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

Show all filings for GANNETT CO INC /DE/

Form 10-Q for GANNETT CO INC /DE/


31-Oct-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

Results from Operations

Gannett Co., Inc. (the Company) reported 2012 third quarter earnings per diluted share, on a GAAP (generally accepted accounting principles) basis of $0.56 compared to $0.41 for the third quarter of 2011. Third quarter earnings, as more fully discussed under Operating Revenues, reflect a number of milestones the Company has been working toward. Broadcasting segment revenues reflected record third quarter results; circulation revenue company-wide increased over the prior year for the first time since early 2007; and company-wide digital revenues climbed above 25% of total revenues. Earnings per diluted share on a year-to-date GAAP basis were $1.35 in 2012 compared to $1.40 last year.

Results for the third quarter of 2012 include $8 million in costs due to workforce restructuring ($5 million after-tax or $0.02 per share), non-cash facility consolidation charges of $4 million ($2 million after-tax or $0.01 per share), pension settlement charges totaling $3 million ($2 million after-tax or $0.01 per share), non-cash charges of $3 million affecting non-operating items ($2 million after tax or $0.01 per share) related to a newspaper partnership investment and a $13 million net tax benefit ($0.06 per share). Results for the third quarter of 2011 included $9 million in costs due to workforce restructuring ($5 million after-tax or $0.02 per share) and a non-cash impairment charge for an investment in an online business of $2 million affecting non-operating items ($1 million after tax).

Results for the first nine months of 2012 include $34 million in costs due to workforce restructuring ($20 million after-tax or $0.09 per share), non-cash facility consolidation charges of $14 million ($8 million after-tax or $0.04 per share), pension settlement charges totaling $8 million ($5 million after-tax or $0.02 per share), non-cash charges of $3 million affecting non-operating items ($2 million after tax or $0.01 per share) related to a newspaper partnership investment and a $13 million net tax benefit ($0.06 per share). Results for the first nine months of 2011 included $23 million in costs due to workforce restructuring ($15 million after-tax or $0.06 per share), non-cash facility consolidation charges of $14 million ($8 million after-tax or $0.03 per share), non-cash impairment charge for an investment in an online business of $2 million affecting non-operating items ($1 million after tax) 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

Third Quarter                                     2012            2011          Change
Operating revenues                             $ 1,309,261     $ 1,266,034            3 %
Operating expenses                               1,092,062       1,067,873            2 %

Operating income                               $   217,199     $   198,161           10 %

Non-operating expense                          $    29,891     $    41,581          (28 %)

Net income attributable to Gannett Co., Inc.   $   133,083     $    99,788           33 %
Per share - basic                              $      0.58     $      0.42           38 %
Per share - diluted                            $      0.56     $      0.41           37 %

--------------------------------------------------------------------------------
 Year-to-Date                                      2012            2011          Change
 Operating revenues                             $ 3,834,888     $ 3,852,234           -
 Operating expenses                               3,265,513       3,233,703            1 %

 Operating income                               $   569,375     $   618,531           (8 %)

 Non-operating expense                          $    92,874     $   116,382          (20 %)

 Net income attributable to Gannett Co., Inc.   $   321,195     $   341,808           (6 %)
 Per share - basic                              $      1.38     $      1.42           (3 %)
 Per share - diluted                            $      1.35     $      1.40           (4 %)

Operating Revenues

Operating revenues increased 3% to $1.31 billion for the third quarter of 2012, the largest increase since the fourth quarter of 2006. The improvement is due, in part, to record third quarter Broadcasting segment revenues, which were up 36% compared to last year, as well as increases in both Digital segment and Publishing circulation revenues. Publishing segment revenues declined 3% for the quarter and declined by 5% for the year-to-date periods, as secular change and the slow pace of the economic recovery resulted in softer advertising demands across most categories. Within Publishing segment revenue, circulation revenue increased by almost 6% in the third quarter, marking a change from the past trend and the first time circulation revenues increased since the first quarter of 2007. Circulation revenue for the Company's domestic local publishing business was 10% higher in the third quarter of 2012 with the impact of the continued roll out of the all access content subscription model driving the increase. Broadcasting segment revenues increased 36% for the quarter and 18% for the first nine months of 2012 driven by strong political and Olympic ad demand as well as growth in retransmission revenue. Digital segment revenues were 5% higher for both the quarter and year-to-date period primarily reflecting solid revenue growth at CareerBuilder.

