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

Show all filings for MCCLATCHY CO

Form 10-Q for MCCLATCHY CO


8-Aug-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 as well as our other filings with the Securities and Exchange Commission. 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 and six months ended June 29, 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 continuing operations included 29 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 regarding the sale of all of the outstanding capital stock of the Anchorage Daily News, Inc. For purposes of presentation only, we updated the term "circulation" to "audience" as it releases to our discussion of revenues. The term "circulation" was used in prior filings with the Securities and Exchange Commission and no other changes were made in conjunction with this language change.

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; and 33.3% of HomeFinder.com, LLC, which operates the online real estate website HomeFinder.com. 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       Six Months Ended
                 June 29,   June 30,   June 29,   June 30,
                   2014       2013       2014       2013
Revenues:
Advertising         64.8%      67.5%      64.5%      67.2%
Audience            31.1%      28.7%      31.4%      28.9%
Other                4.1%       3.8%       4.1%       3.9%
Total revenues     100.0%     100.0%     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. Audience 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" below for a discussion of our revenue performance and contribution by category for the quarters and six months ended June 29, 2014, and June 30, 2013.

Recent Developments

Sale of Anchorage Daily News, Inc.

On May 5, 2014, we completed the sale of the outstanding capital stock of the Anchorage Daily News, Inc. ("Anchorage") for $34 million in cash. In accordance with the Financial Accounting Standards Board Accounting Standards Codification 205-20, "Discontinued Operations", the financial results of Anchorage have been reported as a discontinued operation in our condensed consolidated financial statements for the periods presented. For a more complete discussion of the transaction, refer to Note 2, Divestiture.

Investments in Unconsolidated Companies Activity

On April 1, 2014, Classified Ventures, LLC consummated the sale of its Apartments.com business for $585 million. Accordingly, during the quarter ending June 29, 2014, we recorded our share of the gain on the sale of approximately $144.2 million, before taxes. On April 1, 2014, we received a cash distribution of approximately $146.9 million from Classified Ventures, LLC, which is equal to our share of the net proceeds from the sale. See Note 3, Investments in Unconsolidated Companies.

On May 7, 2014, we transferred our partnership interest in McClatchy-Tribune Information Services ("MCT") to TCA News Service LLC ("TCA") for cash and future newswire content. Concurrently, we entered into a contributor agreement with MCT pursuant to which we will continue to be a contributor of newswire content to MCT for an agreed upon rate, and we will receive newswire content from MCT or its successor at no cost for approximately 10 years. We recognized a $3.1 million intangible asset with respect to the content we will receive from MCT at no cost under these agreements and a $1.7 million gain on sale of the equity investment. See Note 3, Investments in Unconsolidated Companies.

On August 5, 2014, we, along with the remaining partners in Classified Ventures, LLC, have entered into a definitive agreement to sell all of the ownership interests in Classified Ventures, LLC to Gannett Co., Inc. for a price that values Classified Ventures, LLC at $2.5 billion. This transaction is expected to close by the end of fiscal year 2014 and accordingly, we will record a gain on sale of our interest in Classified Ventures, LLC during the period it closes. Our portion of the cash proceeds is expected to be approximately $640 million. Upon close of the transaction, we will enter into a new, five-year affiliate agreement with Cars.com that will allow us to continue to sell Cars.com products and services exclusively in our local markets. In accordance with our bond indenture for our 9.00% Notes, we will offer the after-tax proceeds from this transaction, to the extent that they are not reinvested within 365 days of the closing of the transaction, in an offering to repurchase those notes at par. The 9.00% Notes are currently trading at a premium.

                             Results of Operations



The following table reflects our financial results on a consolidated basis for
the quarters and six months ended June 29, 2014 and June 30, 2013:



                                           Quarters Ended             Six Months Ended
                                       June 29,      June 30,      June 29,      June 30,
                                         2014          2013          2014          2013
Income (loss) from continuing
operations                             $ 91,648      $  10,961    $  75,586      $ (2,236 )
Income (loss) from discontinued
operations, net of tax                   (1,699 )          791       (1,479 )       1,247
Net income (loss)                      $ 89,949      $  11,752    $  74,107      $   (989 )
Net income (loss) per diluted
common share:
Income (loss) from continuing
operations                             $   1.03      $    0.13    $    0.85      $  (0.02 )
Income (loss) from discontinued
operations                                (0.01 )         0.01        (0.01 )        0.01
Net income (loss) per share            $   1.02      $    0.14    $    0.84      $  (0.01 )

The increase in income from continuing operations in the quarter and six months ended June 29, 2014, compared to the same periods in 2013 is primarily related to our portion of the gain on Classified Ventures, LLC's sale of its Apartments.com business. We recorded an after-tax gain of approximately $89.0 million as our share of the gain during the quarter ended June 29, 2014. See discussion in Investments in Unconsolidated Companies Activity above.


                                    Revenues



The following table summarizes our revenues by category:



                               Quarters Ended                              Six Months Ended
                 June 29,    June 30,        $         %      June 29,    June 30,        $          %
(in thousands)     2014        2013       Change     Change     2014        2013        Change     Change
Advertising:
Retail           $  92,655   $ 101,205   $ (8,550)    (8.4)   $ 180,576   $ 197,200   $ (16,624)    (8.4)
National            13,145      16,308     (3,163)   (19.4)      25,971      31,081      (5,110)   (16.4)
Classified:
Auto                18,452      18,829       (377)    (2.0)      36,808      37,654        (846)    (2.2)
Real estate          8,066       8,923       (857)    (9.6)      15,656      17,198      (1,542)    (9.0)
Employment           9,676      10,501       (825)    (7.9)      18,819      20,795      (1,976)    (9.5)
Other               15,369      16,995     (1,626)    (9.6)      30,831      33,506      (2,675)    (8.0)
Total               51,563      55,248     (3,685)    (6.7)     102,114     109,153      (7,039)    (6.4)
classified
Direct
marketing and
other               31,849      30,728       1,121      3.6      60,650      59,223        1,427      2.4
Total              189,212     203,489    (14,277)    (7.0)     369,311     396,657     (27,346)    (6.9)
advertising
Audience            90,817      86,489       4,328      5.0     179,770     170,539        9,231      5.4
Other               11,925      11,630         295      2.5      23,541      23,049          492      2.1
Total revenues   $ 291,954   $ 301,608   $ (9,654)    (3.2)   $ 572,622   $ 590,245   $ (17,623)    (3.0)

During the quarter and six months ended June 29, 2014, total revenues decreased 3.2% and 3.0%, respectively, compared to the same periods 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 audience revenues due primarily to the shift of some of our newspapers to fee-for-service contracts, sales of our subscription products and, to a lesser extent, growth in other revenues.

Advertising Revenues

Total advertising revenues decreased 7.0% and 6.9% during the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. While we experienced declines in almost all of our advertising revenue categories, the decrease in total advertising revenues related primarily to declines in retail, national and other classified advertising. These decreases in advertising revenues were partially offset by increases in our digital retail, digital automotive classified advertising and direct marketing revenues. In addition, we no longer have an affiliate agreement to sell products from Apartments.com subsequent to Classified Ventures, LLC's sale of that business on April 1, 2014. Accordingly, we had no revenues from Apartments.com in the quarter ended June 29, 2014, compared to $1.0 million in revenues from sales of Apartments.com products in the same period of 2013 and $0.4 million in the six months ended June 29, 2014, compared to $1.9 million in the same period of 2013.

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

                               Quarters Ended       Six Months Ended
                             June 29,   June 30,   June 29,   June 30,
                               2014       2013       2014       2013
Advertising:
Retail                          49.0%      49.7%      48.9%      49.7%
National                         6.9%       8.0%       7.0%       7.9%
Classified                      27.3%      27.2%      27.7%      27.5%
Direct marketing and other      16.8%      15.1%      16.4%      14.9%
Total advertising              100.0%     100.0%     100.0%     100.0%

Retail:

During both the quarter and six months ended June 29, 2014, retail advertising revenues decreased 8.4% compared to the same periods in 2013. In the quarter ended June 29, 2014, the decrease in retail advertising revenues was primarily due to a decrease of 13.2% in print ROP advertising revenues and 11.4% in preprint advertising revenues, compared to the same period in 2013. These were partially offset by an increase in digital retail advertising of 7.8% in the quarter ended June 29, 2014, compared to the same period in 2013. In the six months ended June 29, 2014, the decrease in retail advertising


revenues was primarily due to a decrease of 12.5% in print ROP advertising revenues and 10.7% in preprint advertising revenues compared to the same period in 2013. These decreases were partially offset by an increase in digital retail advertising of 5.1% during the six months ended June 29, 2014, compared to the same period in 2013. The overall decreases in retail advertising revenues were widespread among the ROP and preprint categories, reflecting a sluggish retail environment.

National:

National advertising revenues decreased 19.4% and 16.4% during the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. We experienced a 21.0% and 19.3% decrease in print national advertising and a 15.8% and 9.7% decrease in digital national advertising during the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. Decreases in total national advertising revenues during these periods were led by decreases in the banking and telecommunications categories, which showed unusually strong performances in the same periods of 2013. Also contributing to the decline in total national advertising revenues for the quarter and six months ended June 29, 2014, was a decrease in the entertainment category.

Classified:

During the quarter and six months ended June 29, 2014, classified advertising revenues decreased 6.7% and 6.4%, respectively, compared to the same periods in 2013. The print automotive, print and digital employment, and print other (primarily reflecting legal, remembrance and celebration notices and miscellaneous advertising) categories represented our largest declines in classified advertising during these periods and were partially offset by an increase in the digital automotive category. While the decreases in classified advertising revenues are partially a result of the slowly improving economy, advertisers are increasingly using digital advertising, which is widely available from many of our competitors, instead of print advertising. During the quarter and six months ended June 29, 2014, compared to the same periods in 2013, we experienced a decrease in print classified advertising of 11.7% and 11.3%, respectively, while digital classified advertising only decreased 0.5% in both of these periods. The decreases in digital classified advertising were impacted by the lack of Apartments.com revenue in the quarter and six months ended June 29, 2014, compared to the same periods in 2013.

The following is a discussion of the major classified advertising categories for the quarter and six months ended June 29, 2014, as compared to the same periods in 2013:

Automotive advertising revenues decreased 2.0% and 2.2% in the quarter and six months ended June 29, 2014, respectively. Print automotive advertising revenues declined 21.6% and 22.1% in the quarter and six months ended June 29, 2014. However, digital automotive advertising revenues were up 10.4% and 10.8% in the quarter and six months ended June 29, 2014, respectively. 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 9.6% and 9.0% in the quarter and six months ended June 29, 2014, respectively. 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 4.0% and 4.6% in the quarter and six months ended June 29, 2014, respectively. Digital real estate advertising revenues decreased 18.7% and 16.1% in the quarter and six months ended June 29, 2014, respectively. Digital real estate revenues in the quarter and six months ended June 30, 2013, included $1.0 million and $1.9 million, respectively, of revenues from the sales of Apartments.com products that we no longer sell, as discussed above.

Employment advertising revenues decreased 7.9% and 9.5% in the quarter and six months ended June 29, 2014, respectively, reflecting an employment market that has been slow to recover and due to the continued shift from traditional media to digital media, which includes a wider array of options. Print employment advertising revenues declined 9.8% and 9.9% in the quarter and six months ended June 29, 2014, respectively. Digital employment advertising revenues were down 6.3% and 9.2% in the quarter and six months ended June 29, 2014, respectively.

Other classified advertising revenues, which include legal, remembrance and celebration notices and miscellaneous advertising, decreased 9.6% and 8.0% in the quarter and six months ended June 29, 2014, respectively. Print other classified advertising revenues declined 10.0% and 8.3% in the quarter and six months ended June 29, 2014, respectively. Digital other classified advertising revenues were down 8.1% and 7.0% in the quarter and six months ended June 29, 2014, respectively.


Digital:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 26.2% and 25.9% of total advertising revenues in the quarter and six months ended June 29, 2014, respectively. Total digital advertising includes digital advertising both bundled with print and sold on a stand-alone basis. In the quarter ended June 29, 2014, total digital advertising revenues increased 1.2% to $49.5 million compared to the same period in 2013. Digital-only advertising revenues increased 10.0% to $31.0 million in the quarter ended June 29, 2014, compared to the same period in 2013. In the six months ended June 29, 2014, total digital advertising revenues increased 0.8% to $95.9 million compared to the same period in 2013. Digital-only advertising revenues totaled $59.9 million, an increase of 10.7% in the six months ended June 29, 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 look for multiple advertising channels to reach their customers. We had no revenues from Apartments.com in the quarter ended June 29, 2014, compared to $1.0 million in revenues from sales of Apartments.com products in the same period of 2013 and $0.4 million in the six months ended June 29, 2014, compared to $1.9 million in the same period of 2013. Digital advertising revenues sold in conjunction with print products declined 10.9% and 12.2% in the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013 as a result of fewer print advertising sales.

