DallasNews Corp - Quarter Report: 2012 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

       For the quarterly period ended: March 31, 2012

OR

Commission File No. 1-33741

A. H. Belo Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (214) 977-8200

Former name, former address and former fiscal year, if changed since last report.

None

Indicate by check mark whether 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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A. H. BELO CORPORATION

FORM 10-Q

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PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements

A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (continued)

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See accompanying Notes to Condensed Consolidated Financial Statements.

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A. H. Belo Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Note 1: Summary of Significant Accounting Policies

Description of Business. A. H. Belo Corporation (“A. H. Belo” or the “Company”), headquartered in Dallas, Texas, is a distinguished newspaper publishing and local news and information company that owns and operates four metropolitan daily newspapers and several associated websites, with publishing roots that trace to The Galveston Daily News, which began publication in 1842. A. H. Belo publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes; The Providence Journal (www.providencejournal.com), the oldest continuously-published daily newspaper in the United States and winner of four Pulitzer Prizes; The Press-Enterprise (www.pe.com) (Riverside, California), serving the Inland Southern California region and winner of one Pulitzer Prize; and The Denton Record-Chronicle (www.dentonrc.com), a daily newspaper operating in Denton, Texas, approximately 40 miles north of Dallas. The Company publishes various niche publications targeting specific audiences, and its investments and/or partnerships include Classified Ventures, LLC, owner of cars.com, and the Yahoo! Inc. (“Yahoo!”) Newspaper Consortium. A. H. Belo also owns and operates commercial printing, distribution and direct mail service businesses. In February 2008, the Company’s former parent, Belo Corp. (“Belo”), separated its publishing operations in a spin-off transaction (the “Distribution”) and A. H. Belo became an independent registrant listed on the New York Stock Exchange (trading symbol: AHC). Unless the context requires otherwise, all dollar amounts in this Quarterly Report on Form 10-Q are in thousands, except per share amounts.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of A. H. Belo and its subsidiaries have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Transactions between the companies comprising A. H. Belo have been eliminated in the condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The Company’s operating segments are defined as its newspapers within a given market. The Company has determined that according to the applicable accounting guidance all of its operating segments meet the criteria to be aggregated into one reporting segment.

In the first quarter of 2011, the Company implemented Accounting Standards Update (“ASU”) No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which requires greater prominence in presenting comprehensive income in the consolidated financial statements. Accordingly, the condensed consolidated financial statements now include condensed consolidated statements of comprehensive loss for all periods presented and the condensed consolidated statements of shareholders’ equity no longer present the components of this balance.

In September 2011, the Financial Accounting Standards Board issued ASU No. 2011-08 – Intangibles – Goodwill and Other (Topic 350); Testing Goodwill for Impairment. The purpose of this amendment is to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU No. 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Unless conditions warrant an interim evaluation of goodwill, the Company performs its annual impairment test each December 31. The adoption of this amendment is not anticipated to have a material impact on the Company’s financial condition, results of operations or its liquidity.

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Note 2: Goodwill and Intangible Assets

The Company has recorded intangible assets consisting of goodwill and subscriber lists from its previous acquisitions. The carrying value of goodwill was $24,582, net of cumulative impairment losses of $439,509, as of March 31, 2012 and December 31, 2011. The remaining goodwill is recorded at The Dallas Morning News reporting unit. The table below sets forth the Company’s identifiable intangible assets, consisting of subscriber lists which are amortized over an 18 year period:

Note 3: Investments

The Company owns investment interests in various entities and records these interests under the equity method or cost method of accounting. Under the equity method, the Company records its share of the investee’s earnings or losses each period in other (expense) income, net, in the condensed consolidated statements of operations, and under the cost method, the Company records earnings or losses when the amounts are realized. During the three months ended March 31, 2012 and 2011, the Company recorded $351 and $279, respectively, of earnings from equity investments. The table below sets forth the Company’s investments as of March 31, 2012 and December 31, 2011:

Investments accounted for under the equity method include the following:

Note 4: Share-Based Compensation

On February 8, 2008, A. H. Belo established a long-term incentive plan under which eight million common shares were authorized for equity awards. On the Distribution date, awards under the plan were issued to holders of Belo stock options and restricted stock units (“RSUs”) in connection with the Distribution. Subsequent awards are granted to A. H. Belo employees and outside directors in the form of non-qualified stock options, incentive stock options, restricted shares, RSUs, performance shares, performance units or stock appreciation rights. The Company considers these awards in the calculation of its basic and diluted earnings per share. Anti-dilutive share-based awards excluded from the calculation of earnings per share consisted of 2,187,957 and 3,199,765 stock options and RSUs for the three months ended March 31, 2012 and 2011, respectively.