Third quarter 2012 company-wide digital revenues, which include Digital segment revenues and all digital revenues generated and reported by the other business segments, were $335 million, 23% higher compared to the third quarter in 2011 and were approximately 26% of the Company's total operating revenues. For the year-to-date period, company-wide digital revenues were $919 million, 15% higher compared to the same period in 2011. Comparisons for both the quarter and year-to-date periods reflect the continued roll out of the all access content subscription model as well as higher digital advertising and marketing solutions revenue.

Operating Expenses

Operating expenses including facility consolidation, workforce restructuring and pension settlement charges, were slightly higher for the quarter and year-to-date periods in 2012 as compared to the same periods last year. 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 $10 million for the third quarter and $60 million for the year-to-date period in 2012. These expenses are related to the continued roll out of the all access content subscription model, digital website re-launches and digital marketing service initiatives. Publishing segment expenses increased by 1% for the quarter compared to last year, reflecting the impact of continuing efficiency efforts and lower newsprint expense, offset by strategic initiative spending and facility consolidation costs. Publishing segment expenses for the first nine months of 2012 decreased 1% compared to last year as the impact of continuing efficiency efforts and lower newsprint expense was partially offset by strategic initiative spending and higher workforce restructuring costs. Newsprint expense comparisons to the prior year were 11% lower in the quarter and 8% lower for the first nine months of 2012. The increases in Broadcast and Digital segment expenses for the quarter and year-to-date periods were driven by higher costs associated with revenue growth. A separate discussion of operating expenses excluding special items (non-GAAP basis) begins on page 9.

Operating Income

Operating income was $217 million for the third quarter of 2012, an increase of $19 million or 10% compared to the third quarter last year, reflecting significant increases in the Broadcasting and Digital segments, partially offset by a decline in Publishing operating income. Broadcasting segment operating income increased 73% to $119 million for the quarter due to substantial Olympic and political spending as well as higher retransmission revenue. Digital segment operating income was $40 million, up 16% from last year as higher revenues at CareerBuilder were partially offset by higher costs associated with revenue growth and strategic initiative spending. Publishing segment


operating income was $74 million for the quarter, down 32% from last year due to advertising softness, strategic initiative spending and facility consolidation costs. This was partially offset by the impact of company-wide efforts to create efficiencies and lower costs.

Operating income was $569 million for the year-to-date period, a decrease of 8% compared to last year. Broadcasting results for the year-to-date period were up 35% reflecting substantial Olympic, political and retransmission revenue growth. Digital results were up 7%, again principally reflecting higher revenues at CareerBuilder, offset by higher costs including strategic initiatives. For the year-to-date period, Publishing segment results were similarly affected by those factors mentioned for third quarter results as well as an increase in workforce restructuring costs. 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 $133 million for the third quarter of 2012, an increase of 33% compared to 2011. Earnings per diluted share were $0.56 in the third quarter compared to $0.41 last year. For the year-to-date period, net income attributable to Gannett Co., Inc. was $321 million, a decrease of 6% compared to 2011. Earnings per diluted share were $1.35 for the year-to-date period compared to $1.40 last year. These results paralleled the overall change in operating income.

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

Publishing Results

Publishing revenues declined 3% to $890 million from $918 million in the third quarter last year and declined 5% to $2.68 billion for the year-to-date period. Publishing revenue year-over-year comparisons improved sequentially within the third quarter and comparisons were better than prior quarter comparisons this year. In addition, third quarter comparisons were the best year-over-year comparisons since early 2007.

