UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 26, 2004
OR
Commission file number 1-6961
GANNETT CO., INC.
(Exact name of registrant as specified in charter)
(State or Other Jurisdiction of Incorporation
or Organization of Registrant)
(I.R.S. Employer
Identification No.)
Registrant’s 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 x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The total number of shares of the registrant’s Common Stock, $1 par value, as of October 28, 2004, was 255,250,585.
PART I. FINANCIAL INFORMATION
Items 1 and 2. Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
Operating Summary
Earnings per diluted share, on a generally accepted accounting principles (“GAAP”) basis, were $1.18 for the third quarter of 2004 and $3.47 for the year-to-date compared with $1.03 for the third quarter of 2003 and $3.15 for the year-to-date 2003.
Net income rose 11% to $310.2 million for the quarter and 10% to $939.0 million for the year-to-date. Operating income increased 11% to $512.2 million for the quarter and 9% to $1.53 billion for the year-to-date.
Operating revenues were $1.82 billion for the quarter, an 11% increase over the same period last year. For the first nine months, operating revenues rose $530.1 million to $5.42 billion, an 11% increase over the same period last year.
Newspaper Results
Reported newspaper publishing revenues increased $150.7 million or 10% for the third quarter of 2004, as compared to the third quarter of 2003, and rose $465.1 million or 11% for the year-to-date. The increases reflect the impact of recently acquired businesses, revenue improvement at most of the company’s newspaper properties and a higher Sterling exchange rate for UK operations.
Recent significant acquisitions affecting year-to-date newspaper comparisons include NurseWeek, acquired in February 2004, Clipper Magazine (“Clipper”), acquired in October 2003, and the Scottish Media Group plc (“SMG”) publishing business, purchased in April 2003.
Newspaper publishing revenues are derived principally from advertising and circulation sales, which accounted for 75% and 19%, respectively, of total newspaper revenues for the third quarter and for the year-to-date of 2004. Ad revenues include amounts derived from advertising placed with newspaper Internet products. Other publishing revenues are mainly from commercial printing businesses, earnings from the company’s 50% owned joint operating agencies in Detroit and Tucson and earnings from its 19.49% equity interest in the California Newspapers Partnership. The table below presents these components of reported revenues for the third quarter and first nine months of 2004 and 2003.
Newspaper publishing revenues, in thousands of dollars
Newspaper advertising
Newspaper circulation
Commercial printing and other
Total
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The table below presents the components of reported newspaper advertising revenues for the third quarter and first nine months of 2004 and 2003. Certain online advertising revenues in 2003 have been reclassified to conform with the 2004 presentation. The reclassification had no effect on total advertising revenues.
Advertising revenues, in thousands of dollars
Local
National
Classified
Total ad revenue
The company’s growth over the years has been partly through the acquisition of new businesses. To facilitate an analysis of operating results, certain information discussed below is on a pro forma basis, which means that results are presented as if all properties owned at the end of the third quarter of 2004 were owned throughout the periods covered by the discussion. The company consistently uses, for individual businesses and for aggregated business data, pro forma reporting of operating results in its internal financial reports, because it enhances measurement of performance by permitting comparisons with prior period historical data. Likewise, the company uses this same pro forma data in its external reporting of key financial results and benchmarks.
In the tables that follow, newspaper advertising linage and related revenues are presented on a pro forma basis. Advertising revenues for Newsquest and all non-daily publications are reflected in the amounts below, however, advertising linage and preprint distribution statistics for these businesses are not included.
Advertising revenues, in thousands of dollars (pro forma)
Total Run-of-Press linage
Preprint distribution
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The table below reconciles advertising revenues on a pro forma basis to advertising revenues on a GAAP basis.
