Gannett Co., Inc. 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
For the transition period from to
Commission file number 1-6961
GANNETT CO., INC.
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (703) 854-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and non-accelerated filer in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes ¨ No x
The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrants Common Stock as reported on The New York Stock Exchange on June 23, 2006, was $12,796,617,669. The registrant has no non-voting common equity.
As of February 16, 2007, 234,824,796 shares of the registrants Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrants Annual Meeting of Shareholders to be held on April 24, 2007, is incorporated by reference in Part III to the extent described therein.
2006 FORM 10-K
Gannett Co., Inc. is a leading international news and information company. In the United States, the company publishes 90 daily newspapers, including USA TODAY, and nearly 1,000 non-daily publications. Along with each of its daily newspapers, the company operates Web sites offering news, information and advertising that is customized for the market served and integrated with its publishing operations. USA TODAY.com is one of the most popular news sites on the Web. The company is the largest newspaper publisher in the U.S.
Newspaper publishing operations in the United Kingdom, operating as Newsquest, include 17 paid-for daily newspapers, almost 300 non-daily publications, locally integrated Web sites and classified business Web sites with national reach. Newsquest is the second largest regional newspaper publisher in the U.K.
In broadcasting, the company operates 23 television stations in the U.S. with a market reach of more than 20.1 million households. Each of these stations also operates locally oriented Web sites offering news, entertainment and advertising content, in text and video format. Through its Captivate subsidiary, the broadcasting group delivers news, information and advertising to a highly desirable audience demographic through its video screens in office tower and select hotel elevators.
Gannetts total Online U.S. Internet Audience in January 2007 was 23.2 million unique visitors, reaching about 14.8% of the Internet audience, as measured by Nielsen//NetRatings.
Complementing its publishing and broadcasting businesses, the company has made strategic investments in online advertising. These include PointRoll, which provides online advertisers with rich media marketing services, and Planet Discover, which provides our local Web sites with deep, robust local search technology, and through several important partnership investments, including CareerBuilder for employment advertising; Classified Ventures for auto and real estate ads; Topix.net, a news content aggregator; ShermansTravel, an online travel service; ShopLocal, a provider of online marketing solutions for local, regional and national advertisers of all types; and 4INFO, which provides mobile phone search services.
The company continues to evolve as it meets the demands of consumers and advertisers in the new digital environment. Three key initiatives have been set forth to take advantage of these opportunities.
Gannett was founded by Frank E. Gannett and associates in 1906 and incorporated in 1923. The company went public in 1967. It reincorporated in Delaware in 1972. Its more than 234 million outstanding shares of common stock are held by approximately 9,579 shareholders of record in all 50 states and several foreign countries. The company has approximately 49,675 employees. Its headquarters are in McLean, Va., near Washington, D.C.
Business segments: The company has two principal business segments: newspaper publishing and broadcasting. Financial information for each of the companys reportable segments can be found in our financial statements, as discussed under Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and as presented under Item 8 Financial Statements and Supplementary Data of this Form 10-K.
The companys 90 U.S. daily newspapers have a combined daily paid circulation of approximately 7.2 million. They include USA TODAY, the nations largest-selling daily newspaper, with a circulation of approximately 2.3 million. Within the publishing segment, the company continues to diversify and expand its portfolio through business acquisitions and internal development. Some examples of this diversification are:
Newspaper partnerships: The company owns a 19.49% interest in California Newspapers Partnership, a partnership that includes 24 daily California newspapers; a 40.6% interest in Texas-New Mexico Newspapers Partnership, a partnership that includes seven daily newspapers in Texas and New Mexico and four newspapers in Pennsylvania; and a 13.5% interest in Ponderay Newsprint Company in the state of Washington.
The companys newspaper subsidiaries in Detroit, Cincinnati and Tucson are participants in joint operating agencies. Each joint operating agency performs the production, sales and distribution functions for the subsidiary and another newspaper publishing company under a joint operating agreement. Operating results for the Detroit and Cincinnati joint operating agencies are fully consolidated along with a charge for the minority partners share of profits. The operating results of the Tucson joint operating agency are accounted for under the equity method, and are reported as a net amount in other operating revenues. The Cincinnati joint operating agency will not be renewed when it expires on Dec. 31, 2007.
Strategic investments: In August 2006, the company made additional investments in CareerBuilder.com, ShopLocal.com, and Topix.net totaling $155 million, which increased the ownership stake in each of those businesses. The company now holds a 42.5% equity interest in CareerBuilder.com, the leading national online service providing recruitment resources; a 42.5% equity interest in ShopLocal.com, a leading provider of Web-based marketing solutions for national and local retailers; and a 31.9% interest in Topix.net, an online news content aggregator.
In January 2006, the company acquired a minority interest in 4INFO, a Palo Alto, Calif., company which offers a comprehensive suite of mobile phone search services. The company also entered into a marketing and distribution agreement for its U.S. newspapers with 4INFO.
The company also owns a 23.6% stake in Classified Ventures, an online business focused on real estate and automotive advertising categories; and a 23.3% interest in ShermansTravel, an online travel news, advertising and booking service.
With all of these affiliates, the company has established important business relationships to leverage its publishing and online assets and operations to grow its revenue base and profits.
Newspaper Publishing/United States
The companys U.S. newspapers reach 16.7 million readers every weekday and 14 million readers every Sunday providing critical news and information from their customers neighborhoods and from around the globe.
At the end of 2006, the company operated 90 U.S. daily newspapers, including USA TODAY, and nearly 1,000 non-daily local publications in 36 states and Guam. The Newspaper Division and USA TODAY are headquartered in McLean, Va. On Dec. 31, 2006, this segment had approximately 37,575 full- and part-time employees.
The companys local newspapers are managed through its U.S. Newspaper Division. These newspapers are in large and small markets, and the geographical diversity is a core strength of the company.
Gannett publishes in major markets such as Phoenix, Ariz.; Indianapolis, Ind.; Detroit, Mich.; Cincinnati, Ohio; Des Moines, Iowa; Nashville, Tenn.; Asbury Park, N.J.; Louisville, Ky.; and Westchester, N.Y.
Mid-sized markets are represented by Salem, Ore.; Fort Myers, Fla.; Appleton, Wis.; Palm Springs, Calif.; Montgomery, Ala.; and Greenville, S.C.
St. George, Utah; Fort Collins, Colo.; Sheboygan, Wis.; Iowa City, Iowa; and Ithaca, N.Y., are examples of our smaller markets.
USA TODAY was introduced in 1982 as the countrys first national, general-interest daily newspaper. It is available in all 50 states to readers on the day of publication throughout the U.S.
It is produced at facilities in McLean, Va., and is transmitted via satellite to offset printing plants around the country and internationally. It is printed at Gannett plants in 20 U.S. markets and at offset plants, not owned by Gannett, in 16 other U.S. markets.
USATODAY.com, one of the most popular newspaper sites on the Web, had more than 53 million visits per month at the end of 2006.
At all of the companys local newspapers, Web sites are operated on a fully integrated basis.
Other businesses that complement, support or are managed and reported within the newspaper segment include: USA WEEKEND, PointRoll, Clipper Magazine, Army Times Publishing, Gannett Healthcare Group, Planet Discover and Gannett Offset. In addition, Gannett News Service provides news services for company newspaper operations and sells its services to independent newspapers; Gannett Retail Advertising Group represents the companys local newspapers in the sale of advertising to national and regional franchise businesses; Telematch offers database management services; Gannett Direct Marketing offers direct-marketing services; and Gannett Media Technologies International develops and markets software and other products for the publishing industry, and provides technology support for the companys newspaper and Web operations.
News and editorial matters: Gannett newspapers are the leading news and information source in their markets with strong brand recognition that attracts readers and advertisers. We maintain and enhance the newspapers strengths with quality management and staff, who focus continuously on product improvements and customer service. Collectively, Gannett newspapers, their Web sites and their expanding portfolio of non-daily publications form a powerful network to distribute and share news and information across the nation. News and editorial decisions are made autonomously by local management.
In 2006, Gannett newsrooms began sweeping changes in content and approach with the introduction of the Information Center concept that enhances their ability to deliver much more information on a 24/7 cycle and in many formats. In addition to more traditional coverage, the newsrooms have elevated such areas as multimedia, data delivery and custom content. The approach of breaking news online and updating in print has become the practice. Additionally, extensive newsroom training in video production for video streaming on webcasts has enhanced local content and viewership.
At the same time, there is expanded emphasis on delivery of local content to readers in the daily and Sunday print products, in non-daily publications and on the community sites online. Some groundbreaking efforts involving community interaction were undertaken, especially in the area of investigative journalism.
The companys domestic daily newspapers receive Gannett News Service (GNS) and subscribe to The Associated Press, and some receive various supplemental news services and syndicated features. GNS is headquartered in McLean, Va., and operates bureaus in Washington, D.C., and six state capitals: Albany, N.Y., Baton Rouge, La., Trenton, N.J., Sacramento, Calif., Springfield, Ill., and Tallahassee, Fla. GNS provides strong coverage of topics of high interest to individual newspapers through its regional reports.
Gannett newspapers and staffers were again recognized nationally for outstanding work. Jerry Mitchell, investigative reporter for The Clarion-Ledger in Jackson, Miss., won the George Polk Award for Justice Reporting for stories that led to the reopening of murder cases of three civil-rights activists and the conviction of the man behind the killings. Mitchell also received a career recognition award from the Investigative Reporters and Editors organization and he was a finalist for a Pulitzer Prize in the Beat Reporting category for the civil-rights work. Other Gannett Pulitzer finalists were Marshall Ramsey of The Clarion-Ledger and Mike Thompson of the Detroit Free Press, both in the Editorial Cartooning category. The Pacific Daily News in Guam received the Robert G. McGruder Award for Diversity Leadership and The Des Moines Register received an Overall Excellence Award from the Society of American Business Editors and Writers. The Daily Advertiser of Lafayette, La., won the 2006 Dart Award for Excellence in Reporting on Victims of Violence.
Audience research: As Gannett newspapers continue to expand their non-daily and online products, a new research approach, audience aggregation, was launched in 2005 and executed more fully in 2006. The company now considers the reach and coverage of multiple products in their communities in their totality as a family of connected products. This broader-based view is to establish the net reach of all products, or selected product offerings, in a single Gannett market. For example, in Phoenix, the combination of many Gannett products including daily and Sunday newspapers, a strong local Web site, weeklies and Spanish language products, among many others reaches 76% of the adult population over seven days, more than 2.1 million people, far more than the print edition of the daily newspaper, The Arizona Republic, reaches by itself.
The company has gathered audience aggregation data for more than 30 Gannett newspapers and will continue to add to that in 2007. While efforts are now focused on our largest properties, the initiative will be launched at all Gannett sites. This aggregated data allows the sales staff to provide detailed information to advertisers about how best to reach their potential customers, which products to use in which combination, and how often. As a result, our ability to use audience aggregation will enable our sales staffs to increase our total advertising revenues while enabling advertisers to enhance the efficiencies of their advertising costs. The training of ad sales staff on how to best execute this audience-based selling strategy is also ongoing.
In addition to the audience-based initiative, the company continues to measure customer attitudes, behaviors and opinions, including conducting usability labs, to better understand our customers Web site patterns, and use focus groups with product users and advertisers to more clearly determine their needs.
Circulation: Detailed information about the circulation of the companys newspapers may be found later in this Form 10-K. Nine of the companys local newspapers reported gains in daily circulation in 2006, and eight increased Sunday circulation. Circulation declined in other markets, a trend generally consistent with the domestic newspaper industry.
Home-delivery prices for the companys newspapers are established individually for each newspaper and range from $1.50 to $3.50 per week for daily newspapers and from $.71 to $2.75 per copy for Sunday newspapers.
As it has done since the inception of the National Do Not Call Registry in 2003, the company continued to aggressively diversify its circulation start sources using more direct mail, kiosk and crew sales efforts. A new sales program called Project 378 was developed and rolled out to all newspapers in 2006. The goal of the program is to focus on long-term subscriber retention at the time sales orders are taken. The program details, through a step-by-step sales process, how to promote and sell new subscriptions that last for a longer period of time. In December 2006, subscriber retention of all new subscriptions when measured at 13-weeks of service had improved by 13.3% and by 6.2% when measured at 26 weeks.
