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TEGNA INC - Quarter Report: 2012 June (Form 10-Q)

Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 24, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number 1-6961

 

 

GANNETT CO., INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   16-0442930

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7950 Jones Branch Drive, McLean, Virginia   22107-0910
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (703) 854-6000.

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

The total number of shares of the registrant’s Common Stock, $1.00 par value outstanding as of June 24, 2012 was 231,421,058.

 

 

 


PART I. FINANCIAL INFORMATION

Items 1 and 2. Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

Results from Operations

Gannett Co., Inc. (the Company) reported 2012 second quarter earnings per diluted share, on a GAAP (generally accepted accounting principles) basis of $0.51 compared to $0.62 for the second quarter of 2011. Earnings per diluted share on a year-to-date basis were $0.79 in 2012 compared to $0.99 last year.

Results for the second quarter of 2012 include $10 million in costs due to workforce restructuring ($6 million after-tax or $0.02 per share), non-cash facility consolidation charges of $5 million ($3 million after-tax or $0.01 per share) and pension settlement charges totaling $5 million ($3 million after-tax or $0.01 per share). Results for the second quarter of 2011 included $9 million in costs due to workforce restructuring ($5 million after-tax or $0.02 per share), non-cash facility consolidation charges of $6 million ($4 million after-tax or $0.02 per share) and a $20 million net tax benefit ($0.08 per share).

Results for the first six months of 2012 include $26 million in costs due to workforce restructuring ($16 million after-tax or $0.07 per share), non-cash facility consolidation charges of $10 million ($6 million after-tax or $0.03 per share) and pension settlement charges totaling $5 million ($3 million after-tax or $0.01 per share). Results for the first six months of 2011 include $15 million in costs due to workforce restructuring ($9 million after-tax or $0.04 per share), non-cash facility consolidation charges of $14 million ($8 million after-tax or $0.03 per share) and a $20 million net tax benefit ($0.08 per share).

A separate discussion of results excluding the effect of special items (Non-GAAP basis) appears on page 9.

A consolidated summary of the Company’s results is presented below:

 

In thousands of dollars, except per share amounts                     

Second Quarter

                    
     2012      2011      Change  

Operating revenues

   $ 1,307,040       $ 1,334,939         (2 %)

Operating expenses

     1,090,522         1,093,185         —     
  

 

 

    

 

 

    

 

 

 

Operating income

   $ 216,518       $ 241,754         (10 %)

Non-operating expense

   $ 29,759       $ 32,927         (10 %)

Net income attributable to Gannett Co., Inc.

   $ 119,889       $ 151,527         (21 %)

Per share – basic

   $ 0.51       $ 0.63         (19 %)

Per share – diluted

   $ 0.51       $ 0.62         (18 %)

 

Year-to-Date

                    
     2012      2011      Change  

Operating revenues

   $ 2,525,627       $ 2,586,200         (2 %)

Operating expenses

     2,173,451         2,165,830         —     
  

 

 

    

 

 

    

 

 

 

Operating income

   $ 352,176       $ 420,370         (16 %)

Non-operating expense

   $ 62,983       $ 74,801         (16 %)

Net income attributable to Gannett Co., Inc.

   $ 188,112       $ 242,020         (22 %)

Per share – basic

   $ 0.80       $ 1.01         (21 %)

Per share – diluted

   $ 0.79       $ 0.99         (20 %)

 

2


Operating Revenues

Operating revenues declined 2% to $1.31 billion for the second quarter of 2012 and 2% to $2.53 billion for the first six months of the year reflecting softer print advertising demand in the Company’s Publishing segment, partially offset by stronger core and politically related advertising demand in the Broadcasting segment and continued growth of CareerBuilder in the Digital segment. Publishing segment revenues declined 6% for both the quarter and year-to-date periods, reflecting in part, the impact of sluggish economic growth on advertising demand. Within publishing segment revenue, circulation revenue declined less than 1%, a sequential improvement from the first quarter comparison. Circulation revenue for U.S. Community Publishing was 1% higher in the second quarter of 2012 with the impact of the continued roll out of the new all access content subscription model driving the increase. At the end of the second quarter, the Company had just over 16,500 digital subscribers, a number that is expected to increase significantly as the new model is introduced in more publishing markets in the latter half of 2012. Broadcasting segment revenues increased 11% for the quarter and 10% for the first six months of 2012 driven by stronger advertising demand and growth in retransmission revenue. Digital segment revenues were almost 5% higher for the quarter and 6% higher for the year-to-date period primarily reflecting solid revenue growth at CareerBuilder.

Second quarter 2012 company-wide digital revenues, which include Digital segment revenues and all digital revenues generated and reported by the other business segments, were $312 million, 13% higher compared to the second quarter in 2011 and were approximately 24% of the Company’s total operating revenues. For the year-to-date period, company-wide digital revenues were $584 million, 11% higher compared to the same period in 2011. Comparisons for both the quarter and year-to-date periods reflect higher digital advertising and marketing solutions revenue and the continued rollout of the new all access content subscription model.

Operating Expenses

Operating expenses including facility consolidation, workforce restructuring and pension settlement charges, were relatively flat for the quarter and year-to-date periods in 2012. Continuing company-wide cost control and efficiency efforts were offset by strategic initiative expenses that primarily impacted the Publishing segment as well as higher pension expense. Strategic initiative expenses were $30 million for the second quarter and $50 million for the year-to-date period in 2012. These expenses are related to the continued rollout of the all access content subscription model, digital website re-launches and digital marketing service initiatives. Publishing segment expenses decreased by 3% for the quarter and 1% for the year-to-date period, reflecting the impact of continuing efficiency efforts and lower newsprint expense, offset partially by strategic initiative spending. Newsprint expense comparisons to the prior year were 7% lower in both the quarter and the first six months of 2012. The increases in Broadcast and Digital segment expenses were driven by higher costs associated with revenue growth.

Operating Income

Operating income was $217 million for the second quarter of 2012, a decrease of $25 million or 10% compared to the second quarter last year, reflecting the impact of the economy on advertising demand in the Company’s Publishing segment as well as the continuing shift of advertising to alternate forms of media, particularly digital media. Publishing segment operating income was $104 million for the quarter, down 25% from last year due to advertising softness, particularly in April and June, as well as strategic initiative spending. This was partially offset by the impact of company-wide efforts to create efficiencies and lower costs. Broadcasting segment operating income increased 18% to $95 million for the quarter due to the impact of stronger politically related ad demand as well as significantly higher core and retransmission revenue, partially offset by an increase in related sales costs and strategic initiative expenses. Digital segment operating income was $37 million, up slightly from last year as higher revenues at CareerBuilder were partially offset by higher costs associated with revenue growth.

Operating income was $352 million for the year-to-date period, a decrease of 16% compared to last year. For the year-to-date period, Publishing segment results were similarly affected by those factors mentioned for second quarter results. Broadcasting results for the year-to-date period were up 16% reflecting higher core advertising, political and retransmission fees. Digital results were up 1%, again principally reflecting higher revenues at CareerBuilder, offset by higher costs including strategic initiatives. Revenue and expense variances are discussed in more detail below.

Net Income Attributable to Gannett Co., Inc.

Net income attributable to Gannett Co., Inc. was $120 million for the second quarter of 2012, a decrease of 21% compared to 2011. Earnings per diluted share were $0.51 in the second quarter compared to $0.62 last year. For the year-to-date period, net income attributable to Gannett Co., Inc. was $188 million, a decrease of 22% compared to 2011. Earnings per diluted share were $0.79 for the year-to-date period compared to $0.99 last year. These lower results paralleled the overall change in operating income.

 

3


The following is a discussion of the Company’s reported operating segment results:

Publishing Results

Publishing revenues declined 6% to $920 million from $977 million in the second quarter last year and declined 6% to $1.79 billion for the year-to-date period. Publishing revenues are derived principally from advertising and circulation sales, which accounted for 65% and 29%, respectively, of total publishing revenues for the second quarter and 64% and 29%, respectively for the year-to-date period. Advertising revenues include amounts derived from advertising placed with print products as well as publishing related internet web sites, mobile and tablet applications. “All other” publishing revenues are mainly from commercial printing operations. The table below presents these components of publishing revenues.

Publishing revenues, in thousands of dollars

 

Second Quarter

   2012      2011      Change  

Advertising

   $ 594,262       $ 646,864         (8 %) 

Circulation

     263,938         265,433         (1 %) 

All other

     62,133         64,842         (4 %) 
  

 

 

    

 

 

    

 

 

 

Total

   $ 920,333       $ 977,139         (6 %) 
  

 

 

    

 

 

    

 

 

 

Year-to-Date

   2012      2011      Change  

Advertising

   $ 1,145,700       $ 1,248,600         (8 %) 

Circulation

     527,274         533,646         (1 %) 

All other

     121,421         124,678         (3 %) 
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,794,395       $ 1,906,924         (6 %) 
  

 

 

    

 

 

    

 

 

 

The table below presents the principal categories of advertising revenues for the Publishing segment.

Advertising revenues, in thousands of dollars

 

Second Quarter

   2012      2011      Change  

Retail

   $ 310,500       $ 333,104         (7 %) 

National

     95,204         115,045         (17 %) 

Classified

     188,558         198,715         (5 %) 
  

 

 

    

 

 

    

 

 

 

Total publishing advertising revenue

   $ 594,262       $ 646,864         (8 %) 
  

 

 

    

 

 

    

 

 

 

Year-to-Date

   2012      2011      Change  

Retail

   $ 589,478       $ 635,601         (7 %) 

National

     185,644         219,781         (16 %) 

Classified

     370,578         393,218         (6 %) 
  

 

 

    

 

 

    

 

 

 

Total publishing advertising revenue

   $ 1,145,700       $ 1,248,600         (8 %) 
  

 

 

    

 

 

    

 

 

 

Publishing advertising revenues decreased 8% in the quarter to $594 million from $647 million in the second quarter of 2011. Advertising revenue comparisons were very volatile in the second quarter of 2012. Advertising revenues on a constant currency basis were 12% lower in April, down just 2% in May and declined 9% in June versus last year. Advertising revenues declined 8% for the year-to-date period to $1.15 billion from $1.25 billion. For U.S. publishing, advertising revenue decreased 8% for the second quarter and year-to-date period. In the UK, advertising revenues were lower by 8% for the second quarter and year-to-date period. On a constant currency basis, advertising revenues in the UK declined 5% for the second quarter and 6% for the year-to-date period. The average exchange rate used to translate UK publishing results from the British pound to U.S. dollars decreased 2% to 1.59 for the second quarter from 1.63 last year and decreased 2% to 1.58 for the year-to-date period from 1.61 last year.

