New York Times Company 10-K 2010
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
THE NEW YORK TIMES COMPANY
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code:(212) 556-1234
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate worldwide market value of Class A Common Stock held by non-affiliates, based on the closing price on June 26, 2009, the last business day of the registrants most recently completed second quarter, as reported on the New York Stock Exchange, was approximately $734 million. As of such date, non-affiliates held 77,947 shares of Class B Common Stock. There is no active market for such stock.
The number of outstanding shares of each class of the registrants common stock as of February 17, 2010 (exclusive of treasury shares), was as follows: 144,600,676 shares of Class A Common Stock and 824,475 shares of Class B Common Stock.
Documents incorporated by reference
Portions of the Proxy Statement relating to the registrants 2010 Annual Meeting of Stockholders, to be held on April 27, 2010, are incorporated by reference into Part III of this report.
This Annual Report on Form 10-K, including the sections titled Item 1A Risk Factors and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that relate to future events or our future financial performance. We may also make written and oral forward-looking statements in our Securities and Exchange Commission (SEC) filings and otherwise. We have tried, where possible, to identify such statements by using words such as believe, expect, intend, estimate, anticipate, will, project, plan and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in any such statements. You should bear this in mind as you consider forward-looking statements. Factors that we think could, individually or in the aggregate, cause our actual results to differ materially from expected and historical results include those described in Item 1A Risk Factors below as well as other risks and factors identified from time to time in our SEC filings.
The New York Times Company (the Company) was incorporated on August 26, 1896, under the laws of the State of New York. The Company is a diversified media company that currently includes newspapers, Internet businesses, investments in paper mills and other investments. Financial information about our segments can be found in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 18 of the Notes to the Consolidated Financial Statements. The Company and its consolidated subsidiaries are referred to collectively in this Annual Report on Form 10-K as we, our and us.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are made available, free of charge, on our Web site http://www.nytco.com, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.
We classify our businesses based on our operating strategies into two segments, the News Media Group and the About Group.
The News Media Group consists of the following:
The About Group consists of the Web sites of About.com, ConsumerSearch.com, UCompareHealthCare.com and Caloriecount.com and related businesses.
Additionally, we own equity interests in a Canadian newsprint company, a supercalendered paper manufacturing partnership in Maine, Metro Boston LLC (Metro Boston), which publishes a free daily newspaper in the greater Boston area, and quadrantONE LLC (quadrantONE), which is an online advertising network that sells bundled premium, targeted display advertising onto local newspaper and other Web sites.
We also own a 17.75% interest in New England Sports Ventures, LLC (NESV), which owns the Boston Red Sox, Fenway Park and other real estate, approximately 80% of New England Sports Network (the regional cable sports network that televises the Red Sox games) and 50% of Roush Fenway Racing, a leading NASCAR team. We are exploring the possible sale of our interest in NESV.
Revenues, operating profit and identifiable assets of foreign operations are not significant.
Our businesses have historically experienced second and fourth quarter advertising volume
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that is generally higher than first and third quarter volume because of lower economic activity during the winter and summer. We believe these seasonal trends were partially masked in 2009 and 2008 by volume declines principally attributable to the general economic slowdown.
The News Media Group segment consists of The New York Times Media Group, the New England Media Group and the Regional Media Group.
A significant portion of the News Media Groups revenue is derived from advertising sold in its newspapers and other publications and on its Web sites, as discussed below. We divide such advertising into three basic categories: national, retail and classified. Advertising revenue also includes preprints, which are advertising supplements. Advertising revenue information for the News Media Group appears under Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
The Times, a daily (Monday through Saturday) and Sunday newspaper, commenced publication in 1851.
The Times is circulated in print in each of the 50 states, the District of Columbia and worldwide. Approximately 44% of the weekday (Monday through Friday) circulation is sold in the 31 counties that make up the greater New York City area, which includes New York City, Westchester, Long Island, and parts of upstate New York, Connecticut, New Jersey and Pennsylvania; 56% is sold elsewhere. On Sundays, approximately 40% of the circulation is sold in the greater New York City area and 60% elsewhere. According to reports filed with the Audit Bureau of Circulations (ABC), an independent agency that audits the circulation of most U.S. newspapers and magazines, for the six-month period ended September 30, 2009, The Times had the largest daily and Sunday circulation of all seven-day newspapers in the United States. In 2009, The Times had more than 820,000 readers who have subscribed for the print edition for two years or more, up from 650,000 in 2000.
The Timess average net paid weekday and Sunday circulation for the years ended December 27, 2009, and December 28, 2008, are shown below:
Our circulation strategy of reducing less profitable circulation and implementing price increases contributed to the decreases in weekday and Sunday copies sold in 2009 compared with 2008. We implemented price increases for subscription and newsstand copies for The Times in the second quarter of 2009.
Approximately 66% of the weekday and 73% of the Sunday circulation was sold through subscriptions in 2009; the remainder was sold primarily on newsstands.
According to data compiled by TNS Media Intelligence, an independent agency that measures advertising sales volume and estimates advertising revenue, The Times had the largest market share in 2009 in advertising revenue among a national newspaper set that consists of USA Today, The Wall Street Journal and The Times. Based on recent data provided by TNS Media Intelligence, we believe The Times ranks first by a substantial margin in advertising revenue in the general weekday and Sunday newspaper field in the New York metropolitan area.
The Times is currently printed at our production and distribution facility in College Point, N.Y., as well as under contract at 25 remote print sites across the United States.
In January 2009, we closed our subsidiary, City & Suburban Delivery Systems, Inc. (City & Suburban), which operated a wholesale distribution business that delivered The Times and other newspapers and magazines to newsstands and retail outlets in the New York metropolitan area. With this change, we moved to a distribution model similar to that of The Timess national edition and, as a result, The Times is currently delivered to newsstands and retail outlets in the New York metropolitan area through a combination of third-party wholesalers and our own drivers. In other markets in the United States and Canada, The Times is delivered through agreements with other newspapers and third-party delivery agents.
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The IHT, a daily (Monday through Saturday) newspaper, commenced publishing in Paris in 1887, is printed at 35 sites throughout the world and is sold in approximately 180 countries. The IHTs average circulation for the years ended December 27, 2009, and December 28, 2008, were 219,256 (estimated), and 239,689, respectively. These figures follow the guidance of Office de Justification de la Diffusion, an agency based in Paris and a member of the International Federation of Audit Bureaux of Circulations that audits the circulation of most of Frances newspapers and magazines. The final 2009 figure will not be available until April 2010.
Effective March 2009, the IHT serves as the global edition of The Times.
NYTimes.com and Other Digital Platforms
The Timess Web site, NYTimes.com, reaches wide audiences across the New York metropolitan region, the nation and around the world. According to Nielsen Online, average unique visitors in the United States to NYTimes.com reached 17.9 million per month in 2009. The Times and the IHT reach an audience around the world with global.nytimes.com (formerly iht.com). We also distribute content on other digital platforms, including mobile applications and social networking sites, as well as reader application products offering a digital reading experience similar to print.
NYTimes.com derives its revenue primarily from the sale of advertising. Advertising is sold to both national and local customers and includes online display advertising (banners, large-format units, half-page units, interactive multimedia), classified advertising (help-wanted, real estate, automotive) and contextual advertising (links supplied by Google). In January 2010, we announced that we will introduce a paid model for NYTimes.com at the beginning of 2011. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations for more information.
We also own Baseline StudioSystems (Baseline), a leading online subscription database and research service for information on the film and television industries and a provider of premium film and television data to Web sites.
The New York Times Media Groups other businesses include:
We also have a 57% ownership interest in Epsilen, LLC (Epsilen, formerly BehNeem, LLC), and the operating results of Epsilen are consolidated in the results of The New York Times Media Group. The Epsilen Environment is a hosted online education solution featuring ePortfolios, global networking and learning management tools.
On October 8, 2009, we completed the sale of WQXR-FM, a New York City radio station, to subsidiaries of Univision Radio Inc. and WNYC Radio. Univision Radio paid us $33.5 million to exchange its 105.9 FM FCC broadcast license and transmitting equipment for our license, equipment and stronger signal at 96.3 FM. At the same time, WNYC Radio purchased the FCC license for 105.9 FM, all related transmitting equipment and WQXR-FMs call letters and Web site from us for $11.5 million. We used the proceeds from the sale to pay outstanding debt.
The New England Media Group comprises the Globe, Boston.com, the T&G, Telegram.com and related businesses. The Globe is a daily (Monday through Saturday) and Sunday newspaper, which commenced publication in 1872. The T&G is a daily (Monday through Saturday) newspaper, which began publishing in 1866. Its Sunday companion, the Sunday Telegram, began in 1884.
We explored a potential sale of the New England Media Group during 2009. After careful consideration and analysis, we terminated that process with respect to the Globe, Boston.com and related
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businesses in October 2009 and with respect to the T&G and Telegram.com in December 2009. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operation for more information on our strategic plan for the Globe.
The Globe is distributed throughout New England, although its circulation is concentrated in the Boston metropolitan area. According to ABC, for the six-month period ended September 30, 2009, the Globe ranked first in New England for both daily and Sunday circulation volume.
The Globes average net paid weekday and Sunday circulation for the years ended December 27, 2009, and December 28, 2008, are shown below:
Our circulation strategy of reducing less profitable circulation and implementing price increases contributed to the decreases in weekday and Sunday copies sold in 2009 compared with 2008. We implemented price increases for subscription and newsstand copies of the Globe in the second quarter of 2009.
Approximately 77% of the Globes weekday circulation and 73% of its Sunday circulation was sold through subscriptions in 2009; the remainder was sold primarily on newsstands.
The T&G, the Sunday Telegram and several Company-owned non-daily newspapers some published under the name of Coulter Press circulate throughout Worcester County and northeastern Connecticut. The T&Gs average net paid weekday and Sunday circulation, for the years ended December 27, 2009, and December 28, 2008, are shown below:
The sales forces of the New England Media Group sell retail, classified and national advertising across multiple platforms, including print newspapers, online, broadcast and direct marketing vehicles, capitalizing on opportunities to deliver to national and local advertisers a broad audience in the New England region.
In the second quarter of 2009, we completed the consolidation of the Globes printing operations into its main Boston facility, and all editions of the Globe are currently printed and prepared for delivery at this facility. Virtually all of the Globes subscription circulation was delivered by a third-party service in 2009.
The Globes Web site, Boston.com, reaches wide audiences in the New England region, the nation and around the world. According to Nielsen Online, average unique visitors in the United States to Boston.com reached 5.3 million per month in 2009.
Boston.com primarily derives its revenue from the sale of advertising. Advertising is sold to both national and local customers and includes online display advertising, classified advertising and contextual advertising.
The Regional Media Group includes 14 daily newspapers, of which 12 publish on Sunday, one paid weekly newspaper, related print and digital businesses, free weekly newspapers, and the North Bay Business Journal, a weekly publication targeting business leaders in Californias Sonoma, Napa and Marin counties. In March 2009, we sold the TimesDaily, a daily newspaper located in Florence, Ala., and its Web site, TimesDaily.com, for $11.5 million.
P.4 2009 ANNUAL REPORT Business
The average weekday and Sunday circulation for the year ended December 27, 2009, for each of the daily newspapers of the Regional Media Group are shown below:
The Petaluma Argus-Courier, in Petaluma, Calif., our only paid subscription weekly newspaper, had an average weekly circulation for the year ended December 27, 2009, of 6,503 copies. The North Bay Business Journal, a weekly business-to-business publication, had an average weekly circulation for the year ended December 27, 2009, of 4,865 copies.
The About Group includes the Web sites of About.com, ConsumerSearch.com, UCompareHealthCare.com and Caloriecount.com and related businesses.
About.com focuses on delivering high-quality content that is personally relevant to its users. The Web site has nearly 800 topical advisors or Guides who produce original content across more than 70,000 topics and 2.5 million articles. About.com was one of the top 15 ad-supported Web sites in the United States in 2009 (per Nielsen Online), with 40 million average monthly unique visitors in the United States (per comScore) and 75 million average monthly unique visitors worldwide (per About.coms internal metrics).
ConsumerSearch.com analyzes expert and user-generated consumer product reviews and recommends the best products to purchase based on the findings. UCompareHealthCare.com provides dynamic Web-based interactive tools that enable users to measure the quality of certain healthcare services. Caloriecount.com offers weight management tools, social support and nutritional information to help users achieve their diet goals.
The About Group generates revenues through cost-per-click advertising (sponsored links for which the About Group is paid when a user clicks on the ad), display advertising and e-commerce (including sales lead generation). Cost-per-click advertising, which in 2009 represented more than 50% of the About Groups revenues, is principally derived from an arrangement with Google under which third-party advertising is placed on the About Groups Web sites.
We have ownership interests in one newsprint mill and one mill producing supercalendered paper, a polished paper used in some magazines, catalogs and preprinted inserts, which is a higher-value grade than newsprint (the Forest Products Investments), as well as in NESV, Metro Boston, and quadrantONE. These investments are accounted for under the equity method and reported in Investments in Joint Ventures in our Consolidated Balance Sheets. For additional information on our investments, see Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of the Notes to the Consolidated Financial Statements.
Forest Products Investments
We have a 49% equity interest in a Canadian newsprint company, Donohue Malbaie Inc. (Malbaie). The other 51% is owned by AbitibiBowater Inc. (AbitibiBowater), a global manufacturer of paper, market pulp and wood products. Malbaie manufactures newsprint on the paper machine it owns within AbitibiBowaters paper mill in Clermont, Quebec. Malbaie is wholly dependent upon AbitibiBowater for its pulp, which is purchased by Malbaie from AbitibiBowaters paper mill in Clermont, Quebec. In 2009, Malbaie produced 214,000 metric tons of newsprint, of which approximately 27% was sold to us, with the balance sold to AbitibiBowater for resale.
Business THE NEW YORK TIMES COMPANY P.5
We have a 40% equity interest in a partnership operating a supercalendered paper mill in Madison, Maine, Madison Paper Industries (Madison). Madison purchases the majority of its wood from local suppliers, mostly under long-term contracts. In 2009, Madison produced 190,000 metric tons, of which approximately 4% was sold to us.
Malbaie and Madison are subject to comprehensive environmental protection laws, regulations and orders of provincial, federal, state and local authorities of Canada or the United States (the Environmental Laws). The Environmental Laws impose effluent and emission limitations and require Malbaie and Madison to obtain, and operate in compliance with the conditions of, permits and other governmental authorizations (Governmental Authorizations). Malbaie and Madison follow policies and operate monitoring programs designed to ensure compliance with applicable Environmental Laws and Governmental Authorizations and to minimize exposure to environmental liabilities. Various regulatory authorities periodically review the status of the operations of Malbaie and Madison. Based on the foregoing, we believe that Malbaie and Madison are in substantial compliance with such Environmental Laws and Governmental Authorizations.
Other Joint Ventures
We own a 17.75% interest in NESV, which owns the Boston Red Sox, Fenway Park and other real estate, approximately 80% of New England Sports Network, a regional cable sports network, and 50% of Roush Fenway Racing, a leading NASCAR team. We are exploring the possible sale of our interest in NESV.
We own a 49% interest in Metro Boston, which publishes a free daily newspaper in the greater Boston area.
We also own a 25% ownership interest in quadrantONE, which is an online advertising network that sells bundled premium, targeted display advertising onto local newspaper and other Web sites. The Web sites of the New England and Regional Media Groups participate in this network.
The primary raw materials we use are newsprint and supercalendered paper. We purchase newsprint from a number of North American producers. A significant portion of such newsprint is purchased from AbitibiBowater, which is one of the largest publicly traded pulp and paper manufacturers in the world.
In 2009 and 2008, we used the following types and quantities of paper (all amounts in metric tons):
The paper used by The New York Times Media Group, the New England Media Group and the Regional Media Group was purchased from unrelated suppliers and related suppliers in which we hold equity interests (see Forest Products Investments).
As part of our continuing efforts to reduce our newsprint consumption, we have reduced the size of the majority of our newspapers.
P.6 2009 ANNUAL REPORT Business
Our media properties and investments compete for advertising and consumers with other media in their respective markets, including paid and free newspapers, Web sites, broadcast, satellite and cable television, broadcast and satellite radio, magazines, direct marketing and the Yellow Pages. Competition for advertising is generally based upon audience levels and demographics, price, service, targeting capabilities and advertising results, while competition for circulation and readership is generally based upon format, content, quality, service, timeliness and price.
The Times competes for advertising and circulation primarily with national newspapers such as The Wall Street Journal and USA Today, newspapers of general circulation in New York City and its suburbs, other daily and weekly newspapers and television stations and networks in markets in which The Times circulates, and some national news and lifestyle magazines.
The IHTs key competitors include all international sources of English language news, including The Wall Street Journals European and Asian Editions, the Financial Times, Time, Newsweek International and The Economist, satellite news channels CNN, CNNi, Sky News International, CNBC and BBC.
The Globe competes primarily for advertising and circulation with other newspapers and television stations in Boston, its neighboring suburbs and the greater New England region, including, among others, The Boston Herald (daily and Sunday).
Our other newspapers compete for advertising and circulation with a variety of newspapers and other media in their markets.
In addition, as a result of the secular shift from print to digital media, all our newspapers increasingly face competition for audience and advertising from a wide variety of digital alternatives, including news and other Web sites, news aggregation sites and online classified services.
NYTimes.com and Boston.com primarily compete for advertising and traffic with other advertising-supported news and information Web sites, such as Yahoo! News and CNN.com, and classified advertising portals. Internationally, global.nytimes.com competes against international online sources of English language news, such as bbc.co.uk and reuters.com.
About.com competes for advertising and traffic with large-scale portals, such as AOL, MSN, and Yahoo!. About.com also competes with targeted Web sites whose content overlaps with that of its individual channels, such as WebMD, CNET, Wikipedia, iVillage and the Web sites of Demand Media, such as eHow.
NESV competes in the Boston (and through its interest in Roush Fenway Racing, in the national) consumer entertainment market, primarily with other professional sports teams and other forms of live, film and broadcast entertainment.
Baseline competes with other online database and research services that provide information on the film and television industries and provide film and television data to Web publishers, such as IMDb.com, Tribune Media Services and Rovi.
We had approximately 7,665 full-time equivalent employees as of December 27, 2009.
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As of December 27, 2009, approximately 1,870 full-time equivalent employees of The Times and NYTimes.com were represented by 9 unions with 10 labor agreements. More than three quarters of the 1,498 full-time equivalent employees of the Globe and Boston.com are represented by 10 unions with 12 labor agreements, 10 of which were renegotiated during the second half of 2009, as a critical component of the strategic plan for the Globe discussed under Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations. Listed below are collective bargaining agreements covering the following categories of employees and applicable expiration dates.
The IHT has approximately 300 employees worldwide, including approximately 176 located in France, whose terms and conditions of employment are established by a combination of French national labor law, industry-wide collective agreements and Company-specific agreements.
Approximately one-third of the 454 full-time equivalent employees of the T&G are represented by four unions. Labor agreements with production unions expired or will expire on August 31, 2009, October 8, 2009 and November 30, 2016. The labor agreements with the Providence Newspaper Guild, representing newsroom and circulation employees, expired on August 31, 2007. Negotiations for new contracts are ongoing. We cannot predict the timing or the outcome of these negotiations.
Of the approximately 235 full-time equivalent employees at The Press Democrat, 78 are represented by three unions. The labor agreement with the pressmen expires on December 31, 2010, the labor agreement with the Newspaper Guild expires on December 31, 2011, and the labor agreement with the Teamsters, which represents certain employees in the circulation department, expires on June 30, 2011.
P.8 2009 ANNUAL REPORT Business
You should carefully consider the risk factors described below, as well as the other information included in this Annual Report on Form 10-K. Our business, financial condition or results of operations could be materially adversely affected by any or all of these risks, or by other risks or uncertainties not presently known or currently deemed immaterial, that may adversely affect us in the future.
Economic weakness and uncertainty in the United States, in the regions in which we operate and in key advertising categories has adversely affected and may continue to adversely affect our advertising revenues.
Advertising spending, which drives a significant portion of our revenues, is sensitive to economic conditions. National and local economic conditions, particularly in the New York City and Boston metropolitan regions, as well as in Florida, affect the levels of our national, retail and classified advertising revenue. Economic factors that have adversely affected advertising revenue include weakened consumer and business spending, high unemployment, declining home sales and other challenges affecting the economy. Our advertising revenues are particularly adversely affected if advertisers respond to weak economic conditions by reducing their budgets or shifting spending patterns or priorities, or if they are forced to consolidate or cease operations. Continuing weak economic conditions and outlook would adversely affect our level of advertising revenues and our business, financial condition and results of operations.
All of our businesses face substantial competition for advertisers and audiences.
We face substantial competition for advertising revenue in our various markets from free and paid newspapers, magazines, Web sites, television, radio, other forms of media, direct marketing and the Yellow Pages. Competition for advertising is generally based on audience levels and demographics, price, service and advertising results. It has intensified both as a result of the continued development and fragmentation of digital media and adverse economic conditions. Competition from all of these media and services affects our ability to attract and retain advertisers and consumers and to maintain or increase our advertising rates.
Our reputations for quality journalism and content are important in competing for advertising revenue in this environment. These reputations are based on consumer and advertiser perceptions. If they are perceived as less reliable or are otherwise damaged or if consumers fail to differentiate our content from other content providers on the Internet or otherwise, we may experience a decline in revenues.
The increasing popularity of digital media and the progressing shift in consumer habits and advertising expenditures from traditional to digital media may adversely affect our revenues if we are unable to successfully grow our digital businesses.
Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending have shifted and may continue to shift from traditional media forms to the Internet and other digital media. We expect that advertisers will continue to allocate greater portions of their budgets to digital media, which can offer more measurable returns than traditional print media through pay for performance and keyword-targeted advertising. This secular shift has intensified competition for advertising in traditional media and has contributed to and may continue to contribute to a decline in print advertising.
In addition, as audience attention is increasingly focused on digital media, circulation of our newspapers may be adversely affected, which may decrease circulation revenue and exacerbate declines in print advertising. If we are not successful in growing our digital businesses to offset declines in revenues from our print products, our business, financial condition and prospects will be adversely affected.
If we are unable to retain and grow our digital audience and advertiser base, our digital businesses will be adversely affected.
The increasing number of digital media options available on the Internet, through mobile devices and through social networking tools is expanding consumer choice significantly. As a result, we may not be able to increase our online traffic sufficiently and retain a base of frequent visitors to our Web sites and applications on mobile devices.
If traffic levels decline or stagnate, we may not be able to create sufficient advertiser interest in our digital businesses and to maintain or increase the advertising rates of the inventory on our Web sites. Even if we maintain traffic levels, the market position of our brands may not be sufficient to counteract the significant downward pressure on advertising
Risk Factors THE NEW YORK TIMES COMPANY P.9
rates that the marketplace has experienced as a result of a significant increase in inventory. We may also be adversely affected if the use of technology developed to block the display of advertising on Web sites proliferates.
Online traffic is also driven by Internet search results, including search results provided by Google, the primary search engine directing traffic to the Web sites of the About Group and many of our other sites. Our digital businesses may be negatively affected if search engines change the methods for directing search queries to Web pages. Cost-per-click revenue of the About Group is principally derived from an arrangement with Google. Adverse developments affecting Googles ability to place third-party advertising on the About Groups Web sites may have an adverse effect on the About Groups business, financial condition and prospects.
Faced with a multitude of media choices and a dramatic increase in accessible information, consumers are favoring personalized, up-to-the minute sources of news in custom-targeted formats. The increasing popularity of news aggregation Web sites and customized news feeds may reduce our traffic levels by creating a disincentive for the audience to visit our Web sites or use our digital applications. In addition, the presentation of some of our content in aggregation with other content may lead audiences to fail to appreciate the full depth of the products and services we offer and to distinguish our content from the content of other providers.
If, as a result, we are unable to maintain and grow our digital audience, our digital businesses will be adversely affected.
The dynamic and evolving digital environment presents multiple challenges that could adversely affect our efforts to further develop our digital businesses.
Our digital businesses operate in a highly dynamic and rapidly evolving competitive environment in which consumer demand moves in unanticipated directions due to the evolution of competitive alternatives, rapid technological change and regulatory developments.
As mobile phones and other devices are becoming increasingly important alternatives to computer Internet access, the expectations and preferences of our audience may change further. Our digital businesses will only succeed if we manage to exploit new and existing technologies to distinguish our products and services from those of our competitors while developing new forms of content that provide optimal user experiences.
We announced in January 2010 that we will introduce a paid model for NYTimes.com at the beginning of 2011 with the intention to create a second revenue stream while preserving NYTimes.coms robust advertising business. Our ability to build an online subscriber base depends on market acceptance, the timely development of an adequate online infrastructure and other factors that are required to derive significant online subscription revenue from the paid model. Traffic levels may stagnate or decline as a result of the implementation of the paid model, which may adversely affect NYTimes.coms advertiser base and advertising rates and result in a decline in online revenues.
Technological developments and any changes we make to our business model may require significant capital investments. We may be limited in our ability to invest funds and resources in digital opportunities and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. It may also be difficult to attract and retain talent for critical positions. Some of our existing competitors and possible additional entrants may have greater operational, financial and other resources or may otherwise be better positioned to compete for opportunities and as a result, our digital businesses may be less successful.
We may not be able to maintain and form strategic relationships to attract more consumers, which depend on the efforts of our partners, fellow investors and licensees that may be beyond our control.
If we cannot address all the challenges we face in the continued development of our digital businesses in this environment, our business, financial condition and prospects will be adversely affected.
Decreases in circulation volume adversely affect our circulation and advertising revenues.
Advertising and circulation revenues are affected by circulation and readership levels of our newspaper properties. Competition for circulation and readership is generally based upon format, content, quality, service and price. In recent years, our newspaper properties, and the newspaper industry as a whole, have experienced declining print circulation volume. This is due to, among other factors, increased competition from new media formats and sources other than traditional newspapers (often free to users),
P.10 2009 ANNUAL REPORT Risk Factors
declining discretionary spending by consumers affected by weak economic conditions, high subscription and newsstand rates, and a growing preference among some consumers to receive all or a portion of their news other than from a newspaper. We have also experienced volume declines as a result of our strategy to reduce other-paid circulation to focus promotional spending on individually paid circulation, which is generally more profitable, and the implementation of circulation price increases at many of our newspaper properties. If these or other factors result in a prolonged decline in circulation volume, the rate and volume of advertising revenues may be adversely affected (as rates reflect circulation and readership, among other factors). Circulation revenue may also be adversely affected if higher subscription and newsstand prices are not sufficient to offset volume declines.
Events with short-term negative impact may have a disproportionate effect if they occur during a time of high seasonal demand.
Our businesses have historically experienced second and fourth quarter advertising volume that is generally higher than the first and third quarter volume because of lower economic activity during the winter and summer. If an event with short-term negative impact on our business were to occur during a time of high seasonal demand, there could be a disproportionate effect on the operating results of that business for the year.
Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options.
Our long-term debt is currently rated below investment grade by Standard & Poors and Moodys Investors Service. If our credit ratings remain below investment grade or are lowered further, borrowing costs for future long-term debt or short-term borrowing facilities may increase and our financing options, including our access to the unsecured borrowing market, will be more limited. We may also be subject to additional restrictive covenants that would reduce our flexibility. In addition, macroeconomic conditions, such as continued or increased volatility or disruption in the credit markets, would adversely affect our ability to refinance existing debt or obtain additional financing to support operations or to fund new acquisitions or capital intensive internal initiatives.
If we are unable to execute cost-control measures successfully, our total operating costs may be greater than expected, which may adversely affect our profitability.
We have significantly reduced operating costs by reducing staff and employee benefits and implementing general cost-control measures across the Company, and expect to continue these cost-control efforts. If we do not achieve expected savings or our operating costs increase as a result of our strategic initiatives, our total operating costs may be greater than anticipated. In addition, if our cost-reduction strategy is not managed properly, such efforts may affect the quality of our products and our ability to generate future revenue. Reductions in staff and employee compensation and benefits could also adversely affect our ability to attract and retain key employees.
In addition, we operate with significant operating leverage. Significant portions of our expenses are fixed costs that neither increase nor decrease proportionately with revenues. If we are not able to implement further cost control efforts or reduce our fixed costs sufficiently in response to a decline in our revenues, we may experience a higher percentage decline in our income from continuing operations.
Sustained increases in costs of providing pension and employee health and welfare benefits and the underfunded status of our pension plans may adversely affect our operations, financial condition and liquidity.
Employee wages and benefits, including pension expense, account for approximately 43% of our total operating costs. As a result, our profitability is significantly affected by costs of pension benefits and other employee benefits. Factors beyond our control, including the interest rate environment and returns on plan assets, affect our pension expense and may increase our funding obligations. Our qualified pension plans were underfunded as of the January 1, 2010 valuation date and we expect to make substantial contributions in the future to fund this deficiency. If interest rates remain low, investment returns are below expectations, or there is no further legislative relief, those contributions may be higher than currently anticipated. As a result, we may have less cash available for working capital and other corporate uses, which may have an adverse impact on our operations, financial condition and liquidity.
Risk Factors THE NEW YORK TIMES COMPANY P.11
A significant number of our employees are unionized, and our business and results of operations could be adversely affected if labor negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations.
More than 40% of our full-time equivalent work force are unionized. As a result, we are required to negotiate the wages, salaries, benefits, staffing levels and other terms with many of our employees collectively. Our results could be adversely affected if future labor negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations. If we were to experience labor unrest, strikes or other business interruptions in connection with labor negotiations or otherwise or if we are unable to negotiate labor contracts on reasonable terms, our ability to produce and deliver our most significant products could be impaired. In addition, our ability to make short-term adjustments to control compensation and benefits costs, rebalance our portfolio of businesses or otherwise adapt to changing business needs may be limited by the terms of our collective bargaining agreements.
Due to our participation in multiemployer pension plans, we have exposures under those plans that may extend beyond what our obligations would be with respect to our employees.
We participate in, and make periodic contributions to, various multiemployer pension plans that cover many of our union employees. Our required contributions to these funds could increase because of a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these funds, inability or failure of withdrawing companies to pay their withdrawal liability, lower than expected returns on pension fund assets or other funding deficiencies.
We incurred significant pension withdrawal liabilities in 2009 in connection with amendments to various collective bargaining agreements affecting certain multiemployer pension plans and the closure of City & Suburban, which resulted in the partial or complete cessation of contributions to certain multiemployer plans. We may be required to make additional contributions under applicable law with respect to those plans or other multiemployer pension plans from which we may withdraw or partially withdraw. Our withdrawal liability for any multiemployer pension plan will depend on the extent of that plans funding of vested benefits. If a multiemployer pension plan in which we participate is reported to have significant underfunded liabilities, such underfunding could increase the size of our potential withdrawal liability.
A significant increase in the price of newsprint, or limited availability of newsprint supply, would have an adverse effect on our operating results.
The cost of raw materials, of which newsprint is the major component, represented approximately 7% of our total operating costs in 2009. The price of newsprint has historically been volatile and may increase as a result of various factors, including:
In addition, we rely on our suppliers for deliveries of newsprint. The availability of our newsprint supply may be affected by various factors, including strikes and other disruptions that may affect deliveries of newsprint.
If newsprint prices increase significantly or we experience significant disruptions in the availability of our newsprint supply in the future, our operating results will be adversely affected.
We may buy or sell different properties as a result of our evaluation of our portfolio of businesses. Such acquisitions or divestitures would affect our costs, revenues, profitability and financial position.
From time to time, we evaluate the various components of our portfolio of businesses and may, as a result, buy or sell different properties. These acquisitions or divestitures affect our costs, revenues, profitability and financial position. We may also consider the acquisition of specific properties or businesses that fall outside our traditional lines of business if we deem such properties sufficiently attractive.
Each year, we evaluate the various components of our portfolio in connection with annual impairment testing, and we may be required to record a non-cash charge if the financial statement carrying value of an asset is in excess of its estimated
P.12 2009 ANNUAL REPORT Risk Factors
fair value. Fair value could be adversely affected by changing market conditions within our industry. An impairment charge would adversely affect our reported earnings.
Acquisitions involve risks, including difficulties in integrating acquired operations, diversions of management resources, debt incurred in financing these acquisitions (including the related possible reduction in our credit ratings and increase in our cost of borrowing), differing levels of management and internal control effectiveness at the acquired entities and other unanticipated problems and liabilities. Competition for certain types of acquisitions, particularly Internet properties, is significant. Even if successfully negotiated, closed and integrated, certain acquisitions or investments may prove not to advance our business strategy and may fall short of expected return on investment targets.
Divestitures also have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems, and potential post-closing claims for indemnification. In addition, current economic conditions may result in fewer potential bidders and unsuccessful sales efforts. Expected cost savings, which are offset by revenue losses from divested businesses, may also be difficult to achieve or maximize due to our fixed cost structure.
From time to time, we make noncontrolling minority investments in private entities. We may have limited voting rights and an inability to influence the direction of such entities, although income from such investments may represent a significant portion of our income. Therefore, the success of these ventures may be dependent upon the efforts of our partners, fellow investors and licensees. These investments are generally illiquid, and the absence of a market inhibits our ability to dispose of them. This inhibition as well as an inability to control the timing or process relating to a disposition could adversely affect our liquidity and the value we may ultimately attain on a disposition. If the value of the companies in which we invest declines, we may be required to take a charge to earnings.
We may not be able to protect intellectual property rights upon which our business relies, and if we lose intellectual property protection, our assets may lose value.
Our business depends on our intellectual property, including our valuable brands, content, services and internally developed technology. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.
Unauthorized parties may attempt to copy or otherwise obtain and use our content, services, technology and other intellectual property, and we cannot be certain that the steps we have taken to protect our proprietary rights will prevent any misappropriation or confusion among consumers and merchants, or unauthorized use of these rights.
Advancements in technology have exacerbated the risk by making it easier to duplicate and disseminate content. In addition, as our business and the risk of misappropriation of our intellectual property rights have become more global in scope, we may not be able to protect our proprietary rights in a cost effective manner in a multitude of jurisdictions with varying laws.
