"We are excited about the early results. Thus far, only a small percentage of renewals have opted out of the Plus program, telling us our print readers value our content and high-quality journalism and are willing to pay extra for it in digital form. Similarly, we have added thousands of new digital-only subscribers to our paying customer base. We intend to expand this model to our other markets beginning next month. We believe the new subscription revenues will begin to make a more significant impact in the fourth quarter. In 2013, we believe the new Plus program could add more than $20 million depending on a number of factors, including how quickly we complete our company-wide rollout.
"Cash expenses, excluding restructuring costs, were down 1.3% in the quarter as compared to the third quarter of 2011. We continued to carefully balance expense management with strategically investing in our products and doing so enabled us to generate another quarter of healthy operating cash flow. For instance, our cash expenses declined even though we invested approximately $2.0 million in new revenue initiatives and enterprise-wide operating systems in the third quarter. All of our papers continue to publish daily, providing communities with needed news and information in whatever print or digital form they choose to access it. And every one of them does so profitably. Clearly high quality content delivered daily in multiple mediums continues to be a successful business.
"Our share of income from all equity investments was $11.7 million in the third quarter of 2012 and $27.1 million in the first nine months of the year. McClatchy's investments, particularly our digital investments, are consistently producing strong results which speak to the staying power of the underlying products. They are strategically important to our newspaper websites and we continue to work closely with these companies to maximize financial and operational performance.
"Looking forward, we will continue to focus on our strong and growing set of products and revenue initiatives, especially in digital and direct marketing. One thing we have learned from the 2011 fourth quarter holiday season and the spring holiday season this year is that advertisers increasingly bunch their spending around these major events. We are cautiously optimistic for another strong holiday season, but do not have sufficient visibility to provide specific guidance on advertising revenues for our fourth quarter.
"We will continue to carefully balance expense management with strategically investing in our products. We expect to continue to benefit from stability in newsprint pricing, recognizing that comparisons to 2011 get tougher even in a soft newsprint pricing environment. On balance, we expect cash expenses to be flat to down in the low-single-digit percent range in the fourth quarter of 2012."
Elaine Lintecum, McClatchy's CFO said, "We focused our excess cash flow for the third quarter on paying seasonally higher interest and tax payments. The debt balance at the third quarter remained at $1.564 billion and we finished the quarter with a cash balance of $15.7 million. Our nearest-term bond maturity in November 2014 is approximately $66 million - not an issue given our free cash flow. Our leverage ratio at the end of the third quarter as defined in our credit agreement was 4.71 times cash flow and our interest coverage was 2.19 times."
The company's statistical report, which summarizes revenue performance for the third fiscal quarter and first nine months of fiscal 2012, follows.
Non-GAAP Financial Measures:
In addition to the results reported in accordance with accounting principles generally accepted in the United States ("GAAP") included in this press release, the company has presented non-GAAP financial measures such as adjusted net income, operating cash flows and operating cash flow margins. Adjusted net income is defined as net income excluding amounts (net of tax) for loss (gain) on extinguishment of debt, restructuring related charges, gain on sale of internet asset, accelerated depreciation on equipment, non-cash impairments, reversal of interest on tax items and other certain discrete tax items. Operating cash flow is defined as operating income plus depreciation and amortization, restructuring related charges and other non-cash impairments. Operating cash flow margin is defined as operating cash flow divided by net revenues. These non-GAAP financial measures are reconciled to GAAP measures in the attached schedule. Management believes these non-GAAP measures, when read in conjunction with the company's GAAP financials, provide useful information to investors by offering:
-- the ability to make more meaningful period-to-period comparisons of the company's on-going operating results;
-- the ability to better identify trends in the company's underlying business;
-- a better understanding of how management plans and measures the company's underlying business; and
-- an easier way to compare the company's most recent operating results against investor and analyst financial models.
These non-GAAP financial measures should not be considered a substitute or an alternative to these computations calculated in accordance with and required by GAAP. McClatchy's non-GAAP financial measures may not be comparable to similarly titled measures presented by other companies.
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