 

4


The percentage changes in the advertising revenue categories for domestic publishing, Newsquest and in total on a constant currency basis are as follows:

 

Second Quarter

   U.S.
Publishing
    Newsquest
(in pounds)
    Total
Constant
Currency
    Total
Publishing
Segment
 

Retail

     (7 %)      (4 %)      (7 %)      (7 %) 

National

     (18 %)      3 %     (17 %)      (17 %) 

Classified

     (4 %)      (7 %)      (5 %)      (5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (8 %)      (5 %)      (8 %)      (8 %) 

Year-to-Date

   U.S.
Publishing
    Newsquest
(in pounds)
    Total
Constant
Currency
    Total
Publishing
Segment
 

Retail

     (7 %)      (5 %)      (7 %)      (7 %) 

National

     (16 %)      2 %     (15 %)      (16 %) 

Classified

     (5 %)      (7 %)      (5 %)      (6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (8 %)      (6 %)      (8 %)      (8 %) 

Across the Publishing segment in the second quarter, all categories of advertising revenue comparisons were better than first quarter year-over-year comparisons except national.

Retail advertising was 7% lower in the second quarter of 2012, reflecting volatility as positive year-over-year comparisons in May did not offset softer ad demand in April and June. Retail advertising on a year-to-date basis was also down 7%.

National advertising declined 17% for the second quarter and 16% for the first six months of 2012, driven by declines at USA TODAY and U.S. Community Publishing. National advertising comparisons were positive at Newsquest for both the quarter and year-to-date periods in pounds.

Classified advertising revenue at the Company’s domestic publishing operations declined 4% for the second quarter of 2012, although the comparison improved relative to the first quarter comparisons. All domestic classified advertising category comparisons were better than first quarter comparisons. Automotive advertising was almost 1% higher compared to the second quarter last year, while employment was slightly less than 1% lower. Real estate advertising was down 14%, reflecting the slow recovery in the housing market. Classified advertising comparisons, in pounds, at Newsquest were uneven in the second quarter with lagging results in April and June offsetting slightly positive results in May.

The percentage changes in the classified revenue categories for domestic publishing, Newsquest and in total on a constant currency basis are as follows:

 

Second Quarter

   U.S.
Publishing
    Newsquest
(in pounds)
    Total
Constant
Currency
    Total
Publishing
Segment
 

Automotive

     1     (14 %)      (1 %)      (2 %) 

Employment

     (1 %)      (4 %)      (2 %)      (3 %) 

Real Estate

     (14 %)      (8 %)      (12 %)      (13 %) 

Legal

     (3 %)      —          (3 %)      (3 %) 

Other

     (7 %)      (6 %)      (7 %)      (7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (4 %)      (7 %)      (5 %)      (5 %) 

Year-to-Date

   U.S.
Publishing
    Newsquest
(in pounds)
    Total
Constant
Currency
    Total
Publishing
Segment
 

Automotive

     (1 %)      (15 %)      (3 %)      (3 %) 

Employment

     (1 %)      (5 %)      (2 %)      (3 %) 

Real Estate

     (14 %)      (8 %)      (12 %)      (13 %) 

Legal

     (7 %)      —          (7 %)      (7 %) 

Other

     (8 %)      (5 %)      (7 %)      (8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (5 %)      (7 %)      (5 %)      (6 %) 

 

5


Circulation revenues declined less than 1% for the second quarter of 2012 to $264 million from $265 million last year and declined 1% to $527 million for the first six months of 2012. Circulation revenue for U.S. Community Publishing was 1% higher in the second quarter of 2012 and was up almost 1% for the first six months of 2012. Circulation revenue comparisons were up for the first time since the end of 2008. Circulation revenue comparisons improved sequentially within the second quarter as the all access content subscription model continues to be rolled out. The Company expects that the price for subscribers will increase approximately 25% to 30% as a result of the all access content subscription model. At the end of the quarter, approximately half of the U.S. Community Publishing sites had rolled out the model. The Company expects to complete substantially all of the rollout by the end of 2012. The Company is also implementing single copy price increases of 30% to 100% at nearly all its domestic daily newspapers. The Company expects total circulation revenue in U.S. Community Publishing to grow approximately 25% once all of the markets are rolled out early next year.

Net paid daily circulation for local publishing operations declined 8% for the quarter and 7% for the first six months of 2012, while Sunday net paid circulation decreased by 9% and 6%, respectively. USA TODAY’s average daily circulation decreased 1% compared to the second quarter last year and increased 1% on a year-to-date basis.

“All Other” revenues decreased 4% for the quarter and were down 3% for the year-to-date period, primarily due to a decrease in UK commercial printing revenues.

The Company’s publishing operations, including U.S. Community Publishing, USA TODAY and affiliated companies and Newsquest, generate advertising and subscription revenues from web sites, tablets, and mobile applications that are associated with their publishing businesses. These revenues are reflected within all publishing categories on the income statement discussed above, and they are separate and distinct from revenue generated by businesses included in the Company’s Digital segment. Digital revenues associated with publishing operations increased 29% for the quarter and 21% for the year-to-date period, reflecting the Company’s strategic efforts to provide digital advertising and marketing solutions as well as the impact of the new all access content subscription model. Digital revenues at U.S. Community Publishing were higher 33% for the quarter and 22% for the year-to-date period due to both the digital marketing solutions efforts and to the content subscription model implementations. Digital revenues at USA TODAY and its associated businesses were up 37% for the second quarter and 31% for the first six months of 2012. Digital revenues in the UK were 10% higher in pounds for the quarter and 8% higher for the year-to-date period.

Publishing operating expenses decreased by 3% in the quarter to $816 million from $838 million in the second quarter of 2011 and were down 1% to $1.63 billion for the year-to-date period. The expense declines primarily reflect the result of continued efficiency efforts as well as lower newsprint expense. These savings were partially offset by strategic initiative spending and higher workforce restructuring costs. Expenses related to strategic initiatives totaled approximately $28 million for the quarter and $46 million for the year-to-date period. Workforce restructuring costs totaled $10 million and facility consolidation costs totaled $5 million in the second quarter of 2012 compared to $9 million and $6 million, respectively, last year. For the first six months of 2012, workforce restructuring costs totaled $28 million and facility consolidation costs totaled $10 million compared to $15 million and $14 million, respectively, for the same period last year.

Newsprint expense was 7% lower in the quarter and the first six months of 2012 due to declines in consumption. For the third quarter of 2012, the Company expects its newsprint expense will again be below year ago levels.

Publishing segment operating income was $104 million in the quarter, which includes the impact of strategic investments, compared to $139 million last year, a decrease of 25%. Operating income for the year-to-date period was $166 million, a decrease of 35% compared to last year. The decrease reflects lower operating revenues, partially offset by lower operating expenses.

Digital Results

The Digital segment includes results for CareerBuilder, PointRoll, ShopLocal, Reviewed.com and Planet Discover.

Digital segment operating revenues were $181 million in the second quarter of 2012 compared to $173 million in 2011, an increase of 5%. Year-to-date operating revenues were $350 million compared to $331 million, an increase of 6%, primarily reflecting continued strong revenue growth at CareerBuilder. CareerBuilder continues to build market share in the U.S. and its international operations have expanded in Europe and Brazil.

Digital operating expenses were $145 million in the second quarter of 2012 compared to $137 million in 2011, an increase of 5%. Year-to-date operating expenses were $297 million compared to $279 million in 2011, an

 

6


increase of 6%. Expenses increased reflecting higher costs at CareerBuilder and strategic spending on digital initiatives.

Broadcasting Results

Broadcasting includes results from the Company’s 23 television stations and Captivate. Broadcasting revenues were $205 million in the second quarter, 11% higher than the second quarter last year primarily reflecting stronger advertising demand. Revenues for the year-to-date period 2012 were $382 million, an increase of 10% from $348 million last year.

Television revenues for the quarter were $198 million, up 11% from the comparable period in 2011. Television revenues for the year-to-date period were $369 million, up 10% from the comparable period in 2011. Both the quarter and year-to-date comparisons reflect a significant increase in core and politically related advertising. Core advertising was led by an increase in auto spending, which was up almost 30% compared to last year’s second quarter, and up 22% on a year-to-date basis. Increases in medical and banking advertising categories also contributed to the higher core advertising. Political advertising increased $9 million for the second quarter of 2012 compared to last year and $13 million on a year-to-date basis. Retransmission revenues totaled $23 million for the quarter and $45 million year-to-date, both achieving an increase of 17% over the comparable periods in 2011. There are no incremental costs associated with retransmission revenues; therefore, all of these revenues contribute directly to operating income.

Total adjusted television revenues, defined to exclude the estimated incremental impact of ad revenue related to political spending, were up 6% for the second quarter and year-to-date periods of 2012. The increase was due, in part, to strengthened demand for automotive advertising and several other key categories in the quarter.

Digital revenues in Broadcasting were up 13% for the second quarter reflecting a 15% increase in revenues at Captivate and an 11% increase in digital revenue associated with the Company’s television stations. Digital revenues on a year-to-date basis were up 7%.

Based on current trends, the Company expects the percentage increase in total television revenues for the third quarter of 2012 to be in the low thirties compared to the third quarter of 2011.

Broadcasting operating expenses for the second quarter totaled $111 million, up 7% from the second quarter 2011. The increase is primarily due to approximately $2 million of strategic initiative expenses and higher sales costs associated with higher revenue. Broadcasting operating expenses for the first six months totaled $214 million, up 5% from the same period in 2011 due to $3 million of strategic initiative expenses in 2012 and higher sales costs associated with higher revenues. Operating income in 2012 was $95 million for the second quarter and $167 million for the year-to-date period compared to $80 million and $144 million, respectively in 2011.

Corporate Expense

Corporate expense in the second quarter was $19 million, up 40% from the second quarter last year due to the pension settlement charges recognized in the second quarter of 2012. Year-to-date corporate expenses increased 6% to $34 million from $32 million last year, also reflecting the impact of the pension settlement charges.

Non-Operating Income and Expense

Equity Earnings

Equity income increased 9% to $9 million for the second quarter this year and 14% to $13 million year-to-date, due primarily to strong results from Classified Ventures which were up 4% for the quarter and 19% year-to-date.

