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GCI > SEC Filings for GCI > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for GANNETT CO INC /DE/

Form 10-Q for GANNETT CO INC /DE/


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a leading international media and marketing solutions company, and one of the largest, most geographically diverse local content providers in the U.S. Through a vast network of broadcast, digital, mobile and print products, we inform and engage more than 110 million people every month.
Our Broadcasting Segment includes 42 television stations that we either own or service through shared service agreements. Excluding owner-operators, we are the No. 1 NBC affiliate group; No. 1 CBS affiliate group; and the No. 4 ABC affiliate group. These stations cover 30% of the U.S. population in markets with nearly 35 million households. We are the largest independent television station group of major network affiliates in the top 25 U.S. markets.
Within our Publishing Segment, we provide content through 82 local U.S. daily publications, including USA TODAY, a multi-platform news and information media company, as well as more than 400 non-daily local publications in 30 states and Guam. USA TODAY ranks No. 1 in the industry in total daily combined print and digital circulation, according to the Alliance for Audited Media. Our subsidiary Newsquest is one of the United Kingdom's leading regional community news providers, providing its markets with 17 daily paid-for titles, more than 200 weekly print products, magazines and trade publications.
We own and operate a number of stand-alone digital subsidiaries, the results of which are included in our Digital Segment. The largest of these subsidiaries is CareerBuilder, a global leader in human capital solutions, providing everything from labor market intelligence to talent management software and other recruitment solutions, with a presence in more than 60 markets worldwide and a focus on technology solutions and niche sites. CareerBuilder.com is the largest online job site in the U.S., measured both by traffic and revenue. On April 1, 2014, CareerBuilder announced the acquisition of Broadbean, a leader in online recruitment software that enables job distribution, candidate sourcing and big data analytics for employers. The acquisition, when combined with the addition of Economic Modeling Specialist Intl. in 2012, represents the next step in CareerBuilder's transformation, positioning it as a leading company in the rapidly growing software-as-a-service market for talent management solutions. Results from Operations
The primary categories of Broadcasting Segment revenue are: 1) core advertising which includes local and national non-political advertising; 2) political advertising revenues which are seasonal with peaks occurring in even years (e.g. 2014 and 2012) and particularly in the fourth quarter of those years; 3) retransmission revenues representing fees paid by satellite and cable networks and telecommunications companies to carry the company's television signals on their network; and 4) other revenues, which consist of digital revenues generated through advertising on the stations' web, tablet and mobile products; and payments by advertisers to television stations for other services, such as producing advertising material. We generate Publishing Segment revenue primarily through advertising and subscriptions to our print and digital publications. Our advertising departments sell retail, classified and national advertising across multiple platforms including print, web sites, mobile, tablet and other specialty publications. The largest subsidiary within our 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.
Our largest component of operating expense is payroll and benefits. Other significant operating expenses include the costs of locally produced content and purchased syndicated programming in the Broadcasting Segment, production (raw materials) and distribution costs within the Publishing Segment, and sales and marketing costs within the Digital Segment.


Consolidated Summary
A consolidated summary of our results is presented below:
In thousands, except per share
data                                                            First Quarter
                                     2014         % of Total         2013         % of Total       Change

Operating revenues:
Broadcasting                     $   382,268           27 %      $   191,580           16 %           100 %
Publishing                           842,063           60 %          871,233           70 %            (3 %)
Digital                              179,735           13 %          174,922           14 %             3 %
Total operating revenues         $ 1,404,066          100 %      $ 1,237,735          100 %            13 %

Operating expenses               $ 1,200,072                     $ 1,086,678                           10 %

Operating income:
Broadcasting                     $   154,549           76 %      $    83,676           55 %            85 %
Publishing                            42,988           21 %           60,137           40 %           (29 %)
Digital                               23,824           12 %           23,604           16 %             1 %
Corporate                            (17,367 )         (9 %)         (16,360 )        (11 %)            6 %
Total operating income               203,994          100 %          151,057          100 %            35 %
Non-operating expense                 81,905                          29,194                          ***
Provision for income taxes            52,500                           5,400                          ***
Net income attributable to
noncontrolling interests              10,430                          11,898                          (12 %)
Net income attributable to
Gannett Co., Inc.                $    59,159                     $   104,565                          (43 %)

Net income per share:
Basic                            $      0.26                     $      0.46                          (43 %)
Diluted                          $      0.25                     $      0.44                          (43 %)

Weighted average number of common shares outstanding:
Basic 227,230 229,396 (1 %) Diluted 232,268 235,162 (1 %)

During the first quarter of 2014, a number of factors impacted our consolidated results. The largest of these drivers was the inclusion of the first full quarter of operations of television stations acquired or serviced as a result of the Belo transaction, continued growth of retransmission revenues in our broadcasting operations, and the exceptional ratings we achieved during the Winter Olympic Games. Throughout the quarter, we continued to make progress in stabilizing our publishing operations and managing industry-wide softening of revenues through a number of initiatives including the All Access Content Subscription Model and the launch of the USA TODAY content editions in our local domestic publishing operations. Coupled with our efficiency initiatives, including consolidation of printing and distribution platforms, global sourcing and real estate optimization, we are managing expenses to align with industry-wide softening of revenues for our publishing business. Our Digital Segment, led by CareerBuilder, provided consistent solid revenue growth while CareerBuilder positions itself for expansion in the software-as-a-service market for talent management solutions. Growth of digital revenues within our Publishing and Broadcasting Segments reflects the success of our expansion of digital marketing services, particularly with search and social products. As a result of these factors, the mix of our revenues and expenses is changing, with a significantly higher share of our revenues being generated by higher growth and higher margin broadcasting and digital operations.
Our operating revenues were $1.40 billion in the first quarter of 2014, an increase of 13% from $1.24 billion in the same period last year. The increase was driven primarily by a record level of Broadcasting Segment revenues which increased 100%, reflecting the first full quarter of revenue from the Belo television stations, strong advertising demand associated with the Winter Olympic Games and political spending as well as substantial increases in retransmission revenue. On a pro forma basis, had we owned the Belo television stations in the same period last year and excluding Captivate, total operating revenue would have increased 3% in the first quarter of 2014. Broadcasting Segment revenues on a pro forma basis increased 20% in the first quarter of 2014. Publishing Segment revenues were down 3% reflecting the impact of the extreme winter weather on advertising demand and circulation revenue in certain markets as well as the shift of Easter to the second quarter of 2014,


partially offset by an increase in digital advertising and the launch of USA TODAY local editions. Publishing Segment advertising comparisons for the quarter were the best since the first quarter of 2013. Digital Segment revenue increased 3% in the first quarter of 2014, driven by continued growth at CareerBuilder.
Our operating expenses were $1.20 billion in the first quarter of 2014, an increase of 10% from $1.09 billion in the same period last year. Broadcasting Segment operating expenses increased 111% supporting the higher revenue generated by the recently acquired Belo television stations and costs incurred this quarter specific to the integration activities to support synergies going forward. On a pro forma basis, company-wide operating expenses were flat compared to last year. Broadcasting Segment expenses on a pro forma basis were up 5% compared to last year. Publishing Segment operating expenses were down 1% due to ongoing cost control and efficiency efforts and volume declines. Digital Segment operating expenses increased 3% due primarily to continued investment in sales growth efforts at CareerBuilder. A separate discussion of operating expenses excluding special items (non-GAAP basis) begins on page 22. Non-operating expense was $81.9 million in the first quarter of 2014, an increase of $52.7 million compared to 2013. This increase was primarily due to a $34.2 million increase in interest expense and a $19.2 million increase in other non-operating items. The substantial increase in interest expense reflects primarily the issuance of debt in the second half of last year to fund the acquisition of Belo, partially offset by a lower average interest rate. Total average outstanding debt was $3.65 billion for the first quarter of 2014 compared to $1.49 billion last year. The weighted average interest rate on total outstanding debt was 7.15% for the first quarter of 2014 compared to 8.19% last year. The increase in other non-operating items is primarily driven by costs we incurred to retire our 9.375% notes that were due to mature in 2017. The charges included a call premium paid as well as a write off of unamortized debt issuance costs and original issue discount. These notes were retired in March at a price of 104.688%. The early redemption of these notes will save us approximately $18 million in interest expense for the remainder of 2014.
Our reported effective income tax rate was 47.0% for the first quarter of 2014, compared to 4.9% for the first quarter of 2013. The tax rate for the first quarter in 2014 was higher than the comparable rate in 2013 due to special items in both years. The 2014 rate was negatively impacted by a $23.8 million tax charge recognized on the sale of KMOV-TV in St. Louis, MO to Meredith Corporation in February 2014. The 2013 rate was positively impacted by a net tax benefit of $27.8 million related to the resolution of a multi-year federal audit settlement and the release of a significant reserve for an uncertain state tax position. A separate discussion of effective income tax rates excluding special items (non-GAAP basis) appears on page 28.
The weighted average number of diluted shares outstanding for the first quarter of 2014 decreased by 2.9 million shares from 2013 primarily due to shares repurchased since the first quarter of 2014, partially offset by equity awards issued in connection with the our share-based compensation programs. See Part II, Item 2 for information on share repurchases. Segment Results
The following is a discussion of our reported operating segment results for the first quarter of 2014. Unless otherwise noted, all comparisons are to the comparable prior year period.
Broadcasting Segment Results
A summary of our Broadcasting Segment results is presented below:

In thousands                                            First Quarter
                                                 2014         2013      Change

Operating revenues                            $ 382,268    $ 191,580      100 %
Operating expenses:
Operating expenses, exclusive of depreciation   200,525      100,969       99 %
Depreciation                                     11,697        6,754       73 %
Amortization of intangible assets                10,221          181      ***
Facility consolidation charges                    5,276            -      ***
Total operating expenses                        227,719      107,904      ***
Operating income                              $ 154,549    $  83,676       85 %


Broadcasting Segment revenues are grouped into four categories: Core (Local and National), Political, Retransmission and Other. Digital revenues are included in the Other category. The following table summarizes the year-over-year changes in these select revenue categories.

In thousands                                                      First Quarter
                                                     2014          Percentage Change From 2013
                                                   Reported        Reported        Pro Forma (a)

Core (Local & National)                         $    257,371            88 %                6 %
Political                                              9,976           508 %              431 %
Retransmission (b)                                    87,468           142 %               66 %
Other                                                 27,453            60 %               17 %
Total                                           $    382,268           100 %               20 %

(a) The pro forma figures are presented on the basis as if the Belo acquisition and disposition of Captivate had occurred at the beginning of 2013.
(b) Reverse compensation to network affiliates is included as part of programming costs and therefore excluded from this line.

Broadcasting Segment revenues in the first quarter of 2014 increased 100% to $382.3 million driven primarily by the Belo acquisition, higher advertising demand associated with Winter Olympic Games and political spending, as well as a substantial increase in retransmission revenues. Core advertising revenue, which consists of Local and National non-political advertising, increased 88% to $257.4 million in the first quarter in 2014. A 6% increase in pro forma core revenues was driven by $41.3 million in advertising associated with the Winter Olympic Games on the 16 NBC stations that we own or service, partially offset by the loss of Super Bowl revenue that aired on our CBS stations in the first quarter of 2013 (the 2014 Super Bowl aired on Fox). Advertising trends improved year over year across most major categories including automotive, medical, telecom, and media. Political advertising totaled $10.0 million as many state and local campaigns increased spending. Retransmission revenue increased 142% to $87.5 million in the quarter resulting from renegotiated agreements, annual rate increases in existing agreements and the growing strength of our newly expanded broadcasting business. Other revenue, which includes digital revenue, increased 60% to $27.5 million in the first quarter of 2014.
Based on current trends and including a full quarter of results for the former Belo stations, we expect the increase in total television revenues for the second quarter of 2014 on a percentage basis to be in the nineties compared to the second quarter of 2013. On a pro forma basis, the percentage increase in total television revenues in the second quarter of 2014 is projected to be up in the mid-teens compared to the second quarter of 2013.
Broadcasting Segment operating expenses for the first quarter of 2014 increased 111% to $227.7 million primarily due to the Belo acquisition as well as higher investments in digital initiatives and reverse network compensation for the former Belo stations. On a pro forma basis, Broadcasting Segment operating expenses increased 5% in the first quarter of 2014. Operating income in the first quarter of 2014 increased 85% to $154.5 million from $83.7 million in the first quarter of 2013.
Publishing Segment Results
A summary of our Publishing Segment results is presented below:

In thousands                                            First Quarter
                                                 2014         2013      Change

Operating revenues                            $ 842,063    $ 871,233      (3 %)
Operating expenses:
Operating expenses, exclusive of depreciation   762,484      778,860      (2 %)
Depreciation                                     23,260       23,225       - %
Amortization of intangible assets                 3,787        4,226     (10 %)
Facility consolidation charges                    9,544        4,785      99 %
Total operating expenses                        799,075      811,096      (1 %)
Operating income                              $  42,988    $  60,137     (29 %)


Publishing Segment revenues were generated principally from advertising and circulation sales, which accounted for 60% and 33% of total Publishing Segment revenues for the first quarter of 2014. Advertising revenues include amounts generated from print advertising as well as digital advertising on publishing-related Internet websites, mobile and tablet applications. The table below presents the main components of Publishing Segment revenues:

In thousands                                First Quarter
                                     2014         2013      Change

Advertising                       $ 501,300    $ 526,499     (5 %)
Circulation                         282,076      285,972     (1 %)
All other                            58,687       58,762      - %
Total Publishing Segment revenues $ 842,063    $ 871,233     (3 %)

Publishing Segment revenues in the quarter were $842.1 million, down 3% from $871.2 million, due to the impact of harsh winter weather on advertising demand and circulation in certain markets, the shift of Easter to the second quarter of 2014, partially offset by a significant increase in digital advertising revenue. Although advertising revenues were lower, year-over-year comparisons for the quarter were the best since the first quarter of 2013.
The table below presents the principal categories of advertising revenues for the Publishing Segment:

In thousands                                            First Quarter
                                                 2014         2013      Change

Retail                                        $ 252,985    $ 269,618     (6 %)
National                                         83,702       85,518     (2 %)
Classified                                      164,613      171,363     (4 %)
Total Publishing Segment advertising revenues $ 501,300    $ 526,499     (5 %)

Retail advertising revenues decreased 6% in the first quarter of 2014 as harsh winter weather tempered advertising demand as well as the shift of Easter to the second quarter of 2014. Overall, national advertising comparisons improved relative to the fourth quarter (based on a comparable 13-week quarter). On the same basis, classified advertising comparisons were better than the fourth quarter driven by improved real estate and employment comparisons. The percentage changes within the advertising revenue categories for U.S. Publishing, Newsquest, total Publishing Segment, including on a constant currency basis, are as follows:

                                                                        First Quarter
                                                                                         Total
                                                                                      Publishing
                                                                                       Constant        Total Publishing
                                      U.S. Publishing      Newsquest (in pounds)       Currency            Segment

Retail                                      (7 %)                    (4 %)                 (7 %)                (6 %)
National                                    (2 %)                   (14 %)                 (3 %)                (2 %)
Classified                                  (6 %)                    (4 %)                 (5 %)                (4 %)
Total Publishing Segment advertising
revenues                                    (6 %)                    (5 %)                 (6 %)                (5 %)

Across the Publishing Segment in the first quarter, all categories of year-over-year advertising revenue comparisons were lower as tepid economic growth in the U.S. and U.K., ongoing pressure from industry-wide revenue softening, and severe weather in the quarter impacted advertising demand. The shift of Easter to the second quarter this year also negatively affected comparisons, particularly in the retail category. The average exchange rate used to translate U.K. publishing results from the British pound to U.S. dollars increased 6% for the quarter.


Overall percentage changes within the classified revenue categories for U.S. Publishing, Newsquest, total Publishing Segment, including on a constant currency basis, are as follows:

                                                                       First Quarter
                                                                                       Total
                                                                                    Publishing
                                                                                     Constant        Total Publishing
                                     U.S. Publishing     Newsquest (in pounds)       Currency            Segment

Automotive                                  (2 %)                  (5 %)                 (2 %)                (1 %)
Employment                                  (8 %)                   5 %                  (4 %)                (2 %)
Real Estate                                 (3 %)                 (10 %)                 (6 %)                (4 %)
Legal                                       (7 %)                   - %                  (7 %)                (7 %)
Other                                      (10 %)                  (8 %)                 (9 %)                (7 %)
Total Publishing Segment classified
revenue                                     (6 %)                  (4 %)                 (5 %)                (4 %)

Total circulation revenues decreased 1% for the first quarter of 2014 to $282.1 million from $286.0 million last year. Circulation revenue for our local domestic publishing business was 3% lower in the first quarter of 2014, due to the cycling of the All Access Content Subscription Model from last year. Local domestic circulation revenue comparisons within the quarter improved, reflecting the favorable impact of the phased rollout of the USA TODAY content editions. Circulation revenue at USA TODAY was relatively unchanged in the first quarter of 2014. In the U.K. circulation revenues in local currency, were 7% higher in the first quarter of 2014 reflecting the fourth consecutive quarter of circulation growth due to the positive impact of cover price increases. Commercial printing and other publishing revenue was relatively unchanged for the quarter as an increase in domestic commercial printing revenues was offset by a decrease in U.K. commercial printing revenues.
Digital revenues associated with the Publishing Segment increased 8% for the first quarter. Digital revenues at USA TODAY and its associated businesses were up 41% for the first quarter of 2014, fueled by increased user engagement across all digital platforms. Digital revenues for our local domestic publishing business increased 3% for the first quarter. These increases reflect the impact of our strategic successes in providing digital advertising and marketing solutions. Digital revenues in the U.K. were 18% higher for the quarter in local currency.
Publishing Segment operating expenses decreased 1% in the quarter to $799.1 million compared to $811.1 million in the first quarter a year ago. This decrease was primarily due to cost control and efficiency efforts, partially offset by strategic initiative investments. Newsprint expense was 6% lower in the quarter due primarily to declines in consumption.
Publishing Segment operating income was $43.0 million in the quarter compared to $60.1 million last year, a decrease of 29%. Digital Segment Results
A summary of our Digital Segment results is presented below:

In thousands                                            First Quarter
                                                 2014         2013      Change

Operating revenues                            $ 179,735    $ 174,922       3 %
Operating expenses:
Operating expenses, exclusive of depreciation   147,623      142,211       4 %
Depreciation                                      4,553        4,386       4 %
Amortization of intangible assets                 3,735        4,721     (21 %)
Total operating expenses                        155,911      151,318       3 %
Operating income                              $  23,824    $  23,604       1 %

The Digital Segment includes results for stand-alone digital subsidiaries including CareerBuilder, PointRoll, and Shoplocal. Many of our other digital offerings are tightly integrated within our existing publishing or broadcasting offerings, and therefore the results of these integrated digital offerings are reported within the operating results of the Publishing and Broadcasting Segments.


Digital Segment operating revenues increased 3% to $179.7 million in the first quarter of 2014 compared to $174.9 million in 2013. CareerBuilder revenues were up 4% driven by accelerating sales of human capital software solutions as well as their recent vertical acquisition of Oil and Gas Job Search and geographical expansion into Vietnam.
Digital Segment operating expenses increased 3% to $155.9 million in the first quarter of 2014 compared to $151.3 million in 2013, reflecting investments by CareerBuilder in sales staff and technology development. As a result, Digital Segment operating income for the quarter was $23.8 million, an increase of 1% compared to last year.
Corporate Expense
Corporate expense in the first quarter of 2014 increased 6% to $17.4 million. The increase of $1.0 million reflects higher marketing and training efforts and . . .

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