Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission
file number 1-6961
GANNETT CO., INC.
(Exact name of registrant as specified in its charter)
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Delaware
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16-0442930 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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7950 Jones Branch Drive, McLean, Virginia
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22107-0910 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (703) 854-6000.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
The total number of shares of the registrants Common Stock, $1.00 par value, outstanding as of
September 28, 2008, was 228,116,392.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Items 1 and 2. Financial Statements and Managements Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENTS DISCUSSION AND ANALYSIS OF OPERATIONS
Results from Continuing Operations
Gannett Co, Inc. (the Company) reported income from continuing operations for the third
quarter of 2008 of $158.1 million or $0.69 per diluted share The results for the quarter include
$23.0 million in pre-tax severance expenses ($14.4 million after-tax or $0.07 per share) related to
reductions in force and efficiency efforts in the U.S. and the UK. For the same period a year ago,
income from continuing operations was $234.0 million or $1.01 per diluted share.
For the year-to-date, the 2008 loss from continuing operations was $1,940.9 million or $8.49
per diluted share compared to income in 2007 from continuing operations of $730.3 million or $3.12
per diluted share. During the second quarter of 2008, the Company recorded certain non-cash
impairment charges totaling approximately $2.8 billion on a pre-tax basis and $2.5 billion on an
after-tax basis or $11.07 per diluted share. These charges are more fully described in Note 3 to
the Condensed Consolidated Financial Statements in this report.
Business Acquisitions and Establishment of New Business Segment
On September 3, 2008, the Company increased its ownership in CareerBuilder LLC (CareerBuilder)
to 50.8% from 40.8%, obtaining a controlling interest. Accordingly, the results of CareerBuilder,
beginning with September, are now fully consolidated. On June 30, 2008, the Company increased its
ownership in ShopLocal LLC (ShopLocal) to 100% from 42.5%, and the results of ShopLocal, from that
date, are now fully consolidated. Prior to these acquisitions, the equity share of CareerBuilder
and ShopLocal results were reported as equity earnings in the non-operating section of the
Statements of Income.
Beginning with the third quarter, a new Digital business segment is being reported, which
includes CareerBuilder and ShopLocal results from the date of full consolidation, as well as
PointRoll, Planet Discover and Schedule Star. Prior period results for PointRoll, Planet Discover
and Schedule Star have been reclassified from the publishing segment to the new digital segment.
Operating results from the operation of web sites that are associated with publishing operations
and broadcast stations continue to be reported in the publishing and broadcast segments.
Operating Revenue and Expense Discussion
The narrative which follows provides background on key revenue and expense areas and principal
factors affecting amounts and comparisons.
Operating Revenues
Operating revenues declined 9.0% to $1.6 billion for the third quarter of 2008 and 9.2% to
$5.0 billion for the first nine months of the year. The decline was principally due to softer
publishing advertising demand resulting from weak economic conditions in the U.S. and the UK.
Publishing revenue declines were offset partially by Olympic and political ad spending in
broadcasting and revenues from the consolidation of CareerBuilder and ShopLocal. On a pro forma
basis, assuming Gannett consolidated CareerBuilder and ShopLocal in the third quarters of 2008 and
2007, operating revenues would have been 10.2% lower. A more detailed discussion of revenues by
business segment is included in following sections of this report.
Operating Expenses
Operating expenses declined 2.2% for the third quarter, while for the year-to-date period they
increased substantially, as a result of the second quarter non-cash impairment charges (refer to
Note 3 to the Condensed Consolidated Financial Statements in this report for information regarding
these charges). The reduction in operating expenses for the quarter reflects continued cost
control and efficiency efforts, including lower newsprint expense from significantly reduced
consumption, as well as lower pension and other employee benefit costs. Savings in these areas
were partially offset by pre-tax severance expense of $23.0 million, and by incremental operating
costs resulting from the consolidation of CareerBuilder and ShopLocal. On a pro forma basis and
excluding severance costs, operating expenses declined 5.3% for the quarter.
2
Excluding severance costs, payroll expenses were down 2% for the quarter and 3% for the first
nine months, reflecting headcount reductions across the Company.
Newsprint expenses were down 3% for the third quarter of 2008 and 12% for the first nine
months. Newsprint usage prices for the third quarter rose 16% but consumption was down 17%. For
the nine month period, prices were 4% higher and consumption was 16% lower.
During the second quarter of 2008, the Company made changes to its domestic benefit plans,
improving its 401(k) plan employer matching contribution while freezing benefits under certain
Company sponsored defined benefit pension plans. As a result, the Company recognized a pre-tax
curtailment gain for its domestic pension plans of approximately $46.5 million ($28.9 million
after-tax or $0.13 per share).
The Companys continued aggressive cost control efforts at nearly all business properties
throughout 2008 mitigated to a significant degree the effects of lower revenue results. The
Company has plans to implement further cost control measures in the fourth quarter, including
additional headcount reductions.
The Company has increased strategic spending for online/digital operations, including costs
for new personnel and technology.
Publishing Results
Publishing revenues declined 14% to $1.4 billion from $1.6 billion in the third quarter and
11% to $4.4 billion from $4.9 billion year-to-date.
Publishing operating revenues are derived principally from advertising and circulation sales,
which accounted for 72% and 22% of total publishing revenues for the third quarter and 73% and 21%
of total publishing revenues for the year-to-date period. Advertising revenues include amounts
derived from advertising placed with print products as well as publishing internet web sites. All
other publishing revenues are mainly from commercial printing operations. The table below
presents the components of publishing revenues.
Publishing revenues, in thousands of dollars
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Third Quarter |
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2008 |
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2007 |
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% Change |
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Advertising |
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$ |
977,111 |
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$ |
1,187,744 |
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(17.7 |
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Circulation |
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298,978 |
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309,143 |
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(3.3 |
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All other |
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86,627 |
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95,085 |
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(8.9 |
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Total |
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$ |
1,362,716 |
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$ |
1,591,972 |
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(14.4 |
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Year-to-date |
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2008 |
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2007 |
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% Change |
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Advertising |
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$ |
3,182,194 |
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$ |
3,690,926 |
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(13.8 |
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Circulation |
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914,150 |
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939,184 |
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(2.7 |
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All other |
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264,581 |
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288,553 |
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(8.3 |
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Total |
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$ |
4,360,925 |
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$ |
4,918,663 |
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(11.3 |
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3
The table below presents the principal categories of advertising revenues for the publishing
segment.
Advertising revenues, in thousands of dollars
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Third Quarter |
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2008 |
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2007 |
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% Change |
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Retail |
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$ |
457,789 |
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$ |
509,746 |
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(10.2 |
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National |
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155,528 |
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168,830 |
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(7.9 |
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Classified |
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363,794 |
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509,168 |
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(28.6 |
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Total publishing advertising revenue |
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$ |
977,111 |
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$ |
1,187,744 |
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(17.7 |
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Year-to-date |
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2008 |
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2007 |
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% Change |
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Retail |
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$ |
1,444,600 |
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$ |
1,581,974 |
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(8.7 |
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National |
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499,959 |
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540,196 |
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(7.4 |
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Classified |
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1,237,635 |
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1,568,756 |
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(21.1 |
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Total publishing advertising revenue |
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$ |
3,182,194 |
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$ |
3,690,926 |
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(13.8 |
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Publishing advertising revenues decreased 18% to $977 million from $1.2 billion for the third
quarter as the Company experienced significant declines in all three revenue categories. For U.S.
publishing, advertising decreased 15%, while in the UK, advertising revenues fell 28%. In British
pounds, advertising revenues in the UK declined 24% for the third quarter and 14% for the first
nine months. The average exchange rate used to translate UK publishing results from the British
pound to U.S. dollars decreased 6% to 1.90 from 2.02 for the third quarter and decreased slightly
less than 2% to 1.95 from 1.99 for the year-to-date period. On a constant currency basis total
publishing advertising revenue would have been 17% lower for the third quarter and 13% lower for
the year-to-date period.
For the third quarter and year-to-date periods, retail advertising revenues declined 10% and
9%, respectively. Retail advertising in the U.S. was down 10% for the quarter and 9% year-to-date.
In the UK retail revenues were down 14% for the quarter and 8% year-to-date. Revenues were lower
in most principal retail categories, with the most significant declines in the furniture,
department store, and telecommunications categories. Certain of these category losses are tied to
the troubled real estate sector in the U.S. and the UK.
National advertising revenues declined 8% for the third quarter and 7% year-to-date. National
ad revenue results reflect soft advertising demand at USA TODAY, down 7% for the third quarter and
8% year-to-date. Paid ad pages at USA TODAY were 713 for the third quarter compared to 803 for the
same period last year and were 2,370 year-to-date compared to 2,741 last year. Growth in the
advocacy, financial, and home and building categories was more than offset by losses in the
entertainment, travel, automotive and technology categories.
Classified advertising revenues declined 29% for the quarter and 21% year-to-date.
Domestically, classified revenues were 27% lower for the third quarter and 23% lower year-to-date.
For the quarter, employment was down 36%, real estate was 33% lower and automotive was 19% below
last year. On a year-to-date basis employment was down 30%, real estate was down 31% and
automotive was 14% lower. Increasingly, classified results in all principal categories were
adversely affected by the troubled real estate sector and a deterioration in general economic
conditions. The Companys properties in the states of Arizona, California, Nevada and Florida have
been most adversely affected by these economic developments.
UK classified revenues were 33% lower for the quarter and 19% lower for the year-to-date. On
a constant currency basis, UK classified revenues were down 29% for the quarter and 17%
year-to-date. General economic conditions in the UK have also significantly worsened since the
beginning of the year. Home mortgage lending is down substantially and the unemployment rate has
risen. Real estate revenues were 54% lower for the quarter and were down 32% for the year-to-date.
Employment revenue declined 30% for the quarter and 14% year-to-date, and automotive was off 30%
for the quarter and 23% year-to-date.
4
The Companys publishing operations, including its U.S. Community Publishing Group, the USA
TODAY Group and the Newsquest Group, generate a portion of advertising revenues from the operation
of web sites that are associated with their traditional print businesses. These revenues are
reflected within the retail, national and classified categories presented and discussed above, and
they are separate and distinct from revenue generated by businesses included in the Companys new
digital segment. These online/digital advertising revenues declined 4% and rose 1% for the quarter
and year-to-date periods, respectively.
Circulation revenues declined 3% for the third quarter and the first nine months of 2008. Net
paid daily circulation for publishing operations, excluding USA TODAY, declined 6% for the third
quarter and the year-to-date periods, while Sunday net paid circulation was down 5% for the third
quarter and year-to-date periods. In the September Publishers Statement submitted to ABC,
circulation for USA TODAY for the previous six months increased .01% from 2,293,137 in 2007 to
2,293,310 in 2008.
The decrease in All other revenues for the third quarter and year-to-date periods is
primarily due to lower commercial printing activity.
Publishing operating expenses were down 7% for the third quarter. However, these expenses
included approximately $20.4 million of severance costs related to reductions in force and
efficiency efforts. These severance costs were more than offset by savings related to employee
benefit programs, reduced newsprint consumption and the effect of other aggressive costs controls.
Excluding the 2008 severance expenses, publishing expenses were 8% lower for the quarter.
Newsprint expense was 3% lower for the quarter, reflecting a 17% decline in usage, including
savings from web width reductions and greater use of light weight newsprint, partially offset by a
16% increase in price. Year-to-date, newsprint expense declined 12% on a 16% decline in usage and
a 4% increase in price. For the remainder of 2008, newsprint prices are expected to be above prior
year levels, while consumption will continue to be significantly below last year.
Publishing expense comparisons for the year to date periods are affected by the second quarter
non-cash impairment charges (refer to Note 3 to the Condensed Consolidated Financial Statements in
this report for more information regarding these charges) totaling approximately $2.5 billion.
Cost comparisons for the year-to-date are also affected by an allocation to the publishing segment
of a portion of the pension plan curtailment gain recognized in the second quarter of 2008. The
curtailment gain, however, was more than offset by year to date severance expenses of $59.3 million
related to reductions in force and efficiency efforts for domestic and UK publishing.
Excluding the impact of the non-cash charges, newsprint costs, the pension curtailment gain
and severance costs, publishing expenses declined 6% for the year-to-date period. This reflects
aggressive cost controls at most properties, partially offset by increased spending for the
Companys online/digital operations at its publishing sites, including costs for personnel
additions and technology to support new revenue initiatives.
Publishing segment operating income declined $145.9 million or 44% for the quarter, reflecting
the challenging advertising environment, partially mitigated by cost savings throughout the group.
Excluding the 2008 severance expenses, segment operating income would have declined $125.5 million
or 38%. The weakening of the British pound also contributed to the decline in operating income by
approximately $5 million. The publishing segment reported a loss of $1.7 billion for the
year-to-date period of 2008, reflecting the non-cash impairment charges discussed in Note 3 to the
Condensed Consolidated Financial Statements in this report. Absent non-cash impairment charges and
the 2008 severance expenses, publishing operating income would have declined $242.4 million or 23%
for the year-to-date period.
Broadcasting Results
Broadcasting includes results from the Companys 23 television stations and Captivate.
Reported broadcasting revenues were $197.0 million in the third quarter, a 4% increase compared to
$189.5 million in 2007. The increase reflects nearly $24 million in ad spending related to the
Olympics on the Companys NBC affiliates and approximately $26 million in politically related
advertising. However, the weakening economy had a negative impact on certain core advertising
categories, including auto, which partially offset the incremental Olympic and political revenues.
Year-to-date revenues were $559.7 million compared to $577.3 million in 2007, a decline of $17.6
million or 3%. The year-to-date decline reflects reduced core category ad demand amid the soft
economic environment and the absence in 2008 of Super Bowl ad spending on the Companys CBS
affiliates. These factors were partially offset by the incremental Olympic and political ad
revenues.
5
Broadcasting revenues include ad revenues generated from the operation of web sites that are
associated with its television stations. These revenues are separate and distinct from revenue
generated by businesses included in the Companys new digital segment. The broadcasting
online/digital revenues rose 15% for the quarter and year-to-date period.
Broadcasting operating expenses for the third quarter totaled $113.0 million, down 4% from
$118.1 million a year ago, reflecting continued cost controls, offset in part by severance expense.
On a year-to-date basis, operating costs were down 4%.
Reported operating income from broadcasting rose $12.5 million or 17% in the third quarter but
was $2.1 million or 1% lower for the year-to-date period.
Based on current pacings, television revenues for the fourth quarter of 2008 will be slightly
higher than last years fourth quarter in the low single digits due to political spending this
year.
Digital Results
On September 3, 2008, the Company increased its ownership in CareerBuilder to 50.8% from
40.8%, obtaining a controlling interest, and therefore, the results of CareerBuilder beginning in
September are now fully consolidated. On June 30, 2008, the Company increased its ownership in
ShopLocal to 100% from 42.5%, and from that date the results of ShopLocal are now fully
consolidated. Prior to these acquisitions, the Companys equity share of CareerBuilder and
ShopLocal results were reported as equity earnings. Subsequent to the CareerBuilder acquisition,
the Company reflects a minority interest charge on its Statements of Income (Expense) related to
the other partners ownership interest.
Beginning with the third quarter, a new digital business segment is being reported, which
includes CareerBuilder and ShopLocal from the dates of their full consolidation, as well as
PointRoll, Planet Discover and Schedule Star. Prior period results for PointRoll, Planet Discover
and Schedule Star have been reclassified from the publishing segment to the new digital segment.
The principal reason for the significant increase in the quarter and, to a lesser extent,
year-to-date digital revenues and expenses is the consolidation of CareerBuilder and ShopLocal.
Digital revenues increased from $17.2 million to $77.6 million for the third quarter and increased
from $46.6 million to $111.5 million year-to-date. Digital expenses increased similarly, from
$11.1 million to $71.5 million for the third quarter, and from $34.6 million to $101.7 million for
the year-to-date period.
Operating income for the digital segment reflects positive results in the quarter and
year-to-date periods for CareerBuilder, PointRoll and ShopLocal, which are partially offset by
continued investment in Schedule Star and expenses associated with the development of our digital
infrastructure.
Corporate Expense
Corporate expenses in the third quarter were $14.3 million compared to $17.8 million a year
ago. Year-to-date corporate expenses were $40.0 million compared to $59.5 million a year ago. The
decline reflects tight cost controls, including lower compensation and benefit costs for the
quarter and year-to-date periods. The year-to-date period decline also reflects an allocation of
part of the pension curtailment gain recorded in the second quarter.
Consolidated Operating Expenses
For the third quarter, operating expenses declined by $31.4 million or 2%. Costs for the
quarter include $23 million of severance expense, and the inclusion of operating costs from the
initial consolidation of CareerBuilder and ShopLocal. However, these incremental costs were more
than offset by newsprint savings (higher prices more than offset by lower consumption), lower
payroll and benefit expenses due to headcount reductions and benefit plan changes, a lower currency
exchange rate for Newsquest expenses and aggressive cost controls throughout publishing, broadcast
and corporate operations. On a pro forma basis and excluding severance expenses, consolidated
operating expenses for the quarter declined 5%.
On a year-to-date basis, total consolidated operating expenses increased substantially due to
the inclusion of the non-cash charges related to goodwill, other intangible assets and property,
plant and equipment discussed in Note 3 to the Condensed Consolidated Financial Statements in this
report. Year-to-date costs include $63 million in severance, and costs from the initial
consolidation of CareerBuilder and ShopLocal. However, these incremental costs were more than
offset by the pension plan curtailment gain ($46.5 million) recorded in the second quarter,
newsprint expense savings, lower compensation and benefit costs and generally strong cost controls.
On a pro forma basis and excluding the non-cash impairment charges, the severance expenses and the
pension plan curtailment gain, consolidated operating expenses declined 4% for the year-to-date
period.
6
Non-Operating Income and Expense
Equity Earnings
At the end of 2007, the Companys equity share of operating results from its newspaper
partnerships, including Tucson, which participates in a joint operating agency, the California
Newspapers Partnership and Texas-New Mexico Newspapers Partnership, were reclassified from All
other revenue and reflected as Equity income (losses) in unconsolidated investees, net in the
non-operating section of the Consolidated Statements of Income. These amounts include the
Companys equity share of results from CareerBuilder and ShopLocal for periods prior to when the
Company began consolidating their results of operations.
The Companys net equity loss in unconsolidated investees for the year-to-date period of 2008
includes $261 million of second quarter impairment charges related to equity investments in
newspaper partnerships and certain other businesses (discussed in Note 3 to the Condensed
Consolidated Financial Statements in this report). The companys net equity income in
unconsolidated investees declined $9.6 million for the third quarter reflecting lower operating
results from newspaper partnership investments, continuing investment in digital assets including
Metromix, and the absence of the Companys share of CareerBuilders September 2008 results (now
consolidated).
Interest Expense
The Companys interest expense decreased $16.2 million or 25.7% for the quarter and $63.0
million or 31.2% year-to-date, reflecting lower interest rates and lower average borrowings.
The daily average outstanding balance of commercial paper was $1.81 billion during the third
quarter of 2008 and $1.14 billion during the third quarter of 2007. The daily average outstanding
balance of commercial paper was $1.13 billion during the first nine months of 2008 and $1.87
billion during the first nine months of 2007. The weighted average interest rate on commercial
paper was 3.4% and 5.7% for the third quarter of 2008 and 2007, respectively. For the year-to-date
periods of 2008 and 2007, the weighted average interest rate on commercial paper was 3.4% and 5.4%,
respectively.
Total average outstanding debt for the third quarter was $4.11 billion in 2008 and $4.45
billion in 2007. For the year-to-date periods of 2008 and 2007, total average outstanding debt was
$4.04 billion and $4.77 billion, respectively. The weighted average interest rate for total
outstanding debt was 4.4% for the quarter compared to 5.5% last year and 4.4% year-to-date compared
to 5.4% last year.
At the end of the third quarter of 2008, the Company had approximately $2.2 billion in
floating rate obligations outstanding. A 1/2% increase or decrease in the average interest rate for
these obligations would result in an increase or decrease in annual interest expense of $10.8
million.
Other Non-Operating Items
The decrease in Other non-operating items for the third quarter reflects the inclusion of
minority interest expense related to CareerBuilder, beginning in September of 2008, a reduced level
of investment income and foreign currency charges associated with UK pound-denominated
transactions. For the year-to-date periods, Other non-operating items is above last year due
principally to the first quarter 2008 gain of $25.5 million on the sale of excess land adjacent to
the Companys headquarters in McLean, VA.
Provision (Benefit) for Income Taxes
The Companys effective income tax rate for continuing operations was 26.4% for the third
quarter compared to 32.3% for the comparable period of 2007. The lower tax rate for the third
quarter 2008 reflects incremental benefits from the release of prior years U.S. state tax reserves
upon the favorable settlement of contested issues. In addition, the tax rate reflects a benefit
from a lower statutory rate on UK earnings beginning in 2008.
The Company reported a pre-tax loss of $1,918.7 million for the first nine months of 2008.
These pre-tax losses include impairment charges taken in the second quarter, the majority of which
are not deductible for income tax purposes. Therefore, the effective tax benefit rate on these
pre-tax losses, including the impairment charges, are at the very low levels of (1.2)% for the
year-to-date period. Excluding the pre-tax and tax effects of all impairment charges recorded in
the second quarter, the Companys effective tax rate on such earnings would have been 30.1% for the
year-to-date period. This rate reflects the third quarter factors discussed above plus the
benefits from favorable renegotiation of prior year tax positions with UK tax authorities. The
Company expects further release of U.S. state tax reserves in the fourth quarter of 2008.
7
Discontinued Operations
Earnings from discontinued operations represent the combined operating results (net of income
taxes) of the Norwich (CT) Bulletin, the Rockford (IL) Register Star, the Observer-Dispatch in
Utica, NY and The Herald-Dispatch in Huntington, WV that were sold to GateHouse Media, Inc. on May
7, 2007 and the Chronicle-Tribune in Marion, IN that was contributed to the Gannett Foundation on
May 21, 2007. The revenues and expenses from each of these properties have, along with associated
income taxes, been removed from continuing operations and netted into a single amount on the
Statement of Income titled Income from the operation of discontinued operations, net of tax for
the period presented.
Taxes provided on the earnings from discontinued operations totaled $4.1 million for 2007.
This includes U.S. federal and state income taxes and represents an effective rate of approximately
39%. The excess of this effective rate over the U.S. statutory rate of 35% is due principally to
state income taxes. Also included in discontinued operations is the $73.8 million net after-tax
gain recognized in the second quarter of 2007 on the disposal of these properties. Taxes provided
on the gain totaled approximately $139.8 million, covering U.S. federal and state income taxes and
represent an effective rate of 65%. The excess of this effective rate over the U.S. statutory rate
of 35% is due principally to the non-deductibility of goodwill associated with the properties
disposed.
Earnings from discontinued operations, excluding the gain, per diluted share were $0.03 for
2007. Earnings per diluted share for the gain on the disposition of these properties were $0.32.
Net Income/Loss
The Companys net income was $158.1 million or $0.69 per diluted share for the third quarter
compared to net income of $234.0 million or $1.01 per diluted share for 2007. For the year-to-date
period of 2008, the Companys net loss was $1,940.9 million or $8.49 per diluted share compared
with net income of $810.3 million or $3.46 per diluted share for the comparable period of 2007.
The 2008 year-to-date results include $2.8 billion of non-cash charges ($2.5 billion after-tax) as
discussed in Note 3 to the Condensed Consolidated Financial Statements in this report.
The weighted average number of diluted shares outstanding for the third quarter of 2008
totaled 228,331,000 compared to 232,698,000 for the third quarter of 2007. For the first nine
months of 2008 and 2007, the weighted average number of diluted shares outstanding totaled
228,488,000 and 234,067,000, respectively. In the first nine months of 2008, 2.1 million shares
were repurchased. Shares repurchased in the first nine months of 2007 totaled 2.8 million. See
Part II, Item 2 for information on share repurchases.
Certain Matters Affecting Future Operating Results
The Companys results to be reported for its fourth quarter and for 2009 are likely to be
adversely affected by the current disruption in world financial markets and by the recessionary and
worsening conditions in the U.S. and UK economies.
Advertising revenues may be adversely affected in all key categories and revenue comparisons
may be more challenged than that experienced thus far in 2008. Operating results in the UK are
also likely to be adversely affected by the decline in the exchange rate of the British pound from
that used to translate results through the first nine months of 2008 (1.95). On November 3, 2008,
the exchange rate had declined to 1.61.
For 2009, the Companys expenses for its qualified retirement plans may increase substantially
as the market value of plan assets has declined as a direct consequence of the recent financial
market disruption. The impact of changes in plan asset values will not be precisely known,
however, until the end of 2008.
The Company has further plans to significantly reduce Company wide expense levels in the face
of these economic factors and the competitive pressures facing its businesses.
Acquisitions, Investments and Asset Dispositions
On December 31, 2007, the Company acquired X.com, Inc. (BNQT.com). X.com, Inc. operates an
action sports digital network covering eight different action sports including surfing,
snowboarding and skateboarding. X.com will be affiliated with the USA TODAY Sports brand.
In February 2008, the Company formed quadrantONE, a new digital ad sales network, with three
other top media companies: Tribune Company, Hearst Corporation and The New York Times Company.
In March 2008, the Company purchased a minority stake in Fantasy Sports Ventures (FSV). FSV
owns a set of fantasy sports content sites and manages advertising across a network of affiliated
sites.
8
In May 2008, the Company purchased a minority stake in Cozi Group Inc. (COZI). COZI owns and
maintains family organization software aimed at busy families.
In July 2008, the Company purchased a minority stake in Mogulus, LLC, a company that provides
internet broadcasting services. Also in July 2008, the Company increased its investment in 4INFO,
maintaining its approximate ownership interest.
In August 2008, the Company purchased 100% of the outstanding shares of Pearls Review, Inc.,
an online nursing certification and continuing education review site.
The above business acquisitions and investments did not materially affect the Companys
financial position or results of operations.
On June 30, 2008, the Company acquired from Tribune Company and The McClatchy Company their
minority ownership interests in ShopLocal LLC, a leading marketing and database services company
for major retailers in the U.S. The Company now owns 100% of ShopLocal and began consolidating its
results at the beginning of the third quarter of 2008. The acquisition enables ShopLocal to
collaborate with another Gannett company, PointRoll, to create ads that dynamically connect retail
advertisers and consumers, online and in the store. Consequently, ShopLocals operations turned
profitable in third quarter.
On September 3, 2008, the Company acquired an additional 10% stake in CareerBuilder from
Tribune Company increasing its investment to 50.8% so that it is now the majority and controlling
owner. Beginning in September 2008, the operations of CareerBuilder have been consolidated and are
reported in the digital segment. The related minority interest charge for CareerBuilder is
reflected in Other non-operating items in the Statement of Income.
The financial statements reflect an allocation of purchase price that is preliminary for
business acquisitions completed subsequent to September 30, 2007.
In April 2007, the Company disposed of a parcel of real estate located adjacent to its
corporate headquarters in McLean, Virginia. In accordance with the installment method of
accounting under SFAS No. 66, Accounting for Sales of Real Estate, $6 million of the gain was
recognized in other non-operating income during the second quarter of 2007. The remaining gain of
$25.5 million was deferred and recognized in the first quarter of 2008.
Liquidity, Capital Resources, Financial Position, and Statements of Cash Flows
The Companys cash flow from operating activities was $775.7 million for the first nine months
of 2008, compared to $861.6 million for the first nine months of 2007. The decrease reflects lower
publishing and broadcast earnings and related cash flow from those operations.
Cash flows used in the Companys investing activities totaled $189.4 million for the nine
months of 2008, reflecting $104.0 million of capital spending, $137.2 million of payments for
acquisitions (discussed in Note 5 to the financial statements), and $41.3 million for investments.
These cash inflows were partially offset by $69.5 million of proceeds from the sale of assets and
$23.5 million of proceeds from investments.
Cash flows used in financing activities totaled $539.8 million for the first nine months of
2008 reflecting net debt payments of $190.0 million, the payment of dividends totaling $275.5
million and the repurchase of common stock of $72.8 million. The Companys regular quarterly
dividend of $0.40 per share, which was declared in the third quarter of 2008, totaled $91.2 million
and was paid in October 2008. On October 30, 2008, the Board of Directors declared a dividend of
$0.40 per share payable in January 2009 to shareholders of record as of the close of business on
December 12, 2008.
On July 25, 2006, the Board of Directors authorized the repurchase of an additional $1 billion
of the Companys common stock. The shares may be repurchased at managements discretion, either in
the open market or in privately negotiated block transactions. While there is no expiration date
for the repurchase program, the Board of Directors reviews the authorization of the program
annually. Managements decision to repurchase shares will depend on price, availability and other
corporate developments. Purchases will occur from time to time and no maximum purchase price has
been set. As of September 28, 2008, the Company had remaining authority to repurchase up to $808.9
million of the Companys common stock. For more information on the share repurchase program, refer
to Item 2 of Part II of this Form 10-Q.
On June 16, 2008 the Company repaid at scheduled maturity $500 million in aggregate principal
amount of 4.125% notes, using borrowings in the commercial paper market.
On April 2, 2007, the Company repaid at scheduled maturity $700 million in aggregate principal
amount of 5.50% notes. The repayment was funded with proceeds of commercial paper borrowings,
including $525 million
9
which had been raised prior to the end of the first quarter of 2007 and which were temporarily
invested in marketable securities until the repayment date of the
notes.
In June 2007, the Company issued $1.0 billion aggregate principal amount of unsecured senior
convertible notes in an underwritten public offering. Proceeds from the notes were used to repay
commercial paper obligations. The convertible notes bore interest at a floating rate equal to one
month LIBOR, reset monthly, minus twenty-three basis points. As anticipated, on July 15, 2008, the
holders of all of the convertible notes required the Company to repurchase their notes for cash at
a price equal to 100% of the principal amount of the notes submitted for repurchase, plus accrued
and unpaid interest.
In July 2008, the Company received proceeds of $280 million from borrowings under a new term
loan agreement with certain lenders. The term loan is payable in full on July 14, 2011. The loan
carries interest at a floating rate and may be prepaid at any time without penalty.
The proceeds from the term loan, along with proceeds received from commercial paper issuances,
approximately $500 million of which had been received from borrowings prior to the end of the
second quarter and which were held in interest bearing deposits, were used to repurchase the $1.0
billion convertible notes discussed above.
The Companys operations have historically generated strong positive cash flow which, along
with the Companys program of issuing commercial paper and maintaining bank revolving credit
agreements, has provided adequate liquidity to meet the Companys requirements, including those for
acquisitions. During September 2008, liquidity in the commercial paper market was highly
constrained and the Company elected to borrow under its revolving credit agreements to repay
commercial paper outstanding as it matured. As of September 28, 2008 the Company had $696 million
of borrowings under its revolving credit facilities which were used to reduce commercial paper
outstanding to $1.2 billion. On September 30, subsequent to the end of the reporting period, the
Company borrowed an additional $1.2 billion under the revolving credit facilities, bringing the
total borrowed to $1.9 billion. The additional funds were invested and are being used to repay all
outstanding paper as it matures through December 12, 2008, thereby replacing commercial paper
borrowings with borrowings under the revolving credit facilities. The Company anticipates reducing
the level of these borrowings over time with cash flow from operations and will look to
strategically refinance the amounts borrowed under the revolving credit facilities with the
issuance of long-term debt.
On October 31, 2008, the Company amended each of its three revolving credit agreements and its
term loan agreement. Under each of the amendments, the existing financial covenant requiring that
the Company maintain shareholders equity in excess of $3.5 billion was replaced with a new
covenant that requires that the Company maintain a senior leverage ratio of less than 3.5x. The
senior leverage ratio is the ratio of the Companys senior unsecured debt outstanding to its EBITDA
measured on a trailing four quarters basis. At this time, all of the Companys debt is senior and
unsecured. The new covenant also requires the Company to maintain a total leverage ratio of less
than 4.0x. Total leverage ratio would also include any subordinated debt the Company may issue in
the future.
In addition, the aggregate size of the revolving credit facilities was reduced to $3.1 billion
from $3.9 billion. There is a further provision that the aggregate size of the three revolving
credit agreements will be reduced on a dollar-for-dollar basis for the first $397 million that the
Company raises in the capital markets prior to December 31, 2009. Irrespective of any such interim
reductions, the aggregate size of the three revolving credit agreements will be reduced to $2.75
billion on December 31, 2009. The amendments also provide for certain changes to the pricing of
the facilities. For the revolving credit facilities, the commitment fees may range from 0.125% to
0.25% depending on credit ratings for the Companys senior unsecured debt from Moodys and Standard
& Poors (S&P). The rate currently in effect is 0.125%.
Under each of the agreements, the Company may borrow at an applicable margin above the
Eurodollar base rate or the higher of the Prime Rate or the Federal Funds Effective Rate plus
0.50%. Under the amended revolving credit agreements, the applicable margin for such borrowings
ranges from 1.00% to 2.25% depending on credit ratings. Under the term loan agreement, the
applicable margin varies from 1.25% to 2.25%. At its current ratings the Company will pay an
applicable margin of 1.00% under the revolving credit agreements and 1.25% under the term loan
agreement.
10
Also, in connection with the amendments, the Company agreed to provide future guarantees from
its domestic wholly-owned subsidiaries in the event that the Companys credit ratings from either
Moodys or S&P fall below investment grade. If the guarantees are triggered, then existing notes
and other unsecured debt of the Company will become structurally subordinated to the revolving
credit agreements and the term loan. The amended facilities provide the Company with ample
liquidity to operate its business and pursue its strategic objectives.
The Companys short-term debt is currently rated A-2 and P-2 by Standard & Poors (S&P) and
Moodys Investors Service (Moodys), respectively. The Companys senior unsecured long-term debt
is rated BBB+ by S&P and A3 by Moodys. On July 17, 2008, Moodys announced that it was placing
the Companys long-term rating of A3 under review for a possible downgrade, while re-affirming the
P-2 short-term rating applicable to its commercial paper. On October 1, 2008 S&P placed the
Companys long-term rating of BBB+ and short-term rating A-2 on credit watch with negative
implications, effectively precluding the Company from issuing commercial paper pending the outcome
of its review of the short-term rating. However, at that time the Company had ceased borrowing
through commercial paper issuance.
The Company has an effective universal shelf registration statement with the Securities and
Exchange Commission under which an unspecified amount of securities may be issued. Proceeds from
any takedowns off the shelf may be used for general corporate purposes, including capital
expenditures, working capital, securities repurchase programs, repayment of debt and the financing
of acquisitions.
Looking ahead, the Company expects to fund capital expenditures, interest, dividends and other
operating requirements through cash flows from operations. The Company expects to fund debt
maturities, acquisitions and investments through a combination of cash flows from operations, funds
raised in the capital or credit markets, or through borrowing capacity under its credit facilities.
The Companys financial and operating performance and its ability to generate sufficient cash flow
for these purposes and to maintain compliance with credit facility covenants are subject to certain
risk factors as noted in the following section of this report.
The Companys foreign currency translation adjustment, included in accumulated other
comprehensive income and reported as part of shareholders equity, totaled $634 million at the end
of the third quarter 2008 versus $777 million at the end of 2007. This change reflects a 7.6%
decrease in the exchange rate for the British pound. Newsquests assets and liabilities at
September 28, 2008 and December 30, 2007 were translated from the British pound to U.S. dollars at
an exchange rate of approximately 1.84 at September 28, 2008 and 2.00 at the end of 2007,
respectively. For the third quarter and first nine months of 2008, Newsquests financial results
were translated at an average rate of 1.90 and 1.95, compared to 2.02 and 1.99 last year.
The Company is exposed to foreign exchange rate risk primarily due to its operations in the
United Kingdom, for which British pound is the functional currency. If the price of British pound
against the U.S. dollar had been 10% more or less than the actual price, operating income,
excluding the non-cash impairment charges recorded in the second quarter, for the third quarter and
year-to-date periods of 2008 would have increased or decreased approximately 2%.
Certain Factors Affecting Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q contain forward-looking information.
The words expect, intend, believe, anticipate, likely, will and similar expressions
generally identify forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results and events to differ materially
from those anticipated in the forward-looking statements. The Company is not responsible for
updating or revising any forward-looking statements, whether the result of new information, future
events or otherwise, except as required by law.
Potential risks and uncertainties which could adversely affect the Companys results include,
without limitation, the following factors: (a) increased consolidation among major retailers or
other events which may adversely affect business operations of major customers and depress the
level of local and national advertising; (b) a further economic downturn in some or all of the
Companys principal publishing or broadcasting markets leading to decreased circulation or local,
national or classified advertising; (c) a decline in general publishing readership and/or
advertiser patterns as a result of competitive alternative media or other factors; (d) an increase
in newsprint or syndication programming costs over the levels anticipated; (e) labor disputes which
may cause revenue declines or increased labor costs; (f) acquisitions of new businesses or
dispositions of existing businesses; (g) a decline in viewership of major networks and local news
programming; (h) rapid technological changes and frequent new product introductions prevalent in
electronic publishing; (i) an increase in interest rates; (j) a weakening in the British pound to
U.S. dollar exchange rate; (k) volatility in financial and credit markets which could affect the
value of retirement plan assets and the Companys ability to raise funds through debt or equity
issuances; (1) changes in the regulatory environment; (m) an other than temporary decline in
operating results and enterprise value that could lead to further non-cash goodwill, other
intangible asset or property, plant and equipment impairment charges; and (n) general economic,
political and business conditions.
11
CONDENSED CONSOLIDATED BALANCE SHEETS
Gannett Co., Inc. and Subsidiaries
In thousands of dollars (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Sept. 28, 2008 |
|
|
Dec. 30, 2007 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
122,777 |
|
|
$ |
77,249 |
|
Trade receivables, less allowance for doubtful receivables
(2008 $37,672; 2007 $36,772) |
|
|
880,364 |
|
|
|
956,523 |
|
Other Receivables |
|
|
52,583 |
|
|
|
92,660 |
|
Inventories |
|
|
137,641 |
|
|
|
97,086 |
|
Deferred income taxes |
|
|
29,970 |
|
|
|
28,470 |
|
Prepaid expenses and other current assets |
|
|
122,650 |
|
|
|
91,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,345,985 |
|
|
|
1,343,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Cost |
|
|
4,840,443 |
|
|
|
4,921,877 |
|
Less accumulated depreciation |
|
|
(2,479,697 |
) |
|
|
(2,306,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
2,360,746 |
|
|
|
2,615,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible and other assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
8,477,895 |
|
|
|
10,034,943 |
|
Indefinite-lived and amortizable intangible assets, less
accumulated amortization |
|
|
553,840 |
|
|
|
735,461 |
|
Investments and other assets |
|
|
680,280 |
|
|
|
1,158,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible and other assets |
|
|
9,712,015 |
|
|
|
11,928,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,418,746 |
|
|
$ |
15,887,727 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
12
CONDENSED CONSOLIDATED BALANCE SHEETS
Gannett Co., Inc. and Subsidiaries
In thousands of dollars (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Sept. 28, 2008 |
|
|
Dec. 30, 2007 |
|
|
|
(Unaudited) |
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and current portion of film
contracts payable |
|
$ |
305,206 |
|
|
$ |
257,393 |
|
Compensation, interest and other accruals |
|
|
464,343 |
|
|
|
407,245 |
|
Dividends payable |
|
|
91,519 |
|
|
|
93,050 |
|
Income taxes |
|
|
44,557 |
|
|
|
24,301 |
|
Deferred income |
|
|
301,725 |
|
|
|
180,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,207,350 |
|
|
|
962,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
508,723 |
|
|
|
696,112 |
|
Income taxes |
|
|
262,235 |
|
|
|
319,778 |
|
Long-term debt |
|
|
3,908,319 |
|
|
|
4,098,338 |
|
Postretirement medical and life insurance liabilities |
|
|
205,114 |
|
|
|
216,988 |
|
Other long-term liabilities |
|
|
484,963 |
|
|
|
556,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,576,704 |
|
|
|
6,850,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries |
|
|
236,037 |
|
|
|
20,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Preferred stock of $1 par value per share
|
|
|
|
|
|
|
|
|
Authorized: 2,000,000 shares; Issued: none |
|
|
|
|
|
|
|
|
Common stock of $1 par value per share |
|
|
|
|
|
|
|
|
Authorized: 800,000,000 shares; |
|
|
|
|
|
|
|
|
Issued: 324,418,632 shares |
|
|
324,419 |
|
|
|
324,419 |
|
Additional paid-in capital |
|
|
736,606 |
|
|
|
721,205 |
|
Retained earnings |
|
|
10,804,544 |
|
|
|
13,019,143 |
|
Accumulated other comprehensive income |
|
|
289,737 |
|
|
|
430,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,155,306 |
|
|
|
14,495,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less treasury stock, 96,302,240 shares and
94,216,075 shares, respectively, at cost |
|
|
(5,549,301 |
) |
|
|
(5,478,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
6,606,005 |
|
|
|
9,017,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and
shareholders equity |
|
$ |
13,418,746 |
|
|
$ |
15,887,727 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
13
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Gannett Co., Inc. and Subsidiaries
Unaudited, in thousands of dollars (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
% Inc |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
(Dec) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing advertising |
|
$ |
977,111 |
|
|
$ |
1,187,744 |
|
|
|
(17.7 |
) |
Publishing circulation |
|
|
298,978 |
|
|
|
309,143 |
|
|
|
(3.3 |
) |
Digital |
|
|
77,594 |
|
|
|
17,181 |
|
|
|
*** |
|
Broadcasting |
|
|
197,000 |
|
|
|
189,540 |
|
|
|
3.9 |
|
All other |
|
|
86,627 |
|
|
|
95,085 |
|
|
|
(8.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,637,310 |
|
|
|
1,798,693 |
|
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expenses, exclusive of depreciation |
|
|
985,004 |
|
|
|
1,026,041 |
|
|
|
(4.0 |
) |
Selling, general and administrative expenses, exclusive of
depreciation |
|
|
328,320 |
|
|
|
313,654 |
|
|
|
4.7 |
|
Depreciation |
|
|
57,682 |
|
|
|
61,017 |
|
|
|
(5.5 |
) |
Amortization of intangible assets |
|
|
7,123 |
|
|
|
8,852 |
|
|
|
(19.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,378,129 |
|
|
|
1,409,564 |
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
259,181 |
|
|
|
389,129 |
|
|
|
(33.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income in unconsolidated investees, net |
|
|
5,711 |
|
|
|
15,332 |
|
|
|
(62.8 |
) |
Interest expense |
|
|
(46,802 |
) |
|
|
(63,010 |
) |
|
|
(25.7 |
) |
Other non-operating items |
|
|
(3,333 |
) |
|
|
4,173 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(44,424 |
) |
|
|
(43,505 |
) |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
214,757 |
|
|
|
345,624 |
|
|
|
(37.9 |
) |
Provision for income taxes |
|
|
56,700 |
|
|
|
111,600 |
|
|
|
(49.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
158,057 |
|
|
$ |
234,024 |
|
|
|
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
|
(31.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
|
(31.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.40 |
|
|
$ |
0.40 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
14
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Gannett Co., Inc. and Subsidiaries
Unaudited, in thousands of dollars (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended |
|
|
% Inc |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
(Dec) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing advertising |
|
$ |
3,182,194 |
|
|
$ |
3,690,926 |
|
|
|
(13.8 |
) |
Publishing circulation |
|
|
914,150 |
|
|
|
939,184 |
|
|
|
(2.7 |
) |
Digital |
|
|
111,495 |
|
|
|
46,614 |
|
|
|
*** |
|
Broadcasting |
|
|
559,748 |
|
|
|
577,265 |
|
|
|
(3.0 |
) |
All other |
|
|
264,581 |
|
|
|
288,553 |
|
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,032,168 |
|
|
|
5,542,542 |
|
|
|
(9.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expenses, exclusive of depreciation |
|
|
2,960,042 |
|
|
|
3,136,453 |
|
|
|
(5.6 |
) |
Selling, general and administrative expenses, exclusive of
depreciation |
|
|
922,755 |
|
|
|
954,811 |
|
|
|
(3.4 |
) |
Depreciation |
|
|
182,902 |
|
|
|
185,879 |
|
|
|
(1.6 |
) |
Amortization of intangible assets |
|
|
21,838 |
|
|
|
26,562 |
|
|
|
(17.8 |
) |
Goodwill and other asset impairment charges (see Note 3) |
|
|
2,491,365 |
|
|
|
|
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,578,902 |
|
|
|
4,303,705 |
|
|
|
52.9 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,546,734 |
) |
|
|
1,238,837 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income (losses) in unconsolidated investees, net (see Note 3) |
|
|
(258,837 |
) |
|
|
31,322 |
|
|
|
*** |
|
Interest expense |
|
|
(139,308 |
) |
|
|
(202,355 |
) |
|
|
(31.2 |
) |
Other non-operating items |
|
|
26,158 |
|
|
|
14,459 |
|
|
|
80.9 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(371,987 |
) |
|
|
(156,574 |
) |
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,918,721 |
) |
|
|
1,082,263 |
|
|
|
*** |
|
Provision (benefit) for income taxes |
|
|
22,200 |
|
|
|
352,000 |
|
|
|
(93.7 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,940,921 |
) |
|
|
730,263 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from the operation of discontinued operations, net of tax |
|
|
|
|
|
|
6,221 |
|
|
|
*** |
|
Gain on disposal of newspaper business net of tax |
|
|
|
|
|
|
73,814 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(1,940,921 |
) |
|
$ |
810,298 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations per share basic |
|
$ |
(8.49 |
) |
|
$ |
3.12 |
|
|
|
*** |
|
Discontinued operations per share basic |
|
|
|
|
|
|
0.03 |
|
|
|
*** |
|
Gain on disposal of newspaper businesses per share basic |
|
|
|
|
|
|
0.32 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share basic |
|
$ |
(8.49 |
) |
|
$ |
3.47 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations per share diluted |
|
$ |
(8.49 |
) |
|
$ |
3.12 |
|
|
|
*** |
|
Discontinued operations per share diluted |
|
|
|
|
|
|
0.03 |
|
|
|
*** |
|
Gain on disposal of newspaper businesses per share diluted |
|
|
|
|
|
|
0.32 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share diluted |
|
$ |
(8.49 |
) |
|
$ |
3.46 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
1.20 |
|
|
$ |
1.02 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
15
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Gannett Co., Inc. and Subsidiaries
Unaudited, in thousands of dollars
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,940,921 |
) |
|
$ |
810,298 |
|
Adjustments to reconcile net income (loss) to operating cash
flows: |
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of tax |
|
|
|
|
|
|
(73,814 |
) |
Taxes paid on gain on sale of discontinued operations |
|
|
|
|
|
|
(134,932 |
) |
Depreciation and amortization |
|
|
204,740 |
|
|
|
212,441 |
|
Goodwill and other asset impairment charges (see Note 3) |
|
|
2,491,365 |
|
|
|
|
|
Provision for deferred income taxes |
|
|
(198,300 |
) |
|
|
5,700 |
|
Pension (benefit) expense, net of pension contributions |
|
|
(46,851 |
) |
|
|
45,054 |
|
Equity losses (income) in unconsolidated investees, net (see
Note 3) |
|
|
258,837 |
|
|
|
(31,322 |
) |
Stock-based compensation |
|
|
17,139 |
|
|
|
27,507 |
|
Other net, including asset sale gains and changes in other
assets and liabilities |
|
|
(10,275 |
) |
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow from operating activities |
|
|
775,734 |
|
|
|
861,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(103,979 |
) |
|
|
(93,711 |
) |
Payments for acquisitions, net of cash acquired |
|
|
(137,157 |
) |
|
|
(21,113 |
) |
Payments for investments |
|
|
(41,290 |
) |
|
|
(72,641 |
) |
Proceeds from investments |
|
|
23,518 |
|
|
|
32,110 |
|
Proceeds from sale of assets |
|
|
69,494 |
|
|
|
438,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities |
|
|
(189,414 |
) |
|
|
282,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt, net of debt issuance
fees |
|
|
976,000 |
|
|
|
1,000,000 |
|
Proceeds from (payments of) unsecured promissory notes |
|
|
333,981 |
|
|
|
(1,093,629 |
) |
Payments of unsecured fixed rate notes and other indebtedness |
|
|
(1,500,000 |
) |
|
|
(700,000 |
) |
Dividends paid |
|
|
(275,466 |
) |
|
|
(218,300 |
) |
Cost of common shares repurchased |
|
|
(72,764 |
) |
|
|
(148,273 |
) |
Proceeds from issuance of common stock |
|
|
|
|
|
|
12,050 |
|
Distributions to minority interest in consolidated partnerships |
|
|
(1,548 |
) |
|
|
(2,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(539,797 |
) |
|
|
(1,150,277 |
) |
|
|
|
|
|
|
|
Effect of currency exchange rate change |
|
|
(995 |
) |
|
|
2,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
45,528 |
|
|
|
(3,589 |
) |
Balance of cash and cash equivalents at
beginning of period |
|
|
77,249 |
|
|
|
94,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of cash and cash equivalents at
end of period |
|
$ |
122,777 |
|
|
$ |
90,667 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2008
NOTE 1 Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Gannett Co., Inc.
(the Company) have been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes, which are normally included in the Form 10-K and
annual report to shareholders. The financial statements covering the thirteen week and
year-to-date periods ended September 28, 2008, and the comparable periods of 2007, reflect all
adjustments which, in the opinion of the Company, are necessary for a fair statement of results for
the interim periods and reflect all normal and recurring adjustments which are necessary for a fair
presentation of the Companys financial position, results of operations and cash flows as of the
dates and for the periods presented.
In connection with the May 2007 sale of the Norwich (CT) Bulletin; the Rockford (IL) Register
Star; the Observer-Dispatch in Utica, NY; and The Herald-Dispatch in Huntington, WV to GateHouse
Media, Inc. and the contribution of the Chronicle-Tribune in Marion, IN to the Gannett Foundation,
the results for these publishing businesses are presented in the Condensed Consolidated Statements
of Income (Loss) as discontinued operations. At September 28, 2008, there were no results of
operations or net assets related to these discontinued operations. Amounts applicable to the
discontinued operations, which have been reclassified in the Statements of Income (Loss) for the
thirty-nine week period ended September 30, 2007, are as follows:
|
|
|
|
|
|
|
Thirty-nine Weeks ended |
|
(in millions of dollars) |
|
September 30, 2007 |
|
Revenues |
|
$ |
41.0 |
|
Pre tax income |
|
$ |
10.3 |
|
Net income |
|
$ |
6.2 |
|
Gain (after-tax) |
|
$ |
73.8 |
|
On September 3, 2008, the Company increased its ownership in CareerBuilder LLC (CareerBuilder)
to 50.8% from 40.8%, and in connection therewith became the majority and controlling owner of
CareerBuilder. Accordingly, the results of CareerBuilder beginning with September 2008 are now
fully consolidated. On June 30, 2008, the Company increased its ownership in ShopLocal LLC
(ShopLocal) to 100% from 42.5%, and from that date the results of ShopLocal are now fully
consolidated. Prior to these acquisitions, the equity share of CareerBuilder and ShopLocal results
were reported as equity earnings.
Beginning with the third quarter, a new Digital business segment is being reported, which
includes CareerBuilder and ShopLocal results from the date of full consolidation, as well as
PointRoll, Planet Discover and Schedule Star. Prior period results for PointRoll, Planet Discover
and Schedule Star have been reclassified from the publishing segment to the digital segment.
At the end of 2007, the Companys equity share of operating results from its newspaper
partnerships, including Tucson, which participates in a joint operating agency, the California
Newspapers Partnership and Texas-New Mexico Newspapers Partnership, were reclassified from All
other revenue and reflected as Equity income (losses) in unconsolidated investees, net in the
non-operating section of the Consolidated Statements of Income (Loss). This line also includes
equity income and losses from online/new technology businesses which were previously classified in
Other non-operating items, including results from CareerBuilder and ShopLocal for the periods
prior to their full consolidation in the Companys financial statements.
In the third quarter of 2008, the Company began reporting a new digital segment and a separate
digital revenues line in its Statements of Income. This revenue line includes only revenue from
the businesses that comprise the new digital segment. It therefore includes all revenues from
CareerBuilder and ShopLocal beginning with the full consolidation of these businesses in the third
quarter of 2008, and revenues from PointRoll, Schedule Star and Planet Discover. Revenues from
PointRoll, Schedule Star and Planet Discover had previously been reported within the publishing
segment and were included in the All Other revenue line in the Statement of Income. All other
revenue is now comprised principally of commercial printing revenues. All periods presented
reflect these reclassifications. The digital segment and the digital revenues line do not include
online/digital revenues generated by web sites that are associated with the Companys publishing
and broadcasting operating properties. Such amounts are reflected within these segments and are
included as part of publishing advertising revenues and broadcasting revenues in the Statements of
Income.
17
NOTE 2 Recently issued accounting standards
In October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is
Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of Statement of Financial
Accounting Standards No. 157 in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods
for which financial statement have not been issued. The Company adopted FSP FAS 157-3 for the
period ended September 28, 2008. The adoption did not have a significant impact on the Companys
Consolidated Financial Statements.
In June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This FSP provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those years.
The adoption of FSP No. EITF 03-6-1 will not have a material effect on the Companys Consolidated
Financial Statements.
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). This FSP
clarifies that convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies
that issuers of such instruments should separately account for the liability and equity components
in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. The
adoption of FSP No. APB 14-1 will not have a material effect on the Companys Consolidated
Financial Statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133 with the intent to provide users of financial statements with an enhanced understanding of: (i)
How and why an entity uses derivative instruments; (ii) How derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related interpretations and (iii) How
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged.
The Company is in the process of evaluating the impact of SFAS No. 161 on its Consolidated
Financial Statements.
In December 2007 the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (SFAS No. 141(R)) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 141(R) and
SFAS No. 160 are effective for the beginning of fiscal year 2009. SFAS No. 141(R) will change how
business acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interest, which will be recharacterized as noncontrolling interests and classified as
a component of equity. The Company is in the process of studying the impact of these standards on
the Companys financial accounting and reporting.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157) which is effective for fiscal years beginning after November 15,
2007. The Company adopted SFAS No. 157 at the beginning of 2008. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value
measurements. Refer to Note 12 for information regarding the Companys fair value measurements. In
November 2007, the FASB agreed to a one-year deferral of the effective date for nonfinancial assets
and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The Company
is currently assessing the impact of adopting the deferred portion of the pronouncement.
18
NOTE 3 Impairment and other non-cash charges
Softening business conditions and a decline in the Companys stock price required the Company
to perform an interim impairment test on its goodwill, intangible assets, and other long lived
assets as of March 31, 2008, the first day of its fiscal second quarter. As a result, the Company
recorded non-cash impairment charges in the second quarter to reduce the book value of publishing
goodwill, other publishing intangible assets including mastheads, and certain publishing property,
plant and equipment assets. The carrying value of certain of the Companys investments in
newspaper publishing partnerships and other businesses, which are accounted for under the equity
method, were also written down. The Company also recorded accelerated depreciation expense
associated with certain cost reduction initiatives.
A summary of these second quarter charges is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre Tax |
|
|
After Tax |
|
|
Per Diluted |
|
(in millions except per share amounts) |
|
Amount |
|
|
Amount |
|
|
Share Amount (a) |
|
Publishing segment asset impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
2,138 |
|
|
$ |
2,138 |
|
|
$ |
9.36 |
|
Other intangible assetsprincipally mastheads |
|
|
176 |
|
|
|
113 |
|
|
|
0.50 |
|
Property, plant and equipment |
|
|
177 |
|
|
|
110 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
Total asset impairments |
|
|
2,491 |
|
|
|
2,361 |
|
|
|
10.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
|
8 |
|
|
|
5 |
|
|
|
0.02 |
|
Broadcasting |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
Corporate |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total included in operating expenses |
|
|
2,502 |
|
|
|
2,368 |
|
|
|
10.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newspaper publishing partnerships and other equity
method investments |
|
|
261 |
|
|
|
162 |
|
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash charges |
|
$ |
2,763 |
|
|
$ |
2,530 |
|
|
$ |
11.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Per diluted share amounts are for the year-to-date period ended September 28, 2008 and totals
may not sum due to rounding. |
The goodwill impairment charge results from the application of the impairment testing
provisions of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible
Assets (SFAS No. 142). Impairment testing is customarily performed annually, and last had been
performed at the end of 2007, at which time no goodwill impairment charge was indicated. Because
of softening business conditions within the Companys publishing segment and the decline in the
Companys stock price and market capitalization, this testing was updated as of the beginning of
the second quarter of 2008. For one of the reporting units in its publishing segment, an
impairment was indicated. The fair value of the reporting unit was determined using discounted
cash flow and multiple of earnings techniques. The Company then undertook the next step in the
impairment testing process by determining the fair value of assets and liabilities within this
reporting unit.
The implied value of goodwill determined by the valuation for this reporting unit was less
than the carrying amount by $2.1 billion, and therefore an impairment charge in this amount was
taken. There was no tax benefit recognized related to the impairment charge since the recorded
goodwill was non-deductible as it arose from stock purchase transactions. Therefore, the after-tax
effect of the impairment was $2.1 billion or $9.36 per diluted share for the year-to-date period
ended September 28, 2008.
The impairment charge of $176 million for other publishing intangible assets was required
because revenue results from the underlying businesses have softened from what was expected at the
time they were purchased. In accordance with SFAS No. 142, the carrying values of impaired
indefinite lived intangible assets, principally mastheads, were reduced to fair value. Fair value
was determined using a relief-from-royalty method. In addition, the carrying values of certain
definite lived intangible assets, principally customer relationships, were reduced to fair value in
accordance with Statement of Financial Accounting Standard No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). Deferred tax benefits have been recognized for
these intangible asset impairment charges and therefore the after-tax impact was $113 million or
$0.50 per diluted share for the year-to-date period ended September 28, 2008.
19
The carrying value of property, plant and equipment amounts at certain publishing businesses
was also evaluated due to softening business conditions. The recoverability of these assets was
measured in accordance with SFAS No. 144. This measurement process indicated that expected
undiscounted future cash flows to be generated by certain asset groups would be less than the asset
carrying values. The carrying values of these asset groups were therefore reduced to fair value
and an impairment charge of $177 million was taken. Asset group fair values were determined using
a multiple of earnings technique. The Company also recognized accelerated depreciation of $11
million in connection with certain cost reduction initiatives. Deferred tax benefits were
recognized for these charges and therefore the after-tax impact was $117 million or $0.50 per
diluted share for the year-to-date period ended September 28, 2008.
For certain of the Companys newspaper publishing partnership investments, and for certain
other investments in which the Company owns a minority equity interest, carrying values were
written down to fair value because the businesses underlying the investments had experienced
significant and sustained declines in operating performance, leading the Company to conclude that
they were other than temporarily impaired. The adjustment of newspaper publishing partnership
carrying values comprise the majority of these investment charges, and these were driven by many of
the same factors affecting the Companys wholly owned publishing businesses. These investment
carrying value adjustments were $261 million pre-tax and $162 million on an after-tax basis, or
$0.71 per diluted share for the year-to-date period ended September 28, 2008. The pre-tax charges
for these investments are reflected as Equity income (losses) in unconsolidated investees, net in
the Statement of Income (Loss).
Consistent with the Companys past practice, and as required under SFAS No. 142, the Company
will perform its annual impairment testing of goodwill and other intangible assets in the fourth
quarter of 2008.
NOTE 4 Equity based awards
Stock-based compensation
For the quarters ended September 28, 2008 and September 30, 2007, options were granted for
6,000 and 18,000 shares, respectively. For the year-to-date periods ended September 28, 2008 and
September 30, 2007, options were granted for 813,883 and 825,376 shares, respectively. The
following weighted average assumptions were used to estimate the fair value of those options.
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
2008 |
|
|
2007 |
|
|
Average expected term |
|
4.5 years |
|
|
4.5 years |
|
Expected volatility |
|
|
18.48 |
% |
|
|
17.80 |
% |
Risk-free interest rates |
|
|
2.92 |
% |
|
|
4.52 |
% |
Expected dividend yield |
|
|
4.23 |
% |
|
|
2.09 |
% |
For the third quarter 2008, the Company recorded stock-based compensation expense of $3.7
million, consisting of $2.9 million for nonqualified stock options and $0.8 million for restricted
shares. For the year-to-date 2008, the Company recorded stock-based compensation expense of $17.1
million, consisting of $10.4 million for nonqualified stock options and $6.7 million for restricted
shares. The related tax benefit for stock compensation was $1.4 million for the third quarter and
$6.5 million for the year-to-date period. On an after-tax basis, total stock compensation expense
was $2.3 million or $0.01 per share for the third quarter and $10.6 million or $0.05 per share
year-to-date.
For the third quarter of 2007, the Company recorded stock-based compensation expense of $7.0
million, consisting of $3.9 million for nonqualified stock options and $3.1 million for restricted
shares (including shares issuable under the long-term incentive program). For the year-to-date
2007, the Company recorded stock-based compensation expense of $27.5 million, consisting of $17.8
million for nonqualified stock options and $9.7 million for restricted shares (including shares
issuable under the long-term incentive program). The related tax benefit for stock compensation
expense was $2.6 million for the third quarter and $10.4 million for the year-to-date period. On
an after-tax basis, total stock compensation expense was $4.4 million or $0.02 per share for the
third quarter and $17.1 million or $0.07 per share year-to-date.
During the quarter and year-to-date periods ended September 28, 2008, no options were
exercised.
20
During the quarter ended September 30, 2007, no options were exercised. During the
year-to-date period ended September 30, 2007, options for 216,864 shares of common stock were
exercised. The Company received $12.1 million of cash from the exercise of these options. The
intrinsic value of the options exercised was approximately $1.1 million for the year-to-date
period. The actual tax benefit realized from the tax deductions from the options exercised was
$0.4 million for the year-to-date period.
Option exercises are satisfied through the issuance of shares from treasury stock.
A summary of the status of the Companys stock option awards as of September 28, 2008 and
changes thereto during 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Intrinsic Value |
|
Outstanding at beginning of year |
|
|
27,933,353 |
|
|
$ |
70.88 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
813,883 |
|
|
|
31.74 |
|
|
|
|
|
|
|
|
|
Canceled/Expired |
|
|
(1,051,298 |
) |
|
|
73.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at quarter end |
|
|
27,695,938 |
|
|
$ |
69.62 |
|
|
|
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at quarter end |
|
|
23,077,237 |
|
|
$ |
73.03 |
|
|
|
3.76 |
|
|
|
|
|
Restricted stock
In addition to stock options, the Company issues stock-based compensation in the form of
restricted stock. Restricted stock is an award of common stock that is subject to restrictions and
such other terms and conditions as the Companys Executive Compensation Committee determines.
These awards entitle an employee to receive shares of common stock at the end of a four-year
incentive period conditioned on continued employment. Compensation expense for restricted stock is
recognized for the awards that are expected to vest. The expense is based on the fair value of the
awards on the date of grant and is generally recognized on a straight-line basis over the four-year
incentive period.
The Company has also issued restricted stock to its Board of Directors. Upon each annual
meeting of shareholders, each director receives a long-term award of 1,250 shares of restricted
stock or options to purchase 5,000 shares of stock. The restricted stock awards vest over three
years and expense is recognized on a straight-line basis over the vesting period based on the fair
value of the restricted stock on the date of grant. The options generally vest at 25% per year
beginning on the first anniversary date of the grant date and expense is recognized over the
four-year vesting period.
Additionally, directors may elect to receive their annual fees in restricted stock or options
in lieu of cash. These shares or options generally vest at 25% per quarter after the grant date.
Expense is recognized on a straight-line basis over the twelve-month board year for which the fees
are paid based on the fair value of the stock award on the date of grant.
Directors may also elect to receive their meeting fees in restricted stock or options in lieu
of cash. Restricted stock or options issued as compensation for meeting fees are issued at the end
of the board year during which the fees were earned and fully vests on the date of grant. Expense
is recognized on a straight-line basis over the course of the board year.
21
A summary of the status of the restricted stock awards as of September 28, 2008 and changes
during 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Fair |
|
|
|
Shares |
|
|
Value |
|
Restricted stock outstanding and
unvested at beginning of year |
|
|
1,041,222 |
|
|
$ |
47.89 |
|
Granted |
|
|
59,422 |
|
|
|
28.02 |
|
Vested |
|
|
(18,912 |
) |
|
|
49.97 |
|
Canceled |
|
|
(51,328 |
) |
|
|
49.42 |
|
|
|
|
|
|
|
|
Restricted stock outstanding and
unvested at quarter end |
|
|
1,030,404 |
|
|
$ |
46.63 |
|
|
|
|
|
|
|
|
Long-term incentive program
In February 2006, the Company adopted a three-year strategic long-term incentive program, or
LTIP. Through the use of the LTIP, the Company desired to motivate key executives to drive success
in new businesses while continuing to achieve success in our core businesses. Because of softening
business conditions, in the second quarter of 2008 the Company determined that program targets
would not be achieved, and previously accrued cost at the end of the first quarter of 2008 was
reversed in the second quarter.
NOTE 5 Acquisitions, investments and asset dispositions
On December 31, 2007, the Company acquired X.com, Inc. (BNQT.com). X.com, Inc. operates an
action sports digital network covering eight different action sports including surfing,
snowboarding and skateboarding. X.com will be affiliated with the USA TODAY Sports brand.
In February 2008, the Company formed quadrantONE, a new digital ad sales network, with three
other top media companies: Tribune Company, Hearst Corporation and The New York Times Company.
In March 2008, the Company purchased a minority stake in Fantasy Sports Ventures (FSV). FSV
owns a set of fantasy sports content sites and manages advertising across a network of affiliated
sites.
In May 2008, the Company purchased a minority stake in Cozi Group Inc. (COZI). COZI owns and
maintains family organization software aimed at busy families.
In July 2008, the Company purchased a minority stake in Mogulus, LLC, a company that provides
internet broadcasting services. Also in July 2008, the Company increased its investment in 4INFO
maintaining its approximate ownership interest.
In August 2008, the Company purchased 100% of the outstanding shares of Pearls Review, Inc.,
an online nursing certification and continuing education review site.
The above business acquisitions and investments did not materially affect the Companys
financial position or results of operations.
On June 30, 2008, the Company acquired from Tribune Company and The McClatchy Company their
minority ownership interests in ShopLocal LLC, a leading marketing and database services company
for major retailers in the U.S. The Company now owns 100% of ShopLocal and began consolidating its
results at the beginning of the third quarter of 2008. The acquisition enables ShopLocal to
collaborate with another Gannett company, PointRoll, to create ads that dynamically connect retail
advertisers and consumers, online and in the store. Consequently, ShopLocals operations turned
profitable in third quarter.
On September 3, 2008, the Company acquired an additional 10% stake in CareerBuilder from
Tribune Company increasing its investment to 50.8% so that is it now the majority and controlling
owner. Beginning in September 2008, the operations of CareerBuilder have been fully consolidated
and are reported in the digital segment. The related minority interest charge for CareerBuilder is
reflected in Other non-operating items in the Statements of Income.
In April 2007, the Company disposed of a parcel of real estate located adjacent to its
corporate headquarters in McLean, Virginia. In accordance with the installment method of
accounting under SFAS No. 66, Accounting for Sales of Real Estate, a portion of the gain was
recognized in other non-operating income during the second quarter of 2007. The remaining gain of
$25.5 million was deferred and recognized in the first quarter of 2008.
22
In May 2007, the Company completed the sale of the Norwich (CT) Bulletin, the Rockford (IL)
Register Star, the Observer-Dispatch in Utica, NY, and The Herald-Dispatch in Huntington, WV to
GateHouse Media, Inc. and contributed the Chronicle-Tribune in Marion, IN to the Gannett
Foundation. For all periods presented, results from these businesses have been reported as
discontinued operations.
NOTE 6 Goodwill and other intangible assets
The following table displays goodwill, indefinite-lived intangible assets, and amortizable
intangible assets at September 28, 2008 and December 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008 |
|
|
December 30, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
(in thousands of dollars) |
|
Gross |
|
|
Amortization |
|
|
Gross |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
8,477,895 |
|
|
$ |
|
|
|
$ |
10,034,943 |
|
|
$ |
|
|
Indefinite-lived intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mastheads and trade names |
|
|
109,254 |
|
|
|
|
|
|
|
248,501 |
|
|
|
|
|
Television station FCC licenses |
|
|
255,304 |
|
|
|
|
|
|
|
255,304 |
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
259,155 |
|
|
|
109,902 |
|
|
|
307,114 |
|
|
|
110,491 |
|
Other |
|
|
56,221 |
|
|
|
16,192 |
|
|
|
48,222 |
|
|
|
13,189 |
|
Amortization expense was $7.1 million in the quarter ended September 28, 2008 and $21.8
million year-to-date. For the third quarter and year-to-date of 2007, amortization expense was
$8.9 million and $26.6 million respectively. Amortization expense for the year-to-date period and
quarter was reduced due to the impairment of certain amortizable intangible assets discussed in
Note 3. Customer relationships, which include subscriber lists and advertiser relationships, are
amortized on a straight-line basis over four to 25 years. Other intangibles include commercial
printing relationships, internally developed technology and other assets. These assets were
assigned lives of between 2.5 and 15 years and are amortized on a straight-line basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
|
Digital |
|
|
Broadcasting |
|
|
Total |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 30, 2007 |
|
$ |
8,309,811 |
|
|
$ |
106,080 |
|
|
$ |
1,619,052 |
|
|
$ |
10,034,943 |
|
Acquisitions and adjustments |
|
|
(566 |
) |
|
|
686,682 |
|
|
|
|
|
|
|
686,116 |
|
Impairment |
|
|
(2,138,000 |
) |
|
|
|
|
|
|
|
|
|
|
(2,138,000 |
) |
Dispositions |
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
(137 |
) |
Foreign currency exchange
rate changes |
|
|
(101,521 |
) |
|
|
(3,329 |
) |
|
|
(177 |
) |
|
|
(105,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2008 |
|
$ |
6,069,587 |
|
|
$ |
789,433 |
|
|
$ |
1,618,875 |
|
|
$ |
8,477,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible asset values decreased primarily due to the non-cash charges
discussed in Note 3.
23
NOTE 7 Long-term debt
On June 16, 2008 the Company repaid $500 million in unsecured notes bearing interest at 4.125%
that were due using borrowings in the commercial paper market.
On April 2, 2007, the Company repaid at scheduled maturity $700 million in aggregate principal
amount of 5.50% notes. The repayment was funded with proceeds of commercial paper borrowings,
including $525 million which had been raised prior to the end of the first quarter of 2007 and
which were temporarily invested in marketable securities until the repayment date of the notes.
In June 2007, the Company issued $1.0 billion aggregate principal amount of unsecured senior
convertible notes in an underwritten public offering. Proceeds from the notes were used to repay
commercial paper obligations. The convertible notes bore interest at a floating rate equal to one
month LIBOR, reset monthly, minus twenty-three basis points. As anticipated, on July 15, 2008, the
holders of the convertible notes required the Company to repurchase the convertible notes for cash
at a price equal to 100% of the principal amount of the notes submitted for repurchase, plus
accrued and unpaid interest.
In July 2008, the Company received proceeds of $280 million from borrowings under a new term
loan agreement with certain bank lenders. The term loan is payable in full on July 14, 2011. The
loan carries interest at a floating rate and may be prepaid at any time without penalty.
The proceeds from the term loan, along with proceeds received from commercial paper issuances,
approximately $500 million of which had been received from borrowings prior to the end of the
second quarter and which were held in interest bearing deposits, were used to repurchase the $1.0
billion convertible notes discussed above.
As of September 28, 2008 the Company had $696 million of borrowings under its revolving credit
facilities which were used to reduce commercial paper outstanding to $1.2 billion. On September
30, subsequent to the end of the reporting period, the Company borrowed an additional $1.2 billion
under the revolving credit facilities, bringing the total borrowed to $1.9 billion. The additional
funds were invested and are being used to repay all outstanding paper as it matures through
December 12, 2008, thereby replacing commercial paper borrowings with borrowings under the
revolving credit facilities.
The following schedule of annual maturities of long-term debt assumes the Company had used its
$3.9 billion of revolving credit agreements to refinance remaining unsecured promissory notes, the
unsecured fixed rate notes, the unsecured floating rate notes, the unsecured senior convertible
notes and other indebtedness due in 2008, 2009 and 2011. Based on this refinancing assumption, all
of these obligations are reflected in the maturities for 2012.
|
|
|
|
|
|
|
September 28, |
|
(in thousands) |
|
2008 |
|
|
2009 |
|
$ |
|
|
2010 |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
|
3,908,319 |
|
2013 |
|
|
|
|
Later years |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,908,319 |
|
|
|
|
|
On October 31, 2008, the Company amended each of its three revolving credit agreements and its
term loan agreement. Under each of the amendments, the existing financial covenant requiring that
the Company maintain shareholders equity in excess of $3.5 billion was replaced with a new
covenant that requires that the Company maintain a senior leverage ratio of less than 3.5x. The
senior leverage ratio is the ratio of the Companys senior unsecured debt outstanding to its EBITDA
measured on a trailing four quarters basis. At this time, all of the Companys debt is senior and
unsecured. The new covenant also requires the Company to maintain a total leverage ratio of less
than 4.0x. Total leverage ratio would also include any subordinated debt the Company may issue in
the future.
24
In addition, the aggregate size of the revolving credit facilities was reduced to $3.1 billion
from $3.9 billion. There is a further provision that the aggregate size of the three revolving
credit agreements will be reduced on a dollar-for-dollar basis for the first $397 million that the
Company raises in the capital markets prior to December 31, 2009. Irrespective of any such interim
reductions, the aggregate size of the three revolving credit agreements will be reduced to $2.75
billion on December 31, 2009. The amendments also provide for certain changes to the pricing of
the facilities. For the revolving credit facilities, the commitment fees may range from 0.125% to
0.25% depending on credit ratings for the Companys senior unsecured debt from Moodys and Standard
& Poors (S&P). The rate currently in effect is 0.125%.
Under each of the agreements, the Company may borrow at an applicable margin above the
Eurodollar base rate or the higher of the Prime Rate or the Federal Funds Effective Rate plus
0.50%. Under the amended revolving credit agreements, the applicable margin for such borrowings
ranges from 1.00% to 2.25% depending on credit ratings. Under the term loan agreement, the
applicable margin varies from 1.25% to 2.25%. At its current ratings the Company will pay an
applicable margin of 1.00% under the revolving credit agreements and 1.25% under the term loan
agreement.
Also, in connection with the amendments, the Company agreed to provide future guarantees from
its domestic wholly-owned subsidiaries in the event that the Companys credit ratings from either
Moodys or S&P fall below investment grade. If the guarantees are triggered, then existing notes
and other unsecured debt of the Company will become structurally subordinated to the revolving
credit agreements and the term loan. The amended facilities provide the Company with ample
liquidity to operate its business and pursue its strategic objectives.
NOTE 8 Retirement plans
The Company and its subsidiaries have various retirement plans, including plans established
under collective bargaining agreements, under which most full-time employees are covered. The
Gannett Retirement Plan is the Companys principal retirement plan and covers most U.S. employees
of the Company and its subsidiaries.
On June 10, 2008, the Companys Board of Directors authorized and approved amendments to each
of (i) the Gannett Retirement Plan; (ii) the Gannett Supplemental Retirement Plan (SERP); (iii) the
Gannett 401(k) Savings Plan (401(k) Plan); and (iv) the Gannett Deferred Compensation Plan (DCP).
The amendments are designed to improve the 401(k) Plan while reducing the amount and volatility of
future pension expense. As a result of the amendments to the Gannett Retirement Plan and SERP,
most participants in these plans had their benefits frozen as of August 1, 2008, meaning that their
service and earnings on and after that date will not be considered for purposes of calculating
their retirement benefits. Participants whose Gannett Retirement Plan and, if applicable, SERP
benefits were frozen will have their frozen benefits periodically increased by a cost of living
adjustment until benefits commence.
Effective August 1, 2008, most participants whose benefits were frozen under the Gannett
Retirement Plan and, if applicable, the SERP began receiving higher matching contributions under
the 401(k) Plan. Under the new formula, the matching contribution rate generally increased from 50%
of the first 6% of compensation that an employee elects to contribute to the plan to 100% of the
first 5% of compensation. The Company will also make additional employer contributions to the
401(k) Plan on behalf of certain employees. The DCP was amended to provide for Gannett
contributions on behalf of certain employees whose benefits under the 401(k) Plan are capped by IRS
rules that limit the amount of compensation that can be taken into account when calculating
benefits under a qualified plan. Generally, Gannetts contributions to the DCP will be calculated
by applying the same formula that applies to an employees matching and additional employer
contributions under the 401(k) Plan to the employees compensation in excess of the IRS
compensation limit.
As a result of the amendments to freeze most benefit accruals in the Gannett Retirement Plan
and the SERP, the Company recognized a net pre-tax pension curtailment gain of $46.5 million in the
second quarter of 2008 in accordance with Statement of Financial Accounting Standards No. 88,
Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits.
25
The Companys pension costs, which include costs for qualified, nonqualified and union plans
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-date |
|
(in millions of dollars) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost-benefits earned during
the period |
|
$ |
12.8 |
|
|
$ |
25.6 |
|
|
$ |
56.0 |
|
|
$ |
76.7 |
|
Interest cost on benefit obligation |
|
|
52.8 |
|
|
|
49.4 |
|
|
|
159.5 |
|
|
|
148.3 |
|
Expected return on plan assets |
|
|
(67.1 |
) |
|
|
(68.0 |
) |
|
|
(206.1 |
) |
|
|
(203.9 |
) |
Amortization of prior service credit |
|
|
(0.7 |
) |
|
|
(5.1 |
) |
|
|
(9.7 |
) |
|
|
(15.4 |
) |
Amortization of actuarial loss |
|
|
3.4 |
|
|
|
11.1 |
|
|
|
18.9 |
|
|
|
33.3 |
|
Special termination charge |
|
|
4.2 |
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense for Company-sponsored
retirement plans |
|
|
5.4 |
|
|
|
13.0 |
|
|
|
22.8 |
|
|
|
39.0 |
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(46.5 |
) |
|
|
|
|
Union and other pension cost |
|
|
1.8 |
|
|
|
2.0 |
|
|
|
5.4 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefit cost |
|
$ |
7.2 |
|
|
$ |
15.0 |
|
|
$ |
(18.3 |
) |
|
$ |
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 Postretirement benefits other than pension
The Company provides health care and life insurance benefits to certain retired employees who
meet age and service requirements. Most of the Companys retirees contribute to the cost of these
benefits and retiree contributions are increased as actual benefit costs increase. The Companys
policy is to fund benefits as claims and premiums are paid. Postretirement benefit costs for
health care and life insurance are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-date |
|
(in millions of dollars) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost-benefits earned during the
period |
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
$ |
1.4 |
|
|
$ |
1.6 |
|
Interest cost on net benefit obligation |
|
|
3.5 |
|
|
|
3.3 |
|
|
|
10.5 |
|
|
|
10.1 |
|
Amortization of prior service credit |
|
|
(3.8 |
) |
|
|
(2.8 |
) |
|
|
(11.6 |
) |
|
|
(8.5 |
) |
Amortization of actuarial loss |
|
|
1.1 |
|
|
|
0.7 |
|
|
|
3.5 |
|
|
|
2.1 |
|
Special termination charge |
|
|
1.3 |
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost |
|
$ |
2.5 |
|
|
$ |
1.8 |
|
|
$ |
5.1 |
|
|
$ |
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
NOTE 10 Income taxes
The Company adopted the provisions of FASB Interpretation No. 48 Accounting for Uncertainty
in Income Taxes (FIN No. 48) on January 1, 2007.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective
tax rate was approximately $181.7 million as of December 30, 2007 and $140.7 million as of the end
of the third quarter of 2008. This amount reflects the federal tax benefit of state tax
deductions. Excluding the federal tax benefit of state tax deductions, the total amount of
unrecognized tax benefits as of December 30, 2007 was $264.2 million and as of September 28, 2008
was $216.7 million. The $47.5 million decrease reflects a net reduction for prior year tax
positions of $38.2 million, a reduction for cash settlements of $12.9 million, a reduction for
lapses of statutes of limitations of $5.7 million, and additions in the current year of $9.3
million. The reduction for prior year tax positions, as well as the reduction for cash
settlements, was primarily related to favorable settlements with the UK and with U.S. state tax
authorities.
The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of income tax expense. The Company also recognizes interest income attributable to
overpayment of income taxes as a component of income tax expense. The Company recognized interest
and penalty expense (income) of $(1.8) million and $2.0 million during the third quarter of 2008
and 2007, respectively. The amount of net accrued interest and penalties related to uncertain tax
benefits as of December 30, 2007 was approximately $83.2 million and as of September 28, 2008, was
approximately $97.9 million.
The Company files income tax returns in the U.S. and various state and foreign
jurisdictions. The 2005 through 2007 tax years remain subject to examination by the IRS. The IRS
has commenced examination of the Companys 2005 and 2006 U.S. income tax returns, and this
examination is expected to be completed in 2009. The 2004 through 2007 tax years generally remain
subject to examination by state authorities, and the years 2003-2007 are subject to examination in
the UK. In addition, tax years prior to 2004 remain subject to examination by certain states
primarily due to the filing of amended tax returns upon settlement of the IRS examination for these
years and due to ongoing audits.
It is reasonably possible that the amount of unrecognized benefits with respect to certain of
the Companys unrecognized tax positions will significantly increase or decrease within the next 12
months. These changes may be the result of settlement of ongoing audits, lapses of statutes of
limitations or other regulatory developments. At this time, the Company estimates that the amount
of its gross unrecognized tax positions may decrease by up to approximately $39 million within the
next 12 months, primarily due to lapses of statutes of limitations in various jurisdictions and
potential settlements of ongoing audits and negotiations.
NOTE 11 Comprehensive income (loss)
The table below presents the components of comprehensive income (loss) for the third quarter
and first nine months of 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-date |
|
(in thousands of dollars) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
158,057 |
|
|
$ |
234,024 |
|
|
$ |
(1,940,921 |
) |
|
$ |
810,298 |
|
Other comprehensive income (loss) |
|
|
(108,674 |
) |
|
|
73,093 |
|
|
|
(141,154 |
) |
|
|
172,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
49,383 |
|
|
$ |
307,117 |
|
|
$ |
(2,082,075 |
) |
|
$ |
983,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) consists primarily of foreign currency translation and
mark-to-market adjustments on the interest rate swaps.
27
NOTE 12 Fair value measurement
The Company measures and records in the accompanying condensed consolidated financial
statements certain assets and liabilities at fair value. SFAS No. 157 establishes a fair value
hierarchy for those instruments measured at fair value that distinguishes between assumptions based
on market data (observable inputs) and the companys own assumptions (unobservable inputs). The
hierarchy consists of three levels:
Level 1 Quoted market prices in active markets for identical assets or liabilities;
Level 2 Inputs other than Level 1 inputs that are either directly or indirectly observable;
and
Level 3 Unobservable inputs developed using estimates and assumptions developed by
the company, which reflect those that a market participant would use.
The following table summarizes the financial instruments measured at fair value in the
accompanying condensed consolidated balance sheet as of September 28, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of |
|
|
|
September 28, 2008 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation related investments |
|
$ |
51,284 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
51,284 |
|
Sundry investments |
|
$ |
23,925 |
|
|
$ |
|
|
|
$ |
27,011 |
|
|
$ |
50,936 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
9,990 |
|
|
$ |
|
|
|
$ |
9,990 |
|
The level 3 sundry investments are financial instruments held by CareerBuilder. As discussed
in Note 1 above, the Company began consolidating the financial statements of CareerBuilder in
September 2008. No gain or loss was recognized in the Companys condensed consolidated statement
of income with respect to these investments since the date of consolidation.
NOTE 13 Business segment information
The Company has determined that its reportable segments based on its management and internal
reporting structures are publishing, digital, and broadcasting. Publishing is the largest
component of the Companys business and includes U.S. Community Publishing, Newsquest operations in
the UK and the USA TODAY group. The digital segment was established beginning with the third
quarter of 2008 and includes CareerBuilder, ShopLocal, Schedule Star, Planet Discover and PointRoll
(See Note 1). Prior period results for PointRoll, Planet Discover and Schedule Star have been
reclassified from the publishing segment to the digital segment. Broadcasting includes the
Companys 23 television stations and Captivate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
Excluding discontinued operations |
|
Thirteen weeks ended |
|
|
Inc |
|
(unaudited, in thousands of dollars) |
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
(Dec) |
|
Net Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
1,362,716 |
|
|
$ |
1,591,972 |
|
|
|
(14.4 |
) |
Digital |
|
|
77,594 |
|
|
|
17,181 |
|
|
|
*** |
|
Broadcasting |
|
|
197,000 |
|
|
|
189,540 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,637,310 |
|
|
$ |
1,798,693 |
|
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) (net of
depreciation, and amortization): |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
183,432 |
|
|
$ |
329,365 |
|
|
|
(44.3 |
) |
Digital |
|
|
6,136 |
|
|
|
6,043 |
|
|
|
1.5 |
|
Broadcasting |
|
|
83,957 |
|
|
|
71,479 |
|
|
|
17.5 |
|
Corporate |
|
|
(14,344 |
) |
|
|
(17,758 |
) |
|
|
(19.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,181 |
|
|
$ |
389,129 |
|
|
|
(33.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
48,224 |
|
|
$ |
56,264 |
|
|
|
(14.3 |
) |
Digital |
|
|
4,094 |
|
|
|
1,330 |
|
|
|
*** |
|
Broadcasting |
|
|
8,513 |
|
|
|
8,270 |
|
|
|
2.9 |
|
Corporate |
|
|
3,974 |
|
|
|
4,005 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64,805 |
|
|
$ |
69,869 |
|
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
Thirty-nine weeks ended |
|
|
Inc |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
|
(Dec) |
|
Net Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
4,360,925 |
|
|
$ |
4,918,663 |
|
|
|
(11.3 |
) |
Digital |
|
|
111,495 |
|
|
|
46,614 |
|
|
|
*** |
|
Broadcasting |
|
|
559,748 |
|
|
|
577,265 |
|
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,032,168 |
|
|
$ |
5,542,542 |
|
|
|
(9.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss) (net of
depreciation,
amortization see Note
3): |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
(1,737,470 |
) |
|
$ |
1,063,268 |
|
|
|
*** |
|
Digital |
|
|
9,784 |
|
|
|
12,027 |
|
|
|
(18.6 |
) |
Broadcasting |
|
|
220,996 |
|
|
|
223,053 |
|
|
|
(0.9 |
) |
Corporate |
|
|
(40,044 |
) |
|
|
(59,511 |
) |
|
|
(32.7 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,546,734 |
) |
|
$ |
1,238,837 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
Amortization and Asset
Impairment (see Note
3): |
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
$ |
2,648,943 |
|
|
$ |
171,116 |
|
|
|
*** |
|
Digital |
|
|
6,876 |
|
|
|
3,952 |
|
|
|
74.0 |
|
Broadcasting |
|
|
27,168 |
|
|
|
25,452 |
|
|
|
6.7 |
|
Corporate |
|
|
13,118 |
|
|
|
11,921 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,696,105 |
|
|
$ |
212,441 |
|
|
|
*** |
|
|
|
|
|
|
|
|
|
|
|
29
NOTE 14 Earnings (loss) per share
The Companys earnings (loss) per share (basic and diluted) are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
|
|
September 28, |
|
|
September 30, |
|
|
September 28, |
|
|
September 30, |
|
(in thousands except per share amounts) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income (loss) from
continuing operations (see
Note 3) |
|
$ |
158,057 |
|
|
$ |
234,024 |
|
|
$ |
(1,940,921 |
) |
|
$ |
730,263 |
|
Income from the operation
of discontinued operations,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,221 |
|
Gain on disposal of
newspaper business, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
158,057 |
|
|
$ |
234,024 |
|
|
$ |
(1,940,921 |
) |
|
$ |
810,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding
basic |
|
|
227,920 |
|
|
|
232,392 |
|
|
|
228,488 |
|
|
|
233,724 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
196 |
|
|
|
202 |
|
|
|
|
|
|
|
222 |
|
Restricted stock |
|
|
215 |
|
|
|
104 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding
diluted (a) |
|
|
228,331 |
|
|
|
232,698 |
|
|
|
228,488 |
|
|
|
234,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from
continuing operations per
share basic |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
$ |
(8.49 |
) |
|
$ |
3.12 |
|
Discontinued operations per
share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03 |
|
Gain on disposal of
newspaper business net of
tax basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
basic |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
$ |
(8.49 |
) |
|
$ |
3.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from
continuing operations per
share diluted |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
$ |
(8.49 |
) |
|
$ |
3.12 |
|
Discontinued operations per
share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03 |
|
Gain on disposal of
newspaper business per share
diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
diluted |
|
$ |
0.69 |
|
|
$ |
1.01 |
|
|
$ |
(8.49 |
) |
|
$ |
3.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Diluted weighted average common shares exclude 411 incremental shares resulting from the
application of the treasury stock method to outstanding options and restricted stock for the
thirty-nine weeks ended September 28, 2008. Their effect is anti-dilutive as results for this
period were a net loss. |
30
NOTE 15 Litigation
The Company and a number of its subsidiaries are defendants in judicial and administrative
proceedings involving matters incidental to their business. The Companys management does not
believe that any material liability will be imposed as a result of these matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company believes that its market risk from financial instruments, such as accounts
receivable, accounts payable and debt, is not material. The Company is exposed to foreign exchange
rate risk primarily due to its operations in the United Kingdom, for which the British pound is the
functional currency. If the price of the British pound against the U.S. dollar had been 10% more
or less than the actual price, operating income, excluding the non-cash impairment charges, for the
third quarter and year-to-date periods of 2008 would have increased or decreased approximately 2%.
At the end of the third quarter of 2008, the Company had approximately $2.2 billion in
floating rate obligations outstanding. A 1/2% increase or decrease in the average interest rate
for these obligations would result in an increase or decrease in annual interest expense of $10.8
million.
The estimated fair value of the Companys total long-term debt totaled $3.6 billion at
September 28, 2008.
Item 4. Controls and Procedures
Based on their evaluation, the Companys Chairman, President and Chief Executive Officer and
Executive Vice President and Chief Financial Officer have concluded the Companys disclosure
controls and procedures are effective as of September 28, 2008, to ensure that information required
to be disclosed in the reports that the Company files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.
On September 3, 2008, the Company acquired an additional 10% stake in CareerBuilder LLC
(CareerBuilder) increasing its ownership to 50.8% thereby becoming majority and controlling owner.
In connection with this, the Company began consolidating the results of CareerBuilder and it
represented approximately 6% of the Companys total assets. Due to the timing of this acquisition
and as permitted by SEC guidance, management will exclude CareerBuilder from its December 28, 2008
assessment of internal control over financial reporting.
There have been no other changes in the Companys internal controls or in other factors during
the fiscal quarter that have materially affected, or are reasonably likely to materially affect,
the Companys internal controls over financial reporting.
31
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no share repurchases in the third quarter of 2008. The approximate dollar value of
shares that may yet be purchased under the program is $808,936,610. While there is no expiration
date for the repurchase program, the Board of Directors reviews the authorization of the program
annually.
Item 5. Other Information.
As described more fully in Note 7 to the Condensed Consolidated Financial Statements in this
report, the Company amended each of its three credit revolving agreements effective October 31,
2008. The amendments are attached as Exhibit 10-3, 10-4 and 10-5 to this Form 10-Q.
Item 6. Exhibits
Incorporated by reference to the Exhibit Index attached hereto and made a part hereof.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: November 5, 2008 |
GANNETT CO., INC.
|
|
|
/s/ George R. Gavagan
|
|
|
George R. Gavagan |
|
|
Vice President and Controller
(on behalf of Registrant and as Chief Accounting Officer) |
|
33
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Exhibit |
|
Location |
|
|
|
|
|
2-1
|
|
Equity Purchase Agreement, dated
as of August 28, 2008, among Cape
Publications, Inc., Gannett
Satellite Information Network,
Inc., Tribune Media Net, Inc. and
Tribune National Marketing
Company.
|
|
Incorporated by
reference to Exhibit 2.1
to Gannett Co., Inc.s
Form 8-K dated August 28,
2008 and filed on
September 3, 2008. |
|
|
|
|
|
3-1
|
|
Third Restated Certificate of
Incorporation of Gannett Co.,
Inc.
|
|
Incorporated by reference
to Exhibit 3.1 to Gannett
Co., Inc.s Form 10-Q for
the fiscal quarter ended
April 1, 2007. |
|
|
|
|
|
3-2
|
|
By-laws of Gannett Co., Inc.
|
|
Incorporated by reference
to Exhibit 3.2 to Gannett
Co., Inc.s Form 10-Q for
the fiscal quarter ended
June 29, 2008. |
|
|
|
|
|
3-3
|
|
Form of Certificate of
Designation, Preferences and
Rights setting forth the terms of
the Series A Junior Participating
Preferred Stock, par value $1.00
per share, of Gannett Co., Inc.
|
|
Incorporated by reference
to Exhibit 1 to Gannett
Co., Inc.s Form 8-A
filed on May 23, 1990. |
|
|
|
|
|
4-1
|
|
Rights Agreement, dated as of
May 21, 1990, between Gannett
Co., Inc. and First Chicago Trust
Company of New York, as Rights
Agent.
|
|
Incorporated by reference
to Exhibit 1 to Gannett
Co., Inc.s Form 8-A
filed on May 23, 1990. |
|
|
|
|
|
4-2
|
|
Amendment No. 1 to Rights
Agreement, dated as of May 2,
2000, between Gannett Co., Inc.
and Norwest Bank Minnesota, N.A.,
as successor rights agent to
First Chicago Trust Company of
New York.
|
|
Incorporated by reference
to Exhibit 2 to Gannett
Co., Inc.s Form 8-A/A
filed on May 2, 2000. |
|
|
|
|
|
4-3
|
|
Form of Rights Certificate.
|
|
Incorporated by reference
to Exhibit 1 to Gannett
Co., Inc.s Form 8-A
filed on May 23, 1990. |
|
|
|
|
|
4-4
|
|
Specimen Certificate for Gannett
Co., Inc.s common stock, par
value $1.00 per share.
|
|
Incorporated by reference
to Exhibit 2 to Gannett
Co., Inc.s Form 8-B
filed on June 14, 1972. |
|
|
|
|
|
10-1
|
|
Amendment No. 1 to the Gannett
Co., Inc. Supplemental Retirement
Plan dated July 31, 2008 and
effective August 1, 2008.
|
|
Attached. |
|
|
|
|
|
10-2
|
|
Amendment No. 1 to the Gannett
Co., Inc. Deferred Compensation
Plan Rules for Post-2004
Deferrals dated July 31, 2008 and
effective August 1, 2008.
|
|
Attached. |
|
|
|
|
|
10-3
|
|
Second Amendment, dated October
23, 2008, and Effective as of
October 31, 2008, to Competitive
Advance and Revolving Credit
Agreement.
|
|
Attached. |
34
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Exhibit |
|
Location |
|
|
|
|
|
10-4
|
|
Second Amendment, dated October 23, 2008, and
Effective as of October 31, 2008, to Competitive
Advance and Revolving Credit Agreement.
|
|
Attached. |
|
|
|
|
|
10-5
|
|
Second Amendment, dated October 23, 2008, and
Effective as of October 31, 2008, to Amended and
Restated Competitive Advance and Revolving Credit
Agreement.
|
|
Attached. |
|
|
|
|
|
31-1
|
|
Rule 13a-14(a) Certification of CEO.
|
|
Attached. |
|
|
|
|
|
31-2
|
|
Rule 13a-14(a) Certification of CFO.
|
|
Attached. |
|
|
|
|
|
32-1
|
|
Section 1350 Certification of CEO.
|
|
Attached. |
|
|
|
|
|
32-2
|
|
Section 1350 Certification of CFO.
|
|
Attached. |
|
|
|
|
|
99-1
|
|
Recast Quarterly Segment Financial Data
|
|
Attached. |
The Company agrees to furnish to the Commission, upon request, a copy of each agreement
with respect to long-term debt not filed herewith in reliance upon the exemption from filing
applicable to any series of debt which does not exceed 10% of the total consolidated assets of the
Company.
35