Gannett's Q3 net income down 1.6% year-over-year to US$99.8M, net revenues down 3.5% to US$1.27B with declines in broadcasting, publishing revenues

Kendall Sinclair

Kendall Sinclair

Oct 17, 2011 – Gannett

MCLEAN, Virginia , October 17, 2011 (press release) – --Net Cash Flow from Operating Activities Totaled $188.4 million

--Free Cash Flow Totaled $175.5 million

--Company-Wide Digital Revenues Increased 10% Year-Over-Year

Gannett Co., Inc. a leading international media and marketing solutions company, today reported third quarter 2011 financial results. Highlights are summarized below:

-- Earnings per diluted share, on a GAAP (generally accepted accounting principles) basis were $0.41 for the third quarter of 2011 compared to $0.42 for the third quarter last year.

-- Earnings per diluted share from continuing operations for the September 2011 year-to-date period were $1.40 compared to $1.63 for 2010.

-- Excluding special items in 2010 and 2011, third quarter earnings per diluted share were $0.44 compared to $0.52 for the same quarter in 2010.

-- Earnings per diluted share from continuing operations excluding special items for the September 2011 year-to-date period were $1.42 compared to $1.62 in 2010 on the same basis.

Gracia Martore, president and chief executive officer, said, "All of our business segments continued to deliver consistent profitability in the third quarter. These results, amid continued market volatility, reflect the strength of Gannett's iconic local and national brands and our relentless commitment to continuously enhancing the news, information and services we offer every day to the communities we serve. Importantly, digital revenues continued to show positive momentum in all of our business segments and were up 10 percent company-wide compared to last year, reflecting the success we are having in offering content and solutions across all platforms."

Martore continued, "We remain focused on aligning expenses with areas of opportunity, while leveraging our great brands, strong balance sheet and world-class talent to position Gannett for long-term revenue growth. I'm convinced we have the right strategy and team in place to continue to remake Gannett in the digital age."

Results for the third quarter of 2011 include special charges affecting operating income related to workforce restructuring which totaled $8.7 million ($5.3 million after-tax or $0.02 per share). A non-cash impairment for an investment in an online business of $1.9 million ($1.1 million after-tax) was also recorded in the third quarter which affected non-operating items. Results for the year-to-date 2011 period include charges primarily associated with facility consolidations and workforce restructuring of $37.5 million ($23.0 million after-tax or $0.09 per share), and a non-cash impairment for an investment in an online business of $1.9 million ($1.1 million after-tax). The company realized a net tax benefit of $20.1 million ($0.08 per share) related primarily to a tax settlement covering multiple years.

Results for the third quarter of 2010 included $31.1 million ($23.3 million after-tax or $0.10 per share) of charges associated with facility consolidations, intangible asset impairments and workforce restructuring. In addition to these third quarter 2010 special items, results for the year-to-date 2010 period also included a $28.7 million ($0.12 per share) net tax benefit due primarily to the expiration of the statutes of limitations and the release of certain reserves related to the sale of a business in a prior year and a $2.2 million ($0.01 per share) tax charge related to healthcare reform legislation.

On October 6, 2011, the company announced that Craig Dubow, chairman and chief executive officer, resigned due to disability. Dubow had taken a leave of absence on September 15 to address continuing issues relating to prior medical conditions. Martore, then president and chief operating officer, who served as principal executive officer while Dubow was on medical leave, was promoted to president and chief executive officer and joined the company's Board of Directors. In addition, Marjorie Magner, an independent director since 2006, was named chairman of the board.

Amounts reported in accordance with GAAP are contained in Tables 1 through 4. Certain amounts and comparisons included in the following discussion of GAAP results are supplemented by discussions which exclude the effect of special items. Details of these special items and their effect on GAAP results are included on the Non-GAAP Financial Information Tables 5 through 10 attached to this news release. The company's basis for providing discussions of non-GAAP results is noted below.

CONTINUING OPERATIONS

Net income attributable to Gannett totaled $99.8 million in the third quarter while net income attributable to Gannett on a non-GAAP basis was $106.2 million. Reported operating income was $198.2 million and non-GAAP operating income totaled $206.8 million. Operating cash flow (a non-GAAP term defined as operating income plus special items, depreciation and amortization) was $255.8 million in the quarter.

Reported operating revenues for the company declined 3.5 percent to $1.27 billion in the third quarter from $1.31 billion for the same quarter a year ago. Solid Digital segment revenue growth was driven primarily by higher revenue at CareerBuilder. The revenue decline in the Broadcasting segment reflects significantly lower political advertising compared to 2010's third quarter that more than offset gains in non-political advertising and retransmission revenue. While Publishing segment advertising revenues in total declined amid softening economic conditions, digital revenue for the segment rose 8.0 percent.

Operating expenses including the special charges as noted above totaled $1.07 billion in the third quarter this year, a decline of 4.0 percent compared to the third quarter last year. Operating expenses on a non-GAAP basis were $1.06 billion, 2.0 percent lower than the third quarter a year ago. The decline reflects continuing cost control and efficiency efforts company-wide. Operating expense declines in both the Publishing and Broadcast segments more than offset an increase in Digital segment expenses that rose in line with revenue growth and reflected strategic initiatives.

On July 18, 2011, the company's Board of Directors authorized the resumption of share repurchases under the $1 billion share repurchase program originally approved on July 25, 2006. The purchase of approximately 2.7 million shares was completed during the quarter for $28 million. Current authority remaining under the program is approximately $781 million.

PUBLISHING

Publishing segment operating revenues were $917.8 million for the quarter compared to $969.4 million in the third quarter of 2010 reflecting the impact of the lackluster economic environment on advertising demand. Digital revenues in the Publishing segment were up in the quarter. Circulation revenue was just 1.0 percent lower, a sequential improvement relative to comparisons for the first quarter and second quarter this year.

Advertising revenues totaled $591.7 million in the quarter compared to $646.7 million in the third quarter last year. Advertising revenues in the U.S. were 9.3 percent lower while at Newsquest, the company's operations in the UK, advertising revenues declined 7.9 percent, in pounds. Newsquest's advertising revenue comparisons across all categories improved relative to the first and second quarters this year.

Ad revenue percentage changes for the retail, national and classified categories for the publishing segment for the quarter were as follows:

Third Quarter 2011 Year-over-Year Comparisons
        --------------------------------------------------------------
                          U.S. Publishing      Newsquest     Total       Total
                       (including USA TODAY)  (in pounds) Publishing  Publishing
                                                            Segment     Segment
                                                           (constant
                                                           currency)
                      ---------------------  -----------  ----------  ----------
        Retail                (6.3%)            (5.0%)      (6.1%)      (5.7%)
        National              (17.3%)            7.4%       (15.7%)     (15.4%)
        Classified            (9.4%)            (11.6%)     (10.0%)     (9.0%)
                      ---------------------  -----------  ----------  ----------
                              (9.3%)            (7.9%)      (9.1%)      (8.5%)


National advertising was 15.4 percent lower in the quarter. A decline in advertising demand at USA TODAY was offset partially by an increase in national advertising at Newsquest. Third quarter national advertising comparisons for Newsquest in pounds were almost 5 percentage points better than second quarter comparisons. At USA TODAY, a substantial increase in technology advertising spending, the largest category in the quarter, was more than offset by declines in the entertainment, automotive and financial categories.

An 8.0 percent increase in Publishing segment digital revenues (included in all of the categories above) reflects the company's focus on cross-platform sales and its partnership with Yahoo!. Online revenues in U.S. Community Publishing and Newsquest (in pounds) were up 8.5 percent and 6.2 percent, respectively.

Classified advertising at our domestic publishing operations was 9.4 percent lower during the quarter reflecting primarily the softening economy. Employment advertising in the U.S. was unchanged compared to the third quarter last year while automotive declined 5.2 percent reflecting, in part, supply chain and inventory issues in Japan. The real estate category, reflecting the problematic housing market nationwide, was 20.1 percent lower in the quarter. At Newsquest, classified advertising comparisons in pounds were better than second quarter comparisons due in part to an 11 percentage point improvement in employment advertising comparisons.

The percentage changes in the classified categories for the third quarter of 2011 were as follows:

Third Quarter 2011 Year-over-Year Comparisons
        ----------------------------------------------------
                          U.S.       Newsquest     Total       Total
                       Publishing   (in pounds) Publishing  Publishing
                                                  Segment     Segment
                                                 (constant
                                                 currency)
                       ----------  -----------  ----------  ----------
        Automotive       (5.2%)       (12.8%)     (6.4%)      (5.8%)
        Employment        0.0%        (13.9%)     (4.7%)      (3.3%)
        Real Estate      (20.1%)      (11.6%)     (17.1%)     (15.8%)
        Legal            (17.7%)        ---       (17.7%)     (17.7%)
        Other            (10.7%)      (9.3%)      (10.2%)     (8.9%)
                       ----------  -----------  ----------  ----------
                         (9.4%)       (11.6%)     (10.0%)     (9.0%)


Reported Publishing segment operating expenses were $809.8 million in the quarter, 3.4 percent lower compared with the third quarter last year. On a non-GAAP basis, Publishing segment operating expenses also declined 3.4 percent to $801.1 million from $829.0 million in the same quarter last year. The impact of operating efficiency efforts as well as facility consolidations in prior quarters drove the decline. Newsprint expense was up slightly in the quarter as a 10.1 percent increase in newsprint usage prices was offset by an 8.7 percent consumption decline. The company expects its newsprint expense to be lower in the fourth quarter of 2011 compared with 2010 due to a continued decline in consumption.

Reported Publishing segment operating income totaled $107.9 million. On a non-GAAP basis, Publishing segment operating income was $116.6 million in the quarter and operating cash flow totaled $146.8 million.

BROADCASTING

Broadcasting revenues (which include Captivate) totaled $174.3 million in the quarter compared to $185.3 million in the third quarter last year, which benefited from $21.3 million in advertising demand related to politics.

Television revenues were $168.8 million, $10.8 million lower compared to $179.6 million last year, despite a net decrease of $18.4 million in political spending. Total adjusted television revenues, defined to exclude the incremental impact of the cyclical ad demand related to political spending, were 4.7 percent higher. The increase was due, in part, to strengthening demand for auto advertising in September. Retransmission revenues increased 26.7 percent in the quarter and totaled $20.0 million. Online revenues at our television stations were up 27.5 percent. Based on current trends and comparing against the substantial level of political advertising which totaled $52.4 million in last year's fourth quarter, we expect the percentage decline in total television revenues for the fourth quarter of 2011 to be in the low-teens compared to the fourth quarter of 2010. Excluding the incremental impact of political spending, total television revenues are expected to increase in the very high single digits in the fourth quarter this year compared to the fourth quarter last year.

Broadcasting segment operating expenses declined 10.9 percent this quarter to $105.8 million due primarily to the impact of special items in the third quarter last year. On a non-GAAP basis, operating expenses were 3.8 percent lower. Reported operating income totaled $68.6 million, an increase of 2.9 percent. On a non-GAAP basis operating income declined 9.0 percent while operating cash flow totaled $75.7 million, just $7.5 million lower despite the significant reduction in politically related advertising demand.

DIGITAL

Digital segment operating revenues totaled $173.9 million in the quarter, an increase of 10.3 percent compared to the same quarter last year reflecting primarily continuing strength in CareerBuilder's revenue. Digital segment operating expenses were $139.6 million, 1.7 percent lower, reflecting primarily the impact of special item charges in 2010's third quarter. On a non-GAAP basis, operating expenses were 8.2 percent higher. Digital segment operating income more than doubled on a reported basis and was 19.8 percent higher on a non-GAAP basis. Operating cash flow was $42.1 million compared to $36.0 million a year ago, an increase of 16.8 percent.

Digital revenues company-wide including the Digital segment and all digital revenues generated by the other business segments were 9.8 percent higher and totaled $272.6 million, 21.5 percent of total operating revenues.

At the end of the quarter, Gannett had about 120 domestic web sites affiliated with its local publishing and television markets, USA TODAY, Gannett Government Media and Gannett Healthcare Group. USATODAY.com is one of the most popular newspaper sites on the Web and the USA TODAY app is now a top news app with more than 10 million downloads including those across iPad, iPhone, Android, Windows and now the HP Touchpad. The company also had web sites in all of its 19 television markets. In September, Gannett's consolidated domestic Internet audience share was 51.5 million unique visitors reaching 23.6 percent of the Internet audience, according to Comscore Media Metrix. Newsquest is also an Internet leader in the UK where its network of web sites attracted 78.2 million monthly page impressions from approximately 9.3 million unique users in September 2011. CareerBuilder's unique visitors in the third quarter averaged 24.8 million, an increase of 11.5 percent over the same period last year. And across the company, USA TODAY and our local sites served over 1.3 billion mobile page views in the first half of 2011, up 107 percent from the same time period a year ago.

NON-OPERATING ITEMS

The company's equity earnings include its share of operating results from unconsolidated investees including the California Newspapers Partnership, Texas-New Mexico Newspapers Partnership, Tucson newspaper partnership and other online/digital businesses including Classified Ventures.

Equity income in unconsolidated investees totaled $2.6 million in the quarter compared to $7.0 million in the third quarter last year. The decline reflects lower results for newspaper partnerships and the special impairment charge for an investment in an online business, offset partially by stronger results for certain digital investments particularly Classified Ventures. Excluding the impairment charge, equity income declined $2.6 million to $4.4 million.

