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AHC > SEC Filings for AHC > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for A. H. BELO CORP

Form 10-Q for A. H. BELO CORP


31-Oct-2012

Quarterly Report


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

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

The following information should be read in conjunction with the Company's Financial Statements filed as part of this report.

Overview

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

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

Overview of Significant Activity in the Third Quarter of 2012

During the third quarter of 2012, the Company continued to encounter strong competition for print advertising revenues from digital alternatives and other advertising mediums, but realized improvements in printing and distribution revenues as a result of new and expanded printing and distribution contracts. Total revenues declined by 1.0 percent when compared to the third quarter of 2011, due to advertising and circulation, partially offset by stronger printing and distribution revenues. Operating expenses decreased 2.6 percent, reflecting lower personnel and production-related expenses.

The Company continues to develop and market its portfolio of digital offerings, including 508 Digital, in which The Dallas Morning News provides marketing services such as development of mobile Web sites, search engine marketing and optimization, and social media marketing for its customers' Web presence. Additionally, in the third quarter, The Dallas Morning News announced the Company entered into an operating agreement with a local advertising agency, forming Your Speakeasy LLC, which targets larger business customers and provides turnkey social media account management and content development services.

During July 2012, a Rhode Island court approved a consent judgment related to past tax assessments of real estate by the City of Providence. Under this judgment, The Providence Journal received a credit of $2,500 to be applied against future tax payments. Accordingly, other production, distribution and operating costs were reduced by $2,500 in the third quarter of 2012.

On September 7, 2012, the Company paid a dividend of $0.06 per share, or $1,371, to its shareholders of record and to holders of outstanding RSU awards at the close of business on August 17, 2012. On September 13, 2012, the Company declared a special dividend of $0.24 per share and a quarterly dividend of $0.06 per share, both payable December 7, 2012, to shareholders of record and to holders of outstanding RSU awards at the close of business on November 16, 2012.

During the third quarter of 2012 the Company's Board of Directors authorized the repurchase of up to 1,000 shares of the Company's Series A or Series B Common Stock.


Table of Contents

                             Results of Operations



                                                 Three Months Ended                                Nine Months Ended
                                                    September 30,                                    September 30,
                                                     Percentage                                       Percentage
                                       2012            Change            2011           2012            Change            2011
Total net operating revenues         $ 108,881              (1.0 )%    $ 109,990      $ 322,858              (4.1 )%    $ 336,651
Total operating costs and expenses     107,405              (2.6 )%      110,268        325,678              (6.4 )%      347,762
Total other income (expense), net          466             (26.3 )%          632          1,916              (2.5 )%        1,965

Income (loss) before income taxes        1,942                nm             354           (904 )           (90.1 )%       (9,146 )
Income tax expense                         501               2.5 %           489          1,286             (71.7 )%        4,538

Net income (loss)                        1,441                nm            (135 )       (2,190 )           (84.0 )%      (13,684 )
Net loss attributable to
noncontrolling interests                   (42 )              nm              -             (42 )              nm              -

Net income (loss) attributable to
A. H. Belo Corporation               $   1,483                nm       $    (135 )    $  (2,148 )           (84.3 )%    $ (13,684 )

"nm" - Percent change is not meaningful.

Newspaper Revenues

The Dallas Morning News

The table below sets forth the components of The Dallas Morning News' net operating revenues for the three and nine months ended September 30, 2012 and 2011:

                                                              Three Months Ended September 30,                                        Nine Months Ended September 30,
                                                           Percent                                     Percent                     Percent                                      Percent
                                                          of Total       Percentage                   of Total                    of Total       Percentage                    of Total
                                               2012       Revenues         Change          2011       Revenues        2012        Revenues         Change          2011        Revenues
Advertising and marketing services           $ 41,621         60.0%           (2.0)%     $ 42,466         59.8%     $ 122,647         59.6%           (7.2)%     $ 132,149         60.4%
Display                                        15,057                         (6.2)%       16,048                      45,147                        (14.2)%        52,619
Classified                                      7,128                           1.5%        7,024                      20,476                         (6.5)%        21,894
Preprints                                      13,619                         (2.7)%       13,998                      40,705                         (1.1)%        41,174
Digital                                         5,817                           7.8%        5,396                      16,319                         (0.9)%        16,462

Circulation                                    22,087         31.9%           (3.8)%       22,951         32.4%        66,538         32.4%           (4.6)%        69,717         31.9%
Printing and distribution                       5,638          8.1%             2.3%        5,510          7.8%        16,470         8.0 %           (2.5)%        16,897          7.7%

                                             $ 69,346        100.0%           (2.2)%     $ 70,927        100.0%     $ 205,655       100.0 %           (6.0)%     $ 218,763        100.0%

Display - Revenues decreased for the three months ended September 30, 2012, due to a decline in general advertising, partially offset by an increase in retail advertising. Revenues decreased for the nine months ended September 30, 2012 due to declines in both general and retail advertising, of which approximately $1,076 was attributable to non-recurring advertising associated with the Super Bowl which was held in the Dallas area in February 2011. The improvement in retail advertising for the three months ended September 30, 2012 is due to an increase in food, beverage and electronics advertising.