The company continued its emphasis on its automated payment plan, EZ-Pay. Total EZ-Pay subscribers grew from 33.5% of all subscribers at the end of 2005 to 40.0% of all subscribers at the end of 2006 a 19% increase. EZ-Pay subscribers include those on recurring credit/debit cards as well as 52-week paid-in-advance customers. Subscriber retention among those who use EZ-Pay is currently 29% higher than for subscribers who pay the traditional way, by mail. This higher retention improves circulation volume and provides for a higher return on investment for new subscriber start costs. The companys goal for 2007 is to increase the number of EZ-Pay subscribers by 25%.
Additionally, the company is consolidating all circulation inbound customer service calling operations into three Centers of Excellence (COE) across the country. The COE goals are efficiency and standardization of procedures which will result in better customer service at a lower price. State of the art technology will be employed to help realize the efficiency savings. The first COE opened in Greenville, S.C., in November 2006. All three will be fully functional by the fourth quarter of 2007.
Additional circulation efforts have focused on a fee-for-delivery concept. This was successfully implemented in the Nashville, Tenn., market and the company continues to look to expand this effort to other newspaper properties.
During 2006, the Audit Bureau of Circulations (ABC) announced a new program called Insert Verification Service (IVS). This service involves conducting an audit of the Sunday preprint distribution process to assure advertisers that their messages are getting to the customers they are targeting. Gannetts 22 largest daily newspapers have signed up for IVS in 2007.
At the end of 2006, 68 of the companys domestic daily newspapers, including USA TODAY, were published in the morning and 22 were published in the evening. For local U.S. newspapers, excluding USA TODAY, morning circulation accounts for 92% of total daily volume, while evening circulation accounts for 8%.
USA TODAY is sold at newsstands and vending machines generally at 75 cents per copy. Mail subscriptions are available nationwide and abroad, and home, hotel and office delivery is offered in many markets. Approximately 62% of its net paid circulation results from single-copy sales at newsstands, vending machines or to hotel guests, and the remainder is from home and office delivery, mail, educational and other sales.
Advertising: The newspapers have advertising departments that sell retail, classified and national advertising across multiple platforms including the newspaper, online and niche publications. The Gannett Retail Advertising Group sells regional and national franchise business on behalf of the companys local newspapers. The company also contracts with outside representative firms that specialize in the sale of national ads. Ad revenues from newspaper Internet operations are reported together with revenue from print publishing.
Local or retail display advertising is associated with local merchants or locally owned businesses. In addition, retail includes regional and national chains such as department stores and grocery that sell in the local market.
Classified advertising includes the major categories of automotive, employment and real estate as well as private consumer-to-consumer business for other merchandise and services. While traditional placement for these ad segments has been the classified section, ads also run in other sections within the newspaper, on our Web sites and in niche magazines that specialize in the business segment.
National advertising is display advertising principally from advertisers who are promoting national products or brands. Examples are pharmaceuticals, travel, airlines, or packaged goods. Both retail and national ads also include preprints, typically stand-alone multiple pages that are inserted in the newspaper.
Our audience aggregation approach to research and product development has allowed us to go to market with a new sales approach. Formerly, our salespeople were product experts, focusing on the unique features and benefits of our diverse product line. In the past year, we have intensified our audience-based selling approach which first identifies the advertisers best customers and then matches products that best reach that audience. While there are still many advertisers who want to attain mass reach, many others want to target specific audiences by demographics, geography, consumer buying habits or customer behavior. Our Information Center approach allows us to reach these diverse audiences in different ways: through new products, new media options and through repurposing and repackaging news and information in a variety of formats. Our readership research also defines the audience usage of these products and allows us to create customer-centric solutions that will provide enhanced results for advertisers. The companys audience-based sales efforts have been directed to all levels of advertisers from the smallest locally owned businesses to large complex businesses. Along with this new sales approach, the company has intensified its sales and management training and improved the quality of sales calls.
A new sales force structure was rolled out across our largest 20 newspapers in 2006. The new structure will be in place at all newspapers by the end of 2007. It aligns sales and support resources to the needs of the customer based on staff experience with advertising planning and customer contact. The new structure increases our staff productivity and improves customer service. To maximize our outbound-calling efforts to generate new business, an Internet-based outbound telesales training program was launched companywide. We also completed a full rollout of Gannetts unique classified recruitment sales lead application.
In conjunction with this effort, all of the companys sales force is undertaking the T.I.D.E. program (Think. Identify. Develop. Execute.) in order to better address advertiser needs. More than 800 newspaper, digital and broadcast executives are participating in this program.
Online operations: The overriding objective of our online strategy at Gannett newspapers is to provide compelling content to best serve our customers. A key reason customers turn to a Gannett newspapers online site is to find local news and information. The credibility of the local newspaper, the known and trusted information source, extends to the newspapers Web site and thus differentiates it from other Internet sites. This is a major factor that allows Gannett newspapers to compete successfully as Internet information providers.
A second objective in our online business development is to maximize the natural synergies between the local newspaper and local Web site. The local content already available, the customer relationships, the news and advertising sales staff, and the promotional capabilities are all competitive advantages for Gannett. The companys strategy is to use these advantages to create strong and timely content, sell packaged advertising products that meet the demands of advertisers, operate efficiently and leverage the known and trusted brand of the newspaper.
One example of executing this strategy is The Indianapolis Stars Indymoms.com. In December, this newly launched site attracted 600,000 page views by focusing on a community of stay-at-home and working mothers, with a print edition planned to debut in March 2007. Several Gannett newspapers have launched similar sites with family-oriented content, calendars and forums, helping moms connect on neighborhood news, schools, parenting
issues and family activities including Wilmington, Del., Louisville, Ky., and Cincinnati; others, including Des Moines, Rochester, N.Y., Westchester, N.Y., Nashville, Fort Myers, Fla., Fort Collins, Colo., and Monroe, La., plan to launch similar products in early 2007.
Complementing this work are efforts to register users of Gannett Web sites in order to obtain zip code, age and gender. Such information allows us to better understand the needs of our customers along with providing better defined groups for advertisers.
This strategy has served Gannett well in the development of our newspaper Internet efforts. The aggressive local focus, including advertising sales efforts, combined with effective use of national economies of scale and standardized technology, resulted in solid results in 2006. Strong growth in our online revenues also reflects the value of our digital joint ventures and partnerships with national online advertising providers including CareerBuilder and Classified Ventures. Recent traffic on our sites totaled more than 74 million visits and more than 451 million page views per month. Online revenue for local newspaper Web sites increased by 24% in 2006.
Gannett Media Technologies International (GMTI) provides technological support and products for the companys domestic newspapers and Internet activities, including ad software and database management, editorial production and archiving, and Web site hosting. In addition, GMTI provides similar services to other newspaper companies.
Non-daily operations: The growth of non-daily and online products continued in 2006. The company now publishes nearly 1,000 non-daily publications in the U.S. The companys strategy for non-daily publications is to target them at communities of interest defined in one of three ways: geographically, demographically (e.g. seniors, young readers or ethnic communities) or by lifestyle (e.g. golf or boating enthusiasts).
Production: Eighty-seven domestic daily newspapers are printed by the offset process, and three newspapers are printed using various letterpress processes.
In recent years, improved technology has resulted in greater speed and accuracy and in a reduction in the number of production hours worked at the companys newspapers. The company expects this trend to continue in 2007 and also expects to consolidate some job functions across multiple newspapers sites. New state-of-the-art presses came on line in 2006 in Binghamton, N.Y., Rockford, Ill., and Lafayette, Ind. In Binghamton, the production of three newspapers was centralized and in Lafayette, a Berliner type press was installed. In 2007, press refurbishment and further production consolidation efforts will take place.
During 2006, 24 additional newspapers moved to a 48-inch web width from a 50-inch width, and the three new press launches came on line at 48 inches. An additional 12 press sites will complete the conversion to 48-inch web in 2007.
In 2006, light-weight (45 gram) newsprint was tested and 15 sites began running it daily. The company plans to increase the use of light-weight newsprint in 2007.
Newspaper efficiency improvements also continue to be made in other areas of production. The company introduced new ink optimization software which allowed for savings due to less color ink consumption. Synergies are also planned through the consolidation of toning centers throughout the company network.
Competition: The companys newspapers and affiliated Web sites compete with other media for advertising principally on the basis of their performance in helping to sell the advertisers products or services and their advertising rates. They compete for circulation and readership against other news and information providers, as well as others seeking the time and attention of readers. While most of the companys newspapers do not have daily newspaper competitors that are published in the same city, in certain of the companys larger markets, there is such competition. Most of the companys newspapers compete with other newspapers published in nearby cities and towns and with free-distribution and paid-advertising weeklies, as well as other print and non-print media, including magazines, television, direct mail, cable television, radio, outdoor advertising and Internet media.
The rate of development of opportunities in, and competition from, emerging digital communications services, including those related to the Internet, is increasing. Through internal development programs, acquisitions and partnerships, the companys efforts to explore new opportunities in news, information and communications businesses have expanded and will continue to do so.
Joint operating agencies: At the end of 2006, The Cincinnati Enquirer, the Detroit Free Press and the Tucson (Ariz.) Citizen were published under joint operating agreements with non-Gannett newspapers located in the same cities. All of these agreements provide for joint business, advertising, production and circulation operations and a contractual division of profits. The editorial and reporting staffs of the companys newspapers, however, are separate and autonomous from those of the non-Gannett newspapers. In January 2004, the company provided notice to The E.W. Scripps Company, as required under the terms of the Joint Operating Agreement (JOA) involving The Cincinnati Enquirer, The Cincinnati Post and The Kentucky Post, that the JOA would not be renewed when it expires on Dec. 31, 2007.
Environmental regulation: Gannett is committed to protecting the environment. The companys goal is to ensure its facilities comply with federal, state, local and foreign environmental laws and to incorporate appropriate environmental practices and standards in its operations. The company retains a corporate environmental consultant who is responsible for overseeing regulatory compliance and taking preventive measures where appropriate.
The company is one of the industry leaders in the use of recycled newsprint and increased its purchases of newsprint containing some recycled content from 42,000 metric tons in 1989 to 749,000 metric tons in 2006. During 2006, all of the companys newspapers consumed some recycled newsprint. For the year, 77% of the companys newsprint purchases contained recycled content.
The companys newspapers use inks, photographic chemicals, solvents and fuels. The use, management and disposal of these substances may be regulated by federal, state, local and foreign agencies. Some of the companys newspaper subsidiaries have been included among the potentially responsible parties in connection with the alleged disposal of ink or other wastes at disposal sites that have been subsequently identified as requiring remediation. Additional information about these matters can be found in Item 3, Legal Proceedings, in this Form 10-K. The company does not believe that these matters will have a material impact on its financial position or results of operations.
Raw materials U.S. & U.K.: Newsprint, which is the basic raw material used to publish newspapers, has been and may continue to be subject to significant price changes from time to time. During 2006, the companys total newsprint consumption was 1,216,000 metric tons, including the portion of newsprint consumed at joint operating agencies, consumption by USA WEEKEND, USA TODAY tonnage consumed at non-Gannett print sites and consumption by Newsquest. Newsprint consumption was lower than in 2006, down 2% on an as reported basis and 4% lower on a pro forma basis. The company purchases newsprint from 19 domestic and global suppliers, some of which are under contracts expiring in 2025.
In 2006, newsprint supplies were adequate. The company has and continues to moderate newsprint consumption and expense through press web-width reductions and the printing of some publications on lighter basis weights. The company believes that available sources of newsprint, together with present inventories, will continue to be adequate to supply the needs of its newspapers.
The average cost per ton of newsprint consumed in 2006 increased 9% compared to the 2005 cost. The average cost per ton of newsprint is expected to decline slightly in 2007.
Newspaper Publishing/United Kingdom
Newsquest publishes almost 300 titles in the United Kingdom, including 17 daily paid-for newspapers. Newsquest operates its publishing activities around geographic clusters to maximize the use of management, finance, printing and personnel resources. This approach enables the group to offer readers and advertisers a range of attractive products across the market. The clustering of titles and, usually, the publication of a free newspaper alongside a paid-for newspaper, allows cross-selling of advertising among newspapers serving the same or contiguous markets, thus satisfying the needs of its advertisers and audiences. At the end of 2006, Newsquest had 17 such clusters in the United Kingdom. Newsquests policy is to produce free and paid-for newspapers with an attractive level of quality local editorial content. Newsquest also distributes a substantial volume of advertising leaflets in the communities it serves and it offers a travel/vacation booking service.