If we are unable to procure, protect and enforce our intellectual property rights, we may not realize the full value of these assets, and our business may suffer. If we must litigate in the United States or elsewhere to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others, such litigation may be costly and divert the attention of our management.
Our Class B Common Stock is principally held by descendants of Adolph S. Ochs, through a family trust, and this control could create conflicts of interest or inhibit potential changes of control.
We have two classes of stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock are entitled to elect 30% of the Board of Directors and to vote, with holders of Class B Common Stock, on the reservation of shares for equity grants, certain material acquisitions and the ratification of the selection of our auditors. Holders of Class B Common Stock are entitled to elect the remainder of the Board and to vote on all other matters. Our Class B Common Stock is principally held by descendants of Adolph S. Ochs, who purchased The Times in 1896. A family trust holds approximately 90% of the Class B Common Stock. As a result, the trust has the ability to elect 70% of the Board of Directors and to direct the outcome of any
Risk Factors THE NEW YORK TIMES COMPANY P.13
matter that does not require a vote of the Class A Common Stock. Under the terms of the trust agreement, the trustees are directed to retain the Class B Common Stock held in trust and to vote such stock against any merger, sale of assets or other transaction pursuant to which control of The Times passes from the trustees, unless they determine that the primary objective of the trust can be achieved better by the implementation of such transaction. Because this concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses, the market price of our Class A Common Stock could be adversely affected.
Legislative and regulatory developments may result in increased costs and lower advertising revenue from our digital businesses.
All of our operations are subject to government regulation in the jurisdictions in which they operate. Due to the wide geographic scope of its operations, the IHT is subject to regulation by political entities throughout the world. In addition, our Web sites are available worldwide and are subject to laws regulating the Internet both within and outside the United States. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Advertising revenue from our digital businesses could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to the use of consumer data in digital media.
P.14 2009 ANNUAL REPORT Risk Factors
Our principal executive offices are located in our New York headquarters building in the Times Square area. The building was completed in 2007 and consists of approximately 1.54 million gross square feet, of which approximately 828,000 gross square feet of space have been allocated to us. We owned a leasehold condominium interest representing approximately 58% of the New York headquarters building until March 6, 2009, when one of our affiliates entered into an agreement to sell and simultaneously lease back a portion of our leasehold condominium interest (Condo Interest). The sale-leaseback transaction encompassed 21 floors, or approximately 750,000 rentable square feet, currently occupied by us. The sale price for the Condo Interest was $225 million. We have an option, exercisable during the 10th year of the lease term, to repurchase the Condo Interest for $250 million. The lease term is 15 years, and we have three renewal options that could extend the term for an additional 20 years. We continue to own six floors in our New York headquarters building, totaling approximately 185,000 rentable square feet, that are leased to a third party and that were not included in the sale-leaseback transaction.
In addition, we built a printing and distribution facility with 570,000 gross square feet located in College Point, N.Y., on a 31-acre site for which we have a ground lease. We have an option to purchase the property at any time before the lease ends in 2019. We own two printing plants in Boston and Billerica, Mass., of 703,000 and 290,000 gross square feet, respectively. In the second quarter of 2009, we completed the consolidation of the Globes printing operations into the Boston plant. We also own properties with an aggregate of approximately 1,255,000 gross square feet and lease properties with an aggregate of approximately 757,000 rentable square feet in various locations. These properties, our New York headquarters and the College Point, Boston and Billerica properties are used by our News Media Group. Properties leased by the About Group total approximately 46,000 rentable square feet.
There are various legal actions that have arisen in the ordinary course of business and are now pending against us. Such actions are usually for amounts greatly in excess of the payments, if any, that may be required to be made. It is the opinion of management after reviewing such actions with our legal counsel that the ultimate liability that might result from such actions will not have a material adverse effect on our consolidated financial statements.
THE NEW YORK TIMES COMPANY P.15
P.16 2009 ANNUAL REPORT Executive Officers
The Class A Common Stock is listed on the New York Stock Exchange. The Class B Common Stock is unlisted and is not actively traded.
The number of security holders of record as of February 17, 2010, was as follows: Class A Common Stock: 7,229; Class B Common Stock: 28.
Both classes of our common stock participate equally in our quarterly dividends. In 2008, dividends were paid in the amount of $.23 per share in March, June and September and in the amount of $.06 per share in December. On February 19, 2009, we announced that our Board of Directors voted to suspend the quarterly dividend on our Class A and Class B Common Stock. This decision was intended to provide us with additional financial flexibility given the economic environment and uncertain business outlook. The decision to pay a dividend in future periods and the appropriate level of dividends will be considered by our Board of Directors on an ongoing basis in light of our earnings, capital requirements, financial condition, restrictions in any existing indebtedness and other factors considered relevant.
The following table sets forth, for the periods indicated, the closing high and low sales prices for the Class A Common Stock as reported on the New York Stock Exchange.
Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities THE NEW YORK TIMES COMPANY P.17
The following graph shows the annual cumulative total stockholder return for the five years ending December 31, 2009, on an assumed investment of $100 on December 31, 2004, in the Company, the Standard & Poors S&P 500 Stock Index and an index of peer group communications companies. The peer group returns are weighted by market capitalization at the beginning of each year. The peer group is comprised of the Company and the following other communications companies: Gannett Co., Inc., Media General, Inc., The McClatchy Company and The Washington Post Company. Stockholder return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming monthly reinvestment of dividends, and (ii) the difference between the issuers share price at the end and the beginning of the measurement period by (b) the share price at the beginning of the measurement period. As a result, stockholder return includes both dividends and stock appreciation.
P.18 2009 ANNUAL REPORT Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES(1)
Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities THE NEW YORK TIMES COMPANY P.19
The Selected Financial Data should be read in conjunction with Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the related Notes in Item 8. The results of operations for WQXR-FM and WQEW-AM, previously included in The New York Times Media Group, which is part of the News Media Group, have been presented as discontinued operations for all periods presented. The Broadcast Media Groups results of operations have been presented as discontinued operations, and certain assets and liabilities are classified as held for sale for all periods presented before the Groups sale in 2007. The page following the table shows certain items included in Selected Financial Data. All per share amounts on that page are on a diluted basis. All fiscal years presented in the table below comprise 52 weeks, except 2006, which comprises 53 weeks.
P.20 2009 ANNUAL REPORT Selected Financial Data
Selected Financial Data THE NEW YORK TIMES COMPANY P.21
The items below are included in the Selected Financial Data.
The items below had an unfavorable effect on our results of $56.3 million, or $.38 per share:
The items below had an unfavorable effect on our results of $180.1 million, or $1.24 per share:
The items below increased net income by $18.8 million, or $.13 per share:
The items below had an unfavorable effect on our results of $763.0 million, or $5.28 per share:
P.22 2009 ANNUAL REPORT Selected Financial Data
The items below increased net income by $27.5 million, or $.19 per share:
Selected Financial Data THE NEW YORK TIMES COMPANY P.23
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition as of December 27, 2009, and results of operations for the three years ended December 27, 2009. This item should be read in conjunction with our Consolidated Financial Statements and the related Notes included in this Annual Report.
We are a diversified media company that currently includes newspapers, Internet businesses, investments in paper mills and other investments. Our segments and divisions are:
Our revenues were $2.4 billion in 2009. The percentage of revenues contributed by division is below.
News Media Group
The News Media Group generates revenues principally from print and online advertising and through circulation. Other revenues primarily consist of revenues from news services/syndication, commercial printing, digital archives, rental income and direct mail advertising services. The News Media Groups main operating costs are employee-related costs and raw materials, primarily newsprint.
P.24 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
News Media Group revenues in 2009 by category and percentage share are below.
The About Group generates revenues principally from cost-per-click advertising (sponsored links for which the About Group is paid when a user clicks on the ad), display advertising and e-commerce (including sales lead generation). Almost all of its revenues (95% in 2009) are derived from the sale of cost-per-click and display advertising. Cost-per-click advertising accounted for 59% of the About Groups total advertising revenues in 2009. The About Groups main operating costs are employee-related costs and content and hosting costs.
Our investments accounted for under the equity method are as follows:
We believe that a number of factors and industry trends have had, and will continue to have, an adverse effect on our business and prospects. These include the following:
The challenging business environment in 2009 adversely affected our advertising revenues.
Advertising spending, which drives a significant portion of our revenues, is susceptible to economic conditions. In 2009, the rate of decline in advertising revenues moderated in the fourth quarter, as encouraging signs of improvement were seen in the overall economy. Weak national and local economic conditions, particularly in the New York City and Boston metropolitan regions, as well as in Florida, affected the levels of our national, classified and retail advertising revenue. Changes in spending patterns and priorities, including shifts in marketing strategies and budget cuts of key advertisers, in response to weak economic conditions, have depressed and may continue to depress our advertising revenue.
Secular shift to digital media choices
The competition for advertising revenue in various markets has intensified as a result of the continued development of digital media technologies. We expect that technological developments will continue to favor digital media choices, adding to the challenges posed by audience fragmentation.
We have expanded and will continue to expand our digital offerings; however, most of our revenues are currently from traditional print products where advertising revenues are declining. We believe that the shift from traditional media forms to a growing number of digital media choices has contributed to, and may continue to contribute to, a decline in print advertising. In digital advertising, the marketplace has experienced significant downward pressure on advertising rates as a result of significant increases in inventory. As the advertising climate remains challenged, media companies have been re-evaluating their business models, with some moving towards various forms of online paid models that will depend on greater market acceptance and a shift in consumer attitudes.
Circulation is another significant source of revenue for us. Circulation revenues are affected by circulation and readership levels. In recent years, our newspaper properties, and the newspaper industry as a whole, have experienced declining print circulation volume. This is due to, among other factors,
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.25
increased competition from new media formats and sources other than traditional newspapers (often free to users), declining discretionary spending by consumers, higher subscription and newsstand rates and a growing preference among some consumers for receiving all or a portion of their news from a variety of sources.
A significant portion of our costs are fixed costs and therefore we are limited in our ability to reduce costs in the short term. Our most significant costs are employee-related costs and raw materials, which together accounted for approximately 50% of our total operating costs in 2009. Changes in employee-related costs and the price and availability of newsprint can materially affect our operating results.
For a discussion of these and other factors that could affect our results of operations and financial condition, see Forward-Looking Statements and Item 1A Risk Factors.
We anticipate that the challenges we currently face will continue, and we believe that the following elements are key to our efforts to address them.
We are addressing the increasingly fragmented media landscape by building on the strength of our brands, particularly The Times. Because of our high-quality content, we believe we have very powerful and trusted brands that attract educated, affluent and influential audiences.
In 2009, we significantly expanded the presence of The Times on new digital platforms and added new tools and multimedia features across our properties. We are also attempting to grow the national circulation of The Times by adding local and regional news in certain markets.
Online, our goal is to grow our digital businesses by broadening our audiences, deepening engagement and monetizing the usage of our Web sites. We are pursuing a multiplatform strategy across the Company with new digital products and new platforms, such as mobile, social media networks and reader application products.
Our Internet businesses provide diversified advertising revenue. NYTimes.com benefits from the large national advertiser base that The Times brand attracts and About.com generates most of its revenues from cost-per-click and display advertising. Our goal for NYTimes.com is to continue to build a fully interactive news and information platform and to sustain our leadership positions in our most profitable content areas and verticals. We have made and expect to continue to make investments to grow those areas of our Web sites that have the highest advertiser demand. We are also focused on continuing to offer a premier environment for integrated brand advertising across platforms through online advertising product innovation and our integrated print and online sales structure. As we continue our transition from a company that operated primarily in print to one that is increasingly digital in focus and multiplatform in delivery, we expect that online advertising revenues will be a more important part of our mix. In 2009, Internet revenue accounted for 13.8% of our revenues, versus 12.0% in 2008.