Classified - Revenues increased for the three months ended September 30, 2012, due to higher employment advertising. Revenues decreased for the nine months ended September 30, 2012, primarily due to a decline in automotive and employment advertising.


Table of Contents

Preprint - Revenues decreased for the three and nine months ended September 30, 2012, due to a decline in newspaper advertising inserts, partially offset by higher home delivery mail advertising.

Digital - Revenues increased for the three months ended September 30, 2012, due to higher automotive, employment and real estate classified advertising and due to growth of marketing services revenue associated with 508 Digital. Revenues decreased for the nine months ended September 30, 2012, primarily due to $1,140 of non-recurring revenue associated with a discontinued digital advertising platform and $420 of non-recurring revenue associated with the 2011 Super Bowl. These revenue declines were partially offset by higher automotive, employment and real estate classified advertising and marketing services revenue associated with 508 Digital.

Advertising revenues from The Dallas Morning News niche publications were $5,727 and $5,608, for the three months ended September 30, 2012 and 2011, respectively, and $16,447 and $16,675, for the nine months ended September 30, 2012 and 2011, respectively. Revenues for Briefing and Al Dia increased for the three and nine months ended September 30, 2012, and revenues associated with Quick decreased by $114 and $830 for the three and nine months ended September 30, 2012, respectively, due to the discontinuance of this publication on August 4, 2011. Advertising revenues from niche publications are a component of total display, classified, preprint and digital revenues of The Dallas Morning News presented above.

Circulation - Revenues decreased for the three and nine months ended September 30, 2012, due to a decline in print home delivery and single copy volumes. This decline was partially offset by a price increase related to digital online delivery. The Dallas Morning News continues to assess and adjust its print and digital consumer pricing and content strategy and continues to focus on building high-quality print and digital audiences by improving and expanding its digital product portfolio.

Printing and distribution - Revenues increased in the three months ended September 30, 2012, due to increased distribution of third-party newspapers, and revenues decreased in the nine months ended September 30, 2012, due to a decline in commercial printing volumes as the Company focused on larger and more profitable customers.

The Providence Journal

The table below sets forth the components of The Providence Journal net
operating revenues for the three and nine months ended September 30, 2012 and
2011:



                                                                          Three Months Ended September 30,                                        Nine Months Ended September 30,
                                                                        Percent                                     Percent                    Percent                                     Percent
                                                                       of Total       Percentage                   of Total                   of Total       Percentage                   of Total
                                                           2012        Revenues         Change          2011       Revenues        2012       Revenues         Change          2011       Revenues
Advertising and marketing services                      $   10,474         45.7%          (12.9)%     $ 12,028        52.9 %     $ 33,702         48.5%          (11.8)%     $ 38,213         55.5%
Display                                                      2,708                         (8.3)%        2,953                      8,614                         (8.1)%        9,369
Classified                                                   3,497                        (19.1)%        4,320                     11,871                        (15.2)%       13,996
Preprints                                                    2,907                         (7.0)%        3,125                      8,788                        (10.3)%        9,800
Digital                                                      1,362                        (16.4)%        1,630                      4,429                        (12.3)%        5,048

Circulation                                                  8,856         38.7%             5.5%        8,396        36.9 %       26,107         37.5%             5.2%       24,809         36.1%
Printing and distribution                                    3,583         15.6%            54.4%        2,320        10.2 %        9,757         14.0%            68.8%        5,780          8.4%

                                                          $ 22,913        100.0%             0.7%     $ 22,744       100.0 %     $ 69,566       100.0 %             1.1%     $ 68,802        100.0%

Display - Revenues decreased in the three and nine months ended September 30, 2012, due to a decline in retail and general advertising.

Classified - Revenues decreased for the three months ended September 30, 2012, due to a decline in legal, automotive, obituaries, and employment advertising, partially offset by an increase in real estate advertising. For the nine months ended September 30, 2012, revenues decreased due to a decline in automotive and employment advertising.