Newsquest newspapers operate in competitive markets. Their principal competitors include other regional and national newspaper and magazine publishers, other advertising media such as radio and billboard, Internet-based news and other information and communication businesses.
At the end of 2006, Newsquest had approximately 8,600 full-time and part-time employees. Newsquests revenues for 2006 were approximately $1.2 billion. As with U.S. newspapers, advertising is the largest component of revenue, comprising approximately 78%. Circulation revenue represents 13% of revenues and printing activities account for much of the remainder. During 2006, Newsquest restructured several back office operations to reduce costs.
Newsquest continued to increase color availability in its papers with the installation of a new color tower in Essex. Efficiency improvements have also come through the ink optimization software which was rolled out across the print sites in 2006. Further production improvements were made through the introduction of computer to plate technology at two sites and a mechanical inserter at one site.
Products: Product quality was again recognized by annual awards. Newsquest (Herald & Times) in Glasgow won both Media Company and Publishing Company of the Year at the Drum Scottish Media Awards. For the fifth year, The Northern Echo won North East Newspaper of the Year at the North East Press Awards, while in the south of England, the Oxford Times won a special award for Paid-For Weekly Newspaper of the Year at the Newspaper Society Weekly Newspaper Awards.
Product changes in the year included rationalizing edition structures and making daily products available earlier in many markets. The Argus Lite was launched in February 2006. This free daily product targets commuters traveling by train from Brighton to London each weekday morning. Broadsheet titles the Wiltshire Gazette & Herald and The Wilts & Glos Standard were also converted into tabloid format.
Online operations: Newsquest actively seeks to maximize the value of its local information expertise through development of opportunities offered by the Internet. Through internal growth and in partnership with other businesses, Newsquest has established a number of local and national Web sites that offer news and other information of special interest to its communities, as well as classified and retail advertising and shopping services.
By the end of 2006, all of Newsquests dailies were producing video reports of dramatic and newsworthy events as well as mobile phone clips sent in by readers that captured the attention of local audiences on the Web. For example, the Brighton Argus invited readers to send mobile phone pictures from a New Years Day concert by a locally-based U.K. dance music star. Newsquest papers also reached out in other ways to make themselves relevant to younger people. In November in Newport, an electronic book of condolence for four teenage victims of a car crash was established by the South Wales Argus. This attracted nearly 300 tributes largely from young people and 200 of the comments were reverse published into an eight-page supplement for the paper.
By the end of 2006, online audience for Newsquests Web sites reached 43 million monthly page views from approximately 3.3 million unique users. Newsquest owns 25% of fish4, an online employment Web site. In the National Online Recruitment Audience Survey 2007, fish4 was the U.K.s most popular recruitment Web site with more than 2.5 million unique visitors per month. Additionally, Newsquests wholly owned business s1 was the most popular recruitment Web site in Scotland in the same survey, attracting 316,000 Scottish-based job seekers per month, compared to 114,000 for its nearest rival.
At the end of 2006, the companys broadcasting division, headquartered in McLean, Va., included 23 television stations in markets with a total of more than 20.1 million households covering 18% of the U.S. The broadcasting division also includes Captivate Network, Inc.
At the end of 2006, the broadcasting division had approximately 3,000 full-time and part-time employees. Broadcasting revenues accounted for approximately 11% of the companys reported operating revenues in 2006, 10% in 2005 and 11% in 2004.
The principal sources of the companys television revenues are: 1) local advertising focusing on the immediate geographic area of the stations; 2) national advertising; 3) retransmission of content on satellite and cable networks; 4) advertising on the stations Web sites; and 5) payments by advertisers to television stations for other services, such as the production of advertising material. The advertising revenues derived from a stations local news programs make up a significant part of its total revenues. Captivate derives its revenue principally from national advertising on video screens in elevators of office buildings and select hotels. As of year-end, Captivate had over 7,600 video screens located in 22 major cities across North America.
Advertising rates charged by a television station are based on the ability of a station to deliver a specific audience to an advertiser. The larger a stations ratings in any particular daypart, the more leverage a station has in asking for a price advantage. As the market fluctuates with supply and demand, so does the stations pricing. Practically all national advertising is placed through independent advertising representatives. Local advertising time is sold by each stations own sales force.
Generally, a network provides programs to its affiliated television stations and sells on its own behalf commercial advertising announcements for certain of the available ad spots within the network programs.
The company is currently broadcasting local newscasts in High Definition (HD) in seven cities: Denver, Washington, D.C., St. Louis, Atlanta, Cleveland, Minneapolis and Phoenix. Denver converted to HD for its local newscasts in 2004, and Washington, D.C., in May 2005. St. Louis, Atlanta, Cleveland, Minneapolis and Phoenix converted in 2006. These telecasts have been well received given the dramatic increase in sales of HD televisions.
During 2006, the company acquired the TV station KTVD in Denver and the TV station WATL in Atlanta. Both stations operate as duopoly stations, alongside KUSA in Denver and WXIA in Atlanta. Both stations are affiliated with MyNetworkTV.
For all of its stations, the company is party to network affiliation agreements. The companys three ABC affiliates have agreements which expire on Feb. 28, 2014. The agreements for the companys six CBS affiliates expire on Dec. 31, 2015. The companys 12 NBC-affiliated stations have agreements that expire on Dec. 31, 2016. The companys two MyNetworkTV-affiliated stations have agreements that expire on the last day of the 2011-2012 television season.
Programming: The costs of locally produced and purchased syndicated programming are a significant portion of television operating expenses. Syndicated programming costs are determined based upon largely uncontrollable market factors, including demand from the independent and affiliated stations within the market. In recent years, the companys television stations have emphasized their locally produced news and entertainment programming in an effort to provide programs that distinguish the stations from the competition and to better control costs.
Competition: In each of its broadcasting markets, the companys stations and affiliated Web sites compete for revenues with other network-affiliated and independent television and radio broadcasters and with other advertising media, such as cable television, newspapers, magazines, direct mail, outdoor advertising and Internet media. The stations also compete in the emerging local electronic media space, which includes Internet or Internet-enabled devices, handheld wireless devices such as mobile phones and iPods and any digital spectrum opportunities associated with digital television (DTV). The companys broadcasting stations compete principally on the basis of their audience share, advertising rates and audience composition.
Local news is most important to a stations success, and there is a growing emphasis on other forms of programming that relate to the local community. Network and syndicated programming constitute the majority of all other programming broadcast on the companys television stations, and the companys competitive position is directly affected by viewer acceptance of this programming. Other sources of present and potential competition for the companys broadcasting properties include pay cable, home video and audio recorders and video disc players, direct broadcast satellite, low-power television, video offerings (both wireline and wireless) of telephone companies as well as developing video services. Some of these competing services have the potential of providing improved signal reception or increased home entertainment selection, and they are continuing development and expansion.
Pursuant to the Satellite Home Viewer Extension Reauthorization Act of 2004, a number of the companys television stations are currently being delivered by satellite carriers to subscribers within the stations local markets. The company has entered into retransmission consent agreements with satellite carriers that authorize such delivery, one of which expires in May 2009 and the other in 2010. This law also permits satellite carriers, in certain limited circumstances, to retransmit distant network television stations into areas served by local television stations if it is determined, using FCC-approved signal strength measurement standards, that local stations do not deliver an acceptable over-the-air viewing signal.
Regulation: The companys television stations are operated under the authority of the Federal Communications Commission (FCC) under the Communications Act of 1934, as amended (Communications Act), and the rules and policies of the FCC (FCC Regulations).
Television broadcast licenses are granted for periods of eight years. They are renewable by broadcasters upon application to the FCC and usually are renewed except in rare cases in which a conflicting application, a petition to deny, a complaint or an adverse finding as to the licensees qualifications results in loss of the license. The company believes it is in substantial compliance with all applicable provisions of the Communications Act and FCC Regulations. By the end of 2004, all of the companys stations had converted to digital television operations in accordance with applicable FCC regulations. Nine of the companys stations filed for FCC license renewals in 2004, eight did so in 2005, another five in 2006 and the remaining station filed on Feb. 1, 2007. As of February 2007, three of the eight applications filed in 2004 were granted and all others remain pending. The company expects all pending renewals to be granted in the ordinary course.
FCC Regulations also prohibit concentrations of broadcasting control and regulate network programming. FCC Regulations governing multiple ownership limit, or in some cases prohibit, the common ownership or control of most communications media serving common market areas (for example, television and radio; television and daily newspapers; or radio and daily newspapers). FCC rules permit common ownership of two television stations in the same market in certain circumstances provided that at least one of the commonly owned stations is not among the markets top four rated stations at the time of acquisition. It is under this standard that the company acquired television stations in Jacksonville, Fla., Denver, Colo., and Atlanta, Ga.
In 2003, the FCC substantially changed its ownership rules to allow greater media ownership opportunities, including 1) permitting common ownership of different properties in the same market (depending on market size) but retaining limitations in markets of three or fewer television stations where cross-ownership is prohibited; 2) permitting ownership of a number of television stations in a market (depending on market size); and 3) increasing the national TV ownership cap, covering the number of U.S. TV households one company is permitted to serve from 35% to 45%. In January 2004, Congress passed legislation setting the national ownership cap figure at 39%. Presently the companys 23 television stations reach an aggregate of 18% of U.S. TV households.
In 2004, a federal appeals court found that the FCC had not adequately justified some of the rule changes and remanded the matter back to the FCC. In February 2005, the company, in a joint filing with the Newspaper Association of America, sought review of the decision in the U.S. Supreme Court. The Court refused to take the appeal and therefore, the FCCs pre-2003 ownership rules remain in effect while the FCC deals with the issues raised in the remand. In July 2006, the FCC commenced a proceeding to address the issues raised by the appellate court and other possible revisions to the ownership rules. The company is unable to predict the outcome of these proceedings, which are likely to continue into 2008. If the FCC modifies the current restrictions, it could present opportunities for the company to acquire additional properties in markets it currently serves.
Under current FCC rules, the company may continue to own a newspaper-television combination in Phoenix, Ariz., pending FCC action on its application for permanent waiver filed with the KPNX-TV license renewal in June 2006. The company does not anticipate any action on the application until the FCC resolves the issues addressed in the current ownership proceeding.
At the end of 2006, the company and its subsidiaries had approximately 49,675 full-time and part-time employees. Three of the companys newspapers were published in 2006 together with non-company newspapers pursuant to joint operating agreements, and the employment total above includes the appropriate share of employees at those joint production and business operations.
Approximately 13.5% of those employed by the company and its subsidiaries in the U.S. are represented by labor unions. They are represented by 89 local bargaining units, most of which are affiliated with one of eight international unions under collective bargaining agreements. These agreements conform generally with the pattern of labor agreements in the newspaper and broadcasting industries. The company does not engage in industrywide or companywide bargaining. The companys U.K. subsidiaries bargain with three unions over working practices, wages and health and safety issues only.
The company provides competitive group life and medical insurance programs for full-time domestic employees at each location. The company pays a substantial portion of these costs and employees contribute the balance. Nearly all of the companys units provide retirement or profit-sharing plans that cover all eligible part-time and full-time employees.
In 1990, the company established a 401(k) Savings Plan, which is available to most of its domestic non-represented employees and a small number of unionized employees who have bargained for the plan.
Newsquest employees have local staff councils for consultation and communication with local Newsquest management. Newsquest has provided the majority of its employees with the option to purchase Gannett shares through a share incentive plan along with a retirement plan that incorporates life insurance.
The company strives to maintain good relationships with its employees.
A key initiative for the company is its Leadership and Diversity program that focuses on finding, developing and retaining the best and the brightest employees. Gannetts Diversity Council has been charged with attracting and retaining superior talent and developing a diverse workforce that reflects the communities Gannett serves.
MARKETS WE SERVE
NEWSPAPERS AND NEWSPAPER DIVISION
Non-daily publications: see listing of U.S. non-daily locations on page 14.
NEWSPAPERS AND NEWSPAPER DIVISION (continued)
Times News Group, Inc. (Army Times Publishing Co.)
Headquarters: Springfield, Va.
Advertising offices: Chicago, Ill.; Los Angeles, Calif.; New York, N.Y.