Our research and development group also helps us monitor the changing media and technology landscape so that we can anticipate consumer preferences and devise innovative ways of satisfying them.
As the advertising marketplace changes, we plan to continue to diversify our revenue streams driven by our desire to achieve additional revenue diversity that will make us less susceptible to the inevitable economic cycles.
Print circulation revenue is becoming a more significant part of overall revenues, representing approximately 38% of total revenues in 2009 compared to approximately 31% in 2008, and we continue to evaluate our circulation pricing models. We have seen continued growth in revenue from print circulation, mainly as a result of our strategy of reducing less profitable circulation and increasing prices for subscriptions and newsstand copies of The Times and the Globe.
In January 2010, we announced that we will introduce a paid model for NYTimes.com at the beginning of 2011 to create a second revenue stream while preserving NYTimes.coms robust advertising business. We plan to implement a metered model that will offer users free access to a set number of articles per month and then charge users who are not subscribers once they exceed that number. Through 2010, we will be building a new online infrastructure designed to provide consumers with a frictionless experience across multiple platforms. As our news and information are being featured in an increasingly broad range of end-user devices and services,
P.26 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
we believe that our pricing plans and policies must reflect this vision.
We continue to restructure our cost base to ensure that we are operating our businesses as efficiently as possible. Our focus is to realign our cost base, while maintaining the quality of our journalism and achieving our long-term strategy. We reduced our operating costs by approximately $475 million in 2009 and by approximately $136 million in 2008 and expect that actions taken in 2009 will yield additional benefits in 2010. We have focused our cost restructuring efforts on the following key areas:
Employee-related costs Wages and benefits are the single largest component of our operating costs. In 2009, we reduced the number of full-time equivalent employees by 18%; amended our pension plan for non-union employees to discontinue future benefit accruals and freeze existing accrued benefits effective December 31, 2009; froze our supplemental executive retirement plan that provided enhanced retirement benefits to select members of management; and reduced health benefits for retirees. We expect that these changes will produce significant savings and have a long-term positive impact on our cost structure. As we monitor our overall financial health, we remain focused on evaluating all employee-related costs.
Strategic plan for the Globe We responded to the challenges facing the Globe by implementing a strategic plan that included consolidating the Globes printing facilities, increasing circulation prices and reducing compensation and headcount. The strategic plan involved extensive negotiations with the Globes unions on various cost-cutting measures, resulting in amendments to most of the collective bargaining agreements in effect for the Globe. As a result of these efforts, the Globe has made significant progress.
Streamlining operations to increase efficiencies Across the Company, we have lowered our expense structure by streamlining processes and increasing efficiencies while maintaining the quality of our journalism and focusing our resources where they are most needed. For example, we have outsourced the editing function of The New York Times News Services Division to The Gainesville Sun, which is part of our Regional Media Group.
Closing City & Suburban In January 2009, we closed City & Suburban, which operated a wholesale distribution business that delivered The Times and other newspapers and magazines to newsstands and retail outlets in the New York metropolitan area. The closure improved our operating results in 2009 by approximately $35 million, excluding one-time costs. This is a result of a decrease in costs of approximately $119 million to operate City & Suburban, offset in part by a decrease in revenue of approximately $84 million in other revenues (from the elimination of delivering third-party publications) and in circulation revenue (from the sale of The Times to wholesale distributors rather than retailers).
Over the past several years, we have been managing and rebalancing our portfolio of businesses, focusing more on growth areas, such as digital. We also continue to evaluate our businesses to determine whether they are meeting our targets for financial performance, growth and return on investment and whether they remain relevant to our strategy.
In 2009, we completed the sale of WQXR-FM, a New York City radio station, to subsidiaries of Univision Radio Inc. and WNYC Radio for a total of approximately $45 million. We also sold the TimesDaily, a daily newspaper located in Florence, Ala., and its Web site, TimesDaily.com, for $11.5 million and divested surplus real estate at the Regional Media Group. We are exploring the possible sale of our interest in NESV.
Despite a difficult operating environment, we are pleased with the significant progress that we have made at the New England Media Group. After careful consideration and analysis, we terminated the process of exploring the sale of the Globe, Boston.com and related businesses in October 2009 and the T&G and Telegram.com in December 2009. We concluded that these properties should remain a part of the Company.
The funded status of our qualified pension plans has been adversely affected by the current interest rate environment, and required contributions for our qualified pension plans can have a significant impact on future cash flows.
Our pension assets benefited from strong performance in 2009.
For purposes of accounting principles generally accepted in the United States of America
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.27
(GAAP), the underfunded status of our qualified pension plans improved by approximately $122 million from year-end 2008.
For funding purposes on an Employee Retirement Income Security Act (ERISA) basis, we previously disclosed a January 1, 2009 underfunded status for our qualified pension plans of approximately $300 million. This funding gap reflected the use of a temporary valuation relief allowed by the U.S. Treasury Department, applicable only to our January 1, 2009 valuation. As of January 1, 2009, without the valuation relief, our underfunded status would have been approximately $535 million.
Based on preliminary results, we estimate a January 1, 2010 underfunded status of $420 million.
We do not have mandatory contributions to our sponsored qualified plans in 2010 due to existing funding credits. However, we may choose to make discretionary contributions in 2010 to address a portion of this funding gap. We currently expect to make contributions in the range of $60 to $80 million to our sponsored qualified plans, but may adjust this range based on cash flows, pension asset performance, interest rates and other factors. We also expect to make contributions of approximately $22 to $28 million to The New York Times Newspaper Guild pension plan based on our contractual obligations.
In addition, certain of our cost restructuring efforts created pension withdrawal liabilities, as discussed under Other Items Pension Withdrawal Expense below. While the pension withdrawal liabilities we incurred are significant, we believe the cost restructuring measures were an important step to address pension obligations that we projected would otherwise have continued to grow over time.
Restructuring debt and improving our liquidity
Debt restructuring has been a key area of strategic focus. We have made significant progress in lowering our total debt level through cash flow from operations, divestiture activities, suspension of dividend payments and other actions. Our total debt level at year-end 2009 decreased to $769 million from $1.1 billion at the end of 2008.
In early 2009, we entered into a private financing transaction for $250 million in senior unsecured notes and warrants. We also raised $225 million by entering into a sale-leaseback transaction related to our leasehold condominium interest in our New York headquarters. These transactions improved our financial flexibility and lengthened our debt profile. As a result, the majority of our total debt now matures in 2015 or later.
We also improved our liquidity by taking other steps, including decreasing capital expenditures to $45 million in 2009, down from $127 million in 2008.
We remain focused on reducing our total debt. We plan to do so through the cash we generate from our businesses and the decisive steps we have taken to reduce costs, lower capital spending, suspend our dividend and rebalance our portfolio of assets.
For 2010, we project capital expenditures to be between $40 and $50 million. We expect depreciation and amortization to be $125 to $130 million and interest to be $85 to $90 million.
P.28 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following table presents our consolidated financial results.
Managements Discussion And Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.29
Revenues by reportable segment and for the Company as a whole were as follows:
Advertising, circulation and other revenues by division of the News Media Group and for the Group as a whole were as follows:
Advertising revenue is primarily determined by the volume, rate and mix of advertisements. The effect of the global economic downturn, coupled with the secular changes affecting newspapers, resulted in significant revenue declines in 2009. Advertisers pulled back on print placements in all categories national, classified and retail. In 2009, News Media Group advertising revenues decreased primarily due to lower print and online volume. Print advertising revenues, which represented approximately 85% of total advertising revenues for the News Media Group, declined 28.8% in 2009. Online advertising revenues declined 10.9% in 2009, mainly due to classified advertising declines. However, in the fourth quarter of 2009, the decline in print advertising revenue moderated to 20.0% and online advertising revenue grew over 4% compared with the fourth quarter of 2008.
P.30 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
In 2008, News Media Group advertising revenues decreased primarily due to lower print volume, partially offset by higher online advertising revenues. Print advertising revenues declined 16.7% while online advertising revenues increased 8.7%. A secular shift of print advertising to online alternatives continued to negatively affect classified, national and retail advertising at the News Media Group, and deteriorating economic conditions produced deeper print advertising revenue declines and, in the fourth quarter of 2008, declines in online advertising revenues as well, as advertisers significantly reduced their spending. After growing almost 14% in the first nine months of 2008, online advertising decreased 3.2% in the fourth quarter of 2008 as advertisers cut back on display advertising in response to worsening business conditions.
Advertising revenues (print and online) by category for the News Media Group were as follows:
Below is a percentage breakdown of 2009 advertising revenue by division:
The New York Times Media Group
Total advertising revenues declined in 2009 compared with 2008 primarily due to lower print advertising, particularly in the national category. Online advertising also declined, principally in the classified and national categories.
National advertising revenues decreased in 2009 compared with 2008 primarily due to lower print advertising. National print advertising has been negatively affected by weak economic conditions, with significant categories, such as studio entertainment, financial services and international fashion, experiencing declines. National online advertising also experienced volume declines in 2009 compared with 2008. In the fourth quarter of 2009, the national print advertising revenue declines lessened as the quarter progressed, and national online advertising increased, as advertising demand improved with the stabilizing economy.
Retail advertising revenues in 2009 declined compared with 2008 mainly because of lower volume in various print categories. Continued economic weakness contributed to shifts in marketing strategies and budget cuts of major advertisers, which negatively affected retail advertising.
Classified advertising revenues declined in 2009 compared with 2008 mainly due to declines in all print categories (mainly real estate, help-wanted and automotive) and online categories. Weak economic conditions contributed to the declines in print and online classified advertising, with declines in print classified advertising exacerbated by secular shifts to online alternatives, particularly in the help-wanted and real estate categories.
Total advertising revenues declined in 2008 compared with 2007 primarily due to lower print advertising, particularly in the national category, offset in part by higher online revenues.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.31
National advertising revenues decreased in 2008 compared with 2007 primarily due to lower print advertising, offset in part by higher online revenue. National print advertising was negatively affected by the slowdown in the economy, with significant categories, such as entertainment and telecommunications, experiencing substantial declines. Online national advertising grew in 2008 primarily as a result of secular shifts to online alternatives, but started to decline in the fourth quarter of 2008 as advertisers cut back on spending in response to worsening business conditions.
Classified advertising revenue declined in 2008 compared with 2007 mainly due to declines in all print categories (mainly real estate, help-wanted and automotive). The weakening economic conditions contributed to the declines in classified advertising in print and online, with declines in print classified advertising exacerbated by secular shifts to online alternatives, particularly in the real estate category.
Retail advertising revenue in 2008 declined compared with 2007 mainly because of lower volume in various categories. Deteriorating economic conditions contributed to shifts in marketing strategies and budget cuts of major advertisers, which negatively affected retail advertising.
New England Media Group
Total advertising revenues declined in 2009 compared with 2008 primarily due to continued declines in print advertising revenue. Online advertising also declined.
Retail, national and particularly classified advertising revenues declined in 2009 compared with 2008, mainly due to declines in various print and online advertising categories. Soft economic conditions and challenging market conditions in the Boston and greater New England area led to declines in all print categories of classified advertising revenues (help-wanted, real estate and automotive) and nearly all online classified categories (mainly help-wanted and real estate). The help-wanted category experienced the most significant declines due to the continued softness in the job market. Print declines were also exacerbated by secular shifts to online advertising.
