On Oct. 30, 2002, Standard & Poor's lowered its long-term corporate credit rating for Dow Jones (DJ) to 'A+' from 'AA-' and its short-term corporate credit and commercial paper ratings to 'A-1' from 'A-1+'. The outlook is negative for this New York, N.Y.-headquartered provider of business news and information. The company had about $100 million of debt outstanding at Sept. 30, 2002.
The downgrade follows Standard & Poor's reassessment of Dow Jones' business risk to incorporate much more volatility associated with the company's major operation, The Wall Street Journal. During the past two years, the Journal has suffered a more substantial deterioration in its advertising revenues and cash flow than other newspaper publishers due to the challenging economic conditions and the dependence on financial and technology advertising. In addition, Standard & Poor's expects that the weak operating climate will continue for the Journal, at least in the near term.
The ratings on Dow Jones reflect the company's position as the leading supplier of U.S. business news and its conservative capital structure. These factors are tempered by the heavy concentration of revenues and cash flow derived from the Journal's domestic operations, the cyclical nature of advertising revenues, and the volatility of newsprint prices.
The print publishing segment, which consists primarily of the Journal, accounted for roughly 70% of revenues and EBITDA in 1999 and 2000. Other operations include electronic publishing and community newspapers. However, as a result of the substantial deterioration at the Journal in 2001 and 2002, print publishing represented about 60% of revenues but only about 20% of EBITDA for the first nine months of this year.
The Journal has experienced sharp linage declines, particularly from the core financial and technology sectors. To help offset this weakness, Dow Jones implemented major cost-reduction programs throughout the company during 2001, with additional initiatives this year. Dow Jones has also benefited from significantly lower average newsprint prices in the past year.
Despite the sharply reduced EBITDA levels, the company's relatively low debt levels have helped to partially offset the effect on its financial ratios. Adjusted for operating leases, debt to EBITDA is in the 1.0 times (x) and EBITDA to interest is in the 10x area. However, Dow Jones has generated negative cash flow after capital expenditures and dividends to date in 2002. Following completion of a major print expansion project, capital expenditures this year and in future periods will be significantly lower.
In the 2002 first half, Dow Jones sold five of its community newspapers that resulted in net proceeds of about $230 million. The company initially used these proceeds to pay down debt and to help fund share repurchases. Although Dow Jones continues to make share repurchases in this fourth quarter, debt at the end of 2002 is not expected to exceed the $174 million of a year earlier. The company is likely to consider share repurchases in the future, but funding is expected to be with discretionary cash flow.
The company has $400 million in revolving credit agreements that are used as back up for its commercial paper program. The $130 million agreement expires in June 2003 and the $270 million agreement in June 2006. Commercial paper is the only debt in the capital structure. At the end of the third quarter, availability under the program was about $300 million.
The ratings may be lowered if Dow Jones does not continue to maintain its conservative financial policies during this period of operating weakness. There is little room in the current rating for debt-financed investment opportunities.