Publications: Army Times, Navy Times, Marine Corps Times, Air Force Times, Federal Times, Defense News, Armed Forces Journal, C4ISR Journal, Training and Simulation Journal
Headquarters: Mountville, Pa.
Gannett Healthcare Group
Offices: Bala Cynwyd, Pa. (serving Philadelphia and the Delaware Valley); Dallas/Fort Worth, Texas (serving Texas and Louisiana); Falls Church, Va. (serving Washington, D.C., Northern Virginia and Baltimore, Md.); Fort Lauderdale, Fla. (serving Fort Lauderdale, Orlando and Tampa); Hoffman Estates, Ill. (serving Illinois, Indiana, Michigan and Ohio); San Jose, Calif. (serving California and Western states); Westbury, N.Y. (serving New York, New Jersey and New England states)
Weekly, semi-weekly, monthly or bimonthly publications in Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Guam, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin
Gannett Media Technologies International: Cincinnati, Ohio; Norfolk, Va.; Tempe, Ariz.
Headquarters: Springfield, Va.
Offset sites: Atlanta, Ga.; Minneapolis, Minn.; Miramar, Fla.; Norwood, Mass.; St. Louis, Mo.; Springfield, Va.
Gannett Offset Marketing Services Group
Gannett Direct Marketing Services, Inc.: Louisville, Ky.
Telematch: Springfield, Va.
Gannett Retail Advertising Group: Chicago, Ill.
Gannett Satellite Information Network: McLean, Va.
Gannett News Service
Headquarters: McLean, Va.
Bureau: Washington, D.C.
State bureaus: Albany, N.Y.; Baton Rouge, La.; Trenton, N.J.; Sacramento, Calif.; Springfield, Ill.; Tallahassee, Fla.
Headquarters: Conshohocken, Pa.
Sales offices: Chicago, Ill.; Detroit, Mich.; London, England; Los Angeles, Calif.; New York, N.Y.; San Francisco, Calif.; Washington, D.C.
Headquarters and editorial offices: McLean, Va.
Print sites: Arlington, Texas; Atlanta, Ga.; Batavia, N.Y.; Brevard County, Fla.; Chandler, Ariz.; Columbia, S.C.; Fort Collins, Colo.; Fort Myers, Fla.; Hattiesburg, Miss.; Kankakee, Ill.; Honolulu, Hawaii; Lansing, Mich.; Las Vegas, Nev.; Lawrence, Kan.; Mansfield, Ohio; Marin County, Calif.; Milwaukee, Wis.; Minneapolis, Minn.; Miramar, Fla.; Nashville, Tenn.; Newark, Ohio; Norwood, Mass.; Olympia, Wash.; Pasadena, Texas; Port Huron, Mich.; Raleigh, N.C.; Richmond, Ind.; Rockaway, N.J.; St. Louis, Mo.; Salisbury, N.C.; Salt Lake City, Utah; San Bernardino, Calif.; Springfield, Va.; Tampa, Fla.; Warrendale, Pa.; White Plains, N.Y.; Wilmington, Del.
International print sites: Frankfurt, Germany; Gosselies, Belgium; Hong Kong; London, England
National offices: Atlanta, Ga.; Boston, Mass.; Buffalo, N.Y.; Charleston, S.C.; Charlotte, N.C.; Chicago, Ill.; Cincinnati, Ohio; Cleveland, Ohio; Columbus, Ohio; Dallas, Texas; Denver, Colo.; Detroit, Mich.; Fort Wayne, Ind.; Houston, Texas; Kansas City, Mo.; Las Vegas, Nev.; Los Angeles, Calif.; Memphis, Tenn.; Miami, Fla.; Milwaukee, Wis.; Minneapolis, Minn.; Murfreesboro, Tenn.; Nashville, Tenn.; New Orleans, La.; New York, N.Y.; Oklahoma City, Okla.; Orlando, Fla.; Philadelphia, Pa.; Phoenix, Ariz.; Pittsburgh, Pa.; Raleigh, N.C.; Salt Lake City, Utah; San Antonio, Texas; San Francisco, Calif.; Seattle, Wash.; St. Louis, Mo.; Tampa, Fla.; Tulsa, Okla.; Washington, D.C.
International offices: Hong Kong; London, England; Singapore
Advertising offices: Atlanta, Ga.; Chicago, Ill.; Dallas, Texas; Detroit, Mich.; London, England; Los Angeles, Calif.; McLean, Va.; New York, N.Y.; San Francisco, Calif.
USA TODAY SPORTS WEEKLY
Editorial offices: McLean, Va.
Advertising offices: McLean, Va.; New York, N.Y.
Headquarters and editorial offices: McLean, Va.
Advertising offices: Atlanta, Ga.; Chicago, Ill.; Dallas, Texas; Detroit, Mich.; Los Angeles, Calif.; McLean, Va.; New York, N.Y.; San Francisco, Calif.
Headquarters and editorial offices: McLean, Va.
Print sites: Atglen, Pa.; Dickson, Tenn.; Mt. Morris, Ill.; Reno, Nev.
Advertising offices: Chicago, Ill.; Detroit, Mich.; Los Angeles, Calif.; New York, N.Y.; San Francisco, Calif.
Daily paid-for newspapers/Newsquest PLC
Non-daily publications: Essex, London, Midlands, North East, North West, South Coast, South East, South and East Wales, South West, Yorkshire
Captivate Network, Inc.
Headquarters: Westford, Mass.
Advertising offices: Atlanta, Ga.; Chicago, Ill.; Dallas, Texas; Los Angeles, Calif.; New York, N.Y.; San Francisco, Calif.; Toronto, Ontario.
GANNETT ON THE NET
News and information about Gannett is available on our Web site, www.gannett.com. In addition to news and other information about our company, we provide access through this site to our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after we file or furnish them electronically to the Securities and Exchange Commission.
We also provide access on this Web site to our Principles of Corporate Governance, the charters of our Audit, Executive Compensation and Nominating and Public Responsibility Committees and other important governance documents and policies, including our Ethics and Inside Trading Policies. Copies of all of these corporate governance documents are available to any shareholder upon written request made to our Secretary at our headquarters address. In addition, we will disclose on this Web site changes to, or waivers of, our corporate Ethics Policy.
Gannett properties also offer online services or informational sites on the Internet as follows, listed alphabetically by market:
In addition to the other information contained or incorporated by reference into this Form 10-K, prospective investors should consider carefully the following risk factors before investing in our securities. The risks described below may not be the only risks we face. Additional risks that we do not yet perceive or that we currently believe are immaterial may also adversely affect our business and the trading price of our securities.
Competition from alternative forms of media may impair our ability to achieve revenue growth
Advertising produces the predominant share of our newspaper and broadcasting revenues. With the continued development of alternative forms of media, particularly those based on the Internet, our traditional print and television businesses are facing increasing competition. Alternative media sources also affect our ability to increase our circulation revenues and television audience. This competition could make it difficult for us to grow our advertising and circulation revenues, which we believe will challenge us to expand the contributions of our online and other digital businesses.
The variable nature of our operating and interest expenses make it difficult to control our costs and could reduce our profitability
We continue to face upward pressure on labor and benefit costs, along with volatility in newsprint prices and interest rates. Our ability to control and manage these costs is somewhat limited due to competition and market factors.
Changes in economic conditions in the markets we serve may produce volatility in demand for our products and services
Our operating results depend on the relative strength of the economy in our principal newspaper and television markets as well as the strength or weakness of national and regional economic factors.
Foreign exchange variability could adversely affect our consolidated operating results
Any weakening of the British pound-to-U.S. dollar exchange rate could adversely impact Newsquests earnings contribution to consolidated results.
Changes in regulatory environment may encumber or impede our efforts to improve operating results
Our newspaper and broadcasting operations are subject to government regulation. Changing regulations, particularly FCC regulations which affect our television stations, may result in increased costs and adversely affect our future profitability. FCC regulations required us to construct digital television stations in all of our television markets, despite the fact that the new digital stations are unlikely to produce significant additional revenue until consumers have purchased a substantial number of digital television receivers. Congress established Feb. 17, 2009, as the date by which each television station will be required to return one of the two channels currently assigned to it and operate as a digital facility exclusively.
All of the companys stations have converted to digital television; however, we cannot predict how the transition will affect our broadcast results. In addition, our television stations are required to possess television broadcast licenses from the FCC; when granted, these licenses are generally granted for a period of eight years. Under certain circumstances the FCC is not required to renew any license and could decline to renew our license applications that are currently pending in 2007.
The degree of success of our investment and acquisition strategy may significantly impact our ability to expand overall profitability
We intend to continue efforts to identify and complete strategic investments, partnerships and business acquisitions. These efforts may not prove successful. Strategic investments and partnerships with other companies expose us to risks that we may not be able to control the operations of our investee or partnership, which could decrease the amount of benefits we reap from a particular relationship. Acquisitions of other businesses may be difficult to integrate with our existing operations, could require an inefficiently high amount of attention from our senior management, might require us to incur additional debt or divert our capital from more profitable expenditures, and might result in other unanticipated problems and liabilities.
Newspaper Publishing/United States
Generally, the company owns the plants that house all aspects of the newspaper publication process. In the case of USA TODAY, at Dec. 31, 2006, 16 non-Gannett printers were used to print the newspaper in U.S. markets where there are no company newspapers with appropriate facilities. Four non-Gannett printers in foreign countries are used to print USA TODAY International. USA WEEKEND, Clipper Magazine and Gannett Healthcare Group are also printed under contracts with commercial printing companies. Many of the companys newspapers have outside news bureaus and sales offices, which generally are leased. In several markets, two or more of the companys newspapers share combined facilities; and in certain locations, facilities are shared with other newspaper properties. The companys newspaper properties have rail siding facilities or access to main roads for newsprint delivery purposes and are conveniently located for distribution purposes.
During the past five years, new or substantial additions or remodeling of existing facilities have been completed or are at some stage of construction at 25 of the companys newspaper operations. Gannett continues to make investments in renovations or new facilities, where it improves the products for its readers and advertisers or improves productivity and operating efficiency. The companys facilities are adequate for present operations. A listing of newspaper publishing centers and key properties may be found on pages 12-14.
Newspaper Publishing/United Kingdom
Newsquest owns certain of the plants where its newspapers are produced and leases other facilities. Newsquest headquarters is in Weybridge, Surrey. Substantial additions to Newsquests printing capacity and color capabilities have been made since Gannett acquired Newsquest in 1999. All of Newsquests properties are adequate for present purposes. A listing of Newsquest publishing centers and key properties may be found on page 15.
The companys broadcasting facilities are adequately equipped with the necessary television broadcasting equipment. The company owns or leases transmitter facilities in 29 locations.
During the past five years, substantial improvements to existing facilities were completed in Tampa, Fla. As a result of our duopoly acquisition in Atlanta, we are enlarging the acquired facility to accommodate the staff and technical facilities for both stations. This project will be completed in 2008. All of the companys stations have converted to digital television operations in accordance with applicable FCC regulations. The companys broadcasting facilities are adequate for present purposes.
The companys headquarters and USA TODAY are located in McLean, Va. The company also owns a data and network operations center in nearby Maryland. Headquarters facilities are adequate for present operations.
Information regarding legal proceedings may be found in Note 11 of the Notes to Consolidated Financial Statements.
Some of the companys newspaper subsidiaries have been identified as potentially responsible parties for cleanup of contaminated sites as a result of their alleged disposal of ink or other wastes at disposal sites that have been subsequently identified as requiring remediation. In four such matters, the companys liability could exceed $100,000.
In March 2004, the United States Environmental Protection Agency (EPA) notified Phoenix Newspapers, Inc. (PNI), a wholly owned Gannett subsidiary, that the company is considered a potentially responsible party for costs incurred in the investigation and potential remediation of contamination at a property in Phoenix, Ariz., formally owned by PNI. In August 2005, PNI entered into a voluntary Administrative Order on Consent with the EPA. This Order requires PNI to (1) investigate the extent, if any, to which PNIs use of that property contributed to contamination of the site, (2) if warranted, evaluate options for remediation, and (3) reimburse EPAs oversight costs. Such remaining liability is not expected to be material.
Poughkeepsie Newspapers is required by a consent order with the EPA to fund a portion of the remediation costs at the Hertel Landfill site in Plattekill, N.Y. Poughkeepsie Newspapers has paid and expensed its share of the initial clean up but remains liable for a share of follow-up testing and potential further remediation at the site. Such remaining liability is not expected to be material.