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A. H. Belo Stock Option Activity

The table below sets forth a summary of stock option activity under the A. H. Belo long-term incentive plan for the three months ended March 31, 2012:

A. H. Belo RSU Activity

Under A. H. Belo’s long-term incentive plan, the Board of Directors has awarded RSUs that vest over a period of one to three years. Upon vesting, the RSUs will be redeemed 60 percent in A. H. Belo Series A common stock and 40 percent in cash. A liability is recorded for the portion of the RSUs to be redeemed in cash and as of March 31, 2012, the liability for the cash portion of the redemption was $1,636. During the vesting period, holders of RSUs participate in A. H. Belo dividends declared by receiving payments for dividend equivalents. The RSUs do not have voting rights. The table below sets forth a summary of RSU activity under the A. H. Belo long-term incentive plan for the three months ended March 31, 2012:

The table below sets forth compensation expense related to stock awards, which is recorded on a straight-line basis over the vesting period of the award, for the three months ended March 31, 2012 and 2011:

In the first quarter of 2011, all pre-Distribution options and RSUs issued by Belo Corp. to Company employees were fully vested and the Company no longer recognizes expense for these awards.

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Note 5: Pension and Other Retirement Plans

The Company sponsors two defined benefit pension plans, A. H. Belo Pension Plans I and II (collectively the “A. H. Belo Pension Plans”). A. H. Belo Pension Plan I provides benefits to certain employees primarily employed with The Dallas Morning News or the A. H. Belo corporate offices and A. H. Belo Pension Plan II provides benefits to certain employees at The Providence Journal. These plans were established as a result of the Company’s withdrawal from The G. B. Dealey Retirement Pension Plan (the “GBD Pension Plan”), which was sponsored by Belo, on January 1, 2011. No additional benefits are accruing under the A. H. Belo Pension Plans, as future benefits were frozen prior to the plans’ establishment.

In the first quarter of 2011, the Company made a required contribution of $8,733 to the GBD Pension Plan, of which $3,410 was offset by amounts held by Belo for future pension plan contributions. Additionally, the Company made a voluntary contribution of $30,000 to the A. H. Belo Pension Plans. Required contributions of $5,435 were made to the A. H. Belo Pension Plans in the first quarter of 2012. In an effort to reduce the pension liability and related funding costs, the Company made a $10,000 voluntary contribution to the A. H. Belo Pension Plans during April 2012 along with required contributions of $8,037. The Company anticipates that required contributions for the remainder of 2012 will approximate $9,200.

The Company estimates net periodic pension expense based on the expected return on plan assets, the interest on projected pension obligations and the amortization of actuarial gains and losses in accumulated other comprehensive loss. The table below sets forth components of net periodic pension expense for the three months ended March 31, 2012 and 2011:

Other Defined Contribution Plans. In 2011, the Company resumed matching employee 401(k) contributions during the first and second quarters at 1.5 percent of eligible base salary. Effective January 1, 2012, the Company provides an ongoing dollar-for-dollar match up to 1.5 percent of each eligible participant's contribution on a per-pay-period basis. During the three months ended March 31, 2012 and 2011, the Company recorded expense of $357 and $421, respectively, for its matching contributions under this 401(k) plan.

The Company provides transition benefits to A. H. Belo employees affected by the curtailment of the GBD Pension Plan in 2007, consisting of supplemental contributions for a period of up to five years to the A. H. Belo Transition Supplement Plan, a defined contribution plan established by the Company. The Company anticipates contributions to this plan based on eligible earnings of participants through the first quarter of 2013. Contributions of $4,508 and $5,318 were made in the first quarters of 2012 and 2011, respectively, for the prior year’s eligible earnings of participants. Expense associated with the A. H. Belo Transition Supplement Plan was $1,136 and $1,185 for the three months ended March 31, 2012 and 2011, respectively.

Note 6: Long-term Debt

The Company operates with a credit agreement (“Credit Agreement”) that has a total commitment of $25,000. The Credit Agreement is subject to a borrowing base comprised of eligible accounts receivable and inventory, which determines the available borrowing capacity. If borrowing availability falls below $7,500, a fixed charge coverage ratio covenant of 1:1 will apply.

At March 31, 2012 and December 31, 2011, the Company had eligible collateral to secure borrowings under the Credit Agreement of $28,667 and $38,680 respectively, resulting in a borrowing base of $25,000 for both dates. When letters of credit and other required reserves are deducted from the borrowing base, the Company had $21,207 and $19,970 of borrowing capacity available under the Credit Agreement as of March 31, 2012 and December 31, 2011, respectively. The Company had no borrowings under the Credit Agreement during 2011 or 2012.

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Note 7: Contingencies

On October 24, 2006, 18 former employees of The Dallas Morning News filed a lawsuit against various A. H. Belo-related parties in the United States District Court for the Northern District of Texas. The plaintiffs’ lawsuit mainly consists of claims of unlawful discrimination and ERISA violations. On March 28, 2011, the Court granted defendants summary judgment and dismissed all claims. Plaintiffs moved for reconsideration, which motion was denied by the United States Magistrate. On July 15, 2011, the plaintiffs appealed the decision to the United States Court of Appeals for the Fifth Circuit. The Company believes the lawsuit is without merit and is vigorously defending against it.

