Business context and reporting period
The New York Times Company’s unaudited Form 10-Q covers the 13 weeks and 39 weeks ended September 28, 2014, compared with periods ended September 29, 2013. Its continuing business comprises The New York Times, the International New York Times, digital products and related businesses; revenue is principally from circulation and advertising. The New England Media Group sale was completed in 2013 and is presented as discontinued operations. Management cautions that interim results are seasonal and may not indicate full-year performance.
Financial performance and liquidity
Amounts below are in millions, except per-share data. Comparisons are with the prior-year comparable period.
| Metric | Third quarter 2014 | Nine months 2014 |
|---|---|---|
| Revenue | $364.7; up 0.8% | $1,143.8; up 0.9% |
| Operating profit/(loss), GAAP | $(9.0), versus $12.9 profit | $29.5, down 66.1% from $87.2 |
| Net loss attributable to common stockholders | $(12.5), or $(0.08) per diluted share | $(1.6), or $(0.01) per diluted share |
| Adjusted operating profit (non-GAAP) | $40.0, versus $45.0 | $152.4, versus $172.8 |
| Adjusted diluted EPS (non-GAAP) | $0.03, versus $0.01 | $0.20, versus $0.22 |
| Operating cash flow | $36.2 for nine months, versus $10.1 |
Third-quarter circulation revenue rose 1.3%, advertising was down 0.1%, and other revenue rose 2.7%. Digital-only circulation revenue increased 13.3% to $42.8 million; digital-only subscribers reached approximately 875,000. Digital advertising rose 16.5%, but print advertising fell 5.3%. For the first nine months, circulation rose 1.6%, advertising declined 0.4%, and other revenue increased 3.9%.
Third-quarter operating costs increased 9.1% to $373.8 million, exceeding revenue growth; the GAAP operating margin was approximately negative 2.5%, versus positive 3.6% a year earlier. Nine-month operating costs increased 6.0%; the GAAP operating margin was approximately 2.6%, versus 7.7%. Management attributed cost pressure mainly to severance, higher compensation and benefits, and investment in strategic initiatives. Adjusted operating profit and adjusted EPS are non-GAAP measures; they exclude specified items and should be considered alongside GAAP results.
At September 28, cash and cash equivalents were $414.6 million, short- and long-term marketable securities totaled $551.1 million, and debt and capital lease obligations were $669.4 million. Cash and securities exceeded debt and lease obligations by approximately $296 million. Total debt included $244.1 million of 5% notes due in 2015, $187.4 million of 6.625% notes due in 2016, and the $231.1 million headquarters repurchase option due in 2019. The company reported compliance with financing covenants. Cash and securities declined from year-end 2013; nine-month investing cash outflow was $68.7 million and financing outflow was $35.9 million. Cash dividends paid were $18.2 million.
Material changes, outlook and risks
- Workforce reductions and unusual charges: The company announced cost-saving workforce reductions on October 1, 2014, and recorded $21.4 million of third-quarter severance expense ($26.7 million for the first nine months). Nine-month results also included a $9.5 million pension settlement charge and a $2.6 million early termination charge. A $9.5 million tax benefit from reducing uncertain tax reserves partly offset the effects on reported results.
- Pensions: New mortality tables released after quarter-end may increase pension and postretirement liabilities by approximately $150 million and annual expense by approximately $10 million when fully implemented, with potential for higher future funding needs. A planned lump-sum offer for certain qualified-plan participants could settle $200–$225 million of obligations, assuming 50% acceptance, and produce $60–$80 million of settlement charges in Q4 2014 and Q1 2015. Distributions are expected to use pension-plan assets, not company cash.
- Management outlook: For Q4 2014, circulation revenue growth was expected at a rate similar to Q3, with mid-30,000s net new digital subscribers; advertising revenue was expected to decline in the mid-single digits, while digital advertising was expected to grow in the high-single digits. Other revenue was expected to grow more than 10%, and operating and adjusted operating costs were expected to be roughly flat year over year. For 2014, management expected joint-venture losses of $1–$3 million, depreciation and amortization of $75–$80 million, net interest expense of $53–$57 million and capital expenditures of $35 million. For 2015, it expected depreciation and amortization of $60–$65 million and net interest expense of $40–$45 million, partly reflecting planned repayment of the 5% notes due March 2015 using existing cash.
- Business and legal risks: Management described a challenging, fragmented media market, limited visibility and volatile advertising trends. The company disputes a pension fund demand of approximately $26 million and has recorded no loss contingency, as it does not consider a loss probable. A separate PBGC matter concerning the Boston Newspaper Guild plan remained unresolved; management did not expect a material adverse effect. Management stated that other pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether digital subscription and digital advertising growth can offset continuing print and advertising pressure.
- Whether announced workforce reductions deliver savings sufficient to counter compensation, benefits and strategic-investment costs.
- The actual impact and timing of revised pension mortality assumptions, plan funding requirements, and the planned lump-sum offer and related charges.
- Repayment of the 2015 notes and the company’s cash and securities balance after debt service, dividends and other obligations.
- Developments in the disputed $26 million pension fund claim and the PBGC matter, including any required escrow, bond or contribution.