Pro forma ad revenues
Add: Effect of dispositions
Less: Effect of acquisitions
As reported ad revenues
For the third quarter of 2004, reported and pro forma local advertising revenues rose 15% and 8%, respectively, with pro forma linage up less than 1%. For the year-to-date, reported and pro forma local advertising revenue rose 14% and 6%, respectively, with pro forma linage flat with last year. In the U.S., advances in the furniture, health, financial and home improvement categories were partially offset by declines in the department stores, entertainment, grocery and telecommunications categories. The performance of the company’s small and medium-sized advertisers in its domestic newspapers outpaced the revenue performance of its largest advertisers.
Reported and pro forma national advertising revenues advanced 9% for the third quarter on a 2% pro forma volume decrease. For the quarter, USA TODAY advertising revenues and linage increased 10% and 3%, respectively. Year-to-date, reported and pro forma national advertising revenues advanced 11% and 10%, respectively, on a 4% pro forma volume increase. USA TODAY advertising revenues increased 12% for the year-to-date. USA TODAY’s results for the quarter and year-to-date reflect solid increases in the entertainment, automotive and technology categories and also strong demand for color advertising throughout the year.
For the third quarter, reported and pro forma classified ad revenues rose 12% on a pro forma linage increase of 1% primarily due to strong employment and real estate advertising. On a pro forma basis, help wanted and real estate ad revenues increased 20% and 14%, respectively, for the third quarter. Pro forma automotive ad revenues were down 2% during the quarter. For the year-to-date, reported and pro forma classified ad revenues rose 14% and
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12%, respectively, with pro forma linage up 2% and improvement in all classified categories. Pro forma classified revenue improvements were driven by strength in the employment and real estate categories, which were up 20% and 12%, respectively, for the year-to-date. Online revenue growth continued to be very strong during the third quarter and the first nine months of 2004, advancing 57% and 55%, respectively.
Circulation revenues, as reported, rose 1% for the third quarter and 2% for the year-to-date. Pro forma net paid daily circulation for the company’s newspapers, excluding USA TODAY, declined 2% in the third quarter and the year-to-date. Sunday net paid circulation was down 2% from the comparable quarter of last year and for the year-to-date. USA TODAY reported an average daily paid circulation of 2,311,954 in the ABC Publisher’s Statement for the 26 weeks ended September 26, 2004, a 3% increase over the comparable period a year earlier.
Reported newspaper operating expenses rose $126.5 million or 12% for the quarter and $372.6 million or 12% for the first nine months, reflecting increased newsprint and sales expenses, higher insurance and benefit costs, a higher Sterling exchange rate for Newsquest operations and the impact of recent acquisitions. Expenses associated with non-daily publications also increased as a result of the overall growth in these products. In the third quarter of 2003, newspaper operating expenses were tempered due to changes in certain retiree benefits at U.S. locations. In the third quarter of 2004, the company incurred significant expenses related to USA TODAY’s single-copy price increase described below and also hurricane-related costs that impacted several of the company’s newspapers in the Southeast.
Newsprint expense for the third quarter of 2004 rose 15%, reflecting a 12.4% increase in prices and a 2.4% increase in consumption. For the first nine months of 2004, newsprint expense rose 14%, reflecting an 11.4% increase in prices and a 2.2 % increase in consumption. The increase in newsprint consumption during the quarter and first nine months of 2004 was primarily due to increased circulation at USA TODAY and increased advertising demand in the UK.
Effective September 7, 2004, USA TODAY increased its single-copy price from $0.50 to $0.75. The price increase impacts a little less than 900,000 copies. Expenses associated with the price increase are expected to exceed revenue gains for 2004. The price increase is expected to positively contribute to earnings in 2005. The company will not realize the full $0.25 increase as some portion of this is shared with the distributors.
Newspaper operating income for the quarter rose $24.2 million or 6% and $92.5 million or 8% for the first nine months, reflecting strong revenue growth partially offset by increased newsprint, sales, insurance and benefit costs. Newsquest’s financial results were translated from Sterling to U.S. dollars using an average rate of 1.82 in the third quarter and first nine months of 2004 versus an average rate of 1.61 for the same periods last year.