In addition to the proceeding described above, a number of other legal proceedings are pending against the Company. In the opinion of management, liabilities, if any, arising from these other legal proceedings would not have a material adverse effect on the Company’s results of operations, liquidity, or financial condition.

Note 8: Fair Value Measurements

On March 3, 2011, the Company completed the purchase of the personal residence of a Company officer pursuant to a retention and relocation arrangement. The residence was initially recorded at an estimated fair value of $2,696, based on a purchase price of $3,096 and net of anticipated holding and selling costs of $400. The table below sets forth the assets and liabilities by major categories that are measured at fair value on a nonrecurring basis as required by Accounting Standards Codification No. 820, Fair Value Measurements.

Subsequent to the first quarter of 2011, the Company reassessed the holding and selling costs of the residence and recorded an additional $300 of expense, resulting in a carrying value of $2,396 at March 31, 2012.

The three levels of inputs to valuation techniques in the hierarchy used to measure fair value are:

Level I – Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.

Level II – Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level III – Prices or valuations that require inputs which are significant to the valuation and are unobservable.

Note 9: Dividends

On March 2, 2012, the Company paid a dividend of $0.06 per share, or $1,357, to its shareholders of record and to holders of outstanding RSU awards at the close of business on February 10, 2012. On March 8, 2012, the Company declared a dividend of $0.06 per share payable June 1, 2012 to shareholders of record and to holders of outstanding RSU awards at the close of business on May 11, 2012. The Company did not declare or pay any dividends during the three months ended March 31, 2011.

Note 10: Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss contains actuarial gains and losses associated with the A. H. Belo Pension Plans and gains and losses resulting from negative plan amendments and other actuarial experience related to other post-employment benefit plans. The Company records amortization of accumulated other comprehensive loss in salaries, wages and employee benefits in the consolidated statements of operations. Gains and losses associated with the A. H. Belo Pension Plans are amortized over the weighted average remaining life expectancy of the participants, currently estimated to be 24 years. Gains and losses associated with the Company’s other post-employment benefit plans are amortized over periods ranging between from four to 12 years.

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The table below sets forth the changes in accumulated other comprehensive loss as presented in the Company's condensed consolidated financial statements:

Note 11: Income Taxes

Income taxes are recorded using the liability method in accordance with applicable accounting guidance. The provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted by any discrete events, which are reported in the period in which they occur. This estimate is re-evaluated each quarter based on the Company’s estimated tax expense for the year.

The Company recognized income tax expense of approximately $402 and $420 for the three months ended March 31, 2012 and 2011, respectively, representing effective income tax rates of (11.5) percent and (6.7) percent, respectively. The tax expense for 2012 and 2011 is primarily attributable to the Texas margin tax and changes in the valuation allowance on deferred taxes.

The Company evaluates uncertain tax positions and recognizes a liability for the tax benefit associated with an uncertain position only if it is more likely than not the position will not be sustained on examination by taxing authorities, based on the technical merits of the position. As of March 31, 2012 and December 31, 2011, the Company recorded $331 and $333 in reserves and $70 and $55 in interest and penalties, respectively, for uncertain tax positions. The Company recognizes interest and penalties related to these reserves in interest expense.

The Company currently projects taxable losses for the year 2012 for federal income tax purposes and in certain state income tax jurisdictions. Net operating losses can be carried forward to offset future taxable income. The Company’s net operating loss carryforwards begin to expire in the year 2016 if not utilized.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Unless the context requires otherwise, all dollar amounts in the Quarterly Report on Form 10-Q are in thousands, except per share amounts.)

The following information should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related Notes filed as part of this report.

Overview

A. H. Belo, headquartered in Dallas, Texas, is a distinguished newspaper publishing and local news and information company that owns and operates four metropolitan daily newspapers and several associated websites, with publishing roots that trace to The Galveston Daily News, which began publication in 1842. A. H. Belo publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes; The Providence Journal (www.providencejournal.com), the oldest continuously-published daily newspaper in the United States and winner of four Pulitzer Prizes; The Press-Enterprise (www.pe.com) (Riverside, California), serving the Inland Southern California region and winner of one Pulitzer Prize; and The Denton Record-Chronicle (www.dentonrc.com), a daily newspaper operating in Denton, Texas, approximately 40 miles north of Dallas. The Company publishes various niche publications targeting specific audiences, and its investments and/or partnerships include Classified Ventures, LLC, owner of cars.com, and the Yahoo! Newspaper Consortium. A. H. Belo also owns and operates commercial printing, distribution and direct mail service businesses.

A. H. Belo intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies, and estimates affect its financial statements. Certain prior year amounts have been reclassified to conform to current year presentation.

Overview of Significant Activity in the First Quarter of 2012

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Results of Operations

Newspaper Revenues

The Dallas Morning News

The table below sets forth the components of The Dallas Morning News’ net operating revenues for the three months ended March 31, 2012 and 2011: