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MNI > SEC Filings for MNI > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for MCCLATCHY CO

Form 10-Q for MCCLATCHY CO


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Information

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, including statements relating to future financial performance and operations. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words "believes," "expects," "anticipates," "estimates" or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. For all of those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, trends and uncertainties. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" in Part I, Item 1A of our 2013 Annual Report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements except as required under applicable law.

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 and its consolidated subsidiaries (the "Company," "we," "us" or "our"). This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements ("Notes") as of and for the quarter ended March 30, 2014, included in Item 1 of this Quarterly Report on Form 10-Q, as well as with our audited consolidated financial statements and accompanying notes to the financial statements and MD&A contained in our 2013 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 6, 2014.

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 largest newspaper companies in the country, based on daily circulation, our operations have included 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. See Recent Developments below for further discussion regarding the sale of all of the outstanding capital stock of the Anchorage Daily News.

We also own a portfolio of premium digital assets, including 15.0% of CareerBuilder, LLC, which operates the nation's largest online jobs website, CareerBuilder.com; 25.6% of Classified Ventures, LLC, which operates the auto website Cars.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. See Recent Developments below for further discussion of Classified Ventures, LLC sale of its Apartments.com business.

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

Quarters Ended

                    March 30,   March 31,
                      2014        2013
Revenues:
Advertising             64.0%       66.8%
Circulation             31.6%       29.1%
Other                    4.4%        4.1%
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 quarters ended March 30, 2014, and March 31, 2013.

Recent Developments

Classified Ventures, LLC Consummated the Sale of its Apartments.com Business

On April 1, 2014, Classified Ventures, LLC consummated the sale of its Apartments.com business for approximately $585 million. 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 quarter ending June 29, 2014. On April 1, 2014, we received a distribution of approximately $146.9 million from Classified Ventures, LLC, which is equal to our share of the net proceeds from the sale, before taxes.

Sale of the Anchorage Daily News

On April 8, 2014, we entered into a Stock Purchase Agreement (the "Purchase Agreement") with Alaska Dispatch Publishing, LLC ("ADP") to sell to ADP the outstanding capital stock of the Anchorage Daily News, Inc. ("ADN") for $34 million in cash. Proceeds, net of tax, are expected to be approximately $24 million. We completed the sale on May 5, 2014.

Results of Operations

We had a net loss in the quarter ended March 30, 2014 of $15.8 million, or $0.18 per share, compared to a net loss of $12.7 million, or $0.15 per share, in the quarter ended March 31, 2013.

                                    Revenues



The following table summarizes our revenues by category:



                                            Quarters Ended
                             March 30,    March 31,        $         %
(in thousands)                  2014         2013       Change     Change
Advertising:
Retail                        $  89,661    $  97,859   $ (8,198)    (8.4)
National                         13,283       14,999     (1,716)   (11.4)
Classified:
Auto                             18,771       19,326       (555)    (2.9)
Real estate                       7,745        8,483       (738)    (8.7)
Employment                        9,529       10,854     (1,325)   (12.2)
Other                            15,812       16,801       (989)    (5.9)
Total classified                 51,857       55,464     (3,607)    (6.5)
Direct marketing and other       29,110       28,800         310      1.1
Total advertising               183,911      197,122    (13,211)    (6.7)
Circulation                      90,810       85,828       4,982      5.8
Other                            12,482       12,159         323      2.7
Total revenues                $ 287,203    $ 295,109   $ (7,906)    (2.7)

During the quarter ended March 30, 2014, total revenues decreased 2.7% compared to the same period in 2013 primarily due to the continued decline in demand for advertising in our industry. The continued weak economy and a secular shift in advertising demand from print to digital products, which are generally sold at lower rates than print products, are the principal causes of the decline in total advertising revenues. The decline in total advertising revenues was partially offset by increases in our circulation due primarily to the Plus Program and other revenues.

Advertising Revenues

Total advertising revenues decreased 6.7% during the quarter ended March 30, 2014, compared to the same period in 2013. While we experienced declines in all of our revenue categories, the decrease in total advertising revenues related primarily to declines in retail, national and employment classified advertising. These decreases in advertising revenues were partially offset by increases in our digital retail, digital national, digital automotive classified advertising and direct marketing revenues.


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

                                Quarters Ended
                             March 30,   March 31,
                               2014        2013
Advertising:
Retail                           48.8%       49.7%
National                          7.2%        7.6%
Classified                       28.2%       28.1%
Direct marketing and other       15.8%       14.6%
Total advertising               100.0%      100.0%

Retail:

During the quarter ended March 30, 2014, retail advertising revenues decreased 8.4%, compared to the same period in 2013. The decrease was primarily due to a decrease in print ROP advertising revenues of 10.7% and a decrease in preprint advertising revenues of 9.9%. The decreases were widespread among the ROP and preprint categories, primarily due to the shift of the Easter holiday to the second quarter of 2014. These decreases were partially offset by a 1.9% increase in digital retail advertising.

National:

National advertising revenues decreased 11.4% during the quarter ended March 30, 2014, compared to the same period in 2013. We experienced a 16.1% decrease in print national advertising, offset by a 0.2% increase in digital national advertising during the quarter ended March 30, 2014. Decreases in total national advertising revenues for the quarter ended March 30, 2014, were led by decreases in the banking and telecommunications categories, which were due to unusually strong performances in these categories in the quarter ended March 31, 2013. Also contributing to the decline in total national advertising revenues for the quarter ended March 30, 2014, was a decrease in the entertainment category. These decreases were partially offset by increases in the airlines/transportation, automotive and political categories.

Classified:

During the quarter ended March 30, 2014, classified advertising revenues decreased 6.5% compared to the same period in 2013. The print automotive, print other and print and digital employment categories represented our largest declines in classified advertising during this period, partially offset by an increase in the digital automotive category. While the decreases in classified advertising revenues are partially a result of the weak economy, advertisers are increasingly using digital advertising, which is widely available from many of our competitors, instead of print advertising. During the quarter ended March 30, 2014, compared to the same period in 2013, we experienced an 11.3% decrease in print classified advertising and a 0.6% decrease in digital classified advertising. The following is a discussion of the major classified advertising categories for the quarter ended March 30, 2014, as compared to the same period in 2013:

† Automotive advertising revenues decreased 2.9% in the quarter ended March 30, 2014. Print automotive advertising revenues declined 22.5% and digital automotive advertising revenues were up 10.6% in the quarter ended March 30, 2014. These results reflect the continued migration of automotive advertising to digital platforms as well as the popularity of our Cars.com products with local auto dealerships.

† Real estate advertising revenues decreased 8.7% in the quarter ended March 30, 2014. 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 5.6% and digital real estate advertising revenues decreased 13.8% in the quarter ended March 30, 2014.

† Employment advertising revenues decreased 12.2% in the quarter ended March 30, 2014, 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 13.0% and digital employment advertising revenues were down 11.6% in the quarter ended March 30, 2014.

† Other classified advertising revenues, which include legal, remembrance and celebration notices and miscellaneous advertising decreased 5.9% in the quarter ended March 30, 2014. Print other classified advertising revenues declined 6.0% and digital other classified advertising revenues were down 5.5% in the quarter ended March 30, 2014.


Digital:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 26.2% of total advertising revenues in the quarter ended March 30, 2014. Total digital advertising includes digital advertising both bundled with print and sold on a stand-alone basis. In the quarter ended March 30, 2014, total digital advertising revenues increased 0.8% to $48.2 million compared to the same period in 2013. Digital-only advertising revenues totaled $29.6 million, an increase of 11.0% in the quarter ended March 30, 2014, compared to the same period in 2013. The increase in digital-only advertising reflects the secular shift in advertising demand from print to digital products. We expect this trend to continue as advertisers continue to look for cost-effective alternatives to print advertising. Digital advertising revenues sold in conjunction with print products declined 13.2% in the quarter ended March 30, 2014, compared to the same period in 2013 as a result of fewer print advertising sales.

Direct Marketing and Other:

Direct marketing and other advertising revenues increased 1.1% during the quarter ended March 30, 2014, compared to the same period in 2013. We continue to experience growth in revenues from our "Sunday Select" product, a package of preprinted advertisements delivered to nonsubscribers upon request, which grew 10.2% in the quarter ended March 30, 2014, compared to the same period in 2013.

Circulation Revenues

Circulation revenues increased 5.8% during the quarter ended March 30, 2014, compared to the same period in 2013. Contributing to the growth in total circulation revenues in the quarter ended March 30, 2014, compared to the same period in 2013, was $4.3 million in revenues related to newspapers that changed to fee-for-service circulation delivery contracts. As expected, print 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.

Operating Expenses

Total operating expenses increased 6.2% in the quarter ended March 30, 2014, compared to the same period in 2013. Our total operating expenses reflects our continued effort to reduce costs through streamlining processes to gain efficiencies, as well as headcount reductions. However, operating expenses in the quarter ended March 30, 2014, reflect increases in non-cash operating expenses, including non-cash impairment charges of $0.9 million and accelerated depreciation of $11.4 million. Operating expenses in all periods presented include employee severance related to headcount reductions. The quarter ended March 31, 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 operating expenses:

                                                      Quarters Ended
                                    March 30,     March 31,         $            %
(in thousands)                        2014          2013         Change        Change
Compensation expenses               $  111,116    $  112,576    $  (1,460)        (1.3)
Newsprint, supplements and
printing expenses                       27,942        30,715       (2,773)        (9.0)
Depreciation and amortization
expenses                                40,488        30,446        10,042         33.0
Other operating expenses               111,957       100,774        11,183         11.1
                                    $  291,503    $  274,511    $   16,992          6.2

Compensation expenses, which include the severance costs discussed above, decreased 1.3% in the quarter ended March 30, 2014, compared to the same period in 2013. Payroll expenses in the quarter ended March 30, 2014, decreased 0.2% compared to the same period in 2013, reflecting a 4.0% decline in average full-time equivalent employees partially offset by higher severance costs in the quarter ended March 30, 2014, compared to the same period in 2013. Fringe benefits costs in the quarter ended March 30, 2014, decreased 5.9% compared to the same period in 2013, primarily as a result of lower retirement costs related to our Pension Plan.


Newsprint, supplements and printing expenses decreased 9.0% in the quarter ended March 30, 2014, compared to the same period in 2013. During the quarter ended March 30, 2014, compared to the same period in 2013, newsprint expense declined 10.8% reflecting an 8.2% decrease in newsprint usage and a 2.8% decrease in newsprint prices.

Depreciation and amortization expenses increased 33.0% in the quarter ended March 30, 2014, compared to the same period in 2013, primarily due to the impact of accelerated depreciation. During the quarter ended March 30, 2014, we incurred $13.5 million in accelerated depreciation (i) related to the production equipment associated with outsourcing our printing process at one newspaper and
(ii) resulting from moving the printing operations for another newspaper to the newly purchased production facility. During the quarter ended March 31, 2013, we incurred $2.1 million in accelerated depreciation related to our Miami operations move.

Other operating costs increased 11.1% in the quarter March 30, 2014, compared to the same period in 2013, which includes $4.3 million in expense related to newspapers that changed to fee-for service circulation delivery contracts, $3.6 million in additional professional fees and approximately $2.4 million net in other sales costs for digital advertising and customer sales costs.

Non-Operating Expenses

Interest Expense:

Total interest expense decreased 5.9% in the quarter ended March 30, 2014, compared to the same period in 2013. Interest expense related to debt decreased 3.3% during the quarter ended March 30, 2014, compared to the same period in 2013 reflecting lower overall interest rates and debt balances. Other fluctuations in total interest expense were primarily due to reductions in interest expense on our financial obligations resulting from our elimination of our Miami financial obligation in the quarter ended June 30, 2013 when we completed our move of the Miami operation to a new facility.

Equity Income:

Total income from unconsolidated investments increased 4.3% during the quarter ended March 30, 2014, compared to the same period in 2013 due to the continued growth in income from our internet-related investments. As discussed more fully in Recent Developments above, Classified Ventures sold their Apartments.com business on April 1, 2014 and as such, we will record our portion of the gain during our quarter ending June 29, 2014.

Loss on Extinguishment of Debt:

No notes were repurchased during the quarter ended March 30, 2014. During the quarter ended March 31, 2013, we redeemed or repurchased $145.9 million aggregate principal amount of various series of our outstanding notes. We redeemed or repurchased these notes at a price higher than par value and wrote off historical discounts related to these notes, which resulted in a loss on extinguishment of debt of $12.8 million in the quarter ended March 31, 2013.

Income Taxes:

We recorded an income tax benefit of $12.2 million for the quarter ended March 30, 2014. The benefit was higher than expected due to the inclusion in pre-tax income of certain discrete tax items, such as (i) certain asset disposals, impairments and accelerated depreciation, and (ii) severance for the quarter ended March 30, 2014. Excluding these items, the effective tax benefit rate was 49.5% for the quarter ended March 30, 2014.

In the quarter ended March 31, 2013, we recorded an income tax benefit of $5.7 million. The benefit largely reflects the inclusion in pre-tax loss of discrete tax items, such as (i) loss on the refinancing of debt, (ii) certain asset disposals, and (iii) severance for the quarter. Excluding these items the effective tax benefit rate was 40.8% in the quarter March 31, 2013.

Liquidity and Capital Resources

Sources and Uses of Liquidity and Capital Resources:

Our cash and cash equivalents were $96.4 million as of March 30, 2014, compared to $17.6 million of cash at March 31, 2013, and $80.8 million as of December 29, 2013. The increase in cash flows in the quarter ended March 30, 2014, compared to the same period in 2013 is due to the redemption and repurchases of notes that occurred during the quarter ended March 31, 2013, with no equivalent repurchases during the current quarter.

