company's initiatives to expand its existing market presence as well as
to extend its consumer reach; the company's ability to expand and diversify
its market segment focus beyond the financial and technology segments and
-22-
the challenge it will face in attempting to become a leading presence in new
market segments, such as health care, automotive, telecom, and high-end
consumer goods, where competing publications and services, such as specialty
and trade magazines, have already established themselves; the competition
the company will face in introducing new products and services in the
business-to-business market from already existing newsletters, trade
publications, research reports and services; with respect to Newswires, the
challenges the company will face in attempting to expand its coverage to the
investment market, in the face of competing resources for in-depth news
analysis; with respect to Newswires and other subscription-based products
and services, the negative impact of economic downturns and consolidation on
sales of the company's products and services; the company's ability to find
strategic and financially attractive core-business acquisition
opportunities; the company's ability to leverage its brands to develop new
business opportunities and to generate advertising and other revenues from
these products; the company's ability to achieve strategic alliances and to
improve the growth and profitability of existing strategic alliances; with
respect to the company's community newspapers business, its ability to
maintain or grow margins and to strengthen its portfolio of newspaper
properties, particularly given the difficulty of finding quality newspaper
properties to acquire; the degree to which the company's new Personal
Journal is able to generate new advertising revenues from diversified
markets, such as health care and consumer goods; the extent to which the
new enhancements to The Wall Street Journal will attract a broader base of
readers, subscribers, and advertisers; in light of the weak advertising
market and competition, the company's ability to attract advertisers to its
new color printing capacity; the company's ability to increase its
circulation and advertising revenues from its international print
publications and to further penetrate overseas markets through print and
television products, given the competition from local language publications
and television networks and other international publications and television
ventures; WSJ.com's ability to continue to increase revenues through
building subscriber and advertiser numbers and to limit expenses; the amount
of user traffic on the company's Internet sites and the pricing of
advertising on Internet sites generally; potential increased regulation of
on-line businesses; adverse developments relating to the company's
commitments, contingencies and equity investments; cost of newsprint; and
such other risk factors as may have been or may be included from time to
time in the company's reports filed with the Securities and Exchange
Commission.
-23-
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings
On February 20, 2001, Market Data Corp. (MDC) commenced a lawsuit against
Dow Jones in the Supreme Court of the State of New York, seeking to compel
the company to pay $11.7 million, plus interest, attorneys fees and costs,
that MDC claimed was owed under the guarantee issued to MDC and Cantor
Fitzgerald Securities (together with its affiliates, "Cantor"), together
with unspecified consequential damages that MDC claimed result from Dow
Jones' failure to pay on the guarantee. The guarantee relates to certain
annual "minimum payments" owed by Telerate for data acquired by Telerate
from Cantor Fitzgerald and MDC under contracts entered into when Telerate
was a subsidiary of Dow Jones, and is described above in Management's
Discussion and Analysis.
In April 2001, Dow Jones paid $5.8 million to MDC covering the period
January 1 to February 14, 2001 preceding Bridge's Chapter 11 bankruptcy
filing. Bridge made the payments for the post-petition periods through the
third quarter of 2001. After certain amendments were made to the complaint,
the remaining claims in this lawsuit sought the payment of interest on the
payment made in the first quarter of 2001 and for attorneys fees and costs
in this litigation. The parties settled these claims and this lawsuit was
then withdrawn.
In October 2001, the bankruptcy court granted Bridge's motion to reject
Telerate's contracts with Cantor and MDC. Telerate has indicated that it
has ceased operations, is no longer receiving government securities data
from Cantor and MDC and will not make further payments to Cantor and MDC.
Cantor and MDC advised the company that they would demand payment from Dow
Jones of an amount they alleged was due on November 15, 2001 under the
contract guarantee as well as future amounts due through October 2006. The
company has various substantial defenses to these claims.
On November 13, 2001, the company instituted a lawsuit in the Supreme Court
of the State of New York seeking a declaratory judgment with respect to the
contract guarantee and the claims of Cantor and MDC. In this lawsuit the
company has asked the court to find that the company does not and will not
owe any payment under the contract guarantee through October 2006. In the
alternative, the company has asked the court to find that if any amount is
owed, it must be reduced by amounts that Cantor and MDC receive or should
have received from other distribution of the data. MDC and Cantor have
moved to dismiss the company's complaint. MDC has asserted counterclaims
demanding payment of $10,197,416 (allegedly the balance owed by Telerate on
November 15, 2001), interest, attorneys' fees, specific performance of the
contract guarantee, and a declaratory judgment as to the validity and
interpretation of the guarantee through October 2006.
Cantor also commenced a separate lawsuit in the Supreme Court of the State
of New York seeking payment of $10 million (allegedly the balance of the
November 2001 minimum payment), payment of $250 million in breach of
contract damages, specific performance of the guarantee, a declaration that
the guarantee remains in full force and effect, payment of approximately $16
million allegedly owed by Telerate and guaranteed by the company in the
contract guarantee for the distribution of certain other data, attorneys'
fees, interest, and other relief.
The company has moved to oppose MDC's and Cantor's motions, claims, and
counterclaims.
-24-
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed:
Exhibit
Number Document
- ------- --------
* 10.1 364-Day Credit Agreement, dated as of June 24, 2002
* 10.2 4-Year Credit Agreement, dated as of June 24, 2002
* 10.3 First Amendment, dated as of June 24, 2002, to
5-Year Credit Agreement, dated as of June 25, 2001
* Securities and Exchange Commission and New York Stock Exchange copies
only.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the period for which this
report is filed.
-25-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOW JONES & COMPANY, INC.
-------------------------
(Registrant)
Dated: August 7, 2002 By: /s/ Robert Perrine
------------------------
Robert Perrine
Chief Accounting Officer
and Controller