In September 2003, the EPA notified Multimedia, Inc., a wholly owned Gannett subsidiary, that the company is considered a de minimis potentially responsible party for costs associated with the Operating Industries, Inc. Superfund Site in Monterey, Calif. Based on the most recent information from the EPA, Multimedia, Inc. expects to settle this matter for approximately $95,000.
In July 2000, the state of New Jersey notified the Courier-Post in Cherry Hill that it was seeking to recover from the newspaper and other parties cleanup costs totaling approximately $1.9 million. These costs were allegedly expended by the New Jersey Department of Environmental Protection to clean up discharges of hazardous substances at the Noble Oil Company site at 30 Cramer Road, Tabernacle, Burlington County, N.J. To date, the Courier-Post has not made any payments to New Jersey in connection with this matter, and no estimate of the newspapers liability at the site is available.
Gannett Co., Inc. shares are traded on the New York Stock Exchange with the symbol GCI.
Information regarding outstanding shares, shareholders and dividends may be found on pages 1, 4 and 30 of this Form 10-K.
Gannett Common stock prices
High-low range by fiscal quarters based on NYSE-composite closing prices.
Purchases of Equity Securities
All of the shares included in column (c) of the table above were repurchased from remaining authorization from the share repurchase program announced on April 14, 2005. An additional $1 billion was authorized on July 25, 2006. 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 this publicly announced repurchase program.
Comparison of shareholder return
The following graph compares the performance of the companys common stock during the period Dec. 31, 2001, to Dec. 31, 2006, with the S&P 500 Index and the S&P 500 Publishing Index (which consists of Dow Jones & Co., Inc., Gannett Co., Inc., The McGraw-Hill Companies, Inc., Meredith Corporation, The New York Times Company and Tribune Company).
The S&P 500 Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The S&P 500 Publishing Index also is weighted by market capitalization.
The graph depicts the results of investing $100 in the companys common stock, the S&P 500 Index, and the S&P Publishing Index at closing on Dec. 31, 2001. It assumes that dividends were reinvested quarterly with respect to the companys common stock, daily with respect to the S&P 500 Index and monthly with respect to the S&P 500 Publishing Index.
Selected financial data for the years 2002 through 2006 is contained under the heading Selected Financial Data and is derived from the companys audited financial statements for those years. Certain reclassifications have been made to previously reported financial data to reflect the sale of discontinued operations in 2005 (see discussion in Discontinued Operations). The information contained in the Selected Financial Data is not necessarily indicative of the results of operations to be expected for future years, and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K.
Gannett Co., Inc. is a leading international news and information company operating primarily in the United States and the United Kingdom (U.K.). We generated approximately 86% of our 2006 consolidated revenues from domestic operations in 41 states, the District of Columbia, and Guam, and approximately 14% from our foreign operations primarily in the U.K. Our goal is to be customer centric by delivering quality products and results for our readers, viewers, advertisers and other customers. We believe that well-managed newspapers, television stations, Internet products, magazine/specialty publications and programming efforts will lead to higher profits for our shareholders. To that end, our strategy has three major components:
We implement our strategy and manage our operations through two business segments: newspaper publishing and broadcasting (television). The newspaper publishing segment includes the operations of 90 daily newspapers, nearly 1,000 non-daily local publications in the United States and Guam and almost 300 titles in the U.K. Our 90 U.S. daily newspapers, including USA TODAY, the nations largest-selling daily newspaper, with a circulation of approximately 2.3 million, have a combined daily paid circulation of 7.2 million, making us the nations largest newspaper group in terms of circulation. Together with the 17 daily paid-for newspapers our Newsquest division publishes in the U.K., the total average daily circulation of our 107 domestic and U.K. daily newspapers was approximately 8 million at the end of 2006. All of our daily newspapers also operate Web sites which are integrated with publishing operations. Our newspaper publishers also have strategic business relationships with online investee companies including CareerBuilder, Classified Ventures, ShopLocal.com and Topix.net.
The newspaper publishing segment also includes PointRoll, an Internet ad services business; Planet Discover, a provider of local, integrated online search and advertising technology; commercial printing; newswire; marketing and data services operations.
Through our broadcasting segment, we own and operate 23 television stations covering 18% of the U.S. in markets with more than 20.1 million households. We also include in this segment the results of Captivate Network, a national news and entertainment network that delivers programming and full-motion video advertising through video screens located in elevators of office towers and select hotels across North America.
2006 operating summary and key business transactions:
The companys fiscal year ends on the last Sunday of the calendar year. The companys 2006 fiscal year ended on Dec. 31, 2006, and encompassed a 53-week period. The companys 2005 and 2004 fiscal years encompassed 52-week periods.
Unless stated otherwise, as in the section titled Discontinued Operations, all of the information contained in Managements Discussion and Analysis of Operations relates to continuing operations. Therefore, the results of The (Boise) Idaho Statesman, and two newspapers in the state of Washington, The (Olympia) Olympian and The Bellingham Herald, which were disposed of in an asset exchange in 2005 as discussed later, are excluded for all periods covered by this report.
From Continuing Operations
Net income per diluted share was $4.90 for 2006 compared to $5.05 for 2005. Earnings from continuing operations per diluted share were $4.90 for 2006 and $4.92 for 2005.
The company began reporting stock-based compensation expense in the first quarter of 2006 as required by Statement of Financial Accounting Standards No. 123(R). Results for the year include stock compensation expense of $47.0 million ($29.1 million after tax, or $0.12 per share). Refer to Note 10 Capital stock, stock options, incentive plans in the Notes to Consolidated Financial Statements for further information concerning this matter.
Operating revenues rose 6% to $8.0 billion for 2006 reflecting the full year consolidation of Detroit newspaper operations beginning on Aug. 1, 2005, the June 26, 2006, acquisition of KTVD-TV in Denver, and the Aug. 7, 2006 acquisition of WATL-TV in Atlanta. Revenue growth from acquisitions was partially offset by the deconsolidation of Texas-New Mexico Newspapers Partnership operations effective Dec. 26, 2005. If Gannett had owned the same properties for all of 2006 and 2005, revenues would have increased 2%.
Internal revenue growth in 2006 came primarily from broadcast and U.S. local newspapers, which achieved solid results in the local and real estate advertising categories, and from non-daily initiatives. Broadcast revenue strengthened due to increased demand for political and issue-related advertising and the winter Olympic games on the companys NBC affiliates.
Overall, the softness in ad revenues from newspaper operations, combined with higher newsprint prices, which were up nearly 9%, stock compensation, and staff consolidation costs, led to a 2% decline in operating income, to $2.0 billion. Interest expense was higher for the year up $77.4 million or 37%, reflecting higher interest rates and higher average debt levels related to acquisitions and share repurchases.
On a segment basis, total newspaper publishing revenues were $7.2 billion for 2006, an increase of 5% over 2005. These revenues are derived principally from sales of advertising (including sales of Internet advertising) and circulation, which accounted for 75% and 18%, respectively, of total newspaper publishing revenues for 2006. Our Newsquest operations generated approximately 17% and 11% of these advertising and circulation revenues, respectively. The remaining $502 million in newspaper publishing revenues were produced primarily by our commercial printing operations and earnings from our 40.6% share in the results of the Texas-New Mexico Newspapers Partnership, the 50% owned Tucson joint operating agency and our 19.49% equity interest in California Newspapers Partnership.
Newspaper publishing expenses increased 8% over 2005 to $5.5 billion, driven by higher newsprint costs, the impact of recent acquisitions, new non-daily products, stock compensation and staff consolidation costs. On a pro forma basis, newspaper publishing expenses increased 3% over 2005.
Through our broadcasting segment, we produced $855 million in revenues for 2006, an increase of 16% from 2005. Broadcasting expenses increased 12% to $475 million reflecting higher television production and advertising sales costs as well as costs from the growth of Captivate operations and the addition of the two acquired broadcast stations.
Challenges for 2007: Looking forward to 2007, the company faces several important challenges, including:
The company will aggressively pursue revenue growth, carefully manage costs and seek out strategic investments, partnerships and business acquisitions.
Basis of reporting
Following is a discussion of the key factors that have affected the companys business over the last three fiscal years. This commentary should be read in conjunction with the companys financial statements, Selected Financial Data and the remainder of this Form 10-K.
Critical accounting policies and the use of estimates: The company prepares its financial statements in accordance with generally accepted accounting principles (GAAP) which require the use of estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent matters. The company bases its estimates on historical experience, actuarial studies and other assumptions, as appropriate, concerning the carrying values of its assets and
liabilities and disclosure of contingent matters. The company reevaluates its estimates on an ongoing basis. Actual results could differ from these estimates.
Critical accounting policies for the company involve its assessment of the recoverability of its long-lived assets, including goodwill and other intangible assets, which are based on such factors as estimated future cash flows and current fair value estimates of businesses. The companys accounting for pension and retiree medical benefits requires the use of various estimates concerning the work force, interest rates, plan investment return, and involves the use of advice from consulting actuaries. The companys accounting for income taxes in the U.S. and foreign jurisdictions is sensitive to interpretation of various laws and regulations therein, and to accounting rules regarding the repatriation of earnings from foreign sources.
Please refer to Note 1 of this Form 10-K for a more complete discussion of all of the companys significant accounting policies.
Business acquisitions, investments, exchanges, dispositions and discontinued operations
2006: In January 2006, the company acquired a minority equity interest in 4INFO, a company offering a comprehensive suite of mobile phone search services.
In April 2006, the company contributed the Muskogee (Okla.) Phoenix to the Gannett Foundation. In connection with the acquisition of Clipper Magazine, Inc. in 2003 and PointRoll, Inc. in 2005, the company paid additional cash consideration totaling $41.2 million in the first quarter of 2006 as a result of certain performance metrics being achieved by these businesses.
In June 2006, the company completed the acquisition of KTVD-TV in Denver and in August the acquisition of WATL-TV in Atlanta, which created the companys second and third duopolies.
In August 2006, the company, McClatchy Co. and Tribune Company announced an agreement concerning their ownership stakes in CareerBuilder.com, ShopLocal.com and Topix.net. Under the terms of the agreement, the company and Tribune Company increased each of their equity stakes in CareerBuilder.com and ShopLocal.com to 42.5%, and in Topix.net to 31.9%. The company paid McClatchy $155 million in connection with this agreement.
In August 2006, the company invested an additional $145 million in the California Newspapers Partnership (CNP) in conjunction with the CNPs acquisition of the Contra Costa Times and the San Jose Mercury News and related publications and Web sites. The companys additional investment enabled it to maintain its 19.49% ownership in the CNP.
The company also purchased several small non-daily products in the U.S. as well as Planet Discover, a provider of local, integrated online search and advertising technology.
The total cash paid in 2006 for business acquisitions was approximately $402.7 million and for investments was $338.3 million. The financial statements reflect an allocation of purchase price that is preliminary for these acquisitions.
2005: On March 31, 2005, the company completed the acquisition of the assets of Hometown Communications Network, Inc., a community publishing company with one daily, 59 weeklies, 24 community telephone directories, a shopping guide and other niche publications in Michigan, Ohio and Kentucky.
On June 10, 2005, the company acquired 92% of the stock of PointRoll, Inc., a leading rich media marketing company that provides Internet user-friendly, non-intrusive technology for advertisers.
Effective July 31, 2005, Knight Ridder, Inc. (now McClatchy Co.) sold its newspaper interests in Detroit to Gannett and MediaNews Group and the two publishers formed the Detroit Newspaper Partnership, L.P. MediaNews Group acquired The Detroit News from Gannett and Gannett acquired the Detroit Free Press. Beginning Aug. 1, 2005, Detroits results have been fully consolidated in the financial statements of Gannett along with a minority interest charge for MediaNews Groups interest. Prior to that date, the results from the companys 50% interest in Detroit had been reported in other operating revenue.
On Aug. 29, 2005, the company completed an exchange of assets in which Knight Ridder (now McClatchy Co.) received from Gannett The (Boise) Idaho Statesman, and two newspapers in the state of Washington: The (Olympia) Olympian and The Bellingham Herald. In return, Gannett received the Tallahassee (Fla.) Democrat and cash consideration. This exchange was accounted for as the simultaneous sale of discontinued operations and a purchase of the Tallahassee newspaper. The company recorded an after-tax gain on this transaction of $18.8 million. Operating results for 2005 and all prior periods presented in this report exclude the results of the former Gannett properties which have been reclassified to income from discontinued operations.