Interest Expense

The Company’s interest expense for the second quarter was $36 million, down 19% from last year reflecting lower average debt levels. Total average outstanding debt was $1.75 billion for the second quarter of 2012 compared to $2.18 billion last year. The weighted average interest rate for total outstanding debt was 7.41% for the second quarter of 2012 compared to 7.36% last year.

Interest expense for the first six months of 2012 was $76 million, down 17% from last year reflecting primarily lower average debt levels. Total average outstanding debt was $1.76 billion for the first six months of 2012 compared to $2.25 billion last year. The weighted average interest rate for total outstanding debt was 7.72% for the first six months of 2012 compared to 7.34% last year.

At the end of the second quarter of 2012, the Company had $440 million in long-term floating rate obligations outstanding. A 50 basis points increase or decrease in the average interest rate for these obligations would result in an increase or decrease in annualized interest expense of $2.2 million.

 

7


Other Non-Operating Items

Other non-operating items decreased $6 million for the second quarter of 2012 and $5 million year-to-date, primarily due to a gain in the second quarter of 2011 associated with the prepayment of a secured promissory note the Company received in connection with the disposition of certain publishing operations in 2010.

Provision for Income Taxes

The Company’s effective income tax rate was 30% for the second quarter of 2012, compared to 22% for the second quarter of 2011. The Company’s effective income tax rate was 29% for first six months of 2012, compared to 25% for the same period last year. The tax rates for both 2012 and 2011 reflect benefits from releases of reserves on prior year tax positions related to tax settlements and the lapse of statutes of limitations. The rate in 2011 was lower than the rate in 2012 due to a special net tax benefit of $20 million primarily from certain audit settlements. A separate discussion of effective income tax rates excluding special items (non-GAAP basis) appears on page 13.

Net Income Attributable to Gannett Co., Inc.

Net income attributable to Gannett Co., Inc. was $120 million for the second quarter of 2012, a decrease of $32 million or 21% compared to 2011. Net income attributable to Gannett Co., Inc. consists of net income reduced by net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests was $16 million in the second quarter of 2012 and $14 million in the same period in 2011. Earnings per diluted share were $0.51 in the second quarter of 2012 compared to $0.62 last year. For the year-to-date period of 2012, net income attributable to Gannett Co., Inc. was $188 million, a decrease of 22% compared to 2011. Net income attributable to noncontrolling interests was $23 million year-to-date in 2012 and $22 million for the same period in 2011. Earnings per diluted share were $0.79 for the year-to-date period in 2012 compared to $0.99 last year.

The weighted average number of diluted shares outstanding for the second quarter of 2012 totaled 237,136,000 compared to 243,995,000 for the second quarter of 2011. For the first six months of 2012 and 2011, the weighted average number of diluted shares outstanding totaled 238,774,000 and 243,652,000, respectively. The decrease is due to shares repurchased since the second quarter of 2011. See Part II, Item 2 for information on share repurchases.

 

8


Operating Results - Non-GAAP Information

The Company uses non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures are not to be considered in isolation from or as a substitute for the related GAAP measures, and should be read only in conjunction with financial information presented on a GAAP basis.

The Company discusses in this report non-GAAP financial performance measures that exclude from its reported GAAP results the impact of special items consisting of workforce restructuring charges, facility consolidation expenses, pension settlement charges and certain credits to its income tax provision. The Company believes that such expenses are not indicative of normal, ongoing operations and their inclusion in results makes for more difficult comparisons between periods and with peer group companies. Workforce restructuring and facility consolidation expenses primarily relate to incremental expenses the Company has incurred to consolidate or outsource production processes and centralize other functions. These expenses include payroll and related benefit costs and accelerated depreciation. The pension settlement charges result from the acceleration of expense related to the timing of certain pension payments. The credit to the tax provision included in the second quarter of 2011 is related to a tax settlement covering multiple years.

Management uses non-GAAP financial performance measures for purposes of evaluating business unit and consolidated company performance. The Company therefore believes that each of the non-GAAP measures provides useful information to investors by allowing them to view the Company’s businesses through the eyes of management and the Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance of its businesses. In addition, many of the Company’s peer group companies present similar non-GAAP measures so the presentation of such measures facilitates industry comparisons.

Non-GAAP Financial Tables/Reconciliations

On an as adjusted basis using non-GAAP amounts for expenses, operating results were as follows:

 

In thousands of dollars, except per share amounts                     

Second Quarter

   2012      2011      Change  

Operating revenues

   $ 1,307,040      $ 1,334,939         (2 %) 

Adjusted operating expenses, non-GAAP basis

     1,070,266        1,077,999         (1 %) 
  

 

 

    

 

 

    

 

 

 

Adjusted operating income, non-GAAP basis

   $ 236,774      $ 256,940         (8 %) 
  

 

 

    

 

 

    

 

 

 

Adjusted net income attributable to Gannett Co., Inc., non-GAAP basis

   $ 132,045      $ 140,713         (6 %) 

Adjusted diluted earnings per share, non-GAAP basis

   $ 0.56      $ 0.58         (3 %) 

Year-to-Date

   2012      2011      Change  

Operating revenues

   $ 2,525,627      $ 2,586,200         (2 %) 

Adjusted operating expenses, non-GAAP basis

     2,132,118        2,137,021         —     
  

 

 

    

 

 

    

 

 

 

Adjusted operating income, non-GAAP basis

   $ 393,509      $ 449,179         (12 %) 
  

 

 

    

 

 

    

 

 

 

Adjusted net income attributable to Gannett Co., Inc., non-GAAP basis

   $ 212,845      $ 239,629         (11 %) 

Adjusted diluted earnings per share, non-GAAP basis

   $ 0.89      $ 0.98         (9 %) 

 

9


Adjustments to remove special items from GAAP results follow:

 

In thousands of dollars, except per share amounts                   

Second Quarter

   2012     2011     Change  

Operating expenses (GAAP basis)

   $ 1,090,522     $ 1,093,185       —     

Remove special items:

      

Workforce restructuring

     (9,736     (8,792     11 %

Facility consolidation charges

     (5,097     (6,394     (20 %) 

Pension settlement charges

     (5,423     —          * **
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 1,070,266     $ 1,077,999       (1 %) 
  

 

 

   

 

 

   

 

 

 

Operating income (GAAP basis)

   $ 216,518     $ 241,754       (10 %) 

Remove special items:

      

Workforce restructuring

     9,736       8,792       11 %

Facility consolidation charges

     5,097       6,394       (20 %) 

Pension settlement charges

     5,423       —          * **
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 236,774     $ 256,940       (8 %) 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Gannett Co., Inc. (GAAP basis)

   $ 119,889     $ 151,527       (21 %) 

Remove special items (net of tax):

      

Workforce restructuring

     5,836       5,392       8 %

Facility consolidation charges

     3,097       3,894       (20 %) 

Pension settlement charges

     3,223       —          * **

Prior year tax reserve adjustments, net

     —          (20,100     * **
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 132,045      $ 140,713       (6 %) 
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share (GAAP basis)

   $ 0.51      $ 0.62       (18 %) 

Remove special items (net of tax):

      

Workforce restructuring

     0.02        0.02       —     

Facility consolidation charges

     0.01        0.02       (50 %) 

Pension settlement charges

     0.01        —          * **

Prior year tax reserve adjustments, net

     —          (0.08     * **
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis) (a)

   $ 0.56      $ 0.58       (3 %) 
  

 

 

   

 

 

   

 

 

 

 

(a) Total per share amount may not sum due to rounding.

 

10


Year-to-Date

   2012     2011     Change  

Operating expenses (GAAP basis)

   $ 2,173,451     $ 2,165,830       —     

Remove special items:

      

Workforce restructuring

     (26,025     (14,759     76 %

Facility consolidation charges

     (9,885     (14,050     (30 %) 

Pension settlement charges

     (5,423     —          ***  
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 2,132,118     $ 2,137,021       —     
  

 

 

   

 

 

   

 

 

 

Operating income (GAAP basis)

   $ 352,176     $ 420,370       (16 %) 

Remove special items:

      

Workforce restructuring

     26,025       14,759       76 %

Facility consolidation charges

     9,885       14,050       (30 %) 

Pension settlement charges

     5,423       —          ***   
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 393,509     $ 449,179       (12 %) 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Gannett Co., Inc. (GAAP basis)

   $ 188,112     $ 242,020       (22 %) 

Remove special items (net of tax):

      

Workforce restructuring

     15,525       9,259       68

Facility consolidation charges

     5,985       8,450       (29 %) 

Pension settlement charges

     3,223       —          ***  

Prior year tax reserve adjustments, net

     —          (20,100     ***  
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 212,845     $ 239,629       (11 %) 
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share (GAAP basis)

   $ 0.79      $ 0.99       (20 %) 

Remove special items (net of tax):

      

Workforce restructuring

     0.07        0.04       75 %

Facility consolidation charges

     0.03        0.03       —     

Pension settlement charges

     0.01        —          ***  

Prior year tax reserve adjustments, net

     —          (0.08     ***  
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis) (a)

   $ 0.89      $ 0.98       (9 %) 
  

 

 

   

 

 

   

 

 

 

 

(a) Total per share amount may not sum due to rounding.

Consolidated operating expenses on a non-GAAP basis for the second quarter of 2012, adjusted to remove costs associated with workforce restructuring, facility consolidations and pension settlement charges, declined 1% compared to 2011. Consolidated operating expense on a non-GAAP basis for the year-to-date period 2012, adjusted to remove costs associated with workforce restructuring, facility consolidations and pension settlement charges, were flat compared to 2011. This includes approximately $30 million of strategic initiative expenses for the quarter and $50 million year-to-date, as well as $4 million and $10 million increases in pension expense for the quarter and year-to-date period, respectively. Current quarter and year-to-date expense levels reflect the impact of efficiency efforts and facility consolidations in prior quarters and lower newsprint expense partially offset by higher Broadcasting and Digital segment expenses.

As a result of the above cost factors, as well as lower overall revenues, as adjusted operating income on a non-GAAP basis was $237 million for the second quarter of 2012, a decrease of 8% from the comparable period last year and was $394 million for the year-to-date period, a decrease of 12% from the comparable period last year. Adjusted net income attributable to Gannett Co., Inc. on a non-GAAP basis was $132 million for the quarter and $213 million for the year-to-date period, decreases of $9 million or 6% and $27 million or 11%, respectively, compared to last year.