Interest expense totaled $40.9 million, down slightly compared to $41.0 million for the third quarter last year. The decline was due to the impact of lower average debt balances offset, in part, by higher average interest costs.

Net cash flow from operating activities was $188.4 million while free cash flow (a non-GAAP measure) totaled $175.5 million in the quarter. The balance of long term debt at quarter end was $1.92 billion, a reduction of $103.2 million during the third quarter. Total cash at the end of the third quarter was $196.0 million.

* * *

USE OF NON-GAAP INFORMATION

The company uses non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures are not to be considered in isolation from or as a substitute for the related GAAP measures, and should be read only in conjunction with financial information presented on a GAAP basis.

In this earnings report, the company discusses non-GAAP financial performance measures that exclude from its reported GAAP results the impact of special items consisting of workforce restructuring charges, facility consolidation expenses, non-cash asset impairment charges and certain charges and credits to its income tax provision. The company believes that such expenses and tax items are not indicative of normal, ongoing operations and their inclusion in results makes for more difficult comparisons between periods and with peer group companies. Workforce restructuring and facility consolidation expenses primarily relate to incremental expenses the company has incurred to consolidate production facilities and centralize functions. These expenses include payroll and related benefit costs and accelerated depreciation. Non-cash asset impairment charges were recorded in 2011 and 2010 to reduce the book value of certain intangible assets and an investment accounted for under the equity method to fair value as the businesses underlying these assets had experienced significant and sustained declines in operating performance. In addition, the company recorded a $20.1 million net tax benefit in the second quarter of 2011 related primarily to a tax settlement covering multiple years. The $28.7 million net tax benefit in the second quarter of 2010 was due primarily to the expiration of the statutes of limitations and the accompanying release of tax reserves related to the sale of a business in a prior year. The first quarter of 2010 included a $2.2 million tax charge related to healthcare reform legislation and the resultant loss of tax deductibility for certain healthcare costs covered by Medicare retiree drug subsidies.

The company also discusses operating cash flow, a non-GAAP financial performance measure that it believes offers a useful view of the overall operation of its businesses. This non-GAAP measure is calculated by adding the expenses associated with the special expense items described above, as well as depreciation and amortization, to operating income as reported on a GAAP basis. This earnings report also discusses free cash flow, a non-GAAP liquidity measure. Free cash flow is defined as "net cash flow from operating activities" as reported on the statement of cash flows reduced by "purchase of property, plant and equipment" as well as "payments for investments" and increased by "proceeds from investments." The company believes that free cash flow is a useful measure for management and investors to evaluate the level of cash generated by operations and the ability of its operations to fund investments in the businesses, repay indebtedness, add to the company's cash balance, or to use in other discretionary activities. Management uses free cash flow to monitor cash available for repayment of indebtedness and in its discussions with the investment community.

Management uses non-GAAP financial performance measures for purposes of evaluating business unit and consolidated company performance. The company therefore believes that each of the non-GAAP measures presented provides useful information to investors by allowing them to view the company's businesses through the eyes of management and the Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance of its businesses. In addition, many of the company's peer group companies present similar non-GAAP measures so the presentation of such measures facilitates industry comparisons.

Tabular reconciliations for the non-GAAP financial measures are contained in Tables 5 through 10 attached to this news release.

As previously announced, the company will hold an earnings conference call at 10:00 a.m. ET today. The call can be accessed via a live webcast through the company's web site, www.gannett.com , or listen-only conference lines. U.S. callers should dial 1-877-879-6209 and international callers should dial 719-325-4774 at least 10 minutes prior to the scheduled start of the call. The confirmation code for the conference call is 1996764. To access the replay, dial 1-888-203-1112 in the U.S. International callers should use the number 719-457-0820. The confirmation code for the replay is 1996764. Materials related to the call will be available through the Investor Relations section of the company's web site Monday morning.


About Gannett

Gannett Co., Inc. is an international media and marketing solutions company that informs and engages more than 100 million people every month through its powerful network of broadcast, digital, mobile and publishing properties. Our portfolio of trusted brands offers marketers unmatched local-to-national reach and customizable, innovative marketing solutions across any platform. Gannett is committed to connecting people -- and the companies who want to reach them -- with their interests and communities. For more information, visit www.gannett.com .

Gannett is not responsible for updating the information contained in this press release beyond the published date, or for changes made to this press release by wire services, Internet service providers or other media.


Industry Intelligence Editor's Note: In an omitted table, Gannett reported 2010 Q3 net income of US$101.4 million.

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