We expect that most of our cash generated from operations in the foreseeable future will be used to repay debt, fund our capital expenditures, invest in new revenue initiatives and enterprise-wide operating systems, and make required


contributions to our qualified defined benefit pension plan ("Pension Plan"). In January 2014, we contributed $25 million to our Pension Plan, which we expect will satisfy all of our required contributions in fiscal year 2014. Our future contributions are discussed in Pension Plan Matters below. As of March 30, 2014, we had approximately $1.6 billion in total debt outstanding, consisting of $900 million aggregate principal amount of publicly-traded senior secured notes due 2022, $29.0 million aggregate principal amount of unsecured publicly-traded notes maturing in 2014 and $626.7 million aggregate principal amount of unsecured publicly-traded notes maturing in 2017, 2027, and 2029. We expect that we will need to refinance a significant portion of this debt prior to the scheduled maturity of such debt. In addition, we expect to use our cash from operations from time to time to opportunistically repurchase our outstanding debt prior to the scheduled maturity of such debt and/or reduce our debt through debt exchanges or similar transactions. We believe that our cash from operations is sufficient to satisfy our liquidity needs over the next 12 months, while maintaining adequate cash and cash equivalents.

On April 1, 2014, Classified Ventures, LLC consummated the sale of its Apartments.com business for $585 million. 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 quarter ending June 29, 2014. On April 1, 2014, we received a distribution of approximately $146.9 million from Classified Ventures, LLC, which is equal to our share of the proceeds from the sale. We expect the after-tax proceeds to be approximately $92 million with approximately $55 million in taxes being paid in the quarter ending September 28, 2014.

The following table summarizes our cash flows:

                                                        Quarters Ended
                                                   March 30,     March 31,
(in thousands)                                        2014         2013
Cash flows provided by (used in)
Operating activities                                $  27,634    $   63,412
Investing activities                                 (10,264)       (3,440)
Financing activities                                  (1,822)     (155,426)
Increase (decrease) in cash and cash equivalents    $  15,548    $ (95,454)

Operating Activities:

We generated $27.6 million of cash from operating activities in the quarter ended March 30, 2014, compared to generating $63.4 million of cash from operating activities in the quarter ended March 31, 2013. The decrease in cash generated from operations is primarily due to the difference in contributions to our Pension Plan (as discussed below), and the timing of net income tax payments and receipts. In the quarter ended March 30, 2014, we had net payments of $4.7 million in income taxes compared to net refunds of approximately $8.2 million in the quarter ended March 31, 2013.

Pension Plan Matters

In the quarter ended March 30, 2014, we made a $25.0 million cash contribution to our Pension Plan to meet our required payment contributions for 2014, while in the quarter ended March 31, 2013, we made a $7.5 million cash contribution.

As of December 29, 2013, the projected benefit obligations of our Pension Plan exceeded plan assets by $303.2 million in our financial statements. Legislation enacted in the second quarter of 2012 mandated a change in the discount rates used to calculate the projected benefit obligations for purposes of funding pension plans under Internal Revenue Service ("IRS") regulations. The new legislation and calculation use historical averages of long-term highly-rated corporate bonds (within ranges as defined in the legislation), which has resulted in the application of a higher discount rate to determine the projected benefit obligations for funding and current long-term interest rates.

In addition, the Pension Relief Act of 2010 ("PRA") provided relief with respect to the funding requirements of the Pension Plan. Under the PRA, we elected an option that allows the required contributions related to our 2009 and 2011 plan years to be paid over 15 years. As a result of these two legislative actions, we estimate that under IRS funding rules, the projected benefit obligation of our Pension Plan exceed plan assets by approximately $203 million as of the end of calendar year 2013. Accordingly, even with the relief provided by the two legislative rules discussed above, based on the current funding position of the Pension Plan, we expect future contributions will be required.

While amounts of future contributions are subject to numerous assumptions, including, among others, changes in interest rates, returns on assets in the Pension Plan and future government regulations, we estimate that a total of approximately $23 million will be required to be contributed to the Pension Plan in fiscal year 2015. The timing and amount of these payments reflect actuarial estimates we believe to be reasonable but are subject to changes. We believe cash flows from operations will be sufficient to satisfy our contribution requirements.


Investing Activities:

We used $10.3 million of cash in investing activities in the quarter ended March 30, 2014, which was primarily due to the purchase of property plant and . . .

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