Table of Contents

Preprint - Revenues decreased in the three and nine months ended September 30, 2012, due to a decline in newspaper advertising inserts which was partially offset by increased home delivery mail advertising.

Digital - Revenues decreased for three months ended September 30, 2012, due to a decline in retail display advertising. For the nine months ended September 30, 2012, revenues decreased due to a decline in retail display advertising, partially offset by higher automotive classified advertising.

Circulation - Revenues increased for the three and nine months ended September 30, 2012, due to a change from a buy-sell arrangement with home delivery carriers to a fee for delivery arrangement. Under this new arrangement, higher revenues are recognized which are offset by higher distribution expenses.

Printing and distribution - Revenues increased for the three and nine months ended September 30, 2012, due to The Providence Journal's continued expansion of single copy distribution services for national and local newspapers. The Providence Journal also increased its commercial printing services to existing customers and added a regional newspaper customer, contributing to the growth.

The Press-Enterprise

The table below sets forth the components of The Press-Enterprise net operating
revenues for the three and nine months ended September 30, 2012 and 2011:



                                                      Three Months Ended September 30,                                        Nine Months Ended September 30,
                                                    Percent                                     Percent                    Percent                                     Percent
                                                   of Total       Percentage                   of Total                   of Total       Percentage                   of Total
                                       2012        Revenues         Change          2011       Revenues        2012       Revenues         Change          2011       Revenues
Advertising and marketing services   $  10,028         60.3%           (6.6)%     $ 10,735         65.8%     $ 30,024         63.0%           (8.1)%     $ 32,672         66.6%
Display                                  2,509                           2.8%        2,440                      7,384                         (9.7)%        8,179
Classified                               2,895                        (13.5)%        3,345                      8,706                        (11.3)%        9,819
Preprints                                3,126                         (6.7)%        3,350                      9,384                         (6.7)%       10,056
Digital                                  1,498                         (6.4)%        1,600                      4,550                         (1.5)%        4,618

Circulation                              3,300         19.9%           (3.0)%        3,402         20.8%       10,010         21.0%           (1.6)%       10,173         20.7%
Printing and distribution                3,294         19.8%            51.0%        2,182         13.4%        7,603         16.0%            21.8%        6,241         12.7%

                                       $16,622        100.0%             1.9%     $ 16,319        100.0%     $ 47,637        100.0%           (3.0)%     $ 49,086        100.0%

Display - Revenues increased for the three months ended September 30, 2012, due to an increase in general advertising, partially offset by a decline in retail advertising. Display advertising revenues decreased for the nine months ended September 30, 2012, due to a decline in retail advertising.

Classified - Revenues decreased in the three and nine months ended September 30, 2012, due to a decline in legal, employment, automotive, real estate and other categories.

Preprint - Revenues decreased in the three and nine months ended September 30, 2012, due to a decline in newspaper advertising inserts and home delivery mail advertising.

Digital - Revenues decreased in the three months and nine months ended September 30, 2012, due to a decline in real estate and other digital classified advertising.

Circulation - Revenues decreased in the three and nine months ended September 30, 2012, due to volume declines in daily home delivery and daily and Sunday single copy sales, and the discontinuation of The Business Press publication at the end of the second quarter of 2011.


Table of Contents

Printing and distribution - Revenues increased in the three and nine months ended September 30, 2012, due to new commercial print and home delivery distribution contracts. The Press-Enterprise was notified in October 2012 that the new owners of a significant commercial printing customer would cease printing its publication at the Company's Riverside facility on October 15, 2012, well before the expiration of the multi-year contract. The Company is pursuing multiple remedies and has not identified any losses which are considered probable associated with this customer.

Operating Costs and Expenses

The table below sets forth the components of the Company's operating costs and
expenses for the three and nine months ended September 30, 2012 and 2011:



                                             Three Months Ended                           Nine Months Ended
                                               September 30,                                September 30,
                                                 Percentage                                   Percentage
                                    2012           Change          2011          2012           Change          2011
Salaries, wages and employee
benefits                          $  43,364           (3.6)%     $  44,958     $ 131,992           (8.1)%     $ 143,552
Other production, distribution
and operating costs                  40,614           (3.3)%        41,996       122,835           (6.1)%       130,875
Newsprint, ink and other
supplies                             15,899            8.8 %        14,618        45,242            2.4 %        44,192
Depreciation                          6,219          (15.8)%         7,386        21,680           (6.7)%        23,225
Amortization                          1,309           (0.1)%         1,310         3,929              - %         3,930
Pension plan withdrawal                  -               - %            -             -              nm           1,988

Total operating costs and
expenses                          $ 107,405           (2.6)%     $ 110,268     $ 325,678           (6.4)%     $ 347,762

Salaries, wages and employee benefits decreased for the three and nine months ended September 30, 2012, due to lower headcount and employee related expenses. During the third quarter of 2012, The Providence Journal extended voluntary separation offers to certain employee groups, resulting in the elimination of 11 positions.