Direct Marketing and Other:

Direct marketing and other advertising revenues increased 3.6% and 2.4% during the quarter and six months ended June 29, 2014, respectively, compared to the same periods 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 8.3% and 9.2% in the quarter and six months ended June 29, 2014, compared to the same periods in 2013.

Audience Revenues

Audience revenues increased 5.0% and 5.4% during the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. Contributing to the growth in total audience revenues in the quarter and six months ended June 29, 2014, compared to the same periods in 2013, was an increase of $7.0 million and $11.4 million, respectively, 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 decreased 2.5% and increased 1.8% in the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. Our total operating expenses reflect our continued effort to reduce costs through streamlining processes to gain efficiencies as well as headcount reductions. However, operating expenses in the quarter and six months ended June 29, 2014, reflect increases in non-cash operating expenses, including non-cash impairment charges and accelerated depreciation, as well as increases for newspapers that changed to fee-for-service circulation delivery contracts as discussed in the Audience Revenues Section above. Operating expenses in all periods presented include employee severance related to headcount reductions. The quarter and six months ended June 30, 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                                 Six Months Ended
                      June 29,     June 30,        $          %       June 29,     June 30,        $          %
(in thousands)          2014         2013        Change     Change      2014         2013        Change     Change
Compensation                                                 (2.3)                                           (1.9)
expenses              $ 103,481    $ 105,871    $ (2,390)             $ 212,033    $ 216,123    $ (4,090)
Newsprint,               29,127       30,131      (1,004)    (3.3)       56,447       60,232      (3,785)    (6.3)
supplements and
printing expenses
Depreciation and         25,926       29,693      (3,767)   (12.7)       66,221       59,929        6,292     10.5
amortization
expenses
Other operating         106,113      105,756          357      0.3      215,312      203,987       11,325      5.6
expenses
                      $ 264,647    $ 271,451    $ (6,804)    (2.5)    $ 550,013    $ 540,271    $   9,742      1.8

Compensation expenses, which include the severance costs discussed above, decreased 2.3% and 1.9% in the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. Payroll expenses in the quarter and six months ended June 29, 2014, decreased 1.8% and 1.1%, respectively, compared to the same periods in 2013, reflecting a


6.4% and 5.3% decline in average full-time equivalent employees partially offset by higher severance costs in these same periods. Fringe benefits costs in the quarter and six months ended June 29, 2014, decreased 4.5% and 5.5%, respectively, compared to the same periods in 2013, primarily as a result of lower retirement costs related to our Pension Plan.

Newsprint, supplements and printing expenses decreased 3.3% and 6.3% in the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. During the quarter and six months ended June 29, 2014, compared to the same periods in 2013, newsprint expense declined 11.4% and 11.3%, respectively. The newsprint declines reflect a 10.1% and 9.4% decrease in newsprint usage and a 1.4% and 2.2% decrease in newsprint prices, during the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. These decreases in newsprint were partially offset by increases in outsourced printing costs of $2.4 million and $2.8 million in the quarter and six months ended June 29, 2014, respectively, primarily related to the outsourcing of our printing process at one newspaper.

Depreciation and amortization expenses decreased 12.7% and increased 10.5% in the quarter and six months ended June 29, 2014, respectively, compared to the same periods in 2013. Changes in amortization expense in the periods presented were minor. The decrease in depreciation expense during the quarter ended June 29, 2014, compared to the same period in 2013 was partially due to the impact of approximately $1.7 million in accelerated depreciation during this second quarter of 2013 compared to none in the same quarter of 2014 and due to less recurring depreciation expense of approximately $2.1 million for assets that have fully depreciated. The increase in depreciation expense in the six months ended June 29, 2014, compared to the same period in 2013, is primarily due to the impact of accelerated depreciation. During the six months ended June 29, 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 six months ended June 30, 2013, we incurred $3.9 million in accelerated depreciation related to our Miami operations move.

Other operating costs increased 0.3% and 5.6% in the quarter and six month ended June 29, 2014, respectively, compared to the same periods in 2013. During the . . .

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