 

11


A summary of the impact of facility consolidation and workforce restructuring charges on the Company’s Publishing segment is presented below:

 

In thousands of dollars                   

Second Quarter

   2012     2011     Change  

Publishing segment operating expenses (GAAP basis)

   $ 816,122     $ 838,493       (3 %) 

Remove special items:

      

Workforce restructuring

     (9,736     (8,792     11 %

Facility consolidation charges

     (5,097     (6,394     (20 %) 
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 801,289     $ 823,307       (3 %) 
  

 

 

   

 

 

   

 

 

 

Publishing segment operating income (GAAP basis)

   $ 104,211     $ 138,646       (25 %) 

Remove special items:

      

Workforce restructuring

     9,736       8,792       11 %

Facility consolidation charges

     5,097       6,394       (20 %) 
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 119,044     $ 153,832        (23 %) 
  

 

 

   

 

 

   

 

 

 

Year-to-Date

   2012     2011     Change  

Publishing segment operating expenses (GAAP basis)

   $ 1,628,144     $ 1,650,681       (1 %) 

Remove special items:

      

Workforce restructuring

     (27,681     (14,759     88 %

Facility consolidation charges

     (9,885     (14,050     (30 %) 
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 1,590,578     $ 1,621,872       (2 %) 
  

 

 

   

 

 

   

 

 

 

Publishing segment operating income (GAAP basis)

   $ 166,251     $ 256,243       (35 %) 

Remove special items:

      

Workforce restructuring

     27,681       14,759       88 %

Facility consolidation charges

     9,885       14,050       (30 %) 
  

 

 

   

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 203,817     $ 285,052        (28 %) 
  

 

 

   

 

 

   

 

 

 

Publishing segment operating expenses in the second quarter of 2012 were impacted by $15 million in costs due to workforce restructuring and facility consolidation charges. Excluding the impact of these items, as adjusted operating expenses on a non-GAAP basis declined 3% to $801 million. Publishing segment operating expenses for the year-to-date period of 2012 were impacted by $38 million in costs due to workforce restructuring and facility consolidation charges. Excluding the impact of these items, as adjusted operating expenses on a non-GAAP basis declined 2% to $1.59 billion. The expense declines primarily reflect the result of continued efficiency efforts and lower costs particularly through Gannett Publishing Services and sourcing initiatives as well as lower newsprint expense, partially offset by strategic initiative expenses. As adjusted operating income for the Publishing segment on a non-GAAP basis was $119 million for the second quarter of 2012 and $204 million for the year-to-date period of 2012.

 

12


A summary of the impact of special items on the Company’s Corporate segment is presented below:

 

In thousands of dollars                    

Second Quarter

   2012     2011      Change  

Corporate segment operating expenses (GAAP basis)

   $ 18,810     $ 13,470        40 %

Remove special items:

       

Pension settlement charges

     (5,423     —           * **
  

 

 

   

 

 

    

 

 

 

As adjusted (non-GAAP basis)

   $ 13,387     $ 13,470        (1 %) 
  

 

 

   

 

 

    

 

 

 

Year-to-Date

   2012     2011      Change  

Corporate segment operating expenses (GAAP basis)

   $ 34,070     $ 31,995        6 %

Remove special items:

       

Workforce restructuring

     1,656       —           * **

Pension settlement charges

     (5,423     —           * **
  

 

 

   

 

 

    

 

 

 

As adjusted (non-GAAP basis)

   $ 30,303     $ 31,995        (5 %) 
  

 

 

   

 

 

    

 

 

 

A summary of the impact of special items on the Company’s effective tax rate in thousands of dollars follows:

 

Second Quarter

   2012     2011  

Income before income taxes as reported

   $ 186,759      $ 208,827   

Net income attributable to noncontrolling interests

     (15,670     (14,000
  

 

 

   

 

 

 

Gannett pretax income (GAAP basis)

     171,089        194,827   

Remove special items:

    

Workforce restructuring

     9,736        8,792   

Facility consolidation charges

     5,097        6,394   

Pension settlement charges

     5,423        —     
  

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 191,345      $ 210,013   
  

 

 

   

 

 

 

Provision for income taxes as reported (GAAP basis)

   $ 51,200     $ 43,300  

Remove special items:

    

Workforce restructuring

     3,900       3,400  

Facility consolidation charges

     2,000       2,500  

Pension settlement charges

     2,200       —     

Prior year tax reserve adjustments, net

     —          20,100  
  

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 59,300     $ 69,300  
  

 

 

   

 

 

 

As adjusted effective tax rate (GAAP basis)

     29.9     22.2

As adjusted effective tax rate (non-GAAP basis)

     31.0     33.0

 

13


Year-to-Date

   2012     2011  

Income before income taxes as reported

   $ 289,193      $ 345,569   

Net income attributable to noncontrolling interests

     (23,281     (21,649
  

 

 

   

 

 

 

Gannett pretax income (GAAP basis)

     265,912        323,920   

Remove special items:

    

Workforce restructuring

     26,025        14,759   

Facility consolidation charges

     9,885        14,050   

Pension settlement charges

     5,423        —     
  

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 307,245      $ 352,729   
  

 

 

   

 

 

 

Provision for income taxes as reported (GAAP basis)

   $ 77,800      $ 81,900  

Remove special items:

    

Workforce restructuring

     10,500       5,500  

Facility consolidation charges

     3,900       5,600  

Pension settlement charges

     2,200       —     

Prior year tax reserve adjustments, net

     —          20,100  
  

 

 

   

 

 

 

As adjusted (non-GAAP basis)

   $ 94,400     $ 113,100  
  

 

 

   

 

 

 

As adjusted effective tax rate (GAAP basis)

     29.3     25.3

As adjusted effective tax rate (non-GAAP basis)

     30.7     32.1

The adjusted non-GAAP tax rate for the second quarter of 2012 was 31.0% compared to 33.0% for the second quarter of last year. The year-to-date adjusted non-GAAP tax rate was 30.7% and 32.1% for 2012 and 2011, respectively. The effective tax rates reflect benefits from releases of reserves on prior year tax positions.

Certain Matters Affecting Future Operating Results

Earlier this year, Gannett announced a detailed strategy focused on generating sustainable revenue growth, increasing profitability and creating shareholder value. The strategy’s three components are: (1) enhancing our core by stabilizing publishing while continuing to grow broadcast and diversified digital businesses; (2) accelerating growth by entering or expanding into related high-potential businesses; and (3) maintaining focus on operating efficiency and asset optimization. In connection with this strategy, Gannett disclosed that by 2015, it expects overall annual revenue growth in the range of 2% to 4%, and pre-tax margins to increase to between 15% and 19%.

The Company also announced a new capital program to be funded entirely through free cash flow. The Company expects to return more than $1.3 billion to shareholders by 2015. Excess cash flow will be used for further investment opportunities and opportunistic debt reduction. The new capital program includes the following actions:

 

   

The Board authorized a 150% increase in Gannett’s dividend to $0.80 per share on an annual basis.

 

   

The Board approved an acceleration of its share repurchases with a new $300 million share repurchase program targeted to be completed over the next two years, which it anticipates making an ongoing part of cash return to shareholders. Through June 24, 2012, the Company repurchased 5.8 million shares at a cost of $81 million.

 

   

The Company will continue to evaluate opportunistic bolt-on acquisitions.

The Company also highlighted a number of key initiatives and expected performance metrics, including:

 

   

A new all access content subscription model for U.S. Community Publishing, which charges for content regardless of platform. Non-subscriber access is metered and limited. The Company expects this model to contribute $100 million in earnings to the Publishing segment annually beginning in 2013. The Company also expects to generate incremental advertising revenue from digital platforms launching with the new model. As of the second quarter of 2012, the all access content subscription model had been launched in 38 markets.

 

   

The re-launch or development of all desktop, mobile and tablet products across Gannett by the end of 2013, beginning with USA TODAY this fall.

 

14


   

The development of a new digital marketing services business targeted at small and medium size businesses, which is expected to generate between $275 million and $350 million in annual revenue by 2015. The initiative is now fully operational in all television markets and Gannett’s top 35 domestic publishing markets.

 

   

The expansion of USA TODAY Sports Media Group, which is expected to be among the top five sports media companies in the country with over $300 million in annual revenue by 2015. In June 2012, USA TODAY Sports Media Group was ranked by Comscore as the fourth most visited digital sports entity.

 

   

Cost management and other asset optimization initiatives with total annual incremental savings expected to reach $100 million to $150 million by 2015. As part of those initiatives, Gannett Publishing Services is expected to contribute approximately $40 million to pre-tax income in 2012, with an increasing impact thereafter.

Expenses related to the strategic initiatives are expected to be approximately $10 million to $15 million in the third quarter of 2012.

Liquidity, Capital Resources, Financial Position, and Statements of Cash Flows

The Company’s net cash flow from operating activities was $317 million for the first six months of 2012, compared to $415 million for the first six months of 2011. Net cash flow from operating activities for 2012 reflects cash contributions totaling $76 million to the Gannett Retirement Plan, the Company’s principal retirement plan. This compares to cash contributions of $14 million in 2011.

Cash flows used for investing activities totaled $34 million for the first six months of 2012. This includes $38 million of capital spending and $9 million of payments for acquisitions. The Company received $10 million of proceeds from investments and $4 million of proceeds from the sale of certain assets. For the same year-to-date period in 2011, cash flows provided by investing activities totaled $4 million, reflecting $29 million of capital spending, $12 million of payments for certain publishing and digital business acquisitions, and $15 million of payments for investments. The Company also received $26 million of proceeds from investments and $34 million of proceeds from the sale of certain assets, of which included $26 million for the prepayment of a secured promissory note.

Cash flows used for financing activities totaled $248 million for the first six months of 2012 reflecting net debt payments of $102 million, payment of dividends totaling $66 million and repurchases of common shares for $81 million. Cash flows used for financing activities totaled $437 million for the first six months of 2011 reflecting debt payments of $334 million, payment of dividends totaling $19 million and an $85 million payment made to repurchase a noncontrolling membership interest.

At the end of the second quarter of 2012, the Company’s total long-term debt was $1.7 billion and its senior leverage ratio was 1.82x, substantially below the maximum senior leverage ratio of 3.5x the Company is permitted to maintain under its revolving credit agreements.

