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Gary Pruitt

NEW YORK McClatchy Co., one of the nation's biggest newspaper companies, reported sharply lower profit and revenue for its third quarter Tuesday and said it would take an accounting charge to reflect the poor conditions in the newspaper business and its falling share price.

McClatchy said it was still determining what size that charge would be, and expected to disclose it in the company's quarterly regulatory filing on or before Nov. 9.

The announcement reflects the deepening malaise in the newspaper business, which has seen advertising slump badly as marketers and readers continue to migrate to the Internet, and amid a long-term decline in circulation. The housing slump has also affected real estate advertising at newspapers.

Before accounting for the charge, McClatchy reported preliminary earnings of $23.5 million, or 29 cents per share, for the three-month period ending in September, down from $51.8 million, or 64 cents per share, a year ago.

The latest results included a charge of 3 cents per share for special tax provisions.

Analysts polled by Thomson Financial were expecting earnings of 31 cents per share. Those estimates normally excluded one-time charges.

McClatchy's shares fell 22 cents or 1.2 percent. to $18.95 in morning trading Tuesday after trading at a 52-week low of $18.50 earlier. The shares have been declining steadily over the past two years, and are down from $39 a share in late June of 2006, when McClatchy completed its acquisition of Knight Ridder Inc.

McClatchy's revenue fell 9.2 percent in the quarter to $540.3 million versus $595.1 million in the same period in 2006. Advertising revenues fell 9.8 percent, while circulation revenues fell 3.7 percent.

In prepared remarks, McClatchy CEO Gary Pruitt said the company's newspapers in California and Florida have been disproportionally hurt by the housing downturn in those markets, which in turn affects real estate advertising.

Pruitt said the company believes that cyclical factors represent "a significant portion of the current advertising downturn." Pruitt said the tough environment for newspaper and the company's declining stock price led it to move up its annual test of goodwill impairment, or the book value of a company's assets, from the usual time of year-end, resulting in the third-quarter charge.

McClatchy, based in Sacramento, Calif., is the third-largest newspaper publisher in the country by circulation, after Gannett Co. and Tribune Co. Its newspapers include The Miami Herald, The Charlotte Observer, and The Sacramento Bee.

Pruitt's statement follows.
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"The economic downturn led by real estate continued to impact our advertising revenues in the third quarter. Once again our Florida and California newspapers were disproportionately hurt -- these two regions accounted for 68% of the decline in advertising revenues in the third quarter while accounting for only 33% of total company revenues.

"Our advertising results were in line with management expectations, and we were able to mitigate the impact of the advertising decline on our income with strong cost controls in the quarter. Total cash expenses were down 8.6% in the third quarter and were down 9.1% through the first nine months. Through September 2007, operating cash flow was down just 2.3% from the first nine months of 2006 on a proforma basis.

"Our outlook for the fourth quarter has been tempered by the continuing adverse effect of the real estate downturn and its impact on the economies in our local markets, particularly in California and Florida. It's clear the economies of these two markets and perhaps the country as a whole are experiencing a greater slowdown than many had anticipated just a few months ago -- and McClatchy is feeling the effects more than most other newspaper companies given our significant operations in California and Florida.

"Accordingly, we expect the advertising revenue decline in the fourth quarter to be similar to that in the second and third quarters. We do not know when this downturn will end, and do not have visibility beyond the fourth quarter. Nonetheless, we believe that cyclical factors represent a significant portion of the current advertising downturn as evidenced by our operations in the California and Florida regions. Looking longer term, we like the prospects for these two regions. We will continue to focus on cost controls and will weather the downturn by remaining efficient and protecting cash flows as best we can.

"The challenging business environment in the second half of 2007, coupled with the drag on our stock price, has resulted in our moving up our annual testing of goodwill and intangible assets for impairment. We are now testing for impairment at the end of the third quarter rather than waiting until the normal time for our testing at year-end. While we are early in our analysis, we expect the real estate downturn and its attendant effects on the local economies in which we operate, together with the additional amount of goodwill recorded under the accounting rules in the Knight Ridder acquisition, will result in an impairment charge.

"We recognize that newspaper revenues have declined and that values have dropped. But McClatchy is a solidly profitable company that is rapidly paying down debt and re-engineering its operations to navigate through a changing environment for all media companies. The impairment at issue involves only non-cash accounting charges, and the simplest way to put that in perspective is to remember that nothing about it changes our operations or our ability to reduce debt."