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GCI > SEC Filings for GCI > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for GANNETT CO INC /DE/


8-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Overview
Gannett Co., Inc. (the Company or Gannett) is a leading international media and marketing solutions company, informing and engaging more than 100 million people on multiple platforms every month through its network of publishing, broadcasting, and digital properties. Its publishing operations include 82 daily newspapers and about 480 magazines and other non-dailies in the U.S., as well as 17 daily paid-for titles, more than 200 weekly print products, magazines and trade publications in the U.K. Its broadcasting operations consist of 23 television stations in 19 U.S. markets and its Captivate subsidiary, which operates video messaging screens in elevators of office buildings and select hotel lobbies across North America. The Company's Digital segment consists of stand-alone digital subsidiaries, including CareerBuilder, the global leader in human capital solutions, helping companies target, attract and retain talent. Its online job site, CareerBuilder.com, is the single largest within North America, based on listings, traffic and ad revenue. In addition, the Company provides digital applications to consumer and commercial customers across all of its segments, ranging from online news and entertainment to digital marketing solutions.
Results from Operations
The Company generates revenue within its Publishing segment primarily through advertising and subscriptions to Gannett's print and digital publications. Its advertising departments sell retail, classified and national advertising across multiple platforms including print, web sites, mobile, tablet and other specialty publications. The principal sources of revenues within the Company's Broadcasting segment are advertising, fees paid for retransmission of the Company's television signals on satellite and cable networks, and payments for other services, such as the production of advertising content. Advertising includes local advertising focused on the immediate geographic area of the stations, national advertising, and advertising on the stations' web, tablet and mobile products. The largest subsidiary within Gannett's Digital segment is CareerBuilder, which generates revenues both through its own sales force by providing talent and compensation intelligence, human resource related consulting services and recruitment solutions and through sales of employment advertising placed with its affiliated media organizations.
The Company's operating expenses consist primarily of payroll and benefits. Other significant operating expenses include production and distribution costs within its Publishing segment, the costs of locally produced and purchased syndicated programming in the Broadcasting segment and sales and marketing costs within the Digital segment.
Consolidated Summary
Gannett reported 2013 first quarter earnings per diluted share, on a GAAP (generally accepted accounting principles) basis of $0.44 compared to $0.28 for the first quarter of 2012.
Operating income was $151 million for the first quarter of 2013, an increase of $15 million or 11% compared to the first quarter last year, reflecting significant increases in the Broadcasting and Digital segments, partially offset by a decline in Publishing segment operating income. Broadcasting segment operating income increased 15% to $84 million for the quarter due to an increase in core television revenue as well as higher retransmission revenue. Digital segment operating income was $24 million, up 45% from last year as higher revenues at CareerBuilder and cost efficiencies contributed to the year-over-year increase. Publishing segment operating income was $60 million for the quarter, down 3% from last year due to advertising softness. Net income attributable to Gannett was $105 million for the first quarter of 2013, an increase of $36 million, or 53%, compared to 2012. Net income attributable to Gannett consists of net income reduced by net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests was $12 million in the first quarter of 2013 and $8 million in the same period in 2012.
The weighted average number of diluted shares outstanding for the first quarter of 2013 totaled 235,162,000 compared to 240,411,000 for the first quarter of 2012. The decrease is primarily due to shares repurchased since the first quarter of 2012, partially offset by equity awards issued in connection with the Company's share-based compensation programs. See Part II, Item 2 for information on share repurchases.


Results for the first quarter of 2013 include $5 million in costs associated with workforce restructuring ($3 million after-tax or $0.01 per share), non-cash facility consolidation and asset impairment charges of $6 million ($4 million after-tax or $0.02 per share), and other non-operating charges of $2 million ($2 million after-tax or $0.01 per share). In addition, the Company recorded a tax benefit of $28 million or $0.12 per share related to resolution of several federal tax claims and a significant uncertain state tax position. Results for the first quarter of 2012 include $16 million in costs due to workforce restructuring ($10 million after-tax or $0.04 per share) and non-cash facility consolidation charges of $5 million ($3 million after-tax or $0.01 per share). A separate discussion of results excluding the effect of special items (Non-GAAP basis) appears on page 7.
A consolidated summary of the Company's results is presented below:

In thousands of dollars, except earnings per
share amounts                                           First Quarter
                                                    2013            2012           Change
Operating revenues                              $ 1,237,735     $ 1,218,587             2 %
Operating expenses                                1,086,678       1,082,929             - %
Operating income                                $   151,057     $   135,658            11 %
Non-operating expense                           $    29,194     $    33,224           (12 %)
Net income attributable to Gannett Co., Inc.    $   104,565     $    68,223            53 %
Per share - basic                               $      0.46     $      0.29            59 %
Per share - diluted                             $      0.44     $      0.28            57 %