The long-term debt of the Company is summarized below:

 

In thousands of dollars              
     Jun. 24, 2012      Dec. 25, 2011  

Unsecured notes bearing fixed rate interest at 6.375% repaid April 2012

   $ —         $ 306,534   

Borrowings under revolving credit agreements expiring September 2014

     440,000         235,000   

Unsecured notes bearing fixed rate interest at 8.75% due November 2014

     247,977         247,609   

Unsecured notes bearing fixed rate interest at 10% due June 2015

     60,360         59,522   

Unsecured notes bearing fixed rate interest at 6.375% due September 2015

     248,236         247,995   

Unsecured notes bearing fixed rate interest at 10% due April 2016

     171,912         169,775   

Unsecured notes bearing fixed rate interest at 9.375% due November 2017

     247,349         247,168   

Unsecured notes bearing fixed rate interest at 7.125% due September 2018

     246,948         246,760   
  

 

 

    

 

 

 

Total long-term debt

   $ 1,662,782       $ 1,760,363   
  

 

 

    

 

 

 

 

15


In April 2012, the Company repaid its 6.375% fixed rate notes using borrowings under the credit agreements. On June 24, 2012, the Company had unused borrowing capacity of $665 million under its revolving credit agreements. In addition, its revolving credit agreements allow the Company to borrow at least $1 billion of additional unsecured debt (unrestricted as to purpose) guaranteed by the guarantor subsidiaries under these credit agreements. This borrowing limit is subject to increases depending upon the Company’s total leverage ratio.

The fair value of the Company’s total long-term debt, based principally on quoted market prices for the individual tranches of debt, totaled $1.8 billion at June 24, 2012.

On February 22, 2012, the Company announced that its Board of Directors approved a 150% increase in its regular quarterly dividend to $0.20 per share. The Board of Directors also authorized an acceleration of its share repurchases with a new $300 million share repurchase program targeted to be completed over the next two years. The shares will be repurchased at management’s discretion, either in the open market or in privately negotiated block transactions. The decision to buy back stock will depend on price, availability and other corporate developments. Purchases will occur from time to time and no maximum purchase price has been set. The board will regularly assess the appropriate dividend level and share repurchase levels depending on economic and market conditions.

Through June 24, 2012, the Company repurchased 5.8 million shares at a cost of $81 million under the new share repurchase program.

The Company’s foreign currency translation adjustment, included in accumulated other comprehensive loss and reported as part of shareholders’ equity, totaled $399 million at the end of the second quarter of 2012 versus $400 million at the end of 2011. Newsquest’s assets and liabilities at June 24, 2012 and December 25, 2011 were translated from the British pound to U.S. dollars at an exchange rate of 1.56. For the second quarter, Newsquest’s financial results were translated from the British pound to U.S. dollars at an average rate of 1.59 for 2012 compared to 1.63 last year.

The Company is exposed to foreign exchange rate risk primarily due to its operations in the United Kingdom, for which the British pound is the functional currency. If the price of the British pound against the U.S. dollar had been 10% more or less than the actual price, operating income for the second quarter of 2012 would have increased or decreased approximately 1%.

Looking ahead, the Company expects to fund capital expenditures, interest, dividends, share repurchases, contributions to its pension plans, investments in strategic initiatives and other operating requirements through cash flows from operations. The Company expects to fund debt maturities, acquisitions and investments through a combination of cash flows from operations, borrowing under its credit agreements or funds raised in the capital or credit markets. The Company’s financial and operating performance and its ability to generate sufficient cash flow for these purposes and to maintain compliance with credit facility covenants are subject to certain risk factors as noted in the section below titled “Certain Factors Affecting Forward-Looking Statements.”

Non-GAAP Liquidity Measure

The Company’s free cash flow, a non-GAAP liquidity measure, was $140 million for the quarter ended June 24, 2012 and $288 million year-to-date. Free cash flow, which the Company reconciles to “Net cash flow from operating activities,” is cash flow from operations reduced by “Purchase of property, plant and equipment” as well as “Payments for investments” and increased by “Proceeds from investments”. The Company believes that free cash flow is a useful measure for management and investors to evaluate the level of cash generated by operations and the ability of its operations to fund investments in new and existing businesses, return cash to shareholders under the Company’s new capital program, repay indebtedness, add to the Company’s cash balance, or to use in other discretionary activities. Management uses free cash flow to monitor cash available for repayment of indebtedness and in its discussions with the investment community.

Reconciliations from “Net cash flow from operating activities” to “Free cash flow” follow:

 

In thousands of dollars             

Second Quarter

   2012     2011  

Net cash flow from operating activities

   $ 154,495     $ 190,726  

Purchase of property, plant and equipment

     (20,187     (16,623

Payments for investments

     —          (14,322

Proceeds from investments

     6,067       20,216  
  

 

 

   

 

 

 

Free cash flow

   $ 140,375     $ 179,997  
  

 

 

   

 

 

 

 

16


Year-to-Date

   2012     2011  

Net cash flow from operating activities

   $ 316,582     $ 414,808  

Purchase of property, plant and equipment

     (38,352     (29,251

Payments for investments

     (500     (14,797

Proceeds from investments

     10,393       25,681  
  

 

 

   

 

 

 

Free cash flow

   $ 288,123     $ 396,441  
  

 

 

   

 

 

 

Net cash flow from operating activities reflects cash contributions to the Gannett Retirement Plan, the Company’s principal retirement plan, of $22 million and $76 million in the second quarter and first six months of 2012, respectively.

Certain Factors Affecting Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q contain forward-looking information. The words “expect,” “intend,” “believe,” “anticipate,” “likely,” “will” and similar expressions generally identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated in the forward-looking statements. The Company is not responsible for updating or revising any forward-looking statements, whether the result of new information, future events or otherwise, except as required by law.

Potential risks and uncertainties which could adversely affect the Company’s results include, without limitation, the following factors: (a) increased consolidation among major retailers or other events which may adversely affect business operations of major customers and depress the level of local and national advertising; (b) a potential increase in competition for the Company’s digital segment businesses; (c) a decline in viewership of major networks and local news programming resulting from increased competition or other factors; (d) a continuance of the generally soft economic conditions in the U.S. and the UK or a further economic downturn leading to a continuing or accelerated decrease in circulation or local, national or classified advertising; (e) a further decline in general print readership and/or advertiser patterns as a result of competitive alternative media or other factors; (f) an increase in newsprint or syndication programming costs over the levels anticipated; (g) labor disputes which may cause revenue declines or increased labor costs; (h) acquisitions of new businesses or dispositions of existing businesses; (i) rapid technological changes and frequent new product introductions prevalent in electronic publishing; (j) an increase in interest rates; (k) a weakening in the British pound to U.S. dollar exchange rate; (1) volatility in financial and credit markets which could affect the value of retirement plan assets and the Company’s ability to raise funds through debt or equity issuances; (m) changes in the regulatory environment; (n) credit rating downgrades, which could affect the availability and cost of future financing; (o) adverse outcomes in proceedings with governmental authorities or administrative agencies; and (p) general economic, political and business conditions; and (q) an other-than-temporary decline in operating results and enterprise value that could lead to further non-cash goodwill, other intangible asset, investment or property, plant and equipment impairment charges. The Company continues to monitor the uneven economic recovery in the U.S., as well as new and developing competition and technological change, to evaluate whether any indicators of impairment exist, particularly for those reporting units where fair value is closer to carrying value.

 

17


CONDENSED CONSOLIDATED BALANCE SHEETS

Gannett Co., Inc. and Subsidiaries

In thousands of dollars (except per share amounts)

 

     Jun. 24, 2012     Dec. 25, 2011  
     (Unaudited)        

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 202,089     $ 166,926  

Trade receivables, less allowance for doubtful receivables (2012 - $30,867, 2011 - $34,646)

     623,431       693,194  

Other receivables

     19,487       17,247  

Inventories

     62,357       49,122  

Deferred income taxes

     25,054       22,771  

Prepaid expenses and other current assets

     87,041       106,631  

Assets held for sale

     27,089       19,654  
  

 

 

   

 

 

 

Total current assets

     1,046,548       1,075,545  
  

 

 

   

 

 

 

Property, plant and equipment

    

Cost

     4,094,935       4,106,681  

Less accumulated depreciation

     (2,515,651     (2,466,454
  

 

 

   

 

 

 

Net property, plant and equipment

     1,579,284       1,640,227  
  

 

 

   

 

 

 

Intangible and other assets

    

Goodwill

     2,878,663       2,864,885  

Indefinite-lived and amortizable intangible assets, less accumulated amortization

     492,501       502,195  

Deferred income taxes

     168,524       208,650  

Investments and other assets

     297,671       324,948  
  

 

 

   

 

 

 

Total intangible and other assets

     3,837,359       3,900,678  
  

 

 

   

 

 

 

Total assets

   $ 6,463,191     $ 6,616,450  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

18


CONDENSED CONSOLIDATED BALANCE SHEETS

Gannett Co., Inc. and Subsidiaries

In thousands of dollars (except per share amounts)

 

     Jun. 24, 2012     Dec. 25, 2011  
     (Unaudited)        

LIABILITIES AND EQUITY

    

Current liabilities

    

Accounts payable and current portion of film contracts payable

   $ 193,002     $ 215,975  

Compensation, interest and other accruals

     386,923       431,934  

Dividends payable

     46,640       18,935  

Income taxes

     47,293       3,658  

Deferred income

     243,996        231,435  
  

 

 

   

 

 

 

Total current liabilities

     917,854       901,937  
  

 

 

   

 

 

 

Income taxes

     100,944       112,088  

Long-term debt

     1,662,782       1,760,363  

Postretirement medical and life insurance liabilities

     158,304       163,699  

Pension liabilities

     823,350        908,110  

Other long-term liabilities

     227,340       258,228  
  

 

 

   

 

 

 

Total liabilities

     3,890,574       4,104,425  
  

 

 

   

 

 

 

Commitments and contingent liabilities (See Note 14)

    

Equity

    

Gannett Co., Inc. shareholders’ equity

    

Preferred stock of $1 par value per share Authorized: 2,000,000 shares; Issued: none

     —          —     

Common stock of $1 par value per share Authorized: 800,000,000 shares; Issued: 324,418,632 shares

     324,419       324,419  

Additional paid-in capital

     611,799       617,727  

Retained earnings

     7,370,460       7,276,200  

Accumulated other comprehensive loss

     (584,568     (595,839
  

 

 

   

 

 

 
     7,722,110       7,622,507  
  

 

 

   

 

 

 

Less treasury stock, 92,997,574 shares and 87,381,638 shares, respectively, at cost

     (5,355,946     (5,294,616
  

 

 

   

 

 

 

Total Gannett Co., Inc. shareholders’ equity

     2,366,164       2,327,891  
  

 

 

   

 

 

 

Noncontrolling interests

     206,453       184,134  
  

 

 

   

 

 

 

Total equity

     2,572,617       2,512,025  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,463,191     $ 6,616,450   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

19


CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Gannett Co., Inc. and Subsidiaries

Unaudited, in thousands of dollars (except per share amounts)

 

     Thirteen Weeks Ended        
     Jun. 24, 2012     Jun. 26, 2011     % Inc
(Dec)
 

Net Operating Revenues:

      

Publishing advertising

   $ 594,262     $ 646,864       (8.1

Publishing circulation

     263,938       265,433       (0.6

Digital

     181,326       173,447       4.5  

Broadcasting

     205,381       184,353       11.4  

All other

     62,133       64,842       (4.2
  

 

 

   

 

 

   

 

 

 

Total

     1,307,040       1,334,939       (2.1
  

 

 

   

 

 

   

 

 

 

Operating Expenses:

      

Cost of sales and operating expenses, exclusive of depreciation

     720,889       739,654       (2.5

Selling, general and administrative expenses, exclusive of depreciation

     316,301       297,196       6.4  

Depreciation

     40,157       42,070       (4.5

Amortization of intangible assets

     8,078       7,871       2.6  

Facility consolidation charges

     5,097       6,394       (20.3
  

 

 

   

 

 

   

 

 

 

Total

     1,090,522       1,093,185       (0.2
  

 

 

   

 

 

   

 

 

 

Operating income

     216,518       241,754       (10.4
  

 

 

   

 

 

   

 

 

 

Non-operating (expense) income:

      

Equity income in unconsolidated investees, net

     8,663        7,973       8.7  

Interest expense

     (36,142     (44,741     (19.2

Other non-operating items

     (2,280     3,841       ***   
  

 

 

   

 

 

   

 

 

 

Total

     (29,759     (32,927     (9.6
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     186,759       208,827       (10.6

Provision for income taxes

     51,200       43,300       18.2   
  

 

 

   

 

 

   

 

 

 

Net income

     135,559       165,527       (18.1

Net income attributable to noncontrolling interests

     (15,670     (14,000     11.9   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Gannett Co., Inc.

   $ 119,889     $ 151,527       (20.9
  

 

 

   

 

 

   

 

 

 

Net income per share – basic

   $ 0.51     $ 0.63       (19.0

Net income per share – diluted

   $ 0.51     $ 0.62       (17.7

Dividends declared per share

   $ 0.20     $ 0.04       ***  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

20


CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Gannett Co., Inc. and Subsidiaries

Unaudited, in thousands of dollars (except per share amounts)

 

     Twenty-six Weeks Ended        
     Jun. 24, 2012     Jun. 26, 2011     % Inc
(Dec)
 

Net Operating Revenues:

      

Publishing advertising

   $ 1,145,700     $ 1,248,600       (8.2

Publishing circulation

     527,274       533,646       (1.2

Digital

     349,678       331,041       5.6  

Broadcasting

     381,554       348,235       9.6  

All other

     121,421       124,678       (2.6
  

 

 

   

 

 

   

 

 

 

Total

     2,525,627       2,586,200       (2.3
  

 

 

   

 

 

   

 

 

 

Operating Expenses:

      

Cost of sales and operating expenses, exclusive of depreciation

     1,443,129       1,457,169       (1.0

Selling, general and administrative expenses, exclusive of depreciation

     624,620       594,743       5.0  

Depreciation

     79,860       83,708       (4.6

Amortization of intangible assets

     15,957       16,160       (1.3

Facility consolidation charges

     9,885       14,050       (29.6
  

 

 

   

 

 

   

 

 

 

Total

     2,173,451       2,165,830       0.4  
  

 

 

   

 

 

   

 

 

 

Operating income

     352,176       420,370       (16.2
  

 

 

   

 

 

   

 

 

 

Non-operating (expense) income:

      

Equity income in unconsolidated investees, net

     12,975        11,431       13.5  

Interest expense

     (75,713     (91,370     (17.1

Other non-operating items

     (245     5,138       ***  
  

 

 

   

 

 

   

 

 

 

Total

     (62,983     (74,801     (15.8
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     289,193       345,569       (16.3

Provision for income taxes

     77,800       81,900       (5.0
  

 

 

   

 

 

   

 

 

 

Net income

     211,393       263,669       (19.8

Net income attributable to noncontrolling interests

     (23,281     (21,649     7.5  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Gannett Co., Inc.

   $ 188,112     $ 242,020       (22.3
  

 

 

   

 

 

   

 

 

 

Net income per share – basic

   $ 0.80     $ 1.01       (20.8

Net income per share – diluted

   $ 0.79     $ 0.99       (20.2

Dividends declared per share

   $ 0.40     $ 0.08       ***  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

21


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Gannett Co., Inc. and Subsidiaries

Unaudited, in thousands of dollars

 

     Thirteen Weeks Ended  
     Jun. 24, 2012     Jun. 26, 2011  

Net income

   $ 135,559      $ 165,527  

Other comprehensive income, before tax:

    

Foreign currency translation adjustments

     (12,297     (3,176

Pension and other postretirement benefit items:

    

Amortization of prior service credit, net

     (2,878     (3,021

Amortization of actuarial loss

     13,241       11,030  

Other

     (1,701     —     
  

 

 

   

 

 

 

Pension and other postretirement benefit items

     8,662       8,009  

Other

     94       (3,552
  

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

     (3,541     1,281  

Income tax expense related to components of other comprehensive income

     (3,157     (2,908
  

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (6,698     (1,627
  

 

 

   

 

 

 

Comprehensive income

     128,861       163,900  

Comprehensive income attributable to noncontrolling interests, net of tax

     (12,921     (12,422
  

 

 

   

 

 

 

Comprehensive income attributable to Gannett Co., Inc.

   $ 115,940     $ 151,478  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

22


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Gannett Co., Inc. and Subsidiaries

Unaudited, in thousands of dollars

 

     Twenty-six Weeks Ended  
     Jun. 24, 2012     Jun. 26, 2011  

Net income

   $ 211,393     $ 263,669  

Redeemable noncontrolling interest accretion (income not available to shareholders)

     —          (973

Other comprehensive income, before tax:

    

Foreign currency translation adjustments

     (1,290 )     21,377  

Pension and other postretirement benefit items:

    

Amortization of prior service credit, net

     (5,750     (6,021

Amortization of actuarial loss

     27,396       21,511  

Other

     (1,701     —     
  

 

 

   

 

 

 

Pension and other postretirement benefit items

     19,945       15,490  

Other

     (992     (5,899
  

 

 

   

 

 

 

Other comprehensive income, before tax

     17,663       30,968  

Income tax expense related to components of other comprehensive income

     (7,354     (5,863
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     10,309       25,105  
  

 

 

   

 

 

 

Comprehensive income

     221,702       287,801  

Comprehensive income attributable to noncontrolling interests, net of tax

     (22,319     (22,600
  

 

 

   

 

 

 

Comprehensive income attributable to Gannett Co., Inc.

   $ 199,383     $ 265,201  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

23


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Gannett Co., Inc. and Subsidiaries

Unaudited, in thousands of dollars

 

     Twenty-six Weeks Ended  
     Jun. 24, 2012     Jun. 26, 2011  

Cash flows from operating activities:

    

Net income

   $ 211,393     $ 263,669  

Adjustments to reconcile net income to operating cash flows:

    

Depreciation and amortization

     95,817       99,868  

Facility consolidation charges

     9,885       14,050  

Pension contributions, net of pension expense

     (76,266     (21,504

Equity income in unconsolidated investees, net

     (12,975     (11,431

Stock-based compensation – equity awards

     12,598       14,953  

Change in other assets and liabilities, net

     76,130       55,203  
  

 

 

   

 

 

 

Net cash flow from operating activities

     316,582       414,808  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (38,352     (29,251

Payments for acquisitions, net of cash acquired

     (9,180     (11,925

Payments for investments

     (500     (14,797

Proceeds from investments

     10,393       25,681  

Proceeds from sale of assets

     4,040       34,430  
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (33,599     4,138  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments of borrowings under revolving credit agreements, net

     205,000        99,000  

Payments of unsecured fixed rate notes

     (306,571     (433,432

Dividends paid

     (66,241     (19,211

Cost of common shares repurchased

     (81,010     —     

Proceeds from issuance of common stock upon exercise of stock options

     2,033       1,657  

Repurchase of noncontrolling membership interest

     —          (85,149

Deferred payments for acquisitions

     (1,027     —     
  

 

 

   

 

 

 

Net cash used for financing activities

     (247,816     (437,135
  

 

 

   

 

 

 

Effect of currency exchange rate change on cash

     (4 )     516  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     35,163       (17,673

Balance of cash and cash equivalents at beginning of period

     166,926       183,014  
  

 

 

   

 

 

 

Balance of cash and cash equivalents at end of period

   $ 202,089     $ 165,341  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 24, 2012

NOTE 1 – Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Gannett Co., Inc. (the Company) have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in the Form 10-K and annual report to shareholders. In the opinion of the Company, the financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of results for the interim periods presented.

NOTE 2 – Recent accounting standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in Accounting Standards Codification 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 did not change the items that must be reported in other comprehensive income. The Company adopted the provisions of ASU 2011-05 in the first quarter of 2012 and elected the second option.

NOTE 3 – Facility consolidation charges

The carrying values of property, plant and equipment at certain publishing businesses were evaluated due to facility consolidation efforts. The Company revised the useful lives of certain assets to reflect the use of those assets over a shortened useful life. As a result of the evaluations, the Company recorded pre-tax charges of $5.1 million and $9.9 million in the second quarter and year-to-date 2012, respectively. For the second quarter and year-to-date periods of 2011, the pre-tax charges were $6.4 million and $14.1 million, respectively. Deferred tax benefits were recognized for these charges and, therefore, the quarter and year-to-date after-tax impact was $3.1 million (or $0.01 per share) and $6.0 million (or $0.03 per share) for 2012, respectively. For the second quarter and year-to-date periods of 2011, the after tax impact was $3.9 million (or $0.02 per share) and $8.5 million (or $0.03 per share), respectively.

NOTE 4 – Goodwill and other intangible assets

The following table displays goodwill, indefinite-lived intangible assets, and amortizable intangible assets at June 24, 2012 and December 25, 2011.