On Sept. 16, 2005, the company acquired the Exchange & Mart and Auto Exchange titles in the U.K.
On Dec. 25, 2005, the company completed an agreement with its partner in the Texas-New Mexico Newspapers Partnership, MediaNews Group, Inc., to expand the partnership. Under this agreement, the company contributed to the partnership its newspaper in Chambersburg, Pa., the Public Opinion, and MediaNews Group contributed three other newspapers in Pennsylvania. As a result of this transaction, the companys ownership interest in the partnership was reduced from 66.2% to 40.6%, and MediaNews Group became the managing partner. At and from the effective date of the agreement, the company has accounted for its partnership interest in Texas-New Mexico Newspapers Partnership under the equity method. In connection with this transaction, the company recorded a minor non-monetary gain that is reflected in Other non-operating items in the Statement of Income.
During 2005, the company also purchased several small non-daily publications in the U.S. and U.K.
The total cash paid for the 2005 business acquisitions was $619 million.
On March 23, 2005, the company, along with Knight Ridder, Inc. (now McClatchy Co.) and Tribune Company, jointly acquired a 75% equity interest in Topix.net, a news content aggregation service.
On Dec. 16, 2005, the company purchased a 23.3% interest in ShermansTravel, an online travel news, advertising and booking service.
2004: In February 2004, the company acquired NurseWeek, a multimedia company with print publications and Web site focused on the recruitment, recognition and education of nurses.
In February 2004, the company exchanged its daily newspaper, The Times in Gainesville, Ga., 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. The non-monetary gain from the exchange is reflected in non-operating income.
In April 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 and select hotel towers across North America.
In May 2004, the company acquired a one-third interest in CrossMedia Services, Inc. (now named ShopLocal.com), a leading provider of Web-based marketing solutions for national and local retailers, with Knight Ridder, Inc. (now McClatchy Co.) and Tribune Company.
The company also purchased a small daily newspaper in Wisconsin and several small non-daily publications in the U.S. and the U.K.
The 2004 business acquisitions (excluding the non-monetary exchange transaction) had an aggregate cash purchase price of approximately $169 million.
In August 2004, the company completed the sale of its NBC affiliate in Kingman, Ariz., KMOH-TV.
RESULTS OF OPERATIONS
Consolidated summary continuing operations
A consolidated summary of the companys results is presented below.
A discussion of operating results of the companys newspaper and broadcasting segments, along with other factors affecting net income, follows. The companys growth over the years has been through, in part, the acquisition of businesses. The discussion below is focused mainly on changes in historical financial results, however certain operating information is also presented on a pro forma basis, which assumes that all properties owned at the end of 2006 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.
Newspaper publishing segment
In addition to its domestic local newspapers, the companys newspaper publishing operations include USA TODAY, USA WEEKEND, Newsquest, which publishes daily and non-daily newspapers in the U.K., Gannett Offset commercial printing and other advertising and marketing services businesses. The newspaper segment in 2006 contributed 89% of the companys revenues and 85% of its operating income.
Newspaper operating results were as follows:
Impact of acquisitions: The increases reflected above for 2006 revenues and expenses are attributable in large measure to business acquisition activity. In particular, full year reporting of the Detroit transaction was a key driver. Until that transaction became effective on Aug. 1, 2005, the companys 50% interest in the Detroit joint operating agency was accounted for under the equity method, thus the company picked up its 50% interest in Detroits pre-tax income as an entry to the all other revenue line in the Statement of Income.
Upon completing the transactions with Knight Ridder (now McClatchy Co.) and MediaNews Group, the company became the majority owner in Detroit operations and therefore, the company has fully consolidated these operations within its newspaper segment. Therefore, all newspaper-related revenue and expense line items for 2006 reflect an increase from this ownership and attendant accounting change.
Foreign currency translation: The average exchange rate used to translate U.K. newspaper results was 1.84 for 2006 and 1.82 for 2005 and 2004, so newspaper segment revenue and expense variances when comparing 2006 with 2005 and 2004 are slightly higher as a result.
Newspaper operating revenues: Newspaper operating revenues are derived principally from advertising and circulation sales, which accounted for 75% and 18%, respectively, of total newspaper revenues in 2006. Ad revenues also include those derived from advertising placed with newspaper-related Internet products. Other publishing revenues are mainly from commercial printing, earnings from the companys 50% owned joint operating agency in Tucson (and Detroit for the first eight months of 2005), revenue from PointRoll and earnings from its 19.49% equity interest in the California Newspapers Partnership and its 40.6% equity interest in the Texas-New Mexico Newspapers Partnership for 2006.
The table below presents the principal components of reported newspaper revenues for the last three years.
The table below presents the principal components of reported newspaper advertising revenues for the last three years.
Reported advertising revenues for 2006 increased $209 million or 4%. The increase reflects the full year impact of 2005 acquisitions, particularly Detroit and Tallahassee, as well as incremental revenues in the U.S. from purchased or internally developed non-daily publications. Approximately 75% of the growth in reported advertising revenue for 2006 was attributable to newly acquired businesses. In the U.K., ad revenues in local currency were weaker in all categories in 2006, but the weakness was moderated slightly by a higher average exchange rate.
In the tables that follow, newspaper advertising and circulation revenue results along with related advertising linage and circulation volume statistics are presented on a pro forma basis. For Newsquest, advertising and circulation revenues are fully reflected in the pro forma amounts below, as are daily paid circulation volumes. Advertising linage for Newsquest is not reflected, however. Reported and pro forma newspaper revenue comparisons are positively impacted by the additional 53rd week in 2006.
The table below reconciles advertising revenues on a pro forma basis to advertising revenues on a GAAP basis.
Reported local ad revenues were up $111 million or 5% in 2006 benefiting from the full-year impact of the 2005 acquisitions and the 53rd week. Local revenues rose in the U.S. and the U.K. Pro forma local ad revenues were up 2%, with pro forma linage up 1% from last year. Revenue from small and medium-sized advertisers advanced in our domestic newspapers, while the revenue performance of larger advertisers softened.
Reported national ad revenues were up $57 million or 7% in 2006, primarily due to higher sales in USA TODAY branded publications and the Detroit transaction. Pro forma national ad revenues increased 1%.
Reported classified ad revenues increased $41 million or 2%. Classified revenue gains were reported by U.S. newspapers but these were partially offset by declining classifieds in the U.K. On a pro forma basis, classified ad revenues decreased 1%, with pro forma linage even. Solid classified gains were achieved in the U.S. in the employment, real estate and legal categories. On a pro forma basis, total real estate ad revenues rose 9% for the year, while automotive and employment ad revenues declined 11% and 4%, respectively. Lower automotive was due to decreased spending by local dealers in the companys domestic and U.K. markets.
Newspaper advertising revenues in millions, as reported.
Looking to 2007, modest ad revenue and volume growth are anticipated in most core newspaper print categories and in most newspaper markets. Continued strong growth is expected from online ad sales and from non-daily products. Revenue results for 2007 will be affected by regional economic performance in the U.S. and the U.K., consumer confidence, the strength of the job market, weakening or strengthening in the British pound-to-U.S. dollar exchange rate and the geopolitical environment.
Reported 2006 newspaper circulation revenues increased $43 million or 3% over 2005, primarily as a result of the Detroit transaction. Circulation revenue for local U.S. newspapers was down slightly, while revenues rose slightly at USA TODAY and in the U.K.
USA TODAYs average daily circulation for 2006 decreased 1% to 2,259,329. USA TODAY reported an average daily paid circulation of 2,269,509 in the Audit Bureau of Circulations (ABC) Publishers Statement for the 26 weeks ended Sept. 24, 2006, a decrease of 1% over the comparable period in 2005.
For local newspapers, morning circulation accounts for approximately 84% of total daily volume, while evening circulation accounts for 16%.
Newspaper circulation revenues in millions, as reported.
Pro forma circulation volume for the companys local newspapers is summarized in the table below and includes data for the companys newspapers participating in joint operating agencies.
Newspaper revenue comparisons 2005-2004: For 2005, reported advertising revenues increased $326 million or 7%. The increase in ad revenues reflects the impact of 2005 acquisitions, including Detroit, Tallahassee, and Hometown Communications, as well as incremental revenues in the U.S. from purchased or internally developed non-daily publications. Approximately 60% of the growth in reported advertising revenue for 2005 was attributed to the newly acquired businesses. In the U.K., ad revenues were weaker in all categories in 2005.
Reported local ad revenues were up $163 million or 8% in 2005. Pro forma local ad revenues were up 1%, with pro forma linage down 3% from 2004. Revenue from small and medium-sized advertisers advanced in our domestic newspapers, while the revenue performance of larger advertisers softened.
Reported national ad revenues were up $31 million or 4% in 2005. Pro forma national ad revenues increased 1% on a 5% pro forma volume decrease.
Reported classified ad revenues increased $132 million or 7% in 2005. On a pro forma basis, classified ad revenues rose 2%, with pro forma linage down 2%. Solid classified gains were achieved in the U.S. in the employment and real estate categories, including online advertising. These gains were largely offset by softness in the U.K.
Reported 2005 newspaper circulation revenues increased $46 million or 4% over 2004, primarily as a result of the Detroit transaction and improvement at USA TODAY. Circulation revenues at USA TODAY rose 9% in 2005, benefiting from a $0.25 single-copy price increase implemented on Sept. 7, 2004. The price increase affected approximately 900,000 copies sold daily at newsstands and newsracks.
USA TODAYs average daily circulation for 2005 decreased 1% to 2,277,064. USA TODAY reported an average daily paid circulation of 2,299,905 in the ABC Publishers Statement for the 26 weeks ended Sept. 25, 2005, a 1% decrease over the comparable period in 2004.
Newspaper operating expense: Newspaper operating costs rose $421 million or 8%, in 2006, primarily due to the Detroit and Tallahassee acquisitions, the internal growth of non-daily publications, higher newsprint costs, stock compensation expense, staff consolidation costs, and the 53rd week.
On a pro forma basis, assuming all properties owned at the end of 2006 were owned throughout 2006 and 2005, newspaper operating expense rose 3%.
On an as reported basis, newsprint expense rose 9%, reflecting a 9% increase in average prices and flat consumption. On a pro forma basis, newsprint costs rose 6% with declines in usage helping to offset higher prices.
Newspaper payroll costs on an as reported basis were up approximately 5% reflecting additions to headcount from acquisitions and non-daily growth. On a pro forma basis, payroll costs rose 2%.
Benefit costs in the aggregate for the newspaper segment were higher in 2006, as a result of stock-based compensation expense and generally higher ongoing costs for employee medical and disability benefits.
Newspaper expense comparisons 2005-2004: Newspaper operating costs rose $374 million or 8%, in 2005, primarily due to the Detroit, Tallahassee, Hometown Communications acquisitions and the internal growth of non-daily publications.
On an as reported basis, newsprint expense rose 9%, reflecting a 9% increase in average prices and a slight decline in consumption.
Newspaper payroll costs on an as reported basis were up approximately 7% reflecting additions to headcount from acquisitions and non-daily growth. On a pro forma basis, payroll costs rose slightly.
Benefit costs in the aggregate for the newspaper segment were lower in 2005, as generally higher ongoing costs for employee medical and disability benefits were more than offset by curtailment gains of approximately $31 million from changes to retiree medical and life insurance benefits.
On a pro forma basis, assuming all properties owned at the end of 2005 were owned throughout 2005 and 2004, newspaper operating expense rose slightly.
Outlook for 2007: Newsprint prices are expected to decline in the U.S. as a result of falling industry-wide consumption and conservation measures as well as additional newsprint production capacity, particularly in Canada and China. In the U.K., we expect another price increase, which will be mitigated by a switch of a significant portion of tonnage to lighter weight newsprint. Overall, we expect the average cost per ton of newsprint to decline marginally in 2007. Payroll costs are expected to rise only marginally, reflecting the impact of staff consolidations in the U.S. and the U.K.
