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Dow Jones & Co Inc – ‘10-Q’ for 6/30/07

On:  Friday, 8/3/07, at 4:51pm ET   ·   For:  6/30/07   ·   Accession #:  29924-7-163   ·   File #:  1-07564

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2007

OR

Commission File Number 1-7564

DOW JONES & COMPANY, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (212) 416-2000

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  q

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  q    No  x

The number of shares outstanding of each of the issuer’s classes of common stock on June 30, 2007: 66,150,531 shares of Common Stock and 19,700,852 shares of Class B Common Stock.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

DOW JONES & COMPANY, INC.

(unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

DOW JONES & COMPANY, INC.

(unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS

DOW JONES & COMPANY, INC.

(unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOW JONES & COMPANY, INC.

NOTE 1:  BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair statement of our consolidated financial position as of June 30, 2007, and our consolidated results of operations for the three and six month periods ended June 30, 2007 and 2006 and consolidated cash flows for the six month periods then ended.  All adjustments reflected in the accompanying financial statements are of a normal recurring nature.  Reclassifications of certain amounts for prior years have been recorded to conform to the current year presentation.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2006 and current reports on Form 8-K filed with the Securities and Exchange Commission.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

As of and for the three and six months ended June 30, 2007, our significant accounting policies and estimates, which are detailed in our annual report on Form 10-K for the year ended December 31, 2006, have not changed except for the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48).  See Note 10 for additional information regarding our adoption of FIN 48.

NOTE 2:  ACQUISITIONS

2007

Acquisition of eFinancialNews

On May 15, 2007, we completed the acquisition of eFinancialNews Holdings Ltd. (eFN), a private U.K. company, for approximately $63 million, including an estimated working capital adjustment.  Based in London, eFN is a diversified media company serving the European financial services industry with print, online, training and events businesses.  Its flagship operations include the weekly Financial News, the eFinancialNews.com Web site and subscription-based services.  It also publishes Private Equity News, a weekly publication focused on the European private equity sector.  eFN will add digital and other non-print businesses to help diversify our reliance on traditional print revenue.  We are integrating eFN into the consumer media segment, where it will be part of our European media operations.  We financed the purchase with a combination of cash and debt.

Under the purchase method of accounting, the total purchase price is allocated to eFN’s net tangible and intangible assets based upon their estimated fair value as of the date of completion of the acquisition.  Based upon the purchase price and the valuation performed, the preliminary purchase price allocation, which is subject to change based on our final analysis, is as follows (in thousands):

We allocated $5.5 million to amortizable intangible assets consisting of customer relationship intangible assets and developed technology with weighted-average useful lives of eleven and five years, respectively.  The pattern of economic benefits to be derived from certain intangible assets is estimated to be greater in the initial period of ownership; accordingly, we will record amortization expense on an accelerated basis over the estimated useful lives of the intangible assets.  We also allocated $11.1 million to the eFN trade name, which will not be amortized as it has an indefinite remaining useful life based primarily on its market position and our plans for continued indefinite use.  Further, $44.7 million was allocated to goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.  Goodwill will not be amortized and it is not deductible for tax purposes.

2006

Acquisition of Factiva

On December 15, 2006, we acquired the remaining 50% interest of Dow Jones Reuters Business Interactive LLC (Factiva) that we did not already own from our joint venture partner, Reuters Group Plc. (Reuters), for an upfront cash purchase price of approximately $176.2 million.  The purchase price consisted of cash tendered of approximately $152.5 million, estimated working capital adjustments of approximately $11.7 million, preferred shares of a subsidiary of approximately $7.5 million and direct third-party transaction costs of approximately $4.5 million.  The preferred shares, which are non-voting, bear a fixed dividend rate of 6% per annum and are included in other noncurrent liabilities.  Factiva is a provider of global business content, research products and services to global enterprises mainly in the finance, corporate, professional services and government sectors and has more than 1.6 million paying subscribers.  We are integrating Factiva with the complementary offerings in the enterprise media segment.  We financed this purchase with the proceeds from divestitures.

Under the purchase method of accounting, the total purchase price is allocated to Factiva’s net tangible and intangible assets based upon their estimated fair value as of the date of completion of the acquisition.  The final purchase price allocation was as follows (in thousands):

We allocated $37.5 million to amortizable intangible assets consisting of customer relationship intangible assets, distribution contract intangible assets and developed technology with weighted-average useful lives of fifteen, eight and four years, respectively.  The pattern of economic benefits to be derived from certain intangible assets is estimated to be greater in the initial period of ownership; accordingly, we will record amortization expense on an accelerated basis over the estimated useful lives of the intangible assets.  We also allocated $39 million to the Factiva trade name, which will not be amortized as it has an indefinite remaining useful life based primarily on its market position and our plans for continued indefinite use.  Further, $145.7 million was allocated to goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.  Goodwill will not be amortized but a portion of it will be deductible for tax purposes.  Liabilities assumed included approximately $28 million of continuing contractual payments with no future economic benefit as well as approximately $3.6 million of restructuring costs related to the severance of approximately 25 Factiva employees.

NOTE 3:  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets related to discontinued operations discussed in Note 4 were excluded from the tables below.

Goodwill balances by reportable segment were as follows:

Other intangible assets were as follows:

Amortization expense, based on intangibles subject to amortization held at June 30, 2007, is expected to be as follows:

(in millions)

⁽¹⁾ The increase in goodwill and other intangible assets primarily resulted from the acquisition of eFN.

⁽²⁾ Represents amortization expense expected for the last six months of 2007.

NOTE 4: DISCONTINUED OPERATIONS

On December 5, 2006, we completed the sale of the non-real estate assets of six local media newspapers and recorded a pre-tax gain of $219.5 million ($132.1 million, net of taxes).  In accordance with the sale agreement, we received $281.5 million of the purchase price in cash at closing (including an estimated working capital adjustment); $1.7 million during the first quarter of 2007 related to the transfer of real property; and, will receive an additional $4.7 million of the purchase price upon transfer of the remaining real property, subject to satisfaction of environmental conditions, in later periods.  The six papers sold were: the News-Times of Danbury, CT; The Daily Star of Oneonta, NY; the Press-Republican of Plattsburgh, NY; the Santa Cruz Sentinel (Santa Cruz, CA); The Daily Item of Sunbury, PA; and the Traverse City Record-Eagle (Traverse City, MI).

The results of the sold newspapers are presented as discontinued operations pursuant to Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Further, the results of those newspapers were excluded from our segment results for all periods presented.  Results of operations for the six local media newspapers included within discontinued operations for the three and six months ended June 30, 2006 were as follows:

NOTE 5: RESTRUCTURING AND OTHER ITEMS

Restructuring actions have been recorded in accordance with SFAS 112, “Employers’ Accounting for Postemployment Benefits” or SFAS 146, “Accounting for the Costs Associated with Exit or Disposal Activities,” as appropriate.  The estimated employee severance payments described below were based on predetermined criteria of existing benefit plans and were therefore recorded when the liability was considered probable and reasonably estimable as required by SFAS 112.

The following table displays the activity and balances of the restructuring reserve accounts through June 30, 2007:

2007

During the second quarter of 2007, we recorded a restructuring charge of $10.1 million, $9.5 million of which was employee severance, primarily reflecting employee severance related to reductions at our consumer media segment as well as smaller reductions at our other segments.  In total, approximately 100 full-time employees were affected.

2006

In the fourth quarter of 2006, we recorded a restructuring charge of $15.4 million, primarily reflecting employee severance related to a workforce reduction of about 160 full-time employees in connection with the restructuring of our enterprise media segment following our recent acquisition of Factiva as well as other initiatives.

During the second quarter of 2006, we recorded a net charge of $6.8 million, consisting of a restructuring charge of $9.9 million, partially offset by a gain of $3.1 million on the sale of certain fixed assets.  The restructuring primarily reflected the elimination of certain positions in technology, circulation and administrative support in favor of outsource vendors.  In total, approximately 250 full-time and 500 part-time employees were affected.

During the first quarter of 2006, we recorded a charge of $20.9 million related to a reorganization of our business.  The charge comprised primarily employee severance related to the elimination of certain senior level positions, as well as additional workforce reductions at other areas of the business identified as part of the reorganization.  In total, approximately 65 full-time employees were affected.

The workforce reductions related to the second quarter 2007 and fourth quarter 2006 restructuring actions are expected to be substantially completed by the fourth quarter of 2007 and the third quarter of 2007, respectively.  The other restructuring actions are substantially complete.

NOTE 6: DEBT

The following table summarizes our debt outstanding for the periods presented:

Debt outstanding at June 30, 2007 was $392 million which consisted of bonds totaling $225 million due February 15, 2008; commercial paper of $144 million with various maturities of less than a year; and, loan notes of $23 million issued in connection with the acquisition of eFN.  These notes are presented as a current liability since they are subject to certain early redemption provisions.  It is currently our intent to manage our commercial paper borrowings as short-term obligations.

As of June 30, 2007, we had available credit agreements totaling $585 million: $100 million through August 20, 2008, $300 million through June 21, 2009 and $185 million through June 23, 2011 under our multiyear revolving credit agreements with several banks.  On February 20, 2007, we entered into a $100 million 18-month credit agreement, with substantially similar restrictive covenants as our other credit agreements, which we canceled on July 3, 2007 as it was no longer needed to support our commercial paper obligations.  The revolving credit agreements contain restrictive covenants, including a limitation on the ratio of consolidated indebtedness to consolidated cash flow of 3.5x.  At June 30, 2007, we were in compliance with respect to all restrictive covenants then in effect, with the leverage ratio equaling approximately 1.4x.

Borrowings under the revolving credit agreements may be made either in Eurodollars with interest that approximates the applicable Eurodollar rate or in U.S. dollars with interest that approximates the bank's prime rate, our certificate of deposit rate or the federal funds rate.  A quarterly fee is payable on the commitments which we may terminate or reduce at any time.  The quarterly fee, which is dependent on our debt rating issued by S&P and Moody's, was .08% at June 30, 2007.  As of June 30, 2007 and December 31, 2006, no amounts were borrowed under the revolving credit lines.

NOTE 7:  PENSION AND OTHER POSTRETIREMENT PLANS

The components of net periodic benefit costs recognized in other comprehensive income were as follows:

NOTE 8: CASH DIVIDENDS DECLARED PER SHARE

We currently pay a $.25 per share dividend each quarter.  Typically, we declare our third quarter dividend in our second quarter, as was done this year.

NOTE 9: COMMITMENTS AND CONTINGENCIES

There are various libel actions, legal proceedings and other matters that have arisen in the ordinary course of business that represent possible contingencies of ours and our subsidiaries.  In our opinion, based on advice of legal counsel, the ultimate outcome to us and our subsidiaries as a result of these legal proceedings and other matters will not have a material effect on our financial statements.  In addition, we have insurance coverage for many of these matters.

Our bylaws provide for indemnification of officers and directors prosecuted in a criminal action or sued in a civil action or proceeding to the full extent permitted by the Delaware General Corporation Law.  The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited; however, we maintain directors' and officers' liability and corporation reimbursement insurance for the benefit of our directors and officers.  The policy provides coverage for certain amounts paid as indemnification pursuant to the provisions of Delaware law and our bylaws.  As a result of our insurance coverage, we believe that the estimated fair value of these indemnification provisions is minimal.

We enter into indemnification agreements in our ordinary course of business, typically with companies from which we are acquiring or to which we are selling businesses, partners in joint ventures, licensees and licensors, and service providers and contractors.  Under these agreements we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, as a result of our activities or our breach of the agreement in question or in connection with any intellectual property infringement claim by any third party with respect to our products.  These indemnification obligations generally survive termination of the underlying agreement, either for some set number of years or perpetually.  In some cases, the maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited.  We believe that the estimated fair value of these indemnity obligations is minimal and we have no liabilities recorded for these obligations as of June 30, 2007.  We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.

NOTE 10:  INCOME TAXES

In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48) was issued, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  We adopted FIN 48 when it became effective for us as of January 1, 2007.  Upon adoption, we recorded approximately a $1.7 million increase in liabilities, a $.4 million increase in assets and a $1.3 million reduction to retained earnings.  

Unrecognized tax benefits (all of which would impact the effective tax rate if recognized) were $19.2 million at January 1, 2007.  Interest expense associated with unrecognized tax benefits, which is recorded on a net basis within income taxes, totaled $0.4 million and $0.9 million for the three and six months ended June 30, 2007, respectively.  The balance of interest accrued totaled $2.7 million as of January 1, 2007.  

The remaining tax years subject to examination by the Internal Revenue Service, as of June 30, 2007, are 2003-2006.  State income tax returns are generally subject to examination for a period of three to four years after filing.  We have various state income tax returns in the process of examination.  The statute of limitations for certain state tax returns is expected to expire within twelve months which could result in a decrease in the unrecognized tax benefit balance of $3 to $4 million.

NOTE 11: COMPREHENSIVE INCOME

Comprehensive income was computed as follows:

NOTE 12:  EARNINGS PER SHARE

Basic and diluted earnings per share were computed as follows:

NOTE 13:  BUSINESS SEGMENTS

We are organized around our distinct brands (franchises), customers and markets with our business and financial content organizations reported in two separate segments – consumer media and enterprise media, and our local general-interest community newspapers and their online media properties reported in the local media segment.  We continue to report certain administrative activities under corporate.

Consumer media is comprised primarily of The Wall Street Journal franchise (including domestic and international print, online, television and radio); and the relatively smaller Barron’s (including print, online and conferences) and MarketWatch franchises (including online, newsletters, television and radio).  The consumer media segment is an integrated business that offers business and financial information content to the consumer market around the globe.  This content is produced to gain readership and ultimately to earn revenue from advertisers and those readers.  We manage consumer media as one segment as its products largely comprise the global WSJ brand, and its sales, newsgathering and most production efforts are centralized and shared across the different editions and our various offerings in the segment are highly integrated.  

Enterprise media is managed as one segment as it comprises product offerings under the Dow Jones brand and offers business and financial information content to other businesses and financial professionals around the globe.  In addition, its product offerings rely on advanced delivery technology to meet customers’ needs and part of this segment’s overall strategy is to add more value to content with technology-enabled, well-designed and conveniently delivered enhancements and new products.  It has a shared information technology infrastructure, including a product development group that develops tools used in all of the offerings.  Enterprise media’s revenues are primarily subscription-based and the segment is comprised of Dow Jones Newswires, Factiva, Dow Jones Indexes, Dow Jones Financial Information Services, Dow Jones Reprints/Permissions and Dow Jones Licensing Services.

Local media includes the operations of Ottaway Newspapers, which publishes daily newspapers, weekly newspapers and “shoppers” in the U.S.

We evaluate the performance of our segments exclusive of restructuring and other charges.  See Note 5 for a further discussion of these items.

Our operations by reportable business segment, on a continuing basis, were as follows:

NOTE 14:  SUBSEQUENT EVENT

On July 31, 2007, we signed a definitive merger agreement under which News Corporation will acquire Dow Jones in a transaction valued at approximately $5.6 billion.  Under the terms of the agreement, which was approved by both companies' boards of directors, Dow Jones stockholders will be entitled to receive $60 in cash for each share of common stock and Class B common stock that they own.  Certain members of the Bancroft family and the trustees of trusts for their benefit who collectively own approximately 37% of Dow Jones’ voting stock have agreed to vote to approve the transaction.  The merger agreement provides that up to 250 holders of record and not more than 10% of the shares of Dow Jones may elect to have their shares of Dow Jones equity converted into a number of Class B units of Newco LLC, a newly formed subsidiary of News Corporation (each unit of which will be exchangeable for News Corporation equity in accordance with the terms and conditions of the Newco LLC operating agreement).  The merger agreement contains customary representations, warranties and covenants made by Dow Jones.  The merger, which is expected to close in the fourth calendar quarter, is subject to, among other things, approval by Dow Jones stockholders, regulatory approvals and other customary closing conditions.

Executive Overview

Dow Jones & Company is a leading provider of global business and financial news and information through newspapers, newswires, magazines, the Internet, indexes, licensing, research products and services, television and radio.  In addition, we own general-interest community newspapers throughout the U.S.  Our vision is to be the world’s best provider of high quality, indispensable and conveniently accessible business and related content wherever, whenever and however our customers want it, consistently generating superior value to all our customers, shareholders and employees.  

For the first half of 2007, approximately 55% of our revenues were derived from the consumer media segment, which includes The Wall Street Journal franchise (including domestic and international print, digital, television and radio) and the relatively smaller Barron’s (including print, digital and conferences) and MarketWatch franchises (including digital, newsletters, television and radio).  Consumer media’s financial results are largely dependent on the operating performance of The Wall Street Journal, which, to a significant extent, is dependent upon business-to-business (B2B) advertising placed in our publications, particularly from the financial and technology sectors.  The enterprise media segment, which includes newswires, indexes, licensing, research products and services and other electronic operations, comprised approximately 34% of our revenues, while the remaining approximately 11% of total revenues were contributed from the general-interest local media segment.

Revenues in the first six months of 2007 were up 17%, which was primarily driven by the acquisition of Factiva.  The combined profit from our business segments rose 43% in the first half of 2007 despite continued industry-wide softness in print advertising.  Print revenues as a percent of total revenues was down to 57% in the first half of 2007 compared with 68% a year before.  These results are the latest evidence of the success of our ongoing transformation plan, the aim of which is to transform Dow Jones from a company heavily dependent on print revenue to a more diversified content-driven consumer and enterprise media company meeting the needs of its customers across all consumer and enterprise media channels; to attract more customers and to encourage them to use us across all media channels; to diversify our reliance on unpredictable print revenue with investments in digital and B2B media and to smartly manage costs.

We have undertaken a number of innovations to reshape our portfolio and to increase our profits.  Our latest example of a successful innovation includes the launch on January 2, 2007 of a redesigned U.S. print Journal with innovative design and content enhancements for the digital age that were made better to serve existing readers and attract new ones.  This redesign began in 2005 and involved the retrofitting of the Journal’s 19 presses at 17 print sites to print to a more industry-standard 48-inch web width from its prior 60-inch web width.  These improvements included changes to the Journal's organization, navigation and content—as well as stronger links to WSJ.com—designed to make accessing Journal content faster and more convenient for readers.  We also expect the new web width will result in operating expense savings of about $20 million per year, mainly from reduced newsprint consumption.   

We also have been making investments in digital and B2B media.  In December 2006, we completed the acquisition of the remaining 50% interest in Factiva that we did not already own.  The Factiva acquisition will increase the revenues of our enterprise media segment by approximately 75%, as well as expand our global reach.  The increased scale together with Factiva’s product offerings, innovative search and delivery technology and complementary customer base will strengthen enterprise media’s product offerings and help propel its growth.  In 2007, we began integrating Factiva within our enterprise media segment and it is already contributing to earnings (six cents per share accretive in the first six months).  

In May 2007, we completed the acquisition of eFinancialNews Holdings Ltd. (eFN), a private U.K. company, for approximately $63 million, including an estimated working capital adjustment.  Based in London, eFN is a diversified media company serving the European financial services industry with print, online, training and events businesses.  Its flagship operations include the weekly Financial News, the eFinancialNews.com Web site and subscription-based services.  It also publishes Private Equity News, a weekly publication focused on the European private equity sector.  eFN will add digital and other non-print businesses to help diversify our reliance on traditional print revenue.  We are integrating eFN into the consumer media segment, where it will be part of our European media operations.  We financed the purchase with a combination of cash and debt.  We expect eFN to be neutral to earnings in 2007 but accretive thereafter.

In March 2007, we formed DJ/IAC Online Ventures, LLC which we jointly own with IAC.  This joint venture will create a new personal finance Internet business targeting the broad Web-savvy consumer audience by launching a community-driven Web site that combines the brands, marketing platforms and personal finance content of The Wall Street Journal, MarketWatch and other Dow Jones products with the marketing, entrepreneurialism and technology expertise of IAC’s businesses, including Ask.com and LendingTree.  We expect this venture to be dilutive to our earnings by about three cents a share this year.

On the cost control side, we continued to identify ways to streamline our operations and eliminate costs.  We announced a restructuring initiative in the second quarter primarily reflecting the reorganization of certain areas of our consumer media business but also included the reorganization of other business units.  In total, approximately 100 full-time positions are expected to be eliminated.   In total, we expect annual savings of $55 million will result from our restructuring actions and other initiatives identified this year to reduce costs and improve profits, including initiatives to further reduce circulation marketing and delivery costs.  While the bulk of these cost savings are not expected to take hold until 2008, we do expect to realize about $16 million of these savings in 2007.  We expect these savings in 2007 should cushion the impact of continued softness in the print advertising environment.

Also, we believe our differentiated and indispensable content is our greatest competitive advantage.  We are very proud that The Wall Street Journal won two Pulitzer Prizes, journalism's highest honor, including the Pulitzer Gold Medal for Public Service for articles exposing stock-options backdating.  These are the Journal's 32^nd and 33^rd Pulitzers.

Results of Operations

Consolidated Results of Operations - Three Months Ended June 30, 2007 and 2006:

Net Income

Net income in the second quarter of 2007 was $21 million, or $.25 per diluted share, compared with second quarter 2006 net income of $28.8 million, or $.34 per share (all “per share” amounts included herein are based on reported net income and diluted weighted-average shares outstanding).  Earnings per share included significantly higher stock-based compensation costs in 2007 following the announcement that News Corporation had submitted a proposal to acquire Dow Jones at $60 per share (see also Note 14).  In addition earnings in both years included restructuring initiatives.  These items are detailed further beginning on page 28.

Revenues

Second quarter 2007 revenues increased $73.7 million, or 16.2%, to $529.7 million, primarily reflecting our acquisition of Factiva, as well as strong organic growth at other parts of our business partially offset by lower advertising revenues at the U.S. print Journal and at our local media properties.  On a basis adjusted for the impact of acquisitions, total revenue was up 0.9%.  Advertising revenue decreased $7 million, or 2.8%, as a result of volume declines at our U.S. print Journal and local media segment, somewhat offset by strong growth from our international publications and Barron’s.  Information services revenue grew $76.9 million, or 80%, reflecting incremental revenue from Factiva as well as continued strong organic growth in indexes and newswires.  Circulation and other revenue increased $3.9 million, or 3.6%, on higher circulation revenue across our digital and print publications.

Operating Expenses

Operating expenses in the second quarter of 2007 increased $80.7 million, or 19.6%, to $491.7 million.  On a basis adjusted for the impact of acquisitions, total expenses increased 2.9%, as higher stock-based compensation costs as well as higher costs related to restructuring initiatives exceeded the savings from reduced newsprint expenses and other cost containment initiatives.  Newsprint costs were lower by 28%, reflecting lower newsprint consumption primarily due to the reduced web width from the U.S. print Journal redesign and 8.7% lower newsprint prices.  Depreciation and amortization expenses were up 4.4%, to $25.6 million, primarily reflecting higher amortization expenses as a result of the acquisition of Factiva.  The number of full-time employees at June 30, 2007 was approximately 7,200 as compared to 7,300 last June (6,700 excluding discontinued operations).  Excluding acquisitions and divestitures, headcount was down 3% compared to last year as a result of our restructuring initiatives.

Operating Income

Operating income in the second quarter of 2007 was $37.9 million (7.2% of revenues), down $6.9 million, or 15.5%, from the second quarter 2006 operating income of $44.9 million (9.8% of revenues) as higher profits from our consumer and enterprise media segments were more than offset by lower profits at our local media segment as well as higher costs for stock-based compensation and restructuring initiatives.

Non-operating Income (Loss)

Equity in Earnings of Associated Companies, Net of Tax

Discontinued Operations

Results of operations for the six local media newspapers included within discontinued operations for the three months ended June 30, 2006 were as follows:

Consolidated Results of Operations - Six Months Ended June 30, 2007 and 2006:

Net Income

Net income in the first half of 2007 was $43.7 million, or $.52 per diluted share, compared with net income in the first six months of 2006 of $90.3 million, or $1.08 per share (all “per share” amounts included herein are based on reported net income and diluted weighted-average shares outstanding).  Earnings per share in 2007 included certain items affecting comparisons that netted to a decrease in earnings of $.18 per share, while earnings in 2006 included certain items affecting comparisons that netted to an increase in earnings of $.55 per share.  These items are detailed further beginning on page 28.

Revenues

Revenues for the first six months of 2007 increased $150.8 million, or 17%, to $1 billion, which was primarily driven by our acquisition of Factiva and strong organic growth at other parts of our business, more than offsetting declines at the U.S. print Journal and at our local media segment.  Adjusting for the impact of the Factiva and eFN acquisitions, total revenues were up 1.7%.  Advertising revenue decreased $4.6 million, or 1%, reflecting declines at our local media segment and U.S. print Journal, partially offset by strong growth from our digital and international publications.  Information services revenue increased $150.7 million, or 79%, reflecting incremental revenue from Factiva and continued organic growth in indexes and newswires revenues.  Circulation and other revenue was higher by $4.6 million, or 2.2%, on increased circulation revenue across our digital and print publications.

Operating Expenses

Operating expenses in the first half of 2007 increased $117.6 million, or 13.9%, to $961 million.  On a basis adjusted for the impact of acquisitions, total expenses were down 1.2%.  The decrease reflected expense reductions associated with reduced newsprint costs and other cost containment initiatives, which exceeded the impact of higher stock-based compensation.  Newsprint costs decreased 23.3%, reflecting an 18.6% decline in newsprint consumption as a result of the reduced web width from the U.S. print Journal redesign and 5.8% lower newsprint prices.  Depreciation and amortization expenses were up 5.2%, to $51.6 million, primarily reflecting the acquisition of Factiva.  

Operating Income

Operating income in the first half of 2007 was $75.8 million (7.3% of revenues), up $33.2 million from the first half of 2006 operating income of $42.6 million (4.8% of revenues), reflecting an increase in the profits of our consumer and enterprise media segments, partially offset by a decline at our local media segment and higher stock-based compensation.  

Non-operating (Loss) Income

Equity in Earnings of Associated Companies, Net of Tax

Discontinued Operations

Results of operations for the six local media newspapers included within discontinued operations for the six months ended June 30, 2006 were as follows: