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NYT > SEC Filings for NYT > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for NEW YORK TIMES CO

Form 10-Q for NEW YORK TIMES CO


6-May-2014

Quarterly Report


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

EXECUTIVE OVERVIEW
We are a global media organization that includes newspapers, digital businesses and investments in paper mills. Our current businesses include The New York Times ("The Times"), the International New York Times, NYTimes.com, international.nytimes.com and related businesses. We generate revenues principally from circulation and advertising. Other revenues primarily consist of revenues from news services/syndication, digital archives, rental income and conferences/events. Our main operating costs are employee-related costs and raw materials, primarily newsprint.
Joint venture investments accounted for under the equity method are currently as follows:
? a 49% interest in a Canadian newsprint company, Donohue Malbaie Inc.; and

? a 40% interest in a partnership, Madison Paper Industries, operating a supercalendered paper mill in Maine.

In the accompanying analysis of financial information, we present certain information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Beginning in 2014, we are presenting in this report supplemental non-GAAP financial performance measures that exclude depreciation, amortization, severance, non-operating retirement costs (as discussed below) and any special items, as applicable. These non-GAAP financial measures should not be considered in isolation from or as a substitute for the related GAAP measures, and should be read in conjunction with financial information presented on a GAAP basis. For further information and reconciliations of these non-GAAP measures to the most directly comparable GAAP items, respectively, diluted earnings per share, operating profit and operating costs, see "Results of Operations - Non-GAAP Financial Measures." Financial Highlights
For the first quarter of 2014, diluted earnings per share from continuing operations was $.02 compared with $.04 for the prior-year period. Diluted earnings per share from continuing operations excluding severance, non-operating retirement costs and a special item discussed below (or "adjusted diluted earnings per share," a non-GAAP measure) for such periods was $0.07 and $0.08, respectively.
Operating profit in the first quarter of 2014 was $22.1 million compared with $28.1 million for the prior-year period. Operating profit before depreciation, amortization, severance, non-operating retirement costs and a special item (or "adjusted operating profit," a non-GAAP measure) for such periods was $56.6 million and $57.1 million, respectively. The decline was mainly due to an increase in operating costs, driven principally by investments associated with the Company's strategic growth initiatives.
During the first quarter of 2014, total revenues increased 2.6%, compared with the same prior-year period, driven by growth in circulation and advertising revenues.
Compared with the prior-year period, circulation revenues increased 2.1% in the first quarter of 2014, mainly as digital subscription initiatives and the 2014 print home-delivery price increase at The Times offset a decline in print copies sold. Revenues from our digital-only subscription packages, e-readers and replica editions increased 13.6% in the first quarter of 2014 compared with the prior-year period. Paid subscribers to digital-only subscription packages, e-readers and replica editions totaled approximately 799,000 as of the end of the first quarter of 2014, an increase of approximately 39,000 subscribers from the end of the fourth quarter of 2013 and an increase of more than 18% year-over-year from the end of the first quarter of 2013.
Compared with the prior-year period, total advertising revenues increased 3.4% in the first quarter of 2014, as print and digital advertising revenues increased 3.7% and 2.2%, respectively.
Operating costs in the first quarter of 2014 increased 3.8% to $365.8 million compared with $352.5 million in the prior-year period. The increase was primarily due to higher compensation and benefits expenses associated with the strategic growth initiatives and higher retirement-related costs, partially offset by cost savings in printing and distribution. Operating costs before depreciation, amortization, severance and non-operating retirement costs (or "adjusted operating costs," a non-GAAP measure) increased 3.2% to $333.8 million in the first quarter of 2014 compared with $323.5 million in the prior-year period.
As of March 30, 2014, we had cash, cash equivalents and short- and long-term marketable securities of approximately $973 million and total debt and capital lease obligations of approximately $685 million. Accordingly, our cash, cash equivalents and marketable securities exceeded total debt and capital lease obligations by approximately $288 million. Our


cash, cash equivalents and marketable securities decreased since the end of 2013, primarily due to the seasonal payment of approximately $44 million in variable compensation and the repayment of approximately $26 million of loans taken against the cash value of corporate-owned life insurance policies. We expect the repayment of these loans to reduce net interest expense by approximately $1.5 million annually. Additionally, during the first quarter of 2014, we contributed approximately $4 million to certain qualified pension plans and made income tax payments of approximately $2 million, offset by cash from our current operations.
On February 20, 2014, our board of directors approved a dividend of $0.04 per share on our Class A and Class B common stock that was paid on April 24, 2014, to all stockholders of record as of the close of business on April 9, 2014. This quarterly dividend has allowed us to return capital to our stockholders while also maintaining the financial flexibility necessary to continue to invest in our transformation and growth initiatives. Given current conditions and the expectation of continued volatility in advertising revenue, as well as the early stage of our growth strategy, we believe it is in the best interests of the Company to maintain a conservative balance sheet and a prudent view of our cash flow going forward. Our board of directors will continue to evaluate the appropriate dividend level on an ongoing basis in light of our earnings, capital requirements, financial condition, restrictions in any existing indebtedness and other relevant factors.
Recent Developments
Strategic Growth Initiatives
In April 2014, we introduced two new offerings to our digital subscription portfolio that give consumers a wider choice of products and services at a broader range of prices. We plan to continue to invest in our digital growth initiatives, largely in the areas of product development, subscriber acquisitions, product management, customer management and distribution. We anticipate that our costs in connection with our strategic growth initiatives will accelerate and increase by approximately $25 to $30 million in 2014 compared with 2013, totaling approximately $45 to $50 million for the full year 2014.
Non-Operating Retirement Costs
While we have made significant progress in our liability-driven investment strategy to reduce the funding volatility of our qualified pension plans, the size of our pension plan obligations relative to the size of our current operations will continue to have a significant impact on our reported financial results. We expect to continue to experience year-to-year volatility in our retirement-related costs, including pension, multiemployer pension and retiree medical costs. In 2014, we expect that our total retirement-related costs will increase to $37 million, or by approximately $19 million compared with 2013 (excluding a $6.2 million multiemployer pension plan withdrawal expense in 2013), due principally to a lower expected return on pension plan assets due to a shift in asset mix from equity to bonds, higher interest costs, the impact of the acceleration of prior service costs due to the sale of the New England Media Group on retiree medical costs, and higher expenses associated with our multiemployer pension plan withdrawal obligations. See "Liquidity and Capital Resources" for additional information regarding our pension obligations and benefit expense.
Our retirement plan obligations have not declined proportionately with the relative size of our business over the years, since we have largely retained all pension liabilities following the sales of the New England and Regional Media Groups. As a result, volatility from year to year resulting from changes in what we refer to as our "non-operating retirement costs" may obscure trends in the financial performance of our operating business. Beginning in 2014, we are presenting supplemental non-GAAP information to operating results, adjusted to exclude non-operating retirement costs.
Non-operating retirement costs include:
? interest cost, expected return on plan assets and amortization of actuarial gains and loss components of pension expense;

? interest cost and amortization of actuarial gains and loss components of retiree medical expense; and

? all expenses associated with multiemployer pension plan withdrawal obligations.

These non-operating retirement costs are primarily tied to financial market performance and changes in market interest rates and investment performance. Non-operating retirement costs do not include service costs and amortization of prior service costs for pension and retiree medical benefits, which we believe reflect the ongoing service-related costs of providing pension benefits to our employees. We consider non-operating retirement costs to be outside the performance of our ongoing core business operations and believe that presenting operating results excluding the impact of non-operating retirement costs, in addition to our GAAP operating results, will provide increased transparency and a better understanding of the underlying trends in our operating business performance. We believe this supplemental information will help clarify how the employee benefit


costs of our principal plans affect our financial position and how they may affect future operating performance, allowing for a better long-term view of the business. See "Results of Operations - Non-GAAP Financial Measures." Outlook
We remain in a challenging business environment, reflecting an increasingly competitive and fragmented landscape, and visibility remains limited. We expect circulation revenues to increase in the low-single digits in the second quarter of 2014 compared with the second quarter of 2013, as we expect to benefit from our digital subscription initiatives, although revenue contributions from our new digital products in the initial launch period will be muted by introductory offers. In addition, we expect the 2014 home-delivery price increase at The Times will have an impact.
We expect advertising revenue trends to remain challenging and subject to significant month-to-month volatility. In the second quarter of 2014, we expect advertising revenues to decrease in the mid-single digits compared with the second quarter of 2013, in part due to more challenging year-over-year comparisons, particularly in print.
While we will continue to be diligent in reducing expenses and managing legacy costs going forward, we will also remain prepared to invest where appropriate, especially in light of our strategic growth initiatives. We expect operating costs and adjusted operating costs to each increase in the low- to mid-single digits in the second quarter of 2014 compared with the second quarter of 2013 as investments associated with our strategic growth initiatives accelerate. Based on assumptions made at the beginning of 2014, we expect non-operating retirement costs to be approximately $9 million in each quarter of 2014. Including the $4 million in contributions we made during the first quarter of 2014, we expect to make contributions of approximately $16 million in total to our qualified pension plans in 2014 to satisfy minimum funding requirements. We expect the following on a pre-tax basis in 2014:
Results from joint ventures: breakeven,

Depreciation and amortization: $75 to $85 million,

Interest expense, net: $53 to $57 million, and

Capital expenditures: $35 to $45 million.


RESULTS OF OPERATIONS

The following table presents our consolidated financial results.

                                                                    For the Quarters Ended
(In thousands)                                           March 30, 2014     March 31, 2013    % Change
Revenues
Circulation                                             $      209,723     $      205,482         2.1
Advertising                                                    158,727            153,538         3.4
Other                                                           21,958             21,655         1.4
Total revenues                                                 390,408            380,675         2.6
Operating costs
Production costs:
Raw materials                                                   22,028             23,751        (7.3 )
Wages and benefits                                              88,616             83,276         6.4
Other                                                           48,339             49,707        (2.8 )
Total production costs                                         158,983            156,734         1.4
Selling, general and administrative costs                      186,724            176,872         5.6
Depreciation and amortization                                   20,092             18,938         6.1
Total operating costs                                          365,799            352,544         3.8
Early termination charge                                         2,550                  -         N/A
Operating profit                                                22,059             28,131       (21.6 )
Loss from joint ventures                                        (2,147 )           (2,870 )     (25.2 )
Interest expense, net                                           13,301             14,071        (5.5 )
Income from continuing operations before income taxes            6,611             11,190       (40.9 )
Income tax expense                                               3,764              5,082       (25.9 )
Income from continuing operations                                2,847              6,108       (53.4 )
Loss from discontinued operations, net of income
taxes                                                             (994 )           (2,785 )     (64.3 )
Net income                                                       1,853              3,323       (44.2 )
Net (income)/loss attributable to the noncontrolling
interest                                                          (110 )              249           *
Net income attributable to The New York Times Company
common stockholders                                     $        1,743     $        3,572       (51.2 )


* Represents an increase or decrease in excess of 100%.


Revenues

Circulation Revenues

Circulation revenues are based on the number of copies of the printed newspaper (through home-delivery subscriptions and single-copy and bulk sales) and digital subscriptions sold and the rates charged to the respective customers. Total circulation revenues consist of revenues from our print and digital products, including digital-only subscription packages, e-readers and replica editions.

Circulation revenues increased in the first quarter of 2014 compared with the same prior-year period mainly due to digital subscription initiatives and the 2014 increase in home-delivery prices at The Times, offset by a decline in print copies sold. Revenues from our digital-only subscription packages, e-readers and replica editions were $40.3 million in the first quarter of 2014 compared with $35.5 million in the first quarter of 2013, an increase of 13.6%.

Advertising Revenues
Advertising revenues are primarily determined by the volume, rate and mix of
advertisements. Advertising spending, which drives a significant portion of
revenues, is sensitive to economic conditions and affected by the continuing
transformation of our industry.
Advertising revenues (print and digital) by category were as follows:
                           For the Quarters Ended
                     March 30,     March 31,
(In thousands)         2014          2013       % Change
National            $  125,620    $  119,953        4.7
Retail                  19,082        18,650        2.3
Classified              14,025        14,935       (6.1 )
Total advertising   $  158,727    $  153,538        3.4

Below is a percentage breakdown of advertising revenues in the first quarters of 2014 and 2013 (print and digital):

First Quarter    National    Retail     Classified    Total
2014                79 %       12 %          9 %       100 %
2013                78 %       12 %         10 %       100 %

Total advertising revenues increased 3.4% in the first quarter of 2014 compared with the same prior-year period due to higher print and digital advertising revenues. Print advertising revenues, which represented approximately 76% of total advertising revenues, increased 3.7% in the first quarter of 2014, mainly due to increases in spending in the national and retail advertising categories, offset by lower spending in the classified advertising category, compared with the same prior-year period. Digital advertising revenues increased 2.2% in the first quarter of 2014, primarily due to increases in the national display advertising category, offset by declines in the classified advertising category, compared with the same prior-year period.
In the first quarter of 2014, total national advertising revenues increased mainly driven by growth in the telecommunications, entertainment and financial services categories, partly offset by declines in the automotive category. The uncertain economic environment, coupled with secular changes in our industry, contributed to declines in total classified advertising revenues, primarily in the real estate, help-wanted and automotive categories in the first quarter of 2014.

Other Revenues

Other revenues primarily consist of revenues from news services/syndication, digital archives, rental income and conferences/events. Other revenues increased slightly in the first quarter of 2014 compared with the same period in 2013.


Operating Costs

Operating costs were as follows:
                                                   For the Quarters Ended
                                             March 30,     March 31,
(In thousands)                                 2014          2013       % Change
Production costs:
Raw materials                               $   22,028    $   23,751       (7.3 )
Wages and benefits                              88,616        83,276        6.4
Other                                           48,339        49,707       (2.8 )
Total production costs                         158,983       156,734        1.4
Selling, general and administrative costs      186,724       176,872        5.6
Depreciation and amortization                   20,092        18,938        6.1
Total operating costs                       $  365,799    $  352,544        3.8

Production Costs

Production costs increased in the first quarter of 2014 compared with the same period in 2013 mainly due to higher salaries and wages (approximately $3 million) and benefits expense (approximately $2 million), offset in part by lower raw materials expense (approximately $2 million). Newsprint expense declined 9.9% in the first quarter of 2014 compared with the same period in 2013, with 5.4% from lower consumption and 4.6% from lower pricing.

Selling, General and Administrative Costs Selling, general and administrative costs increased in the first quarter of 2014 compared with the same period in 2013 primarily due to higher benefits (approximately $5 million), other compensation expense (approximately $2 million) and stock-based compensation expense (approximately $2 million), offset by lower distribution costs ($2 million). Benefits expense was higher mainly due to hiring related to strategic growth initiatives and retirement costs.

Other Item

Early Termination Charge

In the first quarter of 2014, we recorded a $2.6 million charge for the early termination of a distribution agreement, which we expect will result in distribution cost savings for the Company in future periods.

Non-Operating Items

Joint Ventures

Loss from joint ventures was $2.1 million in the first quarter of 2014 compared with a loss of $2.9 million in the first quarter of 2013.

Interest Expense, Net

"Interest expense, net" in our Condensed Consolidated Statements of Operations
was as follows:
                                               For the Quarters Ended
                                              March 30,        March 31,
(In thousands)                                   2014            2013
Cash interest expense                       $    13,051       $  13,251
Non-cash amortization of discount on debt         1,190           1,163
Interest income                                    (940 )          (343 )
Total interest expense, net                 $    13,301       $  14,071


"Interest expense, net" decreased in the first quarter of 2014 compared with the same prior-year period mainly due to a lower level of debt outstanding as a result of repurchases made in 2013 and higher interest income.

