The New York Times Company — Q2 2014 Form 10-Q
Business context and period. The filing covers the 13 weeks and 26 weeks ended June 29, 2014. The company’s continuing business includes The New York Times, the International New York Times, digital products and related businesses; the New England Media Group sale is reported as discontinued operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $388.7 million | $391.0 million | $779.1 million | $771.6 million |
| Operating profit | $16.5 million | $46.2 million | $38.6 million | $74.4 million |
| Net income attributable to common stockholders | $9.2 million | $20.1 million | $10.9 million | $23.7 million |
| Diluted EPS from continuing operations | $0.06 | $0.11 | $0.07 | $0.15 |
| Cash provided by/(used in) operations | Not separately presented for the quarter | $8.1 million | $(26.6) million |
Q2 operating margin was approximately 4.2%, compared with 11.8% a year earlier; the six-month margin was approximately 5.0%, versus 9.6%. The company reported adjusted Q2 operating profit of $55.7 million, down 21.1%, and adjusted diluted EPS of $0.07, down from $0.13. These are non-GAAP measures.
- Q2 circulation revenue rose 1.4%; advertising revenue fell 4.1%; other revenue rose 7.7%. For the first half, these changed by +1.7%, -0.5% and +4.5%, respectively.
- Print advertising remained weak: it declined 6.6% in Q2, while digital advertising grew 3.4%. Digital-only subscriptions, e-readers and replica editions generated $41.7 million in Q2 revenue, up 13.5% year over year.
- Operating costs rose 5.2% in Q2 and 4.5% in the first half, driven mainly by compensation, benefits, marketing and strategic investment spending. Higher retirement costs also weighed on results.
Liquidity, debt and balance sheet
At June 29, 2014, cash, cash equivalents and short- and long-term marketable securities totaled approximately $972 million, compared with total debt and capital lease obligations of approximately $686 million—a reported excess of about $286 million. Cash and cash equivalents alone were $374.6 million. The company said available cash and operating cash flow, together with other sources, should meet financing needs over the next 12 months.
Total debt and capital lease obligations were $686.5 million. Approximately $244.1 million of 5.0% senior notes due 2015 was classified as current; other principal obligations included $205.5 million of 6.625% notes due 2016 and a $230.2 million headquarters-building repurchase option due in 2019. The company reported covenant compliance. It paid a $0.04-per-share dividend on July 31, 2014.
Six-month operating cash flow improved from a use of $26.6 million to generation of $8.1 million. Investing used $104.9 million, primarily reflecting net marketable-security purchases, capital expenditures and repayment of $26.0 million in loans against corporate-owned life insurance. Financing used $11.3 million, including $12.1 million of dividends. Cash and cash equivalents declined by $108.1 million from year-end 2013.
Material changes, outlook and risks
- Digital strategy: The company launched NYT Now, NYT Opinion and Times Premier in Q2. It reported approximately 831,000 paid digital-only subscribers, up 19% year over year and 32,000 sequentially. The new products accounted for most subscriber growth, and were included in the reported count for the first time.
- Costs and investment: Management expected strategic-initiative costs to rise by $25–$30 million versus 2013, to approximately $45–$50 million for full-year 2014. It planned to continue investing while paying attention to costs.
- Q3 outlook: Management expected circulation revenue to be flat year over year, advertising revenue to decline in the mid-single digits, and operating costs and adjusted operating costs each to increase in the low- to mid-single digits. Digital advertising was expected to continue growing at a rate similar to the first half. Advertising trends were described as challenging and volatile, with limited visibility.
- Other 2014 expectations: Joint-venture loss of $1–$3 million; depreciation and amortization of $75–$80 million; net interest expense of $53–$57 million; capital expenditures of $40–$50 million; and qualified pension contributions of approximately $16 million.
- Unusual items: Q2 included a $9.5 million pension settlement charge related to approximately $24 million of lump-sum payments that reduced pension obligations by approximately $32 million. A $9.5 million tax benefit, primarily from reducing the uncertain-tax-position reserve, partly offset the impact on earnings. The first half also included a $2.6 million distribution-agreement termination charge.
- Pension exposure: Proposed mortality-table updates could increase pension and postretirement liabilities by approximately $150 million and annual expense by approximately $10 million, based on preliminary estimates and unchanged other assumptions. Management also expected retirement-related cost volatility.
- Contingencies: The company is vigorously disputing a pension-fund demand of approximately $26 million and recorded no loss contingency, as management did not consider a loss probable. A separate PBGC matter concerning the Boston Newspaper Guild pension plan remained unresolved; management did not expect a material adverse effect. The PBGC had announced a moratorium on enforcement through year-end 2014.
- Other developments: The company repurchased approximately $14.2 million principal amount of its 6.625% notes in July and August 2014. S&P upgraded the senior-note rating to BB from BB- in April. Management reported effective disclosure controls; migration to Essbase was identified as a material internal-control change, not a response to a deficiency or material weakness.
Important facts for investors to verify
- Whether digital-product subscriber growth and monetization persist, noting the first-time inclusion of new products in the 831,000 subscriber count.
- Whether advertising weakness—particularly print—and the stated Q3 revenue and cost outlook materialize.
- The 2015 note maturity and the company’s ability to maintain liquidity while funding strategic initiatives and dividends.
- The final effects of mortality-table revisions on pension liabilities, expense and future funding needs.
- Developments in the disputed $26 million pension-fund demand and the PBGC matter, including any cash, escrow or bonding requirements.
- How reported GAAP results compare with management’s non-GAAP adjusted measures, which exclude specified retirement costs and other items.