Newspaper operating income: Newspaper operating income decreased in 2006, to $1.70 billion from $1.81 billion in 2005. The principal factors affecting operating income changes were the following:
Newspaper operating income comparisons 2005-2004:
Newspaper operating income increased slightly in 2005, up to $1.81 billion from $1.78 billion in 2004. Domestic growth in classified and online revenues, higher circulation revenues at USA TODAY reflecting the single-copy price increase in September 2004, coupled with the acquisitions of Detroit, PointRoll, Hometown Communications and, in the U.K., Exchange & Mart and Auto Exchange, contributed to the increase. Negative factors included higher newsprint prices and softening advertising in the U.K.
Newsquests financial results were translated from British pounds to U.S. dollars using a weighted average rate of 1.82 for 2005 and 2004.
The companys broadcasting operations at the end of 2006 included 23 television stations in markets reaching 18% of U.S. television homes, and Captivate Network, Inc.
Over the last three years, reported broadcasting revenues, expenses and operating income were as follows:
Reported broadcast revenues increased $119 million or 16% for 2006. For the companys television stations, the revenue comparisons reflect 2006 Winter Olympics, robust political and election related advertising, and the acquisition of KTVD-TV in Denver and WATL-TV in Atlanta. Excluding Captivate, broadcast revenues increased 16%; local television station revenue was 12% higher and national was 22% higher. Television online revenue rose more than 50% in 2006.
Incremental television revenues from the Olympic, political and election-related advertising totaled approximately $98 million. Other ad category results for 2006 included higher revenue for telecom, services and home improvement, offset by slightly lower automotive and retail.
Reported operating expenses increased $50 million or 12% in 2006. Excluding Captivate, television operating expenses increased 12% in 2006, primarily due to sales commissions related to higher revenues, programming costs related to launching of several new local shows and acquisitions, stock compensation and the amortization of intangibles. Payroll costs were 5% higher for the year, reflecting local sales commissions on higher revenues and added costs from the acquisition of WATL-TV and KTVD-TV.
Broadcast results 2005-2004: Reported broadcast revenues declined $86 million or 10% for 2005. For the companys television stations, the revenue comparisons reflect the net loss from 2004 of approximately $105 million of Olympic and political advertising. Excluding Captivate, broadcast revenues declined 11%; local television station revenue was 3% lower and national was 24% lower.
Major ad category results for 2005 reflect lower automotive and retail revenue; revenue from the restaurant category was flat and revenue from services and packaged goods was higher.
Reported operating expenses increased $4 million or 1% in 2005. Excluding Captivate, television operating expenses declined 1%, primarily due to lower advertising sales and production costs. Payroll costs were 2% higher for the year, reflecting added costs from Captivate.
Broadcasting revenues in millions, as reported.
Outlook for 2007: Revenues are expected to be lower due to the absence of Winter Olympics and substantially lower political and election-related advertising. Captivate and online revenues are expected to continue their rapid growth. Expenses are expected to moderate, reflecting lower revenue levels.
Consolidated operating expenses
Over the last three years, the companys consolidated operating expenses were as follows:
Cost of sales for 2006 rose $376 million or 9%, primarily reflecting incremental costs from recent acquisitions and internal growth of non-daily products, as well as higher newsprint, pension and staff consolidation costs. On a pro forma basis, cost of sales increased less than 4%.
Selling, general and administrative expenses rose $105 million or 9% primarily due to acquisitions, higher ad sales costs in broadcasting, and expensing of stock-based compensation of $47.0 million in 2006. On a pro forma basis, selling, general and administrative expenses rose 6%.
Depreciation expense was 3% lower in 2006, reflecting accelerated depreciation taken in 2005 on press equipment taken out of service. Amortization of intangible assets rose 48%, reflecting costs associated with recent acquisitions.
Payroll, benefits and newsprint costs (along with certain other production material costs), the largest elements of the companys operating expenses, are presented below, expressed as a percentage of total pre-tax operating expenses.
Operating expense comparisons 2005-2004: Cost of sales for 2005 increased $286 million or 8%, reflecting incremental costs from acquisitions and internal growth of non-daily products, as well as higher newsprint costs. Benefit cost comparisons within the cost of sales category were favorable for 2005, reflecting retiree medical and life insurance curtailment credits.
Selling, general and administrative expenses (SG&A) increased by $62 million or 5% in 2005 primarily due to acquisitions.
Depreciation expense was 9% higher in 2005 reflecting incremental costs from acquisitions as well as from the installation of new printing presses for Detroit operations. Amortization of intangible assets rose 92%, reflecting costs associated with acquisitions.
In total, domestic operating expenses rose, while those in the U.K. were lower, both reflecting overall revenue level changes.
Outlook for 2007: The company anticipates only modest increases in operating costs in 2007. Lower newsprint expenses are anticipated along with lower overall employee benefit costs. Payroll expense increases are expected to be modest, impacted by lower staffing levels.
Non-operating income and expense
Interest expense in 2006 rose $77 million or 37%, reflecting higher interest rates and higher average outstanding debt related to investments and acquisitions, and share repurchases.
Interest expense in 2005 rose $70 million or 50% from 2004, reflecting higher debt levels related to share repurchase activity and acquisitions, and higher interest rates.
Outlook for 2007: Because the company has $2.2 billion in commercial paper obligations at Dec. 31, 2006, that have relatively short-term maturity dates, as well as $750 million of floating rate notes, the company is subject to significant changes in the amount of interest expense it might incur. Assuming the current level of commercial paper borrowings of $2.2 billion, and $750 million of floating rate notes, a 1/2% increase or decrease in the average interest rate would result in an increase or decrease in annual interest expense of $14.8 million.
The company expects its interest expense to decline modestly in 2007, reflecting lower outstanding borrowings partially offset by higher average rates.
A further discussion of the companys debt and credit facilities is contained in the Liquidity and Capital Resources section of this report.
Other non-operating items: In all years shown, non-operating income and expense includes costs associated with certain minority equity interest investments in online/new technology businesses, including a 42.5% stake (one-third prior to August 2006) in CareerBuilder, an online recruitment business. Also included are minority interest charges for consolidated businesses, including the Detroit Newspaper Partnership (after Aug. 1, 2005). Non-operating items in 2005 and 2004 also included minority interest expense related to the Texas-New Mexico Newspapers Partnership, which is not present in 2006 due to the deconsolidation of this entity. Interest and investment income are also reflected in this non-operating category.
The more significant non-recurring items included in this category include: in 2006, a gain on the sale of the companys 10.5% interest in the Cincinnati Reds baseball team; in 2005, a non-monetary gain upon the contribution of the Chambersburg, Pa., newspaper to the Texas-New Mexico Newspapers Partnership; and in 2004, a non-monetary gain on the exchange of the companys newspaper in Gainesville, Ga., for two daily newspapers in Tennessee.
The change in the Other non-operating category relates mainly to reduced charges from the CareerBuilder investment, the excess of gains on the sale of the Cincinnati Reds and several minority interest Internet investments over the 2005 Chambersburg disposition gain, and the absence in 2006 of the minority interest charge related to the Texas-New Mexico Newspapers Partnership.
Provision for income taxes on earnings from continuing operations
The companys effective income tax rate was 32.5% in 2006, 33.4% in 2005 and 33.9% in 2004. The 2006 rate reflects the favorable settlement of tax audits during the year. The provisions of the American Jobs Creation Act, which permit a deduction for certain domestic production activities, favorably affected the companys effective tax rate for 2005 and 2006.
Further information concerning income tax matters is contained in Note 9 of the Consolidated Financial Statements.
Income from continuing operations
For 2006, the companys income from continuing operations declined 4% to $1.16 billion. Higher earnings from broadcasting were more than offset by lower newspaper earnings and higher interest expense. Stock compensation expense related to stock options, which was recorded for the first time in 2006, adversely impacts comparisons. A lower effective tax rate in 2006 moderated the decline in pre-tax earnings.
Income from continuing operations on a per share basis, basic and diluted, declined 0.6% and 0.4%, respectively in 2006, reflecting the impact of share repurchase activity. This is discussed further in the Liquidity and Capital Resources section of this report which follows. The share repurchases made in 2006 will have a favorable impact on earnings per share in 2007.
In 2005, the company reported income from continuing operations of $1.2 billion or $4.92 per diluted share, down 4% and 2%, respectively.
Income from continuing operations, in millions.
Earnings from discontinued operations represent the combined operating results (net of income taxes) of The (Boise) Idaho Statesman and two newspapers in the state of Washington The (Olympia) Olympian and The Bellingham Herald that were part of an exchange transaction with Knight Ridder completed on Aug. 29, 2005. The revenues and expenses from each of these properties have, along with associated income taxes, been removed from continuing operations and reclassified into a single line item amount on the Statements of Income titled Income from the operation of discontinued operations, net of tax for each period presented.
Earnings from discontinued operations, excluding the gain, per diluted share were $0.06 in 2005 and $0.08 in 2004. In the third quarter of 2005, Gannett also reported earnings per diluted share of $0.08 for the gain on the disposition of these properties.
In thousands, except per share amounts
Net income and related per share amounts are presented in the table below, and include income from continuing and discontinued operations.
In millions of dollars, except per share amounts
Liquidity and capital resources
The companys cash flow from operating activities was $1.5 billion in 2006, up from $1.4 billion in 2005, reflecting higher broadcast earnings and cash flow, partially offset by lower Newsquest results, staff consolidation costs and higher newsprint and interest cost.
Cash used by the company for investing activities totaled $751.3 million. This reflects capital spending of $200.8 million; $402.7 million for acquisitions, and $338.3 million for equity investments, including CareerBuilder and Classified Ventures. These cash outflows were partially offset by proceeds from investments and the sale of assets.
Cash used by the company for financing activities totaled $706.1 million in 2006. This reflects repurchase of approximately 3.9 million shares of the companys stock for $215.4 million, the payment of dividends totaling $280.0 million and payments of unsecured promissory notes and other indebtedness totaling $1.5 billion. These financing cash flows were partially offset by the net proceeds from the issuance of the 5.75% notes due 2011 and floating rate notes due 2009 totaling $1.2 billion and proceeds from the exercise of stock options totaling $27.4 million.
Certain key measurements of the elements of working capital for the last three years are presented in the following chart:
Working capital measurements
As part of the adoption of SFAS No. 158 at Dec. 31, 2006, current liabilities increased approximately $35 million.
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, investments and share repurchases.
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 companys commercial paper has been rated A-2 and P-2 by Standard & Poors and Moodys Investors Service, respectively. The companys senior unsecured long-term debt is rated A- by Standard & Poors and A3 by Moodys Investors Service. The company filed an automatic shelf registration statement with the Securities and Exchange Commission on July 25, 2006, under which an unspecified amount of additional debt or equity securities may be issued. The companys Board of Directors has established a maximum aggregate level of $7 billion for amounts which may be raised through borrowings or the issuance of equity securities.
The long-term debt of the company is summarized below.
In thousands of dollars
The unsecured promissory notes at Dec. 31, 2006, were due from Jan. 2, 2007, to Feb. 1, 2007, with rates varying from 5.31% to 5.41%.
The unsecured promissory notes at Dec. 25, 2005, were due from Dec. 27, 2005, to Jan. 28, 2006, with rates varying from 4.09% to 4.30%.
The maximum amount of such promissory notes outstanding at the end of any period during 2006 and 2005 was $3.6 billion and $3.8 billion, respectively. The daily average outstanding balance was $2.8 billion during 2006 and $3.4 billion during 2005 and the weighted average interest rate on commercial paper was 4.9% for 2006 and 3.2% for 2005. Total average debt outstanding in 2006 and 2005 was $5.3 billion and $5.1 billion, respectively. The weighted average interest rate on all debt was 5.2% for 2006 and 4.0% for 2005.
In May 2006, the company issued $500 million aggregate principal amount of 5.75% notes due 2011 and $750 million aggregate principal amount of floating rate notes due 2009 in an underwritten public offering. The net proceeds of the offering were used to pay down commercial paper borrowings.
Other indebtedness includes the loan notes issued in the U.K. to the former shareholders of Newscom in connection with its acquisition. The Newscom notes ($47.2 million) bear interest at 0.50% below the Sterling London Interbank Offered Rate (LIBOR), subject to a cap of 6.75%. The Newscom notes are due on Dec. 31, 2007, but may be redeemed by the company on each interest payment date. The noteholders are entitled to require the company to repay all or part of the notes on any interest payment date by giving 30 days written notice. The remaining other indebtedness
at Dec. 31, 2006, consists primarily of industrial revenue bonds with maturities in 2008 and 2009 at variable interest rates (4.2% at Dec. 31, 2006).