Operating Revenues
Operating revenues increased 2% to $1.24 billion for the first quarter of 2013, representing the Company's third consecutive quarter with year-over-year revenue growth. The first quarter revenue growth is the first quarterly increase in total revenues in a non-Olympic or political broadcast quarter since the second quarter of 2006. The Broadcasting and Digital segments drove the revenue growth. Broadcasting segment revenues increased 9% for the quarter due primarily to substantial increases in retransmission and core advertising revenue. Digital segment revenues were 4% higher compared to last year, reflecting solid revenue growth at CareerBuilder. Publishing segment revenues were relatively unchanged as the positive results of the All-Access Content Subscription Model and digital marketing services were offset by softer advertising demand.
First quarter 2013 company-wide digital revenues, which include Digital segment specific revenues as well as digital product and service revenues generated by the other business segments, were $350 million, 29% higher compared to the first quarter of 2012 and were approximately 28% of the Company's total operating revenues. Comparisons for the quarter reflect revenue increases associated with the implementation of the All-Access Content Subscription Model as well as higher digital advertising and marketing solutions revenue. Through the end of the first quarter of 2012, six local publishing markets had adopted the All-Access Content Subscription Model. The Company completed the roll out of the All-Access Content Subscription Model in 78 local publishing markets by the end of 2012.

Operating Expenses
Operating expenses were relatively unchanged for the first quarter in 2013 as compared to the same period last year. This is the result of continuing company-wide cost control and efficiency efforts, partially offset by higher Broadcasting segment costs associated with higher revenues and the absence of $8 million in furlough payroll savings in the first quarter of 2012. A separate discussion of operating expenses excluding special items (non-GAAP basis) begins on page 7.
Non-Operating Income and Expense
The Company's interest expense for the first quarter was $35 million, down 11% from the same quarter last year reflecting lower average debt levels. Total average outstanding debt was $1.49 billion for the first quarter of 2013 compared to $1.76 billion last year. The weighted average interest rate for total outstanding debt was 8.19% for the first quarter of 2013 compared to 8.02% last year.
At the end of the first quarter of 2013, the Company had $220 million in long-term floating rate obligations outstanding. While these fluctuate with market interest rates, by way of comparison, a 50 basis points change in the average interest rate for these obligations would result in a change in annualized interest expense of $1 million.


Provision for Income Taxes
The Company's effective income tax rate was 4.9% for the first quarter of 2013, compared to 28.1% for the first quarter of 2012. The rate for the first quarter in 2013 was lower than the comparable rate in 2012 due to special items contributing a net tax benefit of $28 million related to resolution of several federal tax claims and a significant uncertain state tax position. A separate discussion of effective income tax rates excluding special items (non-GAAP basis) appears on page 10.

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

Publishing Segment Results

Publishing segment revenues in the quarter totaled $871 million and were relatively unchanged compared to last year as the All-Access Content Subscription Model continued to drive circulation revenue growth, which nearly offset the impact of softer advertising demand during the quarter. Domestic publishing revenues were up slightly in the first quarter, the first increase since mid-2006.

Publishing segment revenues are generated principally from advertising and circulation sales, which accounted for 60% and 33%, respectively, of total Publishing segment revenues for the first quarter. Advertising revenues include amounts generated from print advertising as well as digital advertising on publishing-related internet web sites, mobile and tablet applications. "All other" Publishing segment revenues are mainly from commercial printing operations. The table below presents the main components of Publishing segment revenues:

Publishing Segment Revenues (in thousands of dollars)      First Quarter
                                                         2013         2012      Change
Advertising                                           $ 526,499    $ 551,438     (5 %)
Circulation                                             285,972      263,336      9 %
All other                                                58,762       59,288     (1 %)
Total Publishing segment revenues                     $ 871,233    $ 874,062      - %

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

Publishing Segment Advertising Revenues (in
thousands of dollars)                                  First Quarter
                                                    2013           2012          Change
Retail                                          $  269,618     $  278,978            (3 %)
National                                            85,518         90,440            (5 %)
Classified                                         171,363        182,020            (6 %)
Total Publishing segment advertising revenues   $  526,499     $  551,438            (5 %)

Publishing segment advertising revenues decreased 5% in the first quarter of 2013 to $526 million. Advertising continues to be impacted by the slow pace of economic growth; however, year-over-year comparisons were the best since early 2007. In the U.S., advertising revenues decreased 4% in the quarter. On a constant currency basis, advertising revenues in the U.K. declined 5% for the first quarter. The average exchange rate used to translate U.K. publishing results from the British pound to U.S. dollars decreased 1% for the quarter.