Broadcasting Results
Broadcasting includes results from the company’s television stations and Captivate Network, Inc., which was acquired in April 2004. Broadcasting revenues advanced $33.9 million or 20% for the third quarter and $64.9 million or 12% for the year-to-date. The Summer Olympic Games and political ad spending contributed significantly to broadcasting results for the quarter. For the third quarter of 2004, national revenues increased 29% and local revenues rose 11%, while national and local revenues advanced 17% and 8%, respectively, for the year-to-date. Excluding Captivate, television revenues increased 17% for the quarter and 11% for the year-to-date.
Broadcasting operating expenses increased 7% for the quarter and the first nine months of 2004. Excluding Captivate, television operating expenses increased 2% for the third quarter and 4% for the first nine months of 2004 due to higher advertising sales costs and higher medical costs.
Operating income from broadcasting operations was up $26.4 million or 36% in the third quarter and $43.3 million or 19% for the year-to-date.
For the fourth quarter of 2004, broadcasting revenues and earnings are expected to continue to improve over 2003 results primarily because of political-related ad spending ahead of the November elections.
Operating Cash Flow
The company’s consolidated operating cash flow, defined as operating income plus depreciation and amortization of intangible assets, increased $49.8 million or 10% to $572.8 million for the third quarter of 2004 and $143.0 million or 9% to $1.72 billion for the first nine months, reflecting improved newspaper and broadcasting segment results. All references to “operating cash flow” are to a non-GAAP financial measure. Management believes that use of this measure allows investors and management to measure, analyze and compare the cash resources generated from its business segment operations in a meaningful and consistent manner. The focus on
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operating cash flow is appropriate given the consistent and generally predictable strength of cash flow generation by newspaper and broadcasting operations, and the short period of time it takes to convert new orders to cash. A reconciliation of these non-GAAP amounts to the company’s operating income, which the company believes is the most directly comparable financial measure calculated and presented in accordance with GAAP on the company’s consolidated statements of income, is presented in Note 10 “Business Segment Information” of the Notes to Condensed Consolidated Financial Statements.
Non-Operating Income and Expense / Provision for Income Taxes
The company’s interest expense rose $1.9 million or 6% for the quarter, reflecting higher debt levels from share repurchases and higher short-term interest rates. For the year-to-date, interest expense declined $6.7 million or 6%, reflecting overall lower debt levels than in the first nine months of 2003. The daily average outstanding balance of commercial paper was $2.41 billion during the third quarter of 2004 and $2.36 billion during the third quarter of 2003. The daily average outstanding balance of commercial paper was $2.08 billion and $2.51 billion during the first nine months of 2004 and 2003, respectively. The weighted average interest rate on commercial paper was 1.41% and 1.06% for the third quarter of 2004 and 2003, respectively. For the first nine months of 2004 and 2003, the weighted average interest rate on commercial paper was 1.18% and 1.21%, respectively.
Because the company has $2.7 billion in commercial paper obligations at September 26, 2004 that have relatively short-term maturity dates, the company is subject to significant changes in the amount of interest expense it might incur. Assuming the current level of commercial paper borrowings, a 1/2% increase or decrease in the average interest rate for commercial paper would result in an increase or decrease in annual interest expense of $13.5 million, respectively.
In both periods presented, non-operating income and expense include charges associated with certain minority interest investments in online/new technology businesses and minority interest expense related to the Texas-New Mexico Newspapers Partnership. Non-operating income in the first nine months of 2004 also includes a non-monetary gain from the exchange of the company’s daily newspaper in Gainesville, Ga. In the first nine months of 2003, non-operating income also includes a non-monetary gain on the company’s sale of 33.8% of its interest in the El Paso Times.
The company’s effective income tax rate was 34.0% for the third quarter and 34.1% for the nine months of 2004 compared to 34.2% for the same periods last year.
Net Income
Net income for the third quarter advanced $31.2 million or 11% and earnings per diluted share increased to $1.18 from $1.03, a 15% increase. For the first nine months, net income rose $85.9 million or 10% and earnings per diluted share increased to $3.47 from $3.15, a 10% increase. Primarily as a result of the company’s share repurchase activities, the weighted average number of diluted shares outstanding for the third quarter of 2004 totaled 263,804,000, compared to 272,174,000 for the third quarter of 2003. For the first nine months of 2004 and 2003, the weighted average number of diluted shares outstanding totaled 270,862,000 and 271,114,000, respectively. Approximately 10.1 million shares were repurchased during the third quarter of 2004 and a total of 16.5 million shares were repurchased during the first nine months of 2004. See Part II, Item 2 for information on share repurchases.
Exhibit 11 of this Form 10-Q presents the weighted average number of basic and diluted shares outstanding and the earnings per share for each period.
Liquidity, Capital Resources, and Statements of Cash Flows
The company’s cash flow from operating activities was $1.17 billion for the first nine months of 2004, reflecting solid newspaper and broadcasting results partially offset by a $50 million contribution to the Gannett Retirement Plan in the first quarter and a contribution of approximately $26 million to the UK retirement plan in the second quarter. Cash flow from operating activities was $1.09 billion for the first nine months of 2003.
Cash used by the company for investing activities totaled $372.1 million for the first nine months of 2004 primarily reflecting $195.1 million of capital spending and $164.5 million for the acquisitions of Captivate, NurseWeek, a one-third equity interest in CrossMedia Services, Inc. and several smaller businesses.
Cash used by the company for financing activities totaled $743.4 million for the nine months of 2004, reflecting the repurchase of approximately 16.5 million shares of the company’s stock for $1.4 billion (see further discussion
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below) and the payment of dividends totaling $203.3 million partially offset by the net proceeds from commercial paper borrowings, net of debt issuance costs, totaling $747.4 million and the exercise of stock options totaling $88.3 million. The company’s regular quarterly dividend of $0.27 per share, which was declared in the third quarter of 2004, totaled $69.8 million and was paid on October 1, 2004.
In February 2004, the company announced the reactivation of its existing share repurchase program that was last utilized in February 2000. Under the program, the company had remaining authority to repurchase up to $291 million of the company’s common stock. On May 12, 2004 and July 13, 2004, the company announced that its authority to repurchase shares was increased by $500 million and $1.0 billion, respectively. The shares will be repurchased at management’s discretion, either in the open market or in privately negotiated block transactions. Management’s 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. During the first nine months of 2004, the company purchased approximately 16.5 million shares of its common stock for $1.4 billion. For more information on the share repurchase program, refer to Item 2 of Part II of this Form 10-Q.
Working capital decreased $14.6 million from the end of 2003 reflecting higher taxes payable primarily due to the timing of estimated U.S. Federal and State tax payments partially offset by higher cash and cash equivalents.
The company’s operations have historically generated strong positive cash flow, which, along with the company’s program of issuing commercial paper and maintaining bank revolving credit agreements, has provided adequate liquidity to meet the company’s requirements, including those for acquisitions.
The company regularly issues commercial paper for cash requirements and maintains revolving credit agreements equal to or in excess of any commercial paper outstanding. The company’s commercial paper has been rated A-1 and P-1 by Standard & Poor’s and Moody’s Investors Service, respectively. The company’s senior unsecured long-term debt is rated A by Standard & Poor’s and A2 by Moody’s Investors Service. The company has a shelf registration statement with the Securities and Exchange Commission under which up to $2.5 billion of additional debt securities may be issued. The company’s Board of Directors has established a maximum aggregate level of $7 billion for amounts that may be raised through borrowings or the issuance of equity securities.