Income Taxes
We had income tax expense of $3.8 million (effective tax rate of 56.9%) in the first quarter of 2014 and income tax expense of $5.1 million (effective tax rate of 45.4%) in the first quarter of 2013. The foregoing tax rates were impacted by adjustments to the Company's reserve for uncertain tax positions.

On March 31, 2014, New York State enacted legislation amending the state's corporate tax laws. The legislation generally applies to tax years commencing on or after January 1, 2015. We are currently in the process of evaluating the impact of the new legislation; however, we do not expect that the legislation will have a material impact on our financial condition.

Discontinued Operations
New England Media Group

On October 24, 2013, we completed the sale of substantially all of the assets and operating liabilities of the New England Media Group - consisting of The Boston Globe, BostonGlobe.com, Boston.com, the T&G, Telegram.com and related properties - and our 49% equity interest in Metro Boston, for approximately $70 million in cash subject to customary adjustments. The net after-tax proceeds from the sale, including a tax benefit, were approximately $74 million. In 2013, we recognized a pre-tax gain of $47.6 million on the sale ($28.1 million after tax), which was almost entirely comprised of a curtailment gain. This curtailment gain is primarily related to an acceleration of prior service credits from plan amendments announced in prior years, and is due to a cessation of service for employees at the New England Media Group. In the first quarter of 2014, we recorded a working capital adjustment of $1.6 million. The results of operations of the New England Media Group have been classified as discontinued operations for all periods presented.

The results of operations for the New England Media Group presented as discontinued operations are summarized below.

                                                            For the Quarters Ended
                                                          March 30,       March 31,
(In thousands)                                               2014           2013
Revenues                                                 $       -       $  85,258
Total operating costs                                            -          89,725
Loss from joint ventures                                         -             (70 )
Interest expense, net                                            -               3
Pre-tax loss                                                     -          (4,540 )
Income tax benefit                                               -          (1,755 )
Loss from discontinued operations, net of income taxes           -          (2,785 )
(Loss)/gain on sale, net of income taxes:
Loss on sale                                                (1,559 )             -
Income tax benefit                                            (565 )             -
Loss on sale, net of income taxes                             (994 )             -
Loss from discontinued operations, net of income taxes   $    (994 )     $  (2,785 )

Non-GAAP Financial Measures
We have included in this report certain supplemental financial information derived from consolidated financial information but not presented in our financial statements prepared in accordance with GAAP. Specifically, we have referred to the following non-GAAP financial measures in this report:
diluted earnings per share from continuing operations excluding severance, non-operating retirement costs and the impact of a special item (or adjusted diluted earnings per share from continuing operations);

operating profit before depreciation, amortization, severance, non-operating retirement costs and a special item (or adjusted operating profit); and


operating costs before depreciation, amortization, severance and non-operating retirement costs (or adjusted operating costs).

The special item in the first quarter of 2014 consisted of a $2.6 million charge for the early termination of a distribution agreement.
We have included these non-GAAP financial measures because management reviews them on a regular basis and uses them to evaluate and manage the performance of our operations. We believe that, for the reasons outlined below, these non-GAAP financial measures provide useful information to investors as a supplement to reported diluted earnings/(loss) per share from continuing operations, operating profit/(loss) and operating costs. However, these measures should be evaluated only in conjunction with the comparable GAAP financial measures and should not be viewed as alternative or superior measures of GAAP results.
Adjusted diluted earnings per share provides useful information in evaluating our period-to-period performance because it eliminates items that we do not consider to be indicative of earnings from ongoing operating activities. Adjusted operating profit is useful in evaluating the ongoing performance of our businesses as it excludes the significant non-cash impact of depreciation and amortization as well as items not indicative of ongoing operating activities. Total operating costs include depreciation, amortization, severance and non-operating retirement costs. Total operating costs excluding these items provide investors with helpful supplemental information on our underlying operating costs that is used by management in its financial and operational decision-making.
Non-operating retirement costs include: . . .

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