Publishing revenues are generated principally from advertising and circulation sales, which accounted for 62% and 31%, respectively, of total publishing revenues for the third quarter and 63% and 30%, respectively, for the year-to-date period. Advertising revenues include amounts generated 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

                Third Quarter      2012            2011         Change
                Advertising     $   552,676     $   591,676          (7 %)
                Circulation         276,655         262,099           6 %
                All other            60,869          63,989          (5 %)

                Total           $   890,200     $   917,764          (3 %)


                Year-to-Date       2012            2011         Change
                Advertising     $ 1,698,376     $ 1,840,276          (8 %)
                Circulation         803,929         795,745           1 %
                All other           182,290         188,667          (3 %)

                Total           $ 2,684,595     $ 2,824,688          (5 %)

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

Advertising revenues, in thousands of dollars

       Third Quarter                            2012          2011        Change
       Retail                                 $ 281,673     $ 303,008          (7 %)
       National                                  90,582        98,976          (8 %)
       Classified                               180,421       189,692          (5 %)

       Total publishing advertising revenue   $ 552,676     $ 591,676          (7 %)

--------------------------------------------------------------------------------
    Year-to-Date                              2012            2011          Change
    Retail                                 $   871,151     $   938,609           (7 %)
    National                                   276,226         318,757          (13 %)
    Classified                                 550,999         582,910           (5 %)

    Total publishing advertising revenue   $ 1,698,376     $ 1,840,276           (8 %)

Publishing advertising revenues decreased 7% in the third quarter of 2012 to $553 million and decreased 8% for the year-to-date period to $1.70 billion. Advertising continues to be impacted by the slow pace of the economic recovery, weak job growth and certain secular pressures. Third quarter year-over-year comparisons, however, were better than prior quarter comparisons this year. In the U.S., advertising revenues decreased 6% in the quarter and 8% year-to-date. On a constant currency basis, advertising revenues in the UK declined 7% for the third 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% for both the quarter and year-to-date periods to 1.58 this year compared to 1.61 last year.

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

                                      U.S.                Newsquest              Total Constant           Total Publishing
Third Quarter                      Publishing            (in pounds)                Currency                   Segment
Retail                                      (7 %)                   (6 %)                     (7 %)                      (7 %)
National                                    (8 %)                  (12 %)                     (8 %)                      (8 %)
Classified                                  (3 %)                   (8 %)                     (5 %)                      (5 %)

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

                                      U.S.                Newsquest              Total Constant           Total Publishing
Year-to-Date                       Publishing            (in pounds)                Currency                   Segment
Retail                                      (7 %)                   (5 %)                     (7 %)                      (7 %)
National                                   (14 %)                   (3 %)                    (13 %)                     (13 %)
Classified                                  (4 %)                   (7 %)                     (5 %)                      (5 %)

Total                                       (8 %)                   (6 %)                     (7 %)                      (8 %)

Across the Publishing segment in the third quarter, all categories of advertising revenue comparisons were in line with or better than second quarter comparisons. Retail advertising was 7% lower in the third quarter and year-to-date period of 2012 as tepid economic growth impacted advertising demand. National advertising declined 8% for the third quarter and 13% for the first nine months of 2012, driven by soft ad demand domestically and in the UK. Classified advertising revenue at the Company's domestic publishing operations declined 3% for the third quarter of 2012 as compared to the same period last year and was in line with the second quarter prior period comparison. Automotive advertising was 1% higher compared to the third quarter last year, while employment was 4% lower. Real estate advertising, although down 10% compared to the third quarter of 2011, was stronger than the second quarter comparison and reflects modest improvements in the housing market. Third quarter classified advertising comparisons at Newsquest were 8% lower, in pounds, compared to last year.