Total advertising revenues declined in 2008 compared with 2007 primarily due to the continued decline in print advertising affecting the newspaper industry.
Retail advertising in 2008 declined compared with 2007 mainly due to lower volume in print advertising. The difficult economy and challenging market conditions in Boston and the greater New England area were major factors contributing to these declines.
Classified advertising declined in 2008 in all print categories (mainly help-wanted, real estate and automotive) compared with the prior year due to lower print revenues. The majority of the decline was in the help-wanted category due to softness in the job market and the continued slowdown in the local and national housing markets. In addition, weak economic conditions contributed to the declines in classified advertising in print and online, with declines in print classified advertising exacerbated by secular shifts to online advertising.
National advertising declined in 2008 compared with 2007 mainly due to lower volume in print advertising, partially offset by growth in online advertising.
Regional Media Group
Total advertising revenues declined in 2009 compared with 2008 primarily due to declines in all print categories, particularly in the retail and classified areas (real estate, help-wanted and automotive). Soft economic conditions contributed to declines in the Florida and the California housing markets. About two-thirds of the Regional Media Group advertising revenues came from newspapers in Florida and California. Also, in 2009, online classified and retail advertising decreased due to continued economic weakness.
Total advertising revenues declined in 2008 compared with 2007 primarily due to declines in all print categories, particularly in the classified areas, which were mainly driven by the downturn in the Florida and California housing markets and softening economic conditions. In addition, in 2008 online classified advertising decreased due to deteriorating market conditions.
Circulation revenue is based on the number of copies sold and the subscription and newsstand rates charged to customers. Our newspapers have been executing a circulation strategy of reducing less profitable circulation and raising circulation prices. As we execute this strategy, we are seeing circulation declines but have realized, and believe we will continue to realize, significant benefits in reduced costs and improved circulation profitability.
Circulation revenues in 2009 increased compared with 2008 mainly because of higher subscription
P.32 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
and newsstand prices, offset in part by volume declines across the News Media Group and the impact of the closure of City & Suburban in early January 2009. In the second quarter of 2009, both The Times and the Globe increased subscription and newsstand prices.
Circulation revenues in 2008 increased compared with 2007 because of higher subscription and newsstand prices, offset by volume declines across the News Media Group. The Times increased subscription and weekday newsstand prices in the third quarters of 2007 and 2008. The Globe increased newsstand and subscription prices in the first and third quarters of 2008, and several regional newspapers increased subscription prices in 2008.
Other revenues for the News Media Group decreased in 2009 compared with 2008 primarily due to lower revenues from our wholesale delivery operations as a result of the closure of City & Suburban in early January 2009 in addition to lower commercial printing revenues.
Other revenues for the News Media Group decreased in 2008 compared with 2007 primarily due to the elimination of subscription revenues for TimesSelect, a fee-based product offering subscribers exclusive online access to columnists of The Times and the IHT and The Timess archives, which was discontinued in September 2007, offset in part by rental income from the lease of six floors in our New York headquarters.
In 2009, revenues for the About Group increased primarily due to higher advertising rates in cost-per-click advertising and higher levels of display advertising, which showed an improving trend.
In 2008, revenues for the About Group increased primarily due to higher advertising rates in cost-per-click advertising, offset in part by lower display advertising mainly as a result of a decrease in spending by advertisers. Revenues declined in the fourth quarter of 2008 compared with 2007 as online advertisers cut back on spending in response to worsening business conditions.
Below are charts of our consolidated operating costs.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.33
Operating costs were as follows:
Total production costs in 2009 decreased compared with 2008 primarily as a result of savings from cost restructuring strategies and declining raw materials expense. Our staff reduction efforts and other cost-saving initiatives lowered compensation-related costs and benefits expense by approximately $95 million.
In 2009, raw materials expense declined approximately $84 million, primarily in newsprint, mainly as a result of lower newsprint consumption. Newsprint expense declined 30.3%, with 19.4% from lower consumption and 10.9% from lower pricing. Newsprint prices reached a peak in November 2008, and prices have declined significantly since then due to a rapid decline in consumption, causing an oversupply of newsprint in the market. We believe that prices hit the bottom of the cycle during the third quarter of 2009. Suppliers have recently announced price increases, the majority of which were implemented in the fourth quarter of 2009. We expect newsprint prices to remain under pressure and that further price increases will be dependent on a substantial reduction in capacity to bring newsprint supply and demand more in balance.
The closure of City & Suburban in January 2009 contributed approximately $49 million in production cost savings in 2009.
Total production costs in 2008 decreased compared with 2007 primarily due to lower compensation-related costs (approximately $15 million), mainly resulting from a reduced workforce, lower benefits expense (approximately $10 million) and lower raw materials expense (approximately $9 million), primarily driven by a decline in newsprint consumption. These decreases were partially offset by higher professional fees (approximately $3 million).
In 2008, newsprint expense declined 6.1% compared with 2007, stemming from an 18.9% decrease in consumption, offset in part by a 12.8% increase in newsprint prices. Newsprint prices, which had generally declined in late 2006 and most of 2007, began to increase in the fourth quarter of 2007 and continued to increase in 2008, although several suppliers delayed or rescinded proposed price increases during the fourth quarter of 2008 due to market conditions.
Total selling, general and administrative costs in 2009 decreased compared with 2008, also primarily as a result of savings from cost restructuring strategies. In 2009, our cost reduction efforts resulted in approximately $68 million of savings from the closure of City & Suburban and $49 million in lower promotion costs and professional fees. In addition, we had lower severance costs of approximately $26 million.
Total selling, general and administrative costs in 2008 decreased compared with 2007 mainly because of lower compensation-related costs (approximately $53 million), due to lower incentive compensation and a reduced workforce, benefits expense (approximately $20 million), promotion costs (approximately $19 million) and professional fees (approximately $8 million). Lower pension and other postretirement expense reduced benefits expense. Lower promotion costs resulted from our circulation strategy of reducing less profitable circulation. These decreases were partially offset by higher severance costs (approximately $45 million), which included approximately $29 million for severance costs in connection with the closure of City & Suburban.
P.34 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
Consolidated depreciation and amortization by reportable segment, Corporate and the Company as a whole, were as follows:
Beginning in 2009, we began to allocate Corporates depreciation and amortization expense to our operating segments. Therefore, Corporate no longer recognizes depreciation and amortization expense.
Depreciation and amortization decreased at the News Media Group in 2008 compared with 2007 primarily because beginning in the second quarter of 2008 there was no accelerated depreciation for assets at the Edison, N.J., printing facility, which we closed in March 2008. In 2008, accelerated depreciation for assets at the Edison, N.J., printing facility totaled $5.0 million compared with $42.6 million in 2007. The About Groups depreciation and amortization decreased in 2008 compared with 2007 mainly because an asset reached the end of its amortization period in the second quarter of 2008.
The following table sets forth consolidated costs by reportable segment, Corporate and the Company as a whole.
In 2009, operating costs for the News Media Group decreased compared with 2008 primarily due to reductions in nearly all major expense categories as a result of cost restructuring efforts and declining raw materials expense. The closure of City & Suburban in January 2009 contributed approximately $119 million in cost savings in 2009. Our cost-saving initiatives lowered compensation-related costs and benefits expense by approximately $106 million and promotion costs and professional fees by approximately $44 million. Raw materials expense declined approximately $84 million, particularly in newsprint, mainly as a result of lower newsprint consumption. In addition, we had lower severance costs of approximately $27 million.
In 2008, operating costs for the News Media Group decreased compared with 2007 primarily due to lower compensation-related costs (approximately $68 million), depreciation and amortization (approximately $44 million), benefits expense (approximately $25 million), promotion costs (approximately $21 million) and raw materials expense (approximately $9 million). These decreases were partially offset by higher severance costs (approximately $45 million).
Operating costs for the About Group decreased in 2009 compared with 2008 primarily due to reductions in nearly all major expense categories as a result of cost-saving initiatives. These efforts lowered
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.35
marketing costs ($2.1 million) and professional fees ($1.6 million). Depreciation and amortization expense also declined in 2009 ($1.1 million).
Operating costs for the About Group increased in 2008 compared with 2007 primarily due to higher marketing costs ($3.5 million), content costs ($1.7 million), professional fees ($1.1 million), and compensation-related costs ($0.9 million). The increase in marketing and professional fees was primarily due to investments in new revenue initiatives and the redesign of ConsumerSearch.com in 2008. In addition, operating costs reflect costs from ConsumerSearch, Inc. for the full year of 2008 and only from the date of acquisition in May 2007.
Operating costs for Corporate increased in 2009 compared with 2008 primarily due to higher performance-related compensation costs and benefits expense ($19.2 million) offset in part by lower depreciation expense ($7.8 million).
Operating costs for Corporate decreased in 2008 compared with 2007 primarily due to lower benefits expense ($6.0 million).
The total pension withdrawal obligation expense recorded in 2009 was $78.9 million.
In 2009, employees of the Globe represented by various unions ratified amendments to their collective bargaining agreements that allowed us to withdraw or partially withdraw from various multiemployer pension plans. The withdrawals resulted in withdrawal liabilities to the respective plans for our proportionate share of any unfunded vested benefits. We recorded a $73.6 million charge for the present value of estimated future payments under the pension withdrawal liabilities. Our total estimated future payments relating to withdrawal liabilities to these multiemployer plans are approximately $187 million. These amounts will be adjusted as more information becomes available that will allow us to refine the estimate. The actual liability will not be known until each plan completes a final assessment of the withdrawal liability and issues a demand to us. While the exact period over which the payment of these liabilities would be made has not yet been determined, a withdrawal liability is generally paid in installments over a period of time that could extend up to 20 years (or beyond in the case of a mass withdrawal). Our estimate assumes a payment period of approximately 20 years.
Also in 2009, we recorded a $5.3 million charge for the present value of future payments under a pension withdrawal liability in connection with the closing of City & Suburban. Our total future payments are approximately $7 million.
The total net pension curtailment gain recorded in 2009 was $54.0 million.
We amended a Company-sponsored qualified defined benefit pension plan for non-union employees to discontinue future benefit accruals under the plan and freeze existing accrued benefits effective December 31, 2009. Benefits earned by participants under the pension plan prior to January 1, 2010 were not affected. We also froze a non-qualified defined benefit pension plan that provides enhanced retirement benefits to select members of management. The accrued benefits under this supplemental benefit plan will be determined and frozen based on eligible earnings through December 31, 2009. The reduction of benefits under the qualified and non-qualified plans mentioned above and various other non-qualified plans resulted in a curtailment gain of $56.7 million.
In 2009, we also froze a Company-sponsored qualified pension plan in connection with ratified amendments to a collective bargaining agreement covering the Newspaper Guild of the Globe. As a result, the amendments resulted in a curtailment loss of $2.5 million. As a result, we recognized a curtailment loss of $2.5 million.
In 2009, we also eliminated certain non-qualified retirement benefits of various employees of the Globe in connection with the amendment of two union agreements. The amendments resulted in a curtailment loss of $0.2 million.
The total loss on leases and other recorded in 2009 was $34.6 million.
In 2009, we recorded a loss of $22.8 million for the present value of remaining rental payments under leases, for property previously occupied by City & Suburban, in excess of rental income under potential subleases. We recorded an estimated loss of $16.3 million in the first quarter of 2009 and that loss was updated in the fourth quarter of 2009, which resulted in an additional charge of $6.5 million. Also in 2009, we recorded a loss of $8.3 million for the present value of remaining rental payments under a lease for office space at The New York Times Media Group, in excess of rental income under potential subleases. The loss on abandoned leases may be
P.36 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
further adjusted as we finalize any subleases or other transactions to utilize or exit the vacant properties.
In the fourth quarter of 2009, we recorded a $3.5 million charge for the early termination of a third-party printing contract.
In 2009, we sold certain surplus real estate assets at the Regional Media Group and recorded a pre-tax gain of $5.2 million on the sales.
In 2007, we consolidated the printing operations of a facility we leased in Edison, N.J., into our facility in College Point, N.Y. As part of the consolidation, we purchased the Edison, N.J., facility and then sold it, with two adjacent properties we already owned, to a third party. The purchase and sale of the Edison, N.J., facility closed in the second quarter of 2007, relieving us of rental terms that were above market as well as certain restoration obligations under the original lease. As a result of the purchase and sale, we recognized a net pre-tax loss of $68.2 million in 2007.
There were no impairment charges in connection with our 2009 annual impairment test, which was completed in the fourth quarter. However, the Regional Media Groups estimated fair value approximates its carrying value. The Regional Media Group includes approximately $152 million of goodwill.
In determining the fair value of the Regional Media Group, we made significant judgments and estimates regarding the expected severity and duration of the current economic slowdown and the secular changes affecting the newspaper industry. The effect of these assumptions on projected long-term revenues, along with the continued benefits from reductions to the groups cost structure, play a significant role in calculating the fair value of the Regional Media Group.
We estimated a 2% annual growth rate to arrive at a normalized residual year representing the perpetual cash flows of the Regional Media Group. The residual year cash flow was capitalized to arrive at the terminal value of the Regional Media Group. Utilizing a discount rate of 10.2%, the present value of the cash flows during the projection period and terminal value were aggregated to estimate the fair value of the Regional Media Group. We assumed a discount rate of 10.2% in the discounted cash flow analysis for the 2009 annual impairment test compared to a 9.0% discount rate used in the 2008 annual impairment test. In determining the appropriate discount rate, we considered the weighted average cost of capital for comparable companies.
We believe that if the Regional Media Groups projected cash flows are not met during 2010, a goodwill impairment charge could be reasonably likely in 2010.
In the fourth quarter of 2009 we recorded a $4.2 million charge for a write-down of assets due to the reduced scope of a systems project at the News Media Group.
In the first quarter of 2008, we recorded a non-cash impairment charge of $18.3 million for the write-down of assets for a systems project at the News Media Group. We reduced the scope of a major advertising and circulation project to decrease capital spending, which resulted in the write-down of previously capitalized costs.
In the third quarter of 2008, we performed an interim impairment test at the New England Media Group, which is part of the News Media Group reportable segment, due to certain impairment indicators, including the continued decline in print advertising revenue affecting the newspaper industry and lower-than-expected current and projected operating results. The assets tested included goodwill, indefinite-lived intangible assets, other long-lived assets being amortized and an equity method investment in Metro Boston.
We recorded a non-cash impairment charge of $166.0 million. This impairment charge reduced the carrying value of goodwill and other intangible assets of the New England Media Group to zero.
The fair value of the New England Media Groups goodwill was the residual fair value after allocating the total fair value of the New England Media Group to its other assets, net of liabilities. The total fair value of the New England Media Group was estimated using a combination of a discounted cash flow model (present value of future cash flows) and a market approach model based on comparable businesses. The goodwill was not tax deductible because the 1993 acquisition of the Globe was structured as a tax-free stock transaction.
The fair value of the mastheads at the New England Media Group was calculated using a relief-from-royalty method and the fair value of the customer list was calculated by estimating the present value of associated future cash flows.
The property, plant and equipment of the New England Media Group was estimated at fair value less cost to sell. The fair value was determined giving consideration to market and income approaches to value.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.37
The carrying value of our investment in Metro Boston was written down to fair value because the business had experienced lower-than-expected growth and we anticipated lower growth compared with previous projections, leading management to conclude that the investment was other than temporarily impaired. The impairment was recorded within Net income/(loss) from joint ventures.
Our 2008 annual impairment test, which was completed in the fourth quarter, resulted in an additional non-cash impairment charge of $19.2 million relating to the IHT masthead. The impairment charge reduced the carrying value of the IHT masthead to zero. The asset impairment mainly resulted from lower projected operating results and cash flows primarily due to the economic downturn and secular decline of print advertising revenues. The fair value of the masthead was calculated using a relief-from-royalty method.
In 2007, our annual impairment testing resulted in non-cash impairment charges of $18.1 million related to write-downs of intangible assets at the New England Media Group and our Metro Boston investment. The asset impairments mainly resulted from declines in current and projected operating results and cash flows of the New England Media Group due to, among other factors, unfavorable economic conditions, advertiser consolidations in the New England area and increased competition with online media.
The impairment charges included in Impairment of assets and Net income/(loss) from joint ventures in our Consolidated Statements of Operations, are presented below by asset.
Consolidated operating profit/(loss) by reportable segment, Corporate and the Company as a whole, were as follows:
We discuss the reasons for the year-to-year changes in each segments and Corporates operating profit in the Revenues, Operating Costs, and Other Items sections above.
P.38 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
Net Income/(Loss) from Joint Ventures
We have investments in Metro Boston, two paper mills (Malbaie and Madison), quadrantONE and NESV, which are accounted for under the equity method. Our proportionate share of the operating results of these investments is recorded in Net income/(loss) from joint ventures in our Consolidated Statements of Operations. See Note 6 of the Notes to the Consolidated Financial Statements for additional information regarding these investments.
In 2009, we had net income from joint ventures of $20.7 million compared with $17.1 million in 2008. The 2008 net income in joint ventures included a $5.6 million non-cash impairment charge for our equity investment in Metro Boston.
In 2008, we had net income from joint ventures of $17.1 million compared with a net loss of $2.6 million in 2007. In 2008, the paper mills in which we have equity interests benefited from higher paper selling prices. In addition, NESV had higher earnings in 2008 compared with 2007.
Interest Expense, Net
Interest expense, net, was as follows:
Interest expense, net, increased in 2009 compared with 2008 primarily due to higher interest rates on our debt offset in part by lower average debt outstanding.
Interest expense, net, increased in 2008 compared with 2007 primarily due to lower capitalized interest and interest income offset by lower interest expense. We had higher capitalized interest in 2007 mainly as a result of borrowings related to the construction of our New York headquarters, which we began to occupy in the second quarter of 2007. Interest income was higher in 2007 as a result of funds we advanced to our development partner for the construction of our New York headquarters. This loan was fully repaid in October 2007. We had lower interest expense in 2008 mainly as a result of lower average interest rates and the maturity of medium-term notes in 2007.
We had $2.2 million of tax expense on pre-tax income of $3.8 million in 2009. Our effective income tax rate was 58.4% in 2009. The high tax rate was driven by the impact of certain items, including the reduction of deferred tax asset balances resulting from lower income tax rates, on near break-even results in 2009.
We had an income tax benefit of $6.0 million on a pre-tax loss of $71.9 million in 2008. Our effective income tax rate in 2008 was 8.3%. In 2008, the effective tax rate was low because the goodwill portion of the non-cash impairment charge at the New England Media Group and losses on investments in corporate-owned life insurance policies were non-deductible for tax purposes. In addition, a change in Massachusetts state tax law had an unfavorable effect.
We had an income tax expense of $57.2 million on pre-tax income of $144.1 million in 2007. Our effective income tax rate in 2007 was 39.7%. In 2007, the effective income tax rate was affected by asset sales and an unfavorable tax adjustment for a change in New York State tax law.
On October 8, 2009, we completed the sale of WQXR-FM, a New York City radio station, to subsidiaries of Univision Radio Inc. and WNYC Radio for a total of approximately $45 million. Univision Radio paid us $33.5 million to exchange the FCC 105.9 FM broadcast license and transmitting equipment for our license, equipment and stronger signal at 96.3 FM. At the same time, WNYC Radio purchased the FCC license for 105.9 FM, all related transmitting equipment and WQXR-FMs call letters and Web site from us for $11.5 million. We used the proceeds from the sale to pay outstanding debt. We recorded a pre-tax gain of approximately $35 million (approximately $19 million after tax) in 2009.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.39
In April 2007, we sold WQEW-AM to Radio Disney, LLC (which had been providing substantially all of WQEW-AMs programming through a time brokerage agreement) for $40.0 million. We recognized a pre-tax gain of approximately $40 million (approximately $21 million after tax) in 2007. The results of WQEW-AM were included in the results of WQXR-FM until it was sold in April 2007.
The gain on the sale of WQEW-AM was previously recorded within continuing operations. As a result of the sale of WQXR-FM, both radio stations (Radio Operations) were required to be reported as discontinued operations for all periods presented.
On May 7, 2007, we sold our Broadcast Media Group, which consisted of nine network-affiliated television stations, their related Web sites and digital operating center, for approximately $575 million. We recognized a pre-tax gain on the sale of approximately $190 million (approximately $94 million after tax). In 2008, net income from discontinued operations of approximately $8 million was due to a reduction in income taxes on the gain on the sale and post-closing adjustments to the gain. This decision was a result of an analysis of our business portfolio and allowed us to place an even greater emphasis on developing and integrating our print and growing digital businesses.
The results of operations of the Broadcast Media Group and Radio Operations are presented as discontinued operations in our Consolidated Financial Statements. The operating results of the Broadcast Media Group were previously reported in a separate segment and Radio Operations were previously consolidated in the results of The New York Times Media Group, which is part of the News Media Group.
The results of operations of the Radio Operations and the Broadcast Media Group presented as discontinued operations are summarized below.
P.40 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information about our financial position.
Financial Position Summary
We meet our cash obligations with cash inflows from operations as well as third-party financing. Our primary sources of cash inflows from operations are advertising and circulation sales. Advertising provided 55% and circulation provided 38% of total revenues in 2009. The remaining cash inflows from operations are from other revenue sources such as news services/syndication, commercial printing, digital archives, rental income and direct mail advertising services. Our primary source of cash outflows are for employee compensation, pension and other benefits, raw materials, services and supplies, interest and income taxes. In addition, cash is used for investing in high-return capital projects and to pay maturing debt.
Any cash in excess of cash required for cash obligations is available for:
The disruption in the global economy has adversely affected our level of advertising revenues. While we have seen a moderation in the decline of advertising revenues in the fourth quarter of 2009, if the economic conditions do not improve, they will continue to adversely affect our cash inflows from operations. In addition, our advertising revenues have been adversely affected by increased competition arising from the growth of media alternatives, including distribution of news, entertainment and other information over the Internet and through mobile devices. A secular shift from print advertising to online alternatives has contributed and will likely continue to contribute to significant declines in print advertising revenues.
Required contributions for our qualified pension plans can have a significant impact on cash flows. See Pensions and Other Postretirement Benefits for additional information regarding our pension plans, including their underfunded status.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.41
We have taken and will continue to take steps to improve our liquidity. These actions include but are not limited to:
In 2010, we expect our cash balance, cash provided from operations and third-party financing to be sufficient to meet our cash obligations.
Cash flows by category were as follows:
Operating cash inflows include cash receipts from advertising and circulation sales and other revenue transactions. Operating cash outflows include payments for employee compensation, pension and other benefits, raw materials, services and supplies, interest and income taxes.
While revenues declined in 2009, net cash provided by operating activities increased in 2009 compared with 2008. The revenue decline was more than offset by a reduction in operating costs and lower working capital requirements.