The company’s foreign currency translation adjustment, included in accumulated other comprehensive income and reported as part of shareholders’ equity, totaled $402.7 million at the end of the third quarter versus $352.3 million at the end of 2003. The increase reflects a strengthening of Sterling against the U.S. dollar. Newsquest’s assets and liabilities at September 26, 2004 were translated from Sterling to U.S. dollars at an exchange rate of 1.80 versus 1.78 at the end of 2003. For the third quarter and the first nine months of 2004, Newsquest’s financial results were translated at an average rate of 1.82 versus 1.61 for the same periods last year.
The company is exposed to foreign exchange rate risk primarily due to its operations in the United Kingdom, for which Sterling is the functional currency, which is then translated into U.S. dollars. Translation gains or losses affecting the Condensed Consolidated Statements of Income have not been significant in the past. If the price of Sterling against the U.S. dollar had been 10% more or less than the actual price, reported net income would have increased or decreased approximately 1.5% for both the third quarter and first nine months of 2004.
The company has a 13.5% general partnership interest in Ponderay Newsprint Company. The company, on a several basis, is a guarantor of 13.5% of the principal and interest on a term loan held by Ponderay that totals approximately $81.0 million at September 26, 2004.
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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.
Potential risks and uncertainties which could adversely affect the company’s ability to obtain these 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) an economic downturn in some or all of the company’s principal newspaper or broadcasting markets leading to decreased circulation or local, national or classified advertising; (c) a decline in general newspaper readership 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 Sterling to U.S. dollar exchange rate; and (k) general economic, political and business conditions.
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CONDENSED CONSOLIDATED BALANCE SHEETS
Gannett Co., Inc. and Subsidiaries
Unaudited, in thousands of dollars
ASSETS
Cash and cash equivalents
Trade receivables, less allowance (2004 - $44,780; 2003 - $41,530)
Inventories
Prepaid expenses and other receivables
Total current assets
Property, plant and equipment
Cost
Less accumulated depreciation
Net property, plant and equipment
Intangible and other assets
Goodwill and indefinite-lived intangible assets
Other intangible assets, less accumulated amortization
Investments and other assets
Total intangible and other assets
Total assets
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and current portion of film contracts payable
Compensation, interest and other accruals
Dividends payable
Income taxes
Deferred income
Total current liabilities
Deferred income taxes
Long-term debt
Postretirement medical and life insurance liabilities
Other long-term liabilities
Total liabilities
Minority interests in consolidated subsidiaries
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: 324,420,732 shares
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive income
Less treasury stock, 66,988,083 shares and 52,003,686 shares, respectively, at cost
Total shareholders’ equity
Total liabilities and shareholders’ equity
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited, in thousands of dollars (except per share amounts)
Net Operating Revenues:
Broadcasting
Other
Operating Expenses:
Cost of sales and operating expenses, exclusive of depreciation
Selling, general and administrative expenses, exclusive of depreciation
Depreciation
Amortization of intangible assets
Operating income
Non-operating income (expense):
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net income per share-basic
Net income per share-diluted
Dividends per share
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% Inc
(Dec)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to operating cash flows:
Amortization of intangibles
Pension contributions, net of pension expense
Change in other assets and liabilities, net
Net cash flow from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Payments for acquisitions, net of cash acquired
Payments for investments
Proceeds from investments
Proceeds from sale of certain assets
Net cash used for investing activities
Cash flows from financing activities
Payment of (proceeds from) long-term debt and debt issuance costs
Dividends paid
Cost of common shares repurchased
Proceeds from issuance of common stock
Net cash used for financing activities
Effect of currency rate change
Net increase in cash and cash equivalents
Balance of cash and cash equivalents at beginning of year
Balance of cash and cash equivalents at end of third quarter
Certain prior year amounts have been reclassified to conform with current year presentation.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements 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 13-week period ended September 26, 2004, and the comparative period of 2003, 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 company’s financial position, results of operations and cash flows as of the dates and for the periods presented.
2. Stock-based compensation
Stock-based compensation is accounted for by using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under APB No. 25, because the exercise price of the company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. As permitted, the company has elected to adopt the disclosure only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123” (“SFAS No. 148”).
SFAS No. 123 establishes a fair value-based method of accounting for employee stock-based compensation plans. The company has chosen to continue to report stock-based compensation in accordance with APB No. 25, and provides the following pro forma disclosure of the effects of applying the fair value method to all applicable awards granted. Had compensation cost for the company’s stock options been determined based on the fair value at the grant date for those awards as permitted (but not required) under the alternative method of SFAS No. 123, the company’s results of operations and related per share amounts would have been reduced to the pro forma amounts indicated below:
Third Quarter
(in thousands of dollars, except per share amounts)
Net income as reported
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
Pro forma net income
Earnings per share:
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
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Year-to-date
3. Acquisitions and dispositions
On May 6, 2004, the company acquired a one-third interest in CrossMedia Services, Inc., a leading provider of Web-based marketing solutions for national and local retailers, with Knight Ridder, Inc. and Tribune Company.
On April 2, 2004, the company acquired the assets of Captivate Network, Inc., a national news and entertainment network that delivers programming and full motion video advertising through wireless digital video screens in the elevators of premier office towers across North America.
On February 16, 2004, the company exchanged its daily newspaper, The Times in Gainesville, Georgia, and non-daily publications in the Gainesville area for two daily newspapers and non-daily publications in Tennessee, plus cash consideration. The company recorded this transaction as two simultaneous but separate events; that is, the sale of its publications in Gainesville for which a non-operating gain was recognized and the acquisition of the publications in Tennessee accounted for under the purchase method of accounting.
On February 2, 2004, the company acquired NurseWeek, a multimedia company with print publications and an award-winning Web site focused on the recruitment, recognition and education of nurses. NurseWeek is published as a separate title of Nursing Spectrum, a wholly-owned subsidiary of the company. Altogether, Nursing Spectrum operations now include 10 regional magazines with a combined distribution to more than 1 million registered nurses.
During the first nine months of 2004, the company also purchased several small non-daily publications in the U.S. and the UK.
The acquisitions of Captivate, NurseWeek, the two daily newspapers in Tennessee and several non-daily publications had an aggregate purchase price of approximately $164.5 million and were recorded under the purchase method of accounting. The company is in the process of obtaining valuations of recently acquired businesses, thus the allocation of the purchase price is preliminary.
On August 31, 2004, the company completed the sale of its NBC affiliate in Kingman, Arizona, KMOH-TV.
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4. Goodwill and other intangible assets
The company performed an impairment test of its goodwill and determined that no impairment of goodwill existed at Dec. 28, 2003. Intangible assets that have finite useful lives are amortized over their useful lives and are also subject to tests for impairment.
The following table displays the intangible assets that are subject to amortization and the goodwill and intangible assets that are not subject to amortization as of Sept. 26, 2004, and Dec. 28, 2003:
Goodwill and other intangible assets are as follows:
(in thousands of dollars)
Amortizable intangible assets
Goodwill and indefinite-lived intangible assets increased primarily due to the Captivate, NurseWeek and Tennessee transactions as described in Note 3 and to a higher foreign exchange rate.
Amortization expense was $3.0 million in the quarter ended Sept. 26, 2004 and $8.3 million year-to-date. Amortizable intangible assets are primarily subscriber and advertiser relationships, which are amortized on a straight-line basis over periods up to 25 years. For each of the next five years, amortization expense relating to the identified intangibles is expected to be approximately $11.3 million.
Balance at Dec. 28, 2003
Acquisitions and adjustments
Dispositions
Foreign currency exchange rate changes
Balance at Sept. 26, 2004
Amortizable intangible assets, net
Amortization
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5. Long-term debt
In March 2004, the company entered into a $2.46 billion revolving credit agreement, which consists of a $622.5 million 364-day facility that extends to March 2005 and a $1.8375 billion 5-year facility that extends to March 2009. At the end of the 364-day period, any borrowings outstanding under the 364-day credit facility are convertible into a one-year term loan at the company’s option. Also in March 2004, the company entered into a $200 million two-year revolving credit facility that extends to March 2006. At the end of the two-year period, any borrowings outstanding under the two-year credit facility are convertible into a one-year term loan at the company’s option.
During the first quarter of 2004, the company terminated its $1.53 billion revolving credit agreement that was due to expire in July 2005. The company also terminated its $1.3375 billion 364-day revolving credit facility that was due to expire in March 2004.
At September 26, 2004, the company had a total of $4.025 billion of credit available under three revolving credit agreements. As a result of these credit agreements, commercial paper is carried on the balance sheet as long-term debt.
Approximate annual maturities of long-term debt, assuming that the company used the $4.025 billion credit available under the revolving credit agreements to refinance existing unsecured promissory notes and the tranche of unsecured global notes due in 2005 on a long-term basis and assuming the company’s other indebtedness was paid on its scheduled pay dates, are as follows:
2005
2006
2007
2008
2009
Later years
The fair value of the company’s total long-term debt, determined based on quoted market prices for similar issues of debt with the same remaining maturities and similar terms, totaled $4.7 billion at September 26, 2004.
The company has a 13.5% general partnership interest in Ponderay Newsprint Company. The company, on a several basis, is a guarantor of 13.5% of the principal and interest on a term loan held by Ponderay that totals approximately $81 million at September 26, 2004.
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6. Retirement plans
The company and its subsidiaries have various retirement plans, including plans established under collective bargaining agreements, under which substantially all full-time employees are covered. The Gannett Retirement Plan is the company’s principal retirement plan and covers most U.S. employees of the company and its subsidiaries. The company’s pension costs, which include costs for qualified, nonqualified and union plans, for the third quarter and first nine months of 2004 and 2003 are presented in the following table:
Service cost-benefits earned during the period
Interest cost on benefit obligation
Expected return on plan assets
Amortization of transition asset
Amortization of prior service credit
Amortization of actuarial loss
Pension expense for company-sponsored retirement plans
Union and other pension cost
Pension cost
The company made a voluntary tax-deductible contribution of $50 million to the Gannett Retirement Plan in February 2004. Early in the second quarter of 2004, the company also made a voluntary tax-deductible contribution of $26 million to its UK retirement plan.
7. 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 company’s retirees contribute to the cost of these benefits and retiree contributions are increased as actual benefit costs increase. The company’s policy is to fund benefits as claims and premiums are paid. Postretirement benefit costs for health care and life insurance for the third quarter and first nine months of 2004 and 2003 are presented in the following table:
Net periodic postretirement cost
Curtailment gain
In December 2003, the United States enacted into law the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare, known as “Medicare Part D,” and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is
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at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”), which is effective for public companies the first interim or annual period beginning after June 15, 2004 (the quarter ended September 26, 2004 for our Company).
The company and its actuarial advisors determined that, based on regulatory guidance currently available, benefits provided by the company were at least actuarially equivalent to Medicare Part D, and, accordingly, the company expects to be entitled to the Federal subsidy in all years after 2005.
During the third quarter of 2004, the company adopted the provisions of the Act retroactively to the beginning of fiscal 2004. As a result, the accumulated post retirement benefit obligation (APBO) decreased by $23.5 million. This reduction in the APBO due to the Act is treated as an actuarial gain. The effect of applying FAS 106-2 will reduce the company’s annual postretirement benefit cost by approximately $2.9 million.
During the third quarter of 2003, the company recognized a curtailment gain due to the elimination of postretirement medical and life insurance benefits for employees under 40 years of age on Jan. 1, 2004, and subsequent new hires.
8. Comprehensive income
Comprehensive income for the company includes net income; foreign currency translation adjustments; and unrealized gains or losses on available-for-sale securities, as defined under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
Comprehensive income totaled $273.0 million for the third quarter of 2004 and $295.5 million for the third quarter of 2003. Net income totaled $310.2 million and other comprehensive losses, which were entirely related to foreign currency translation, totaled $37.2 million in the third quarter of 2004. Net income totaled $279.0 million and other comprehensive income, consisting primarily of foreign currency translation, totaled $16.5 million in the third quarter of 2003.
Comprehensive income totaled $989.3 million for the first nine months of 2004 and $949.6 million for the first nine months of 2003. Net income totaled $939.0 million and other comprehensive income, which was entirely related to foreign currency translation, totaled $50.3 million in the first nine months of 2004. Net income totaled $853.2 million and other comprehensive income, consisting primarily of foreign currency translation, totaled $96.4 million in the first nine months of 2003.
9. Outstanding shares
The weighted average number of common shares outstanding (basic) in the third quarter totaled 261,146,000 compared to 269,815,000 for the third quarter of 2003. The weighted average number of diluted shares outstanding in the third quarter totaled 263,804,000 compared to 272,174,000 for the third quarter of 2003.
The weighted average number of common shares outstanding (basic) in the first nine months of 2004 totaled 267,898,000 compared to 268,947,000 for the first nine months of 2003. The weighted average number of diluted shares outstanding in the first nine months of 2004 totaled 270,862,000 compared to 271,114,000 for the first nine months of 2003.
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10. Business segment information
Broadcasting includes results from the company’s 21 television stations and Captivate Network, Inc. Captivate is a national news and entertainment network that delivers programming and full motion video advertising through wireless digital video screens in elevators of premier office towers.
(unaudited, in thousands of dollars)
Newspaper publishing
Operating Income (net of depreciation and amortization):
Corporate
Depreciation and Amortization:
Operating Cash Flow (1):
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A reconciliation of “Operating Cash Flow” to “Operating Income”, as presented in the Consolidated Statements of Income and Business Segment Information, follows:
Thirteen weeks ended Sept. 26, 2004
Operating cash flow
Less:
Thirteen weeks ended Sept. 28, 2003
Thirty-nine weeks ended Sept. 28, 2003
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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 Sterling is the functional currency, which is then translated into U.S. dollars. Translation gains or losses affecting the Condensed Consolidated Statements of Income have not been significant in the past. If the price of Sterling against the U.S. dollar had been 10% less than the actual price, reported net income for the first nine months of 2004 would have decreased approximately 1.5%. In July 2004, the Company entered into derivative transactions (combination options) to mitigate risk associated with significant currency fluctuations as they pertain to earnings from operations in the UK. The period covered by these transactions runs through the remainder of 2004. These instruments are not designated as accounting hedges. Gains and losses experienced throughout the remainder of the year will be included as a component of other non-operating income (expense) in the consolidated statement of income.
Item 4. Controls and Procedures
Based on their evaluation, the company’s Chairman, President and Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded the company’s disclosure controls and procedures are effective as of September 26, 2004, 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 Commission’s rules and forms. There have been no significant changes in the company’s internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the company’s internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 9, 2004, the company announced the reactivation of its existing share repurchase program that was last implemented in February 2000.
Period
6/28/04 - 8/1/04
8/2/04 - 8/29/04
8/30/04 - 9/26/04
Total 3rd Quarter 2004
All of the shares included in column (c) of the table above were repurchased from remaining authorization from the $500 million program announced on May 12, 2004 and from the $1 billion program announced on July 13, 2004. There is no expiration date for the repurchase program. No repurchase programs expired during the periods presented above, and management does not intend to terminate the repurchase program. All share repurchases were part of the publicly announced repurchase program.
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index for list of exhibits filed with this report.
Current Report on Form 8-K submitted July 13, 2004, in connection with disclosure of results of operations and financial condition.
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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 3, 2004
/s/ George R. Gavagan
George R. Gavagan
Vice President and Controller
(on behalf of Registrant and as Chief Accounting Officer)
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EXHIBIT INDEX
ExhibitNumber
Exhibit
Location
Form of Executive Officer Stock Option Award
Agreement. *
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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.
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