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

                    U.S.             Newsquest          Total Constant        Total Publishing
Third Quarter    Publishing         (in pounds)            Currency                Segment
Automotive                 1 %               (15 %)                  (1 %)                   (1 %)
Employment                (4 %)               (4 %)                  (4 %)                   (5 %)
Real Estate              (10 %)               (9 %)                 (10 %)                  (11 %)
Legal                      1 %                -                       1 %                     1 %
Other                     (7 %)               (7 %)                  (7 %)                   (8 %)

Total                     (3 %)               (8 %)                  (5 %)                   (5 %)

--------------------------------------------------------------------------------
                   U.S.             Newsquest          Total Constant        Total Publishing
Year-to-Date    Publishing         (in pounds)            Currency                Segment
Automotive               -                  (15 %)                  (2 %)                   (3 %)
Employment               (2 %)               (5 %)                  (3 %)                   (4 %)
Real Estate             (13 %)               (8 %)                 (11 %)                  (12 %)
Legal                    (4 %)               -                      (4 %)                   (4 %)
Other                    (8 %)               (5 %)                  (7 %)                   (8 %)

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

Circulation revenues increased 6% for the third quarter of 2012 to $277 million from $262 million last year and increased 1% to $804 million for the first nine months of 2012. Company-wide circulation revenues increased for the first time since early 2007, due to the continued roll out of the all access content subscription model. Circulation revenue for the Company's domestic local publishing business was 10% higher in the third quarter of 2012 and was up 3% for the first nine months of 2012. At the end of the quarter, 69 of the Company's 78 targeted domestic local publishing business sites had rolled out the all access content subscription model. The Company expects to complete the remainder of the roll out by the end of 2012. Based on the first six waves of the roll out, which represent 60 markets which launched the new all access content subscription model by early August, the Company generated year-over-year circulation revenue gains in September of between 13% to 31% for each wave. The Company continues to make progress in acquiring digital-only subscribers with approximately 30,000 at the end of the third quarter, an 80% increase over the second quarter. Following the completion of the roll out of the all access content subscription model, the Company plans to implement a marketing strategy to drive further digital subscriber acquisitions, a move that the Company expects will lead to significant growth in the number of digital subscriptions.

Print net paid daily circulation for local publishing operations declined 10% for the quarter and 8% for the first nine months of 2012, while Sunday net paid circulation decreased by 12% and 8%, respectively. USA TODAY's average daily circulation decreased 7% compared to the third quarter last year and decreased 2% on a year-to-date basis.

"All Other" revenues decreased 5% for the quarter and were down 3% for the year-to-date period, primarily due to a decrease in commercial printing revenues.

The Company's publishing operations, including the Company's domestic local publishing business, 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 65% for the quarter and 35% for the year-to-date period, reflecting the impact of the all access content subscription model as well as the Company's strategic efforts to provide digital advertising and marketing solutions. Digital revenues at the Company's domestic local publishing business were higher 76% for the quarter and 40% for the year-to-date period due to the ongoing roll out of the all access content subscription model and digital marketing solutions efforts. Digital revenues at USA TODAY and its associated businesses were up 70% for the third quarter and 43% for the first nine months of 2012. Digital revenues in the UK were 10% higher in pounds for the quarter and 9% higher for the year-to-date period.

Publishing operating expenses increased by 1% in the quarter to $816 million from $810 million last year. Expenses increased slightly due to strategic initiative spending, facility consolidation costs as well as increased pension expense. These increases were partially offset by continued efficiency efforts as well as lower newsprint expense. Publishing operating expenses decreased by 1% for the year-to-date period to $2.44 billion. The decline was due to continued efficiency efforts and lower newsprint expense, partially offset by substantial spending on strategic initiatives, increased workforce restructuring and pension expense. Expenses related to strategic initiatives totaled approximately $9 million for the quarter and $55 million for the year-to-date period of 2012.