Net cash provided by operating activities increased approximately $136 million in 2008 compared with 2007, mainly due to higher working capital requirements in 2007, primarily driven by the income taxes paid on the gains on the sales of the Broadcast Media Group and WQEW-AM, which was partially offset by lower advertising revenues in 2008.
Cash from investing activities generally includes proceeds from the sale of assets or a business. Cash used in investing activities generally includes payments for capital projects, acquisitions of new businesses and equity investments.
Net cash provided by investing activities in 2009 was primarily due to the proceeds from the sale of WQXR-FM and other assets offset in part by capital expenditures.
Net cash used in investing activities in 2008 was primarily due to capital expenditures related to the consolidation of our New York area printing operations into our facility in College Point, N.Y., and for construction of our New York headquarters.
Capital expenditures (on an accrual basis) were $45.4 million in 2009, $127.2 million in 2008 and $375.4 million in 2007. The 2009, 2008 and 2007 amounts include costs related to our New York headquarters of approximately $14 million, $17 million and $166 million, respectively, as well as our development partners costs of $55 million in 2007.
Cash from financing activities generally includes borrowings under third-party financing arrangements and the issuance of long-term debt. Cash used in financing activities generally includes the repayment of amounts outstanding under third-party financing arrangements and long-term debt; and the payment of dividends in 2008 and 2007.
Net cash used in financing activities in 2009 consisted mainly of repayments under our revolving
P.42 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
credit agreements, repayments in connection with the redemption of our 4.5% notes due March 15, 2010 and the repurchase of medium-term notes, partially offset by debt incurred under the issuance of senior unsecured notes and the sale-leaseback financing (see Third-Party Financing below).
Net cash used in financing activities decreased approximately $199 million in 2008 compared with 2007 primarily due to lower repayments of commercial paper and medium-term notes of approximately $251 million, partially offset by $66 million received from our development partner for a loan receivable in 2007.
See our Consolidated Statements of Cash Flows for additional information on our sources and uses of cash.
We currently rely upon our revolving credit agree-ment, a private financing arrangement and a sale-leaseback of a portion of our New York headquarters that we own for financing to supplement cash flows from operations. Our total debt consists of the following:
Based on borrowing rates currently available for debt with similar terms and average maturities, the fair value of our debt was approximately $907 million as of December 27, 2009.
In April 2009, we settled the redemption of all $250.0 million outstanding aggregate principal amount of our 4.5% notes due March 15, 2010, that had been called for redemption in March 2009. The redemption price of approximately $260 million included a $9.3 million premium and was computed under the terms of the notes as the present value of the scheduled payments of principal and unpaid interest, plus accrued interest to the redemption settlement date.
In March 2009, one of our affiliates entered into an agreement to sell and simultaneously lease back the Condo Interest in our headquarters building located at 620 Eighth Avenue in New York City. The sale price for the Condo Interest was $225.0 million. We have an option, exercisable during the 10th year of the lease term, to repurchase the Condo Interest for $250.0 million. The lease term is 15 years, and we have three renewal options that could extend the term for an additional 20 years.
The transaction is accounted for as a financing transaction. As such, we will continue to depreciate the Condo Interest and account for the rental payments as interest expense. The difference between the purchase option price of $250.0 million and the net sale proceeds of approximately $211 million, or approximately $39 million, will be amortized over a 10-year period through interest expense. The effective interest rate on this transaction was approximately 13%.
In February 2009, we repurchased all $49.5 million aggregate principal amount of our 10-year 7.125% series I medium-term notes, maturing November 2009, for $49.4 million, or 99.875% of par (including commission).
In February and March 2009, we repurchased a total of $5.0 million aggregate principal amount of our 10-year 6.950% medium-term notes, maturing November 2009. The remaining aggregate principal amount of $44.5 million was repaid upon maturity in November 2009.
In January 2009, pursuant to a securities purchase agreement with Inmobiliaria Carso, S.A. de C.V. and Banco Inbursa S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa (each an Investor and collectively the Investors), we issued, for an aggregate purchase price of $250.0 million, (1) $250.0 million aggregate principal amount of 14.053% senior unsecured notes due January 15, 2015, and (2) detachable warrants to purchase 15.9 million
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.43
shares of our Class A Common Stock at a price of $6.3572 per share. The warrants are exercisable at the holders option at any time and from time to time, in whole or in part, until January 15, 2015. Each Investor is an affiliate of Carlos Slim Helú, the beneficial owner of approximately 7% of our Class A Common Stock (excluding the warrants). Each Investor purchased an equal number of notes and warrants.
We received proceeds of approximately $242 million (purchase price of $250.0 million, net of a $4.5 million investor funding fee and transaction costs), of which approximately $221 million was allocated to the notes and included in Long-term debt and capital lease obligations and approximately $21 million was allocated to the warrants and included in Additional paid-in-capital in our Consolidated Balance Sheet as of December 27, 2009. The difference between the purchase price of $250.0 million and the $221 million allocated to the notes, or approximately $29 million, will be amortized over a six-year period through interest expense. The effective interest rate on this transaction was approximately 17%.
We have an option, at any time on or after January 15, 2012, to prepay all or any part of the senior unsecured notes at a premium of the outstanding principal amount, plus accrued interest. The prepayment premium is 105.0% from January 15, 2012 to January 14, 2013, 102.5% from January 15, 2013 to January 14, 2014 and 100.0% from January 15, 2014 to the maturity date. In addition, at any time prior to January 15, 2012, we may at our option prepay all or any part of the notes by paying a make-whole premium amount based on the present value of the remaining scheduled payments.
The senior unsecured notes contain certain covenants that, among other things, limit (subject to certain exceptions) our ability and the ability of our subsidiaries to:
We were in compliance with these covenants as of December 27, 2009.
Revolving Credit Agreement
Our $400.0 million credit agreement expiring in June 2011 is used for general corporate purposes and provides a facility for the issuance of letters of credit. We had a second $400.0 million credit agreement that expired in May 2009. We did not renew this
P.44 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
facility as we believe the amounts available under the $400.0 million credit facility expiring in June 2011, in combination with other financing sources, will be sufficient to meet our financing needs through the expiration of that credit facility.
Any borrowings under the revolving credit agreement bear interest at specified margins based on our credit rating, over various floating rates selected by us. The amount available under our revolving credit agreement is summarized in the following table.
The revolving credit agreement contains a covenant that requires a specified level of stockholders equity, which, as defined by the agreement, does not include accumulated other comprehensive loss and excludes the impact of one-time non-cash charges. The required level of stockholders equity (as defined by the agreement) is the sum of $950.0 million plus an amount equal to 25% of net income for each fiscal year ending after December 28, 2003, when net income exists. As of December 27, 2009, the amount of stockholders equity in excess of the required level was approximately $663 million, which excludes the impact of non-cash impairment charges incurred in 2006, 2007 and 2008 that together aggregated approximately $878 million.
In April 2009, Standard & Poors lowered its rating on our senior unsecured debt to B+ from BB- and placed its rating on negative watch. In May 2009, Standard & Poors further lowered its rating to B, citing the effects of declining advertising revenues and operating performance on our leverage. It also changed its rating outlook from negative to stable, citing our ability to maintain adequate liquidity.
In April 2009, Moodys Investors Service downgraded our senior unsecured debt rating to B1 from Ba3 with a negative outlook, citing the expected continued pressure on revenues and operating cash flow as a result of lower newspaper advertising.
We have no liabilities subject to accelerated payment upon a ratings downgrade and do not expect a material increase in our current borrowing costs as a result of these ratings actions. However, we expect that any future long-term borrowings or the extension or replacement of our short-term borrowing facility will reflect the impact of our below investment-grade ratings, increasing our borrowing costs, limiting our financing options, including limiting our access to the unsecured borrowing market, and subjecting us to more restrictive covenants appropriate for non-investment grade issuers. Additional reductions in our credit ratings could further increase our borrowing costs, subject us to more onerous terms and reduce our borrowing flexibility in the future.
The information provided is based on managements best estimate and assumptions of our contractual obligations as of December 27, 2009. Actual payments in future periods may vary from those reflected in the table.
Managements Discussion and Analysis of Financial Condition and Results of Operations THE NEW YORK TIMES COMPANY P.45
In addition to the pension and other postretirement benefits liabilities included in the table above, Other Liabilities Other in our Consolidated Balance Sheets include liabilities related to i) deferred compensation, primarily consisting of our deferred executive compensation plan (the DEC plan), ii) our liability for uncertain tax positions, and iii) various other liabilities. These liabilities are not included in the table above primarily because the future payments are not determinable.
The DEC plan enables certain eligible executives to elect to defer a portion of their compensation on a pre-tax basis. While the initial deferral period is for a minimum of two years up to a maximum of eighteen years (after which time taxable distributions must begin), the executive has the option to extend the deferral period. Therefore, the future payments under the DEC plan are not determinable. See Note 12 of the Notes to the Consolidated Financial Statements for additional information on Other Liabilities Other.
Our tax liability for uncertain tax positions was approximately $98 million, including approximately $28 million of accrued interest and penalties. Until formal resolutions are reached between us and the tax authorities, the timing and amount of a possible audit settlement for uncertain tax benefits is not practicable. Therefore, we do not include this obligation in the table of contractual obligations. See Note 13 of the Notes to the Consolidated Financial Statements for additional information on Income Taxes.
We have a contract with a major paper supplier to purchase newsprint. The contract requires us to purchase annually the lesser of a fixed number of tons or a percentage of our total newsprint requirement at market rate in an arms length transaction. Since the quantities of newsprint purchased annually under this contract are based on our total newsprint requirement, the amount of the related payments for these purchases is excluded from the table above.
We have letters of credit outstanding of approximately $67 million, primarily for obligations under our workers compensation program and for our New York headquarters.
We also have outstanding guarantees on behalf of a third party that provides circulation customer service, telemarketing and subscription services for The Times and the Globe and on behalf of third parties that provide printing and distribution services for The Timess National Edition. As of December 27, 2009, the aggregate potential liability under these guarantees was approximately $4 million. See Note 19 of the Notes to the Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements for the periods presented.
We continually evaluate the policies and estimates we use to prepare our Consolidated Financial Statements. In general, managements estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management.
We believe our critical accounting policies include our accounting for long-lived assets, retirement benefits, stock-based compensation, income taxes, self-insurance liabilities and accounts receivable allowances. Additional information about these policies can be found in Note 1 of the Notes to the Consolidated Financial Statements. Specific risks related to our critical accounting policies are discussed below.
We evaluate whether there has been an impairment of goodwill or intangible assets not amortized on an annual basis or in an interim period if certain circumstances indicate that a possible impairment may exist. All other long-lived assets are tested for impairment if certain circumstances indicate that a possible impairment exists.
The impairment analysis is considered critical to our segments because of the significance of long-lived assets to our Consolidated Balance Sheets.
P.46 2009 ANNUAL REPORT Managements Discussion and Analysis of Financial Condition and Results of Operations
We test for goodwill impairment at the reporting unit level, which are our operating segments. Separate financial information about these segments is regularly evaluated by our chief operating decision maker in deciding how to allocate resources.
The goodwill impairment test is a two-step process. The first step, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is calculated by a combination of a discounted cash flow model and a market approach model. In calculating fair value for each reporting unit, we generally weigh the results of the discounted cash flow model more heavily than the market approach because the discounted cash flow model is specific to our business and long-term projections. If the fair value exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. An impairment loss would be recognized in an amount equal to the excess of the carry