At Dec. 31, 2006, the company had a total of $4.169 billion of credit available under three revolving credit agreements expiring in 2009 and 2010. The revolving credit agreements provide backup for commercial paper and for general corporate purposes; therefore, the unsecured promissory notes, unsecured global notes due in 2007 and Newscom notes are classified as long-term debt.
The commitment fee rates for all revolving credit agreements may range from .07% to .25%, depending on Standard & Poors or Moodys credit rating of the companys senior unsecured long-term debt. The rate in effect on Dec. 31, 2006, was .08% for all facilities. At the option of the company, the interest rate on borrowings under these agreements may be .17% to .50% above the prime rate, the Eurodollar base rate or the Federal Funds Effective Rate plus .50%. The percentages that apply depend on Standard & Poors or Moodys credit rating of the companys senior unsecured long-term debt.
The revolving credit agreements in place at Dec. 31, 2006, contain a single restrictive provision that requires the maintenance of net worth of at least $3.5 billion. At Dec. 31, 2006, net worth was $8.4 billion.
Under an automatic shelf registration filed with the Securities and Exchange Commission in July 2006, an unspecified amount of additional debt or equity securities can be issued. Proceeds from the sale of such securities may be used for general corporate purposes, including capital expenditures, working capital, securities repurchase programs, repayment of long-term and short-term debt and financing of acquisitions. The company may also invest borrowed funds that are not required immediately for other purposes in short-term marketable securities.
The following annual maturities schedule of long-term debt assumes the company had used its $4.169 billion of revolving credit agreements to refinance existing unsecured promissory notes and the unsecured global notes due in 2007 and 2008. Based on this refinancing assumption, the $2.2 billion of unsecured promissory notes are included in maturities for 2010 and the unsecured global notes due in 2007 and 2008 are included in maturities for 2009 and 2010. The companys other indebtedness is assumed to be paid based on its scheduled pay dates.
The fair value of the companys total long-term debt, determined based on quoted market prices for similar issues of debt with the same remaining maturities and similar terms, totaled $5.2 billion at Dec. 31, 2006, approximately equal to its book value.
At Dec. 31, 2006, and Dec. 25, 2005, the company estimates that the amount reported on its balance sheet for financial instruments, including cash and cash equivalents, marketable securities, trade and other receivables, and other long-term liabilities, approximates fair value.
The company has a capital expenditure program (not including business acquisitions) of approximately $200 million planned for 2007, including approximately $16 million for land and buildings or renovation of existing facilities, $157 million for machinery and equipment, and $27 million for vehicles and other assets. Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs. It is expected that the 2007 capital program will be funded from operating cash flow.
In February 2004, the company announced the reactivation of its existing share repurchase program. A total of 3.9 million shares with an aggregate cost of $215.4 million were purchased in 2006 under this program. As of Dec. 31, 2006, the company had remaining authority to repurchase up to $1.1 billion of its common stock. The shares may be repurchased at managements discretion, either in the open market or in privately negotiated block transactions. Managements decision to repurchase shares will depend on price, availability and other corporate developments. Purchases may occur from time to time and no maximum purchase price has been set. For more information on the share repurchase program, refer to Item 5 of Part II of this Form 10-K.
Contractual obligations and commitments
The following table summarizes the expected cash outflows resulting from financial contracts and commitments.
Programming contracts include television station commitments reflected in the consolidated balance sheet and commitments to purchase programming to be produced in future years.
Other long-term liabilities primarily consist of amounts expected to be paid under postretirement benefit plans.
In December 1990, the company adopted a Transitional Compensation Plan (the Plan). The Plan provides termination benefits to key executives whose employment is terminated under certain circumstances within two years following a change in control of the company. Benefits under the Plan include a severance payment of up to three years compensation and continued life and medical insurance coverage.
In February 2004, the company announced the reactivation of its share repurchase program that had last been utilized in February 2000. On July 25, 2006, the authorization to repurchase shares was increased by $1 billion, and as of Dec. 31, 2006, approximately $1.1 billion may yet be purchased under the program. During 2006, 3.9 million shares were purchased under the program for $215.4 million. During 2005, 17.6 million shares were purchased under the program for $1.3 billion. During 2004, the company purchased approximately 20.0 million shares for $1.7 billion. The shares may be repurchased at managements discretion, either in the open market or in privately negotiated block transactions. Managements decision to repurchase shares will depend on price, availability and other corporate developments. Purchases may occur from time to time and no maximum purchase price has been set. Certain of the shares previously acquired by the company have been reissued in settlement of employee stock awards.
In October 2005, the company accelerated the vesting of 4.6 million options for which the option exercise price was substantially above the then current market price for the companys shares. The options affected by this acceleration of vesting were principally comprised of the entire grant made on Dec. 10, 2004, which had an option price of $80.90 (equal to the market price on the grant date) and a fair value established using the Black-Scholes pricing model of $15.18 per option. For its executive officers, the company imposed a holding period that requires them to refrain from selling shares acquired upon the exercise of these options (other than shares that may be sold to cover payment of the exercise price and satisfy withholding taxes) until the date on which the exercise would have been permitted under the options original vesting terms or an executive officers last day of employment, whichever date is earlier.
In December 2004, the company accelerated the vesting of approximately 3.9 million options for which the exercise price was above the then-current market price. The options affected by the acceleration of vesting were principally comprised of the entire grant made on Dec. 12, 2003, which had an option price of $87.33 (equal to the market price on the grant date) and a fair value established using the Black-Scholes pricing model of $21.73 per option.
Because the company has accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) No. 25, and because the options discussed above were priced above current market, the acceleration of vesting of these options did not require accounting recognition in the companys financial statements. However, the impact of the vesting acceleration on pro forma stock-based compensation required to be disclosed in the financial statement footnotes under the provisions of SFAS No. 123, was to increase such disclosed cost by approximately $32 million for 2005 and $52 million for 2004.
The options were accelerated to reduce the expense impact in 2006 and thereafter of the new accounting standard for stock-based compensation. A discussion of this new accounting standard is included in Note 1 to the financial statements.
An employee 401(k) Savings Plan was established in 1990, which includes a company matching contribution in the form of Gannett stock. To fund the companys matching contribution, an Employee Stock Ownership Plan (ESOP) was formed which acquired 2,500,000 shares of Gannett stock from the company for $50 million. The stock purchase was financed with a loan from the company. In June 2003, the debt was fully repaid and all of the shares had been fully allocated to participants. The company elected not to add additional shares to the ESOP and began funding future contributions in cash. The ESOP uses the cash match to purchase on the open market an equivalent number of shares of company stock on behalf of the participants.
The companys common stock outstanding at Dec. 31, 2006, totaled 234,743,902 shares, compared with 238,045,823 shares at Dec. 25, 2005.
Dividends declared on common stock amounted to $283 million in 2006, compared with $273 million in 2005, reflecting an increase in the dividend rate which was partially offset by a decrease in shares outstanding.
Dividends declared per share.
On July 25, 2006, the quarterly dividend was increased from $.29 to $.31 per share.
Accumulated other comprehensive income
The companys foreign currency translation adjustment, included in accumulated other comprehensive income and reported as part of shareholders equity, totaled $699 million at the end of 2006 and $285 million at the end of 2005. The increase reflects a strengthening of Sterling against the U.S. dollar. Newsquests assets and liabilities at Dec. 31, 2006, were translated from Sterling to U.S. dollars at an exchange rate of 1.96 versus 1.74 at the end of 2005. Newsquests financial results were translated at an average rate of 1.84 for 2006 and 1.82 for 2005 and 2004.
The company adopted SFAS No. 158 at Dec. 31, 2006, which changed the accounting for pensions and postretirement benefits as discussed in Note 1 to the financial statements. Under this new standard the company has recognized the funded status of its pension and retiree medical benefit plans in the statement of financial position. As a result of recording the funded status of these plans, the company reduced equity through other comprehensive income by a net after tax charge of $376.6 million. At Dec. 31, 2006, accumulated other comprehensive income includes a $393 million charge for retirement plans.
Effects of inflation and changing prices and other matters
The companys results of operations and financial condition have not been significantly affected by inflation. In both of its principal businesses, subject to normal competitive conditions, the company generally has been able to pass along rising costs through increased selling prices. Further, the effects of inflation and changing prices on the companys property, plant and equipment and related depreciation expense have been reduced as a result of an ongoing capital expenditure program and the availability of replacement assets with improved technology and efficiency.
The company is exposed to foreign exchange rate risk primarily due to its ownership of Newsquest, which uses the British pound as its functional currency, which is then translated into U.S. dollars. The companys foreign currency translation adjustment, related to Newsquest and reported as part of shareholders equity, totaled $699 million at Dec. 31, 2006. This reflects a strengthening of the British pound against the U.S. dollar since the Newsquest acquisition. Newsquests assets and liabilities were translated from British pounds to U.S. dollars at the Dec. 31, 2006, exchange rate of 1.96. Refer to Item 7A below for additional detail.
New accounting pronouncements: In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), effective for the companys first quarter of 2007. Under FIN No. 48, companies are required to make disclosures about uncertainties in their income tax positions, including a roll-forward analysis of tax benefits taken that do not qualify for financial statement recognition. Under FIN No. 48, the recognition of a tax benefit would only occur when it is more likely than not that the position would be sustained upon examination. Adoption of this new accounting standard may result in an adjustment to retained earnings at the beginning of 2007. Management is currently evaluating the impact of this interpretation on the companys financial accounting and reporting.
In September 2006, the FASB issued FASB Statement No. 157 Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value, creates a framework for measuring fair value, and expands disclosure requirements about such fair value measurements. SFAS No. 157 is effective for the companys first quarter of 2008. Management is in the process of studying the impact of this interpretation on the companys financial accounting and reporting.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, postretirement plans) to recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the dates of the fiscal year-end statement of financial position, and provide additional disclosures. On Dec. 31, 2006, the company adopted the recognition and disclosure provisions of SFAS No. 158. See Notes 7 and 8 to the financial statements for further discussion of the effect of adopting Statement 158 on the companys consolidated financial statements.
Certain factors affecting forward-looking statements
Certain statements in this Annual Report on Form 10-K 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) an economic downturn in some or all of the companys principal newspaper or broadcasting markets leading to decreased circulation or local, national or classified advertising; (c) a decline in general newspaper 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 Sterling to U.S. dollar exchange rate; and (k) general economic, political and business conditions.
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, which use the British pound as their functional currency, which is then translated into U.S. dollars. Translation gains or losses affecting the Consolidated Statements of Income have not been significant in the past. A 10% change in the price of Sterling against the U.S. dollar would change reported net income for 2006 by approximately 2%.
Because the company has $2.2 billion in commercial paper obligations outstanding at Dec. 31, 2006, that have relatively short-term maturity dates, as well as $750 million of floating rate notes, the company is subject to significant changes in the amount of interest expense it might incur. Assuming the current level of commercial paper borrowings, and $750 million of floating rate notes, a 1/2% increase or decrease in the average interest rate would result in an increase or decrease in annual interest expense of $14.8 million.
Refer to Note 6 for information regarding the fair value of the companys long-term debt.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Gannett Co., Inc.:
We have audited the accompanying consolidated balance sheets of Gannett Co., Inc. as of December 31, 2006 and December 26, 2005, and the related consolidated statements of income, cash flows, and shareholders equity for the fiscal years then ended. Our audits also included the 2006 and 2005 financial statement schedules listed in the accompanying index in Item 8. These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gannett Co., Inc. at December 31, 2006 and December 26, 2005, and the consolidated results of its operations and its cash flows for the fiscal years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2006 and 2005 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As disclosed in Note 1 in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Nos. 123(R) and 158 during fiscal 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Gannett Co., Inc.s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007, included in Item 9A (page 60), expressed an unqualified opinion thereon.
February 23, 2007
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Gannett Co., Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, Gannett Co., Inc. and its subsidiaries results of operations and cash flows for the period ended December 26, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the 2004 information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
February 25, 2005, except as to the discontinued operations referred to in Note 2, as to which the date is February 20, 2006.
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
The accompanying notes are an integral part of these consolidated financial statements.
GANNETT CO., INC.
CONSOLIDATED BALANCE SHEETS
In thousands of dollars
Commitments and contingent liabilities (see Note 11)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
In thousands of dollars, except per share amounts
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of dollars
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
In thousands of dollars