Other production, distribution and operating costs decreased for the three and nine months ended September 30, 2012, primarily due to the execution of a consent judgment related to past tax assessments of real estate by the City of Providence. Under this judgment, The Providence Journal received a credit of $2,500 to be applied against future tax payments. Reduced outside service costs, including legal, consulting and temporary services, also accounted for the lower expenses for the nine months ended September 30, 2012.

Newsprint, ink and other supplies expense increased for the three months and nine months ended September 30, 2012, due to greater cost of supplements and ink. During the three months ended September 30, 2012, the Company's publishing operations used 16,348 metric tons of newsprint at an average cost of $632 per metric ton compared to 16,164 metric tons, at average cost of $635 per metric ton for the same period in 2011. For the nine months ended September 30, 2012, the Company's publishing operations used 47,609 metric tons of newsprint at an average cost of $629 per metric ton compared to 49,895 metric tons, at average cost of $641 per metric ton for the same period in 2011.

Depreciation expense decreased for the three and nine months ended September 30, 2012, due to lower depreciable fixed assets as a result of reduced capital spending in recent years. The lower expense was partially offset by additional depreciation expense of $370 and $1,881 in the first and second quarters of 2012 due to a change in the estimated life of certain production assets.

Pension plan withdrawal loss was $1,988 for the nine months ended September 30, 2011. This loss is related to the finalization of the allocation of the assets and liabilities from the GBD Pension Plan in the second quarter of 2011.

Interest expense related to letters of credit and unused borrowing commitments decreased for the three and nine months ended September 30, 2012. For the nine months ended September 30, 2012, this decrease was partially offset by $114 in interest expense incurred on a settlement made with the Internal Revenue Service for a tax matter from prior to the Distribution.


Table of Contents

The Company includes in other income, net, the following items as set forth in the table below:

                                          Three Months Ended September 30,                Nine Months Ended September 30,
                                                         Percentage                                    Percentage
                                        2012               Change         2011          2012             Change          2011
Earnings from equity method
investments                           $    607                (14.4)%     $ 709      $    1,733              (0.7)%     $ 1,746
Interest income                             29                (23.7)%        38             102             (27.7)%         141
Gain (loss) on sale of fixed assets        (68 )                 nm          48             402                nm          (359 )
Recovery of investment previously
written off                                 -                     - %        -               -                  - %         729
Other income                                26                 183.9%       (31 )           185             (15.1)%         218

Total other income, net               $    594                (22.3)%     $ 764      $    2,422              (2.1)%     $ 2,475

Earnings from equity method investments decreased due to losses recognized on the Company's interest in Wanderful, in which the Company invested in the fourth quarter of 2011. These losses partially offset the investment income recognized from Classified Ventures and the positive current year impact of the Company no longer owning an interest in Belo Investment, LLC, which previously resulted in the Company recognizing investment losses. Additionally, during the first quarter of 2011, the Company recorded a gain of $729 related to the sale of an investment that had been previously written off.

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization

In addition to net income, the Company also evaluates earnings after adjusting for depreciation, amortization, interest and taxes ("EBITDA") and after adding back pension expense, non-cash impairment expense and net investment-related losses, as applicable ("Adjusted EBITDA"). The table below sets forth the Company's EBITDA and Adjusted EBITDA:

                                             Three Months Ended                           Nine Months Ended
                                               September 30,                                September 30,
                                                 Percentage                                   Percentage
                                     2012          Change          2011          2012           Change          2011
Net income (loss) attributable
to A. H. Belo Corporation          $  1,483             nm       $   (135 )    $ (2,148 )          84.3 %     $ (13,684 )
Depreciation and amortization         7,528          (13.4)%        8,696        25,609            (5.7)%        27,155
Interest expense                        128           (3.0)%          132           506            (0.8)%           510
Income tax expense                      501            2.5 %          489         1,286           (71.7)%         4,538

EBITDA                                9,640            5.0 %        9,182        25,253            36.4 %        18,519

Addback:
Pension expense                         849          (46.9)%        1,598         2,897           (58.1)%         6,912

Adjusted EBITDA                    $ 10,489           (2.7)%     $ 10,780      $ 28,150            10.7 %     $  25,431

Neither EBITDA nor Adjusted EBITDA is a measure of financial performance under . . .

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