Newsprint expense was 11% lower in the quarter and 8% lower for the first nine months of 2012 due primarily to declines in consumption. For the fourth quarter of 2012, on a 13 week basis, the Company expects its newsprint expense will again be below the level of the fourth quarter of 2011.

Publishing segment operating income was $74 million in the quarter, which includes the impact of strategic investments, compared to $108 million last year, a decrease of 32%. Operating income for the year-to-date period was $240 million, a decrease of 34% compared to last year. The decreases reflect lower operating revenues and increased strategic initiative spending.


Digital Results

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

Digital segment operating revenues were $182 million in the third quarter of 2012 compared to $174 million in 2011, an increase of 5%. Year-to-date operating revenues for the segment were $532 million compared to $505 million last year, an increase of 5%, 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 $142 million in the third quarter of 2012 compared to $140 million in 2011, an increase of 2%. Year-to-date operating expenses were $439 million compared to $418 million in 2011, an increase of 5%. 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 achieved record third quarter revenue and operating results as revenues were up 36% in the third quarter of 2012 compared to last year and totaled $237 million. The increase reflects the impact of significant Olympic and political advertising as well as an increase in retransmission revenues. Revenues for the year-to-date period of 2012 were $619 million, an increase of 18% from $523 million last year due. The increase also reflects Olympic, political and retransmission revenue growth as well as increased core advertising, particularly in the automotive and medical sectors.

Television revenues for the quarter were $233 million, up 38% from the comparable period in 2011. The revenue growth was driven by $42 million in politically related advertising and approximately $37 million in ad spending related to the Summer Olympics. Approximately $4 million of political spending that aired during the Olympics is included in both the political and Olympic categories. Retransmission revenues increased 12% to $22 million in the third quarter, while Television station digital revenues increased 6% versus last year.

Television revenues for the year-to-date period were $602 million, up 19% from the comparable period in 2011. The increase was due to the Olympic revenue as noted above as well as $59 million in political advertising spending achieved in 2012, an increase of $51 million compared to last year. Television station digital revenues increased 8% compared to last year. Retransmission revenues totaled $68 million year-to-date, up 15% compared to 2011. There are no incremental costs associated with retransmission revenues; therefore, all of these revenues contribute directly to operating income.

Based on current trends, the Company expects the percentage increase in total television revenues for the fourth quarter of 2012 on a 13 week basis to be in the high twenties compared to the fourth quarter of 2011.

Broadcasting operating expenses for the third quarter totaled $118 million, up 12% from the third quarter 2011. The increase is primarily due to higher sales and marketing costs associated with higher revenue during the quarter. Broadcasting operating expenses for the first nine months totaled $333 million, up 7% from the same period in 2011 due to higher sales and marketing costs associated with higher revenues. Operating income in the third quarter of 2012 was up 73% to $119 million, an increase of over $50 million on a revenue increase of $63 million. Operating income for the first nine months of 2012 was up 35% to $286 million.

Corporate Expense

Corporate expense in the third quarter was $15 million, up 19% from the third quarter last year due to the $3 million of pension settlement charges recognized in the third quarter of 2012. Year-to-date corporate expenses increased 10% to $49 million from $45 million last year, reflecting the $8 million of pension settlement charges incurred in 2012.

Non-Operating Income and Expense

Equity Earnings

Equity income increased 17% to $3 million for the third quarter of this year reflecting strong results at certain newspaper partnerships. Equity income increased 14% to $16 million for the first nine months of 2012, due primarily to strong results from Classified Ventures.

Interest Expense

The Company's interest expense for the third quarter was $36 million, down 12% from last year reflecting lower average debt levels. Total average outstanding debt was $1.7 billion for the third quarter of 2012 compared to $2.0 billion last year. The weighted average interest rate for total outstanding debt was 7.57% for the third quarter of 2012 compared to 7.26% last year.


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