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MNI > SEC Filings for MNI > Form 10-K on 6-Mar-2014All Recent SEC Filings

Show all filings for MCCLATCHY CO

Form 10-K for MCCLATCHY CO


6-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Reference is made to Part I, Item 1 "Note About Forward-Looking Statements" and Item 1A "Risk Factors," which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of The McClatchy Company (the "Company," "we," "us" or "our"). MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements ("Notes") as of and for each of the three years ended December 29, 2013, December 30, 2012 and December 25, 2011 included elsewhere in this Annual Report on Form 10-K.

Overview

We are a leading news, advertising and information provider, offering a wide array of print and digital products in each of the markets we serve. As one of the largest newspaper companies in the country, based on daily circulation, our operations include 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. Our largest newspapers include the (Fort Worth) Star-Telegram, The Sacramento Bee, The Kansas City Star, the Miami Herald, The Charlotte Observer and The (Raleigh) News & Observer.

We also own a portfolio of premium digital assets, including 15.0% of CareerBuilder, LLC, which operates the nation's largest online job website, CareerBuilder.com, 25.6% of Classified Ventures, LLC, a company that offers classified websites such as the auto website Cars.com and the rental website Apartments.com, 33.3% of HomeFinder, LLC, which operates the online real estate website HomeFinder.com; and 12.2% of Wanderful Media, owner of Find n Save®, a digital shopping portal that provides advertisers with a common platform to reach online audiences with digital circulars, coupons and display advertising.

Our fiscal year ends on the last Sunday in December. The year ended December 29, 2013 ("fiscal year 2013") and the year ended December 25, 2011 ("fiscal year 2011") both consisted of 52-week periods. The year ended on December 30, 2012 ("fiscal year 2012") consisted of a 53-week period.

The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:

                                               Years Ended
                                      December 29,     December 30,
                                          2013             2012
                 Revenues:
                 Advertising                  67.5%            69.9%
                 Circulation                  28.5%            26.1%
                 Other                         4.0%             4.0%


                 Total advertising           100.0%           100.0%

Our primary sources of revenues are print and digital advertising. All categories (retail, national and classified) of advertising discussed below include both print and digital advertising. Retail advertising revenues include advertising carried as a part of newspapers (run of press ("ROP") advertising), advertising inserts placed in newspapers ("preprint advertising") and/or advertising delivered digitally. Circulation revenues include both print and digital subscriptions or a combination of both. Our print newspapers are delivered by independent contractors and large distributors. Other revenues, includes among others, commercial printing and distribution revenues.

See "Results of Operations" section below for a discussion of our revenue performance and contribution by category for the fiscal years 2013, 2012 and 2011.


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Recent Developments

Non-Cash Impairment Charges

The financial results for fiscal year 2013 include $17.2 million of non-cash impairment charges to earnings to reduce the carrying value of mastheads, real property, land, production equipment and certain equity investments. The non-cash impairment charges include $5.3 million for masthead impairments resulting from our annual impairment testing. In addition, as previously announced, we entered into an outsourcing agreement to print one of our newspapers beginning in mid-March 2014 and to sell certain other property. As a result, we incurred non-cash impairment charges related to our existing production facilities and equipment for $11.9 million.

Accelerated Depreciation on Production Equipment

During the year ended December 29, 2013, we incurred $11.4 million of accelerated depreciation, primarily related to a reduction in the remaining useful lives of production equipment associated with outsourcing or moving our printing process at three of our newspapers.

Completion of Sale of Real Property in Miami and Relocation

On May 27, 2011, we sold 14.0 acres of land in Miami, including the building which held the operations of one of our subsidiaries, The Miami Herald Media Company, and adjacent parking lots, for a purchase price of $236.0 million ("Miami property"). We received cash proceeds of $230.0 million as a result of the sale. The additional $6.0 million was held in an escrow account for our expenses incurred in connection with the relocation of our Miami operations. In April 2012, we received these funds, which were released for payment of costs associated with the relocation of the Miami operations.

In connection with the sale transaction, The Miami Herald Media Company entered into a lease agreement with the buyer pursuant to which we continued to operate our Miami newspaper operations rent free from the existing location, at the Miami property, through May 2013, while our new facilities were being constructed. As result of our continuing involvement in the Miami property and because we would not pay rent during this period, the sale was treated as a financing transaction. Accordingly, we continued to depreciate the carrying value of the building until our operations were moved. In addition, we have recorded a $236.0 million liability (in financing obligations) equal to the sales proceeds received of $230.0 million plus the $6.0 million received from the escrow account for reimbursement of moving expenses. We were imputing rent based on comparable market rates, which was reflected as interest expense until the operations were moved.

As of the end of May 2013, we moved all of our Miami business operations to a leased facility and our production to our new production plant built next to the business operations in Doral, Florida, and we no longer have a continuing involvement with the Miami property. As a result, in fiscal year 2013, we recognized a gain of $12.9 million on the Miami transaction, which was recorded in non-operating (expense) income in our consolidated statements of operations. We also released our financing obligation and property, plant and equipment ("PP&E") from our consolidated balance sheet during the quarter ended June 30, 2013, as described in Note 8, Cash Flow Information.

Classified Ventures, LLC Entered into a Definitive Agreement to Sell Apartments.com

On February 28, 2014, Classified Ventures, LLC entered into a definitive agreement to sell its apartments.com business for approximately $585 million. The transaction is expected to close in the second quarter of fiscal year 2014 and accordingly we will record our share of the gain on the sale, which is expected to be between $140 million to $145 million, before taxes, during the same period. We also expect to receive a distribution of approximately $147 million from Classified Ventures, LLC, which is equal to our share of the net proceeds from the sale shortly after the transaction closes.


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Results of Operations

Fiscal Year 2013 Compared to Fiscal Year 2012

We had net income in fiscal year 2013 of $18.8 million, or $0.22 per diluted share, compared to a net loss of $0.1 million, or $0.00 per diluted share, in fiscal year 2012. The net loss in fiscal year 2012 primarily resulted from the recognition of a non-operating loss on extinguishment of debt related to the refinancing of $762.4 million of our 11.50% Notes pursuant to our cash tender offer in December 2012. See Debt and Related Matters section in the "Liquidity and Capital Resources" section below for additional information related to these tender offer repurchases. In addition, revenues and expenses were higher in 2012 as a result of the extra week in fiscal year 2012.

                                    Revenues

The following table summarizes our revenues by category, which compares fiscal
year 2013 to fiscal year 2012:

                                                      Years Ended
                                  December 29,     December 30,
                                      2013             2012            $          %
    (in thousands)                 (52 weeks)       (53 weeks)      Change     Change
    Advertising:
    Retail                        $     422,462    $     474,031   $ (51,569 )   (10.9 )
    National                             63,724           70,477      (6,753 )    (9.6 )
    Classified:
    Auto                                 78,078           83,396      (5,318 )    (6.4 )
    Real estate                          34,535           36,386      (1,851 )    (5.1 )
    Employment                           40,584           46,954      (6,370 )   (13.6 )
    Other                                66,400           71,544      (5,144 )    (7.2 )


    Total classified                    219,597          238,280     (18,683 )    (7.8 )
    Direct marketing and other          132,636          131,950         686       0.5


    Total advertising                   838,419          914,738     (76,319 )    (8.3 )
    Circulation                         353,963          342,201      11,762       3.4
    Other                                49,855           52,700      (2,845 )    (5.4 )


    Total revenues                $   1,242,237    $   1,309,639   $ (67,402 )    (5.1 )

During fiscal year 2013, total revenues decreased 5.1% compared to fiscal year 2012 primarily due to the continued decline in demand for advertising, and to a lesser degree to the inclusion of an additional week in fiscal year 2012, compared to fiscal year 2013. Industry-wide declines in total advertising revenues persisted during fiscal year 2013. The continued weak economy and a secular shift in advertising demand from print to digital products, which are generally sold at lower prices than print products, are the principal causes of the decline in total advertising revenues. The decline in advertising revenues was partially offset by increases in our circulation revenues due primarily to the Plus Program. Also, the 5.1% decrease in total revenues in fiscal year 2013 as compared to fiscal year 2012, was affected by the 53rd week in fiscal year 2012. We estimate that the extra week in fiscal year 2012 provided for an additional $16.5 million in advertising revenues, $6.4 million in circulation revenues and $24.2 million in total revenues.

Advertising Revenues

Total advertising revenues decreased 8.3% in fiscal year 2013 compared to fiscal year 2012. While we experienced declines in all of our revenue categories, the decrease in advertising revenues related primarily to declines in retail advertising and employment classified advertising, and declines in all categories due to the extra week in 2012. These decreases in advertising revenues in fiscal year 2013 compared to fiscal year


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2012 were partially offset by increases in our digital automotive classified advertising, digital real estate classified advertising and direct marketing revenues.

Newspaper advertising is typically display advertising, or in the case of classified, display and/or liner advertising, while digital advertising can be in the form of display, coupon or banner ads, video, search advertising and/or liner ads. Advertising printed directly in the newspaper is considered ROP advertising while preprint advertising consists of preprinted advertising inserts delivered with the newspaper.

The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:

                                                   Years Ended
                                          December 29,     December 30,
                                              2013             2012
            Advertising:
            Retail                                50.4%            51.8%
            National                               7.6%             7.7%
            Classified                            26.2%            26.1%
            Direct marketing and other            15.8%            14.4%


            Total advertising                    100.0%           100.0%

We categorize advertising revenues as follows:

º •
º Retail - local retailers, local stores of national retailers, department and furniture stores, restaurants and other consumer-related businesses. Retail advertising also includes revenues from preprinted advertising inserts distributed in the newspaper.

º •
º National - national and major accounts such as telecommunications companies, financial institutions, movie studios, airlines and other national companies.

º •
º Classified - local auto dealers, employment, real estate including display advertising and other classified advertising, which includes remembrances, legal advertisements and other miscellaneous advertising.

º •
º Direct Marketing and Other - advertisements in direct mail, shared mail and niche publications, total market coverage publications and other miscellaneous advertising not included in the daily newspaper.

Retail:

Retail advertising revenues decreased 10.9% in fiscal year 2013 compared to fiscal year 2012. The decrease reflects the extra week in fiscal year 2012, lower print ROP revenues in general merchandise and furniture and home furnishing, and lower preprint revenues, which were partially offset by an increase in digital-only retail advertising revenues, such as, banner and display. In fiscal year 2013, compared to fiscal year 2012, we reported decreases in print ROP advertising revenues of 17.0%, digital ROP advertising revenues of 2.0% and preprint advertising revenues of 8.8%.

National:

National advertising revenues decreased 9.6% in fiscal year 2013 compared to fiscal year 2012. For fiscal year 2013, compared to fiscal year 2012, print national advertising decreased 13.6% but was partially offset by an increase of 1.0% in digital national advertising revenues. The decreases in total national advertising revenues were affected by the 53rd week in fiscal year 2012 and they were also broad-based among the categories but were partially offset by increases in the airline segment.


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Classified:

Classified advertising revenues decreased 7.8% in fiscal year 2013 compared to fiscal year 2012. The decrease in classified advertising revenues in fiscal year 2013 was partially a result of the weak economy, the extra week in fiscal year 2012, as well as advertisers increasingly using digital advertising, which is widely available from many competitors, instead of print advertising in the classified category. For fiscal year 2013, compared to fiscal year 2012, print classified advertising decreased 14.1%, reflecting in part, the impact of the extra week in fiscal year 2012, which was partially offset by a 1.0% increase in digital classified advertising revenues. The increases in digital classified advertising primarily reflect stronger digital automotive advertising sales, as well as digital real estate advertising revenues, as discussed below. The following is a discussion of the major classified advertising categories for fiscal year 2013, as compared to fiscal year 2012:

º •
º Automotive advertising revenues decreased in fiscal year 2013 by 6.4%. Print automotive advertising revenues declined 24.3% in fiscal year 2013, while digital automotive advertising revenues were up 9.7% in fiscal year 2013. These results reflect the continued migration of automotive advertising to digital platforms as well as an increase in automobile sales in the United States during the period, and the popularity of our Cars.com products with local auto dealerships.

º •
º Real estate advertising revenues decreased in fiscal year 2013 by 5.1%. Recently, real estate revenue trends reflect single-digit declines in year-over-year comparisons after years of double-digit declines, reflecting a limited recovery in the housing market. Print real estate advertising revenues declined 8.4% in fiscal year 2013; and digital real estate advertising revenues grew 0.7% in fiscal year 2013.

º •
º Employment advertising revenues decreased in fiscal year 2013 by 13.6%, reflecting an employment environment that is not growing quickly and due to the continued shift from traditional media to digital media, which includes a wider array of options. Print employment advertising revenues declined 16.5% in fiscal year 2013 and digital employment advertising revenues were down 11.1% in fiscal year 2013.

º •
º Other classified advertising revenues, which include legal, remembrance and celebration notices and miscellaneous advertising decreased in fiscal year 2013 by 7.2%. Print other classified advertising revenues declined 8.3% in fiscal year 2013 and digital other classified advertising revenues were down 3.5% in fiscal year 2013.

Digital:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 23.8% and 21.8% of total advertising revenues in fiscal years 2013 and 2012, respectively. Total digital advertising includes digital advertising both bundled with print and sold on a stand-alone basis. Digital advertising revenues totaled $199.3 million in fiscal year 2013 and were flat when compared to fiscal year 2012, which included a 53rd week of revenues. Digital-only advertising revenues totaled $118.2 million in fiscal year 2013, representing an increase of 9.1% in fiscal year 2013 compared to fiscal year 2012. Digital advertising revenues sold in conjunction with print products declined 11.2% in fiscal year 2013 compared to fiscal year 2012 as a result of fewer print advertising sales.

Direct Marketing and Other:

Direct marketing and other advertising revenues increased 0.5% during fiscal year 2013 compared to fiscal year 2012, which included a 53rd week of revenues. The increase largely came as a result of growth in our "Sunday Select" product, a package of preprinted advertisements delivered to non-subscribers upon request, which grew 10.3% in fiscal year 2013 compared to fiscal year 2012.


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Circulation Revenues

Circulation revenues increased 3.4% during fiscal year 2013 compared to fiscal year 2012. In late 2012, our newspapers successfully introduced new subscription packages ("Plus Program") for digital content that ended free, unlimited access to the newspapers' websites and certain mobile content. The Plus Program offers both a combined digital and print subscription and a digital-only subscription. The Plus Program provided $31.4 million in additional circulation revenues during fiscal year 2013, compared to $1.2 million in fiscal year 2012. The increase in circulation revenues in fiscal year 2013, compared to fiscal year 2012 also reflected approximately $11.3 million in revenues related to newspapers that changed to fee-for-service circulation delivery contracts during fiscal year 2013. The overall circulation revenues increase was partially offset by lower circulation volumes, as well as the impact of the extra week in fiscal 2012. Daily circulation volumes declined 5.5% in fiscal year 2013 compared to fiscal year 2012. In fiscal year 2012, daily circulation volumes had declined 5.6%. As expected, circulation volumes continue to decline as a result of fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change. We continue to look for new opportunities to reduce our declines in circulation volumes and increase our circulation revenues.

Our digital traffic continues to grow with average monthly total unique visitors to our newspaper websites up 2.2% in fiscal year 2013 compared to fiscal year 2012.

Operating Expenses

During fiscal year 2013, total operating expenses decreased 0.5% compared to fiscal year 2012. Our total operating expenses also reflect our continued effort to reduce costs through streamlining processes to gain efficiencies, as well as headcount reductions. As described more fully in Recent Developments above, during fiscal year 2013, we incurred non-cash impairment charges and accelerated depreciation of $17.2 million and $11.4 million, respectively. Operating expenses decreased in fiscal year 2013, in part, due to the extra week in fiscal year 2012. Operating expenses in all periods presented include employee severance related to permanent headcount reductions as we continue to optimize our operations as a more digitally focused company. Fiscal year 2013 also includes moving expenses primarily related to the relocation of our Miami newspaper operations and other production facility moves and outsourcing.

The following table summarizes our operating expenses, which compares fiscal year 2013 to fiscal year 2012:

                                                          Years Ended
                                      December 29,     December 30,
                                          2013             2012            $          %
(in thousands)                         (52 weeks)       (53 weeks)      Change     Change
Compensation expenses                 $     432,255    $     443,401   $ (11,146 )    (2.5 )
Newsprint, supplements and
printing expenses                           123,133          140,932     (17,799 )   (12.6 )
Depreciation and amortization
expenses                                    122,408          125,275      (2,867 )    (2.3 )
Other operating expenses                    422,360          413,895       8,465       2.0
Asset impairments                            17,181                -      17,181     100.0


                                      $   1,117,337    $   1,123,503   $  (6,166 )    (0.5 )

Miami relocation costs $ 11,399 $ 13,636 $ (2,237 ) (16.4 ) Severance costs $ 4,847 $ 4,651 $ 196 4.2

Compensation expenses, which includes the severance costs discussed above, decreased 2.5% during fiscal year 2013 compared to fiscal year 2012. Payroll expenses in fiscal year 2013 decreased 5.2% compared to fiscal year 2012, reflecting a 4.7% decline in average full-time equivalent headcount. Fringe benefits costs in fiscal year 2013 increased 11.7% compared to fiscal year 2012, primarily as a result of retirement costs


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related to our qualified defined benefit pension plan ("Pension Plan"). These were partially offset by lower medical costs and other fringe benefits.

Newsprint, supplements and printing expenses decreased 12.6% in fiscal year 2013 compared to fiscal year 2012. Newsprint expense decreased by 16.2% in fiscal year 2013 compared to fiscal year 2012, reflecting lower newsprint usage and to a lesser extent, lower newsprint prices. Supplement and printing expense decreased 2.8% in fiscal year 2013 compared to fiscal year 2012.

Depreciation and amortization expenses decreased 2.3% in fiscal year 2013 compared to fiscal year 2012. The decrease in depreciation and amortization expense is partially a result of assets that became fully depreciated at the end of fiscal year 2012 or during fiscal year 2013 and as a result of an expected $1.0 million decrease in amortization expense in fiscal year 2013 compared to fiscal year 2012. The decline in depreciation expense was partially offset by the impact of accelerated depreciation in fiscal year 2013 compared to fiscal year 2012. During fiscal year 2013, we incurred $11.4 million in accelerated depreciation (i) resulting from equipment formerly used in our Miami operations prior to the relocation of these operations, (ii) related to the production equipment associated with outsourcing our printing process at one of our newspapers and (iii) moving the printing operations for another newspaper. During fiscal year 2012, we incurred $8.3 million in accelerated depreciation on retired or decommissioned Miami property assets.

Other operating costs increased 2.0% in fiscal year 2013 compared to fiscal year 2012 primarily reflecting approximately $11.3 million in expenses related to newspapers that changed to fee-for-service circulation delivery contracts during fiscal year 2013 and offset by a decrease of approximately $2.2 million in moving costs related to the relocation of our Miami operations. While we did experience increases in other operating expenses in some categories such as cost related to service providers for digital and direct marketing products, expenses also declined in other categories due to company-wide efforts to reduce costs, including property taxes, insurance, marketing and professional services.

Non-Operating Items

Interest Expense:

Total interest expense decreased 10.5% during fiscal year 2013 compared to fiscal year 2012. Interest expense related to debt decreased 15.2% during fiscal year 2013 compared to fiscal year 2012, largely reflecting lower overall interest rates as a result of the refinancing of our 11.50% senior secured notes due in 2017 ("11.50% Notes") (see Debt and Related Matters discussion below). This decline was partially offset by the impact of the reversal of $12.3 million in interest on taxes in fiscal year 2012, due to certain state tax settlements and benefits from the expiration of statutes of limitation.

Equity Income:

Total income from unconsolidated investments increased 33.6% during fiscal year 2013 compared to fiscal year 2012. The increase is primarily related to our investment in CareerBuilder and Classified Ventures, which reported greater income in fiscal year 2013. The increase was partially offset by a $3.0 million write-down of certain unconsolidated investments, as well as a reduction in income from the other unconsolidated investments during fiscal year 2013.


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Loss on Extinguishment of Debt:

Loss on extinguishment of debt decreased by 84.6% during fiscal year 2013 . . .

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