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

Publishing Segment Advertising
Revenue Categories                                                      First Quarter
                                                                                         Total
                                                                                      Publishing
                                                                                       Constant        Total Publishing
                                      U.S. Publishing      Newsquest (in pounds)       Currency            Segment
Retail                                      (3 %)                  (2 %)                   (3 %)                (3 %)
National                                    (5 %)                  (8 %)                   (5 %)                (5 %)
Classified                                  (5 %)                  (6 %)                   (6 %)                (6 %)
Total Publishing segment advertising
revenues                                    (4 %)                  (5 %)                   (4 %)                (5 %)

Across the categories of Publishing segment advertising, it was a somewhat mixed quarter. Retail advertising was 3% lower in the first quarter as tepid economic growth impacted advertising demand. National advertising was 5% lower for the first quarter, driven by soft ad demand at the Company's local domestic publishing operations, partially offset by an increase in national advertising at USA TODAY. However, comparisons for both retail and national advertising were sequentially better than prior quarter comparisons.
Classified advertising revenue at the Company's domestic publishing operations declined 5% for the first quarter of 2013. Real estate advertising was 5% lower compared to the first quarter last year but prior quarter comparisons improved sequentially. Employment and automotive advertising were down 9% and 3%, respectively, compared to the first quarter of 2012. First quarter classified advertising comparisons in the U.K. were 6% lower, in pounds, compared to last year.

Overall percentage changes in the classified revenue categories for domestic publishing, Newsquest, total Publishing constant currency and total Publishing segment are as follows:

Publishing Segment Classified
Advertising Revenue Categories                                          First Quarter
                                                                                         Total
                                                                                      Publishing
                                                                                       Constant        Total Publishing
                                      U.S. Publishing      Newsquest (in pounds)       Currency            Segment
Automotive                                  (3 %)                   (12 %)                 (4 %)                (4 %)
Employment                                  (9 %)                    (1 %)                 (7 %)                (7 %)
Real Estate                                 (5 %)                    (7 %)                 (5 %)                (6 %)
Legal                                       (9 %)                     - %                  (9 %)                (9 %)
Other                                       (4 %)                    (7 %)                 (5 %)                (5 %)
Total Publishing segment classified
revenue                                     (5 %)                    (6 %)                 (6 %)                (6 %)

Total Company circulation revenues increased 9% for the first quarter of 2013 to $286 million from $263 million last year. Circulation revenue for the Company's domestic local publishing business was 14% higher in the first quarter of 2013, the fourth consecutive quarter of circulation revenue growth. Revenue comparisons reflect generally lower circulation volumes more than offset by price increases. Daily and Sunday average print and digital, replica and non-replica circulation declined 8% and 4%, respectively for the quarter. All other revenues decreased 1% for the quarter, primarily due to a decrease in U.K. commercial printing revenues.
Digital revenues associated with Publishing segment operations increased 76% for the quarter including a 98% increase at the Company's domestic local publishing business. These increases reflect 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 USA TODAY and its associated businesses were up 9% for the quarter. Digital revenues in the U.K. were 17% higher in pounds for the quarter.


Publishing segment operating expenses were relatively unchanged in the quarter at $811 million from $812 million last year. This reflects continued efficiency efforts as well as lower newsprint expense, partially offset by the absence of $8 million of furlough payroll savings last year. Newsprint expense was 10% lower in the quarter due to declines in consumption. Also impacting comparisons were special charges due to continued workforce restructuring and facility consolidations this quarter of $10 million, compared to $23 million last year. Publishing segment operating income was $60 million in the quarter compared to $62 million last year, a decrease of 3%. Digital Segment Results
The Digital segment includes results for stand-alone digital subsidiaries including CareerBuilder, PointRoll, ShopLocal, and Reviewed.com. Many of the Company's other digital offerings are tightly integrated within its existing publishing or broadcasting offerings, and therefore the results of these integrated digital offerings are reported within the operating results of its Publishing and Broadcasting segments.
Digital segment operating revenues were $175 million in the first quarter of 2013 compared to $168 million in 2012, an increase of 4%. The increase reflects strong revenue growth at CareerBuilder both domestically and internationally, on an increasing base of customers. CareerBuilder continues to build market share in the U.S. and its international operations continue to expand. Digital segment operating expenses were $151 million in the first quarter of 2013, slightly lower than last year due primarily to reduced promotion and marketing costs in the quarter. As a result, Digital segment operating income was $24 million, an increase of 45% compared to last year. Broadcasting Segment Results
The Broadcasting segment includes results from the Company's 23 television stations and affiliated digital platforms as well as Captivate Network. Broadcasting segment revenues totaled $192 million in the first quarter and increased 9% compared to last year.
Television revenues for the quarter were $185 million, up 9% from the comparable period in 2012. Retransmission revenues were $36 million for the quarter, an increase of 59% from the same quarter last year. Core advertising revenues increased 2% and when combined with retransmission revenues more than offset lower advertising associated with the move of the Super Bowl broadcast from the Company's 12 NBC stations to its 6 CBS stations this year as well as a $3 million reduction in political ad spending as compared to the first quarter of last year. Excluding the impact of political ad revenues in both quarters, television revenue was up 11% in the first quarter of 2013 over the first quarter of 2012. In addition, television station digital revenues increased 10% versus last year.
Based on current trends, the Company expects the percentage increase in total television revenues for the second quarter of 2013 to be in the mid-single digits compared to the second quarter of 2012.
Broadcasting segment operating expenses for the first quarter totaled $108 million, an increase of 4% over the first quarter of 2012. The increase is primarily due to costs associated with higher revenues and the segment's continuing expansion of digital marketing solutions. Operating income in the first quarter of 2013 increased 15% to $84 million. Corporate Expense
Corporate expense in the first quarter was $16 million, up 7% from the first quarter last year due to a $1.7 million insurance settlement benefit recognized last year, partially offset by a decrease in pension expense.


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, a non-cash impairment charge, a currency related loss recognized in other non-operating items and certain credits to its income tax provision. The Company believes that such expenses and credits 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 as well as accelerated depreciation. The currency loss is related to the weakening of the British pound associated with the downgrade of the U.K. sovereign credit rating during the first quarter. Results also include credits to the income tax provision related to releases of reserves on prior year tax positions.

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 to better facilitate industry comparisons.
Non-GAAP Financial Tables/Reconciliations

The following is a discussion of the Company's as adjusted non-GAAP financial results. All as adjusted (non-GAAP basis) measures are labeled as such or "adjusted."

Adjusted operating results were as follows:

In thousands of dollars, except per share
amounts                                                 First Quarter
                                                    2013            2012           Change

Operating revenues                              $ 1,237,735     $ 1,218,587             2 %
Adjusted operating expenses, non-GAAP basis       1,076,527       1,061,852             1 %
Adjusted operating income, non-GAAP basis       $   161,208     $   156,735             3 %

Adjusted net income attributable to Gannett     $    86,044     $    80,800             6 %
Co., Inc., non-GAAP basis
Adjusted diluted earnings per share, non-GAAP
basis                                           $      0.37     $      0.34             9 %


Adjustments to remove special items from GAAP results follow:

In thousands of dollars, except per share
amounts                                                 First Quarter
                                                    2013            2012           Change

Operating expenses (GAAP basis)                 $ 1,086,678     $ 1,082,929             - %
Remove special items:
Workforce restructuring                              (5,366 )       (16,289 )         (67 %)
Facility consolidation charges                       (4,785 )        (4,788 )           - %
As adjusted (non-GAAP basis)                    $ 1,076,527     $ 1,061,852             1 %

Operating income (GAAP basis)                   $   151,057     $   135,658            11 %
Remove special items:
Workforce restructuring                               5,366          16,289           (67 %)
Facility consolidation charges                        4,785           4,788             - %
As adjusted (non-GAAP basis)                    $   161,208     $   156,735             3 %

Total non-operating (expense) income (GAAP
basis)                                          $   (29,194 )   $   (33,224 )         (12 %)
Remove special items:
Facility consolidation and asset impairment
charges                                               1,651               -           ***
Other non-operating items                             2,077               -           ***
As adjusted (non-GAAP basis)                    $   (25,466 )   $   (33,224 )         (23 %)

Net income attributable to Gannett Co., Inc.
(GAAP basis)                                    $   104,565     $    68,223            53 %
Remove special items (net of tax):
Workforce restructuring                               3,266           9,689           (66 %)
Facility consolidation and asset impairment
charges                                               3,936           2,888            36 %
Other non-operating items                             2,077               -           ***
Prior year tax reserve adjustments                  (27,800 )             -           ***
As adjusted (non-GAAP basis)                    $    86,044     $    80,800             6 %

Diluted earnings per share (GAAP basis)         $      0.44     $      0.28            57 %
Remove special items (net of tax):
Workforce restructuring                                0.01            0.04           (75 %)
Facility consolidation and asset impairment
charges                                                0.02            0.01           ***
Other non-operating items                              0.01               -           ***
Prior year tax reserve adjustments                    (0.12 )             -           ***
As adjusted (non-GAAP basis) (a)                $      0.37     $      0.34             9 %

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

Adjusted consolidated operating expenses for the first quarter of 2013 (adjusted to remove costs associated with workforce restructuring and facility consolidation charges) increased 1% compared to 2012. The increase reflects higher Broadcast segment costs associated with higher revenue and the absence of $8 million in furlough payroll savings in the first quarter of 2012, partially offset by continuing company-wide cost control and efficiency efforts. . . .

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