 

(in thousands of dollars)              
     Jun. 24, 2012      Dec. 25, 2011  
     Gross      Accumulated
Amortization
     Gross      Accumulated
Amortization
 

Goodwill

   $ 2,878,663       $ —         $ 2,864,885       $ —     

Indefinite-lived intangibles:

           

Mastheads and trade names

     93,163         —           93,163         —     

Television station FCC licenses

     255,304         —           255,304         —     

Amortizable intangible assets:

           

Customer relationships

     303,336         182,489         298,437         169,499   

Other

     44,782         21,595         43,624         18,834   

 

25


Customer relationships, which include subscriber lists and advertiser relationships, are amortized on a straight-line basis over four to 25 years. Other intangibles primarily include developed technology, patents and amortizable trade names. These assets were assigned lives of between three and 21 years and are amortized on a straight-line basis.

The following table summarizes the changes in the Company’s net goodwill balance through June 24, 2012.

 

(in thousands of dollars)                         
     Publishing     Digital     Broadcasting     Total  

Balance at Dec. 25, 2011

        

Goodwill

   $ 7,643,255     $ 680,489     $ 1,618,522     $ 9,942,266  

Accumulated impairment losses

     (7,050,778     (26,603     —          (7,077,381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at Dec. 25, 2011

     592,477       653,886       1,618,522       2,864,885  
  

 

 

   

 

 

   

 

 

   

 

 

 

Activity during the period

        

Acquisitions and adjustments

     3,895        12,677       —          16,572  

Foreign currency exchange rate changes

     —          (2,781 )     (13     (2,794
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     3,895       9,896       (13     13,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Jun. 24, 2012

        

Goodwill

     7,647,150       690,385       1,618,509       9,956,044  

Accumulated impairment losses

     (7,050,778     (26,603     —          (7,077,381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at Jun. 24, 2012

   $ 596,372     $ 663,782     $ 1,618,509     $ 2,878,663  
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 5 – Long-term debt

The long-term debt of the Company is summarized below:

 

(in thousands of dollars)              
     Jun. 24, 2012      Dec. 25, 2011  

Unsecured notes bearing fixed rate interest at 6.375% repaid April 2012

   $ —         $ 306,534   

Borrowings under revolving credit agreements expiring September 2014

     440,000         235,000   

Unsecured notes bearing fixed rate interest at 8.75% due November 2014

     247,977         247,609   

Unsecured notes bearing fixed rate interest at 10% due June 2015

     60,360         59,522   

Unsecured notes bearing fixed rate interest at 6.375% due September 2015

     248,236         247,995   

Unsecured notes bearing fixed rate interest at 10% due April 2016

     171,912         169,775   

Unsecured notes bearing fixed rate interest at 9.375% due November 2017

     247,349         247,168   

Unsecured notes bearing fixed rate interest at 7.125% due September 2018

     246,948         246,760   
  

 

 

    

 

 

 

Total long-term debt

   $ 1,662,782       $ 1,760,363   
  

 

 

    

 

 

 

For the first six months of 2012, the Company’s long-term debt was reduced by $97.6 million reflecting net debt repayments of $102 million partially offset by debt discount amortization.

In April 2012, the Company repaid its 6.375% fixed rate notes using borrowings under the credit agreements. On June 24, 2012, the Company had unused borrowing capacity of $665 million under its revolving credit agreements. In addition, its revolving credit agreements allow the Company to borrow at least $1 billion of additional unsecured debt (unrestricted as to purpose) guaranteed by the guarantor subsidiaries under these credit agreements. This borrowing limit is subject to increases depending upon the Company’s total leverage ratio.

 

26


NOTE 6 – Retirement plans

The Company and its subsidiaries have various retirement plans, including plans established under collective bargaining agreements. The Gannett Retirement Plan is the Company’s principal retirement plan. The Company’s retirement plan costs, which include costs for qualified and nonqualified plans, are presented in the following table:

 

(in thousands of dollars)             
     Thirteen Weeks Ended     Twenty-six Weeks Ended  
     Jun. 24,
2012
    Jun. 26,
2011
    Jun. 24,
2012
    Jun. 26,
2011
 

Service cost-benefits earned during the period

   $ 1,747      $ 1,841     $ 3,779     $ 3,946  

Interest cost on benefit obligation

     38,077        41,635       77,731       84,507  

Expected return on plan assets

     (47,145     (51,424     (94,794     (104,523

Amortization of prior service cost

     1,917        1,859       3,845       3,734  

Amortization of actuarial loss

     12,919        9,508       26,424       18,789  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense for Company-sponsored retirement plans

     7,515        3,419       16,985       6,453  

Settlement charges

     5,423        —          5,423       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total retirement plan cost

   $ 12,938      $ 3,419     $ 22,408     $ 6,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

For the twenty-six weeks ended June 24, 2012, the Company made contributions to the Gannett Retirement Plan (GRP) totaling $76 million. The Company contributed an additional $18 million to the GRP early in the third quarter of 2012. The President signed into law the Moving Ahead for Progress in the 21st Century Act or MAP–21 (H.R.4348) in July 2012. The bill includes, among other things, funding stabilization provisions that would affect required contributions for 2012 and 2013. Detailed guidance necessary to determine the precise impact of this legislation has not been issued. However, the Company expects no additional contributions to the GRP will be required for the remainder of 2012 based on the new legislation and a lower contribution level for 2013.

During the second quarter of 2012, the Company recorded settlement charges totaling $5.4 million as a result of the costs of settlements exceeding the sum of service and interest costs for one of the Company’s retirement plans.

NOTE 7 – Postretirement benefits other than pension

The Company provides health care and life insurance benefits to certain retired employees who meet age and service requirements. Most of the Company’s retirees contribute to the cost of these benefits and retiree contributions are increased as actual benefit costs increase. The Company’s policy is to fund benefits as claims and premiums are paid. Postretirement benefit costs for health care and life insurance are presented in the following table:

 

(in thousands of dollars)             
     Thirteen Weeks Ended     Twenty-six Weeks Ended  
     Jun. 24,
2012
    Jun. 26,
2011
    Jun. 24,
2012
    Jun. 26,
2011
 

Service cost-benefits earned during the period

   $ 98     $ 130     $ 273     $ 305  

Interest cost on net benefit obligation

     1,822       2,227       3,872       4,602  

Amortization of prior service credit

     (4,795     (4,880     (9,595     (9,755

Amortization of actuarial loss

     322       1,522       972       2,722  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit credit

   $ (2,553   $ (1,001   $ (4,478   $ (2,126
  

 

 

   

 

 

   

 

 

   

 

 

 

 

27


NOTE 8 – Income taxes

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $77.7 million as of December 25, 2011 and $83.8 million as of June 24, 2012. These amounts reflect the federal tax benefit of state tax deductions. Excluding the federal tax benefit of state tax deductions, the total amount of unrecognized tax benefits as of December 25, 2011 was $110.3 million and as of June 24, 2012 was $113.6 million. The $3.3 million increase reflects additions in the current year of $6.4 million and an increase for prior year tax positions of $9.0 million. These increases are partially offset by reductions for tax positions from prior years of $10.1 million, tax settlements of $1.2 million and the lapse of statutes of limitations of $0.9 million.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company also recognizes as a component of income tax expense interest income attributable to overpayment of income tax and interest credits for the reversal of interest expense previously recorded for uncertain tax positions which are subsequently released. The Company recognized a net benefit from the reversal of interest and penalty expense of $2.0 million during the second quarter of 2012, and recognized a net interest and penalty expense of $0.5 million during the second quarter of 2011. The net interest and penalty benefit recognized in the second quarter of 2012 is primarily from the release of tax reserves. The amount of net accrued interest and penalties related to uncertain tax benefits as of December 25, 2011, was approximately $34.8 million and as of June 24, 2012, was approximately $30.9 million.

The Company files income tax returns in the U.S. and various state and foreign jurisdictions. The 2009 through 2011 tax years remain subject to examination by the IRS. The 2005 through 2011 tax years generally remain subject to examination by state authorities, and the years 2009-2011 are subject to examination in the UK. In addition, tax years prior to 2005 remain subject to examination by certain states primarily due to the filing of amended tax returns upon settlement of the IRS examination for those years and ongoing state audits.

It is reasonably possible that the amount of unrecognized benefits with respect to certain of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations or other regulatory developments. At this time, the Company estimates that the amount of its gross unrecognized tax positions may decrease by up to $49.3 million within the next 12 months.

 

28


NOTE 9 – Supplemental equity information

The following table summarizes equity account activity for the twenty-six week periods ended June 24, 2012 and June 26, 2011.

 

(in thousands of dollars)    Gannett Co.,
Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance at Dec. 25, 2011

   $ 2,327,891     $ 184,134     $ 2,512,025  

Comprehensive income:

      

Net income

     188,112       23,281       211,393  

Other comprehensive income

     11,271       (962     10,309  
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     199,383       22,319       221,702  

Dividends declared

     (93,852     —          (93,852

Stock-based compensation

     12,598       —          12,598  

Treasury shares acquired

     (81,010     —          (81,010

Other activity

     1,154       —          1,154  
  

 

 

   

 

 

   

 

 

 

Balance at Jun. 24, 2012

   $ 2,366,164     $ 206,453     $ 2,572,617  
  

 

 

   

 

 

   

 

 

 

 

(in thousands of dollars)    Gannett Co.,
Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance at Dec. 26, 2010

   $ 2,163,754     $ 170,319     $ 2,334,073  

Comprehensive income:

      

Net income

     242,020       21,649       263,669  

Redeemable noncontrolling interest accretion (income not available to shareholders)

     —          (973     (973

Other comprehensive income

     23,181       1,924       25,105  
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     265,201       22,600       287,801  

Dividends declared

     (19,202     —          (19,202

Stock-based compensation

     14,953       —          14,953  

401(k) match

     12,236       —          12,236  

Other activity

     1,811       63       1,874  
  

 

 

   

 

 

   

 

 

 

Balance at Jun. 26, 2011

   $ 2,438,753     $ 192,982      $ 2,631,735   
  

 

 

   

 

 

   

 

 

 

 

29


NOTE 10 – Fair value measurement

The Company measures and records in the accompanying condensed consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level 1   -    Quoted market prices in active markets for identical assets or liabilities;
Level 2   -    Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3   -    Unobservable inputs developed using estimates and assumptions developed by the company, which reflect those that a market participant would use.

The following table summarizes the Company’s assets and liabilities measured at fair value in the accompanying condensed consolidated balance sheet as of June 24, 2012 and December 25, 2011:

 

(in thousands of dollars)       
     Fair Value Measurements as of
Jun. 24, 2012
 
     Level 1      Level 2      Level 3      Total  

Employee compensation related investments

   $ 30,299       $ —         $ —         $ 30,299   

Rabbi trust investments

     27,345         —           —           27,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 57,644       $ —         $ —         $ 57,644   

Contingent consideration payablea

   $ —         $ —         $ 21,925       $ 21,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 21,925       $ 21,925   

 

     Fair Value Measurements as of
Dec. 25, 2011
 
     Level 1      Level 2      Level 3      Total  

Employee compensation related investments

   $ 17,224       $ —         $ —         $ 17,224   

Rabbi trust investments

     26,162         —           —           26,162   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 43,386       $ —         $ —         $ 43,386   

Contingent consideration payablea

   $ —         $ —         $ 15,808       $ 15,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 15,808       $ 15,808   

 

a 

Under certain acquisition agreements entered into during fiscal 2011 and 2012, the Company has agreed to pay the sellers earn-outs based on the financial performance of the acquired businesses. Contingent consideration payable in the table above represents the estimated fair value of future earn-outs payable under such agreements. The fair value of the contingent payments was measured based on the present value of the consideration expected to be transferred. For the twenty-six weeks ended June 24, 2012, the contingent consideration was increased by $13.9 million as a result of new acquisitions, interest accretion and adjustments to fair value. The increase was partially offset by payments of $7.8 million.

The fair value of the Company’s total long-term debt, based principally on quoted prices on less active markets for the individual tranches of debt (level 2), totaled $1.8 billion and $1.9 billion at June 24, 2012 and December 25, 2011, respectively.

 

30


NOTE 11 – Business segment information

The Company has determined that its reportable segments based on its management and internal reporting structures are Publishing, Digital, and Broadcasting. Publishing includes U.S. Community Publishing, Newsquest operations in the UK and the USA TODAY group. The Digital segment includes CareerBuilder, ShopLocal, Planet Discover, Reviewed.com and PointRoll. Broadcasting includes the Company’s 23 television stations and Captivate.

 

(in thousands of dollars)             
     Thirteen weeks ended     % Inc
(Dec)
 
     Jun. 24, 2012     Jun. 26, 2011    

Net Operating Revenues:

      

Publishing

   $ 920,333     $ 977,139       (5.8

Digital

     181,326       173,447       4.5  

Broadcasting

     205,381       184,353       11.4  
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,307,040     $ 1,334,939       (2.1
  

 

 

   

 

 

   

 

 

 

Operating Income (net of depreciation, amortization and facility consolidation charges):

      

Publishing

   $ 104,211     $ 138,646       (24.8

Digital

     36,531       36,173       1.0  

Broadcasting

     94,586       80,405       17.6  

Corporate

     (18,810     (13,470     39.6  
  

 

 

   

 

 

   

 

 

 

Total

   $ 216,518     $ 241,754       (10.4
  

 

 

   

 

 

   

 

 

 

Depreciation, amortization and facility consolidation charges:

      

Publishing

   $ 33,736     $ 37,271       (9.5

Digital

     8,330       7,648       8.9  

Broadcasting

     7,124       7,465       (4.6

Corporate

     4,142       3,951       4.8  
  

 

 

   

 

 

   

 

 

 

Total

   $ 53,332     $ 56,335       (5.3
  

 

 

   

 

 

   

 

 

 
     Twenty-six weeks ended     % Inc
(Dec)
 
     Jun. 24, 2012     Jun. 26, 2011    

Net Operating Revenues:

      

Publishing

   $ 1,794,395     $ 1,906,924       (5.9

Digital

     349,678       331,041       5.6  

Broadcasting

     381,554       348,235       9.6  
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,525,627     $ 2,586,200       (2.3
  

 

 

   

 

 

   

 

 

 

Operating Income (net of depreciation, amortization and facility consolidation charges):

      

Publishing

   $ 166,251     $ 256,243       (35.1

Digital

     52,794       52,258       1.0  

Broadcasting

     167,201       143,864       16.2  

Corporate

     (34,070     (31,995     6.5  
  

 

 

   

 

 

   

 

 

 

Total

   $ 352,176     $ 420,370       (16.2
  

 

 

   

 

 

   

 

 

 

Depreciation, amortization and facility consolidation charges:

      

Publishing

   $ 66,950     $ 76,191       (12.1

Digital

     16,235       15,072       7.7  

Broadcasting

     14,234       14,924       (4.6

Corporate

     8,283       7,731       7.1  
  

 

 

   

 

 

   

 

 

 

Total

   $ 105,702     $ 113,918       (7.2
  

 

 

   

 

 

   

 

 

 

 

31


NOTE 12 – Earnings per share

The Company’s earnings per share (basic and diluted) are presented below:

 

(in thousands except per share amounts)    Thirteen weeks ended      Twenty-six weeks ended  
     Jun. 24, 2012      Jun. 26, 2011      Jun. 24, 2012      Jun. 26, 2011  

Net income attributable to Gannett Co., Inc.

   $ 119,889       $ 151,527       $ 188,112       $ 242,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     233,334         240,311         234,807         240,012   

Effect of dilutive securities

           

Stock options

     679         1,451         909         1,449   

Restricted stock

     2,490         2,233         2,561         2,191   

Performance share units

     633         —           497         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - diluted

     237,136         243,995         238,774         243,652   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share-basic

   $ 0.51       $ 0.63       $ 0.80       $ 1.01   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share-diluted

   $ 0.51       $ 0.62       $ 0.79       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 13 – Consolidated Statement of Cash Flows

Cash paid in 2012 and 2011 for income taxes and interest (net of amounts capitalized) was as follows:

 

(in thousands of dollars)    Thirteen Weeks Ended      Twenty-six Weeks Ended  
     Jun. 24, 2012      Jun. 26, 2011      Jun. 24, 2012      Jun. 26, 2011  

Income taxes

   $ 13,748       $ 32,098       $ 18,965       $ 68,077   

Interest

   $ 52,392       $ 66,477       $ 75,263       $ 91,106   

NOTE 14 – Commitments, Contingencies and Other Matters

The Company and a number of its subsidiaries are defendants in judicial and administrative proceedings involving matters incidental to their business. The Company’s management does not believe that any material liability will be imposed as a result of these matters.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company believes that its market risk from financial instruments, such as accounts receivable, accounts payable and debt, is not material. The Company is exposed to foreign exchange rate risk primarily due to its operations in the United Kingdom, for which the British pound is the functional currency. If the price of the British pound against the U.S. dollar had been 10% more or less than the actual price, operating income for the second quarter of 2012 would have increased or decreased approximately 1%.

At the end of the second quarter of 2012, the Company had approximately $440 million in long-term floating rate obligations outstanding. A 50 basis points increase or decrease in the average interest rate for these obligations would result in an increase or decrease in annualized interest expense of $2.2 million.

The fair value of the Company’s long-term debt, based on quoted market prices for the individual tranches of debt, totaled $1.8 billion and $1.9 billion at June 24, 2012 and December 25, 2011, respectively.

 

32


Item 4. Controls and Procedures

Based on their evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective, as of June 24, 2012, to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Company’s internal controls or in other factors during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Environmental

There have been no material developments with respect to the Company’s potential liability for environmental matters previously reported in the Company’s 2011 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Period

   (a) Total
Number of
Shares
Purchased
     (b) Average
Price Paid
per Share
     (c) Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Program
     (d) Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Program
 

3/26/12 – 4/29/12

     738,400       $ 14.46         738,400       $ 257,860,197   

4/30/12 – 5/27/12

     1,244,000       $ 13.50         1,244,000       $ 241,065,540   

5/28/12 – 6/24/12

     1,404,500       $ 12.82         1,404,500       $ 223,054,677   

Total

     3,386,900       $ 13.43         3,386,900       $ 223,054,677   

On February 21, 2012, the Company’s Board of Directors approved a new program to repurchase up to $300 million in Gannett common stock (replacing the $1 billion program). There is no expiration date for the new $300 million stock repurchase program. However, it is targeted to be completed over the next two years. All shares repurchased were part of a publicly announced repurchase program.

In addition to the above, as of June 24, 2012, 144,000 shares were repurchased as part of the publicly announced repurchase program at an average price of $13.30, but were settled subsequent to the end of the quarter. The effect of those repurchases decreased the maximum dollar value available under the program to $221,140,187.

Item 6. Exhibits

Incorporated by reference to the Exhibit Index attached hereto and made a part hereof.

 

33


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 1, 2012       GANNETT CO., INC.
     

/s/ Teresa S. Gendron

      Teresa S. Gendron
      Vice President and Controller
      (on behalf of Registrant and as Chief Accounting Officer)

 

34


EXHIBIT INDEX

 

Exhibit
Number

  

Exhibit

  

Location

  3-1    Third Restated Certificate of Incorporation of Gannett Co., Inc.    Incorporated by reference to Exhibit 3.1 to Gannett Co., Inc.’s Form 10-Q for the fiscal quarter ended April 1, 2007.
  3-2    Amended by-laws of Gannett Co., Inc.    Incorporated by reference to Exhibit 3-2 to Gannett Co., Inc.’s Form 10-Q for the fiscal quarter ended June 27, 2010.
  4-1    Specimen Certificate for Gannett Co., Inc.’s common stock, par value $1.00 per share.    Incorporated by reference to Exhibit 2 to Gannett Co., Inc.’s Form 8-B filed on June 14, 1972.
10-1    Description of Gannett Co., Inc.’s Non-Employee Director Compensation*    Attached.
10-2    Termination Benefits Agreement dated July 23, 2012 between Gannett Co., Inc. and Victoria D. Harker.*    Incorporated by reference to Exhibit 99-2 to Gannett Co., Inc.’s Form 8-K filed on June 22, 2012.
31-1    Rule 13a-14(a) Certification of CEO.    Attached.
31-2    Rule 13a-14(a) Certification of CFO.    Attached.
32-1    Section 1350 Certification of CEO.    Attached.
32-2    Section 1350 Certification of CFO.    Attached.
101    The following financial information from Gannett Co., Inc. Quarterly Report on Form 10-Q for the quarter ended June 24, 2012, formatted in XBRL includes: (i) Condensed Consolidated Balance Sheets at June 24, 2012 and December 25, 2011, (ii) Condensed Consolidated Statements of Income for the fiscal quarters ended June 24, 2012 and June 26, 2011, (iii) Condensed Consolidated Statements of Comprehensive Income for the fiscal quarters ended June 24, 2012 and June 26, 2011, (iv) Condensed Consolidated Cash Flow Statements for the fiscal year-to-date periods ended June 24, 2012 and June 26, 2011, and (v) the Notes to Condensed Consolidated Financial Statements.    Attached.

 

* Asterisk identifies management contracts and compensatory plans or arrangements.

 

35