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New York Times Company 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

 

FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For quarterly period ended June 25, 2006

 

Commission file number 1-5837

 

THE NEW YORK TIMES COMPANY

(Exact name of registrant as specified in its charter)

 

NEW YORK

 

13-1102020

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

229 WEST 43RD STREET, NEW YORK, NEW YORK

(Address of principal executive offices)

 

10036

(Zip Code)

 

Registrant’s telephone number, including area code     212-556-1234

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  Large accelerated filer x Accelerated filer o Non-accelerated filer o.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No x.

 

Number of shares of each class of the registrant’s common stock outstanding as of July 28, 2006 (exclusive of treasury shares):

 

Class A Common Stock

 

143,653,100 shares

 

Class B Common Stock

 

832,622 shares

 

 

 



 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE NEW YORK TIMES COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars and shares in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

 

 

(13 Weeks)

 

(26 Weeks)

 

Revenues

 

 

 

 

 

 

 

 

 

Advertising

 

$

577,984

 

$

572,363

 

$

1,132,611

 

$

1,106,142

 

Circulation

 

219,705

 

218,482

 

439,986

 

438,099

 

Other

 

61,059

 

54,224

 

117,923

 

106,411

 

Total revenues

 

858,748

 

845,069

 

1,690,520

 

1,650,652

 

 

 

 

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

 

 

 

Raw materials

 

84,478

 

78,353

 

166,415

 

153,182

 

Wages and benefits

 

171,201

 

172,005

 

347,578

 

348,913

 

Other

 

135,893

 

128,518

 

271,413

 

253,712

 

Total production costs

 

391,572

 

378,876

 

785,406

 

755,807

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

368,103

 

359,651

 

737,765

 

703,177

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

759,675

 

738,527

 

1,523,171

 

1,458,984

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of assets

 

 

 

 

122,946

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

99,073

 

106,542

 

167,349

 

314,614

 

 

 

 

 

 

 

 

 

 

 

Net income from joint ventures

 

8,770

 

3,138

 

10,737

 

2,890

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

13,234

 

11,844

 

25,758

 

26,092

 

 

 

 

 

 

 

 

 

 

 

Income from non-compete agreement

 

 

1,250

 

 

2,500

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and minority interest

 

94,609

 

99,086

 

152,328

 

293,912

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

33,540

 

38,110

 

56,397

 

121,768

 

 

 

 

 

 

 

 

 

 

 

Minority interest in net loss/(income) of subsidiaries

 

244

 

(161

)

337

 

(280

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61,313

 

$

60,815

 

$

96,268

 

$

171,864

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

144,792

 

145,524

 

144,978

 

145,696

 

Diluted

 

144,943

 

146,003

 

145,166

 

146,377

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.42

 

$

.42

 

$

.66

 

$

1.18

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.42

 

$

.42

 

$

.66

 

$

1.17

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

.175

 

$

.165

 

$

.340

 

$

.320

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



 

THE NEW YORK TIMES COMPANY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

 

June 2006

 

December 2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,437

 

$

44,927

 

 

 

 

 

 

 

Accounts receivable-net

 

397,848

 

435,273

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Newsprint and magazine paper

 

23,001

 

28,190

 

Work-in-process and other

 

4,267

 

3,910

 

Total inventories

 

27,268

 

32,100

 

 

 

 

 

 

 

Deferred income taxes

 

68,118

 

68,118

 

 

 

 

 

 

 

Other current assets (see Note 7)

 

201,117

 

77,328

 

 

 

 

 

 

 

Total current assets

 

735,788

 

657,746

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

 

 

 

 

Investments in joint ventures

 

245,914

 

238,369

 

 

 

 

 

 

 

Property, plant and equipment (less accumulated depreciation and amortization of $1,412,197 in 2006 and $1,368,187 in 2005)

 

1,552,167

 

1,468,403

 

 

 

 

 

 

 

Intangible assets acquired

 

 

 

 

 

Goodwill

 

1,444,621

 

1,439,881

 

 

 

 

 

 

 

Other intangible assets acquired (less accumulated amortization of $182,378 in 2006 and $168,319 in 2005)

 

397,974

 

411,106

 

 

 

 

 

 

 

Miscellaneous assets (see Note 7)

 

232,082

 

317,532

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,608,546

 

$

4,533,037

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



THE NEW YORK TIMES COMPANY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

 

June 2006

 

December 2005

 

 

 

(Unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Commercial paper outstanding

 

$

503,975

 

$

496,450

 

Accounts payable

 

229,767

 

201,119

 

Accrued payroll and other related liabilities

 

96,549

 

100,390

 

Accrued expenses

 

162,144

 

185,063

 

Unexpired subscriptions

 

81,572

 

81,870

 

Current portion of long-term debt and capital lease obligations

 

103,553

 

1,630

 

Construction loan (see Notes 3 and 11)

 

24,446

 

 

 

 

 

 

 

 

Total current liabilities

 

1,202,006

 

1,066,522

 

 

 

 

 

 

 

Other Liabilities

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

720,471

 

821,962

 

Capital lease obligations

 

75,587

 

76,338

 

Deferred income taxes

 

55,066

 

79,806

 

Other

 

785,769

 

783,185

 

 

 

 

 

 

 

Total other liabilities

 

1,636,893

 

1,761,291

 

 

 

 

 

 

 

Minority Interest

 

232,945

 

188,976

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Common stock of $.10 par value:

 

 

 

 

 

Class A – authorized 300,000,000 shares; issued: 2006 – 151,151,834; 2005 – 150,939,371 (including treasury shares: 2006 - 7,388,492; 2005 – 6,558,299)

 

15,115

 

15,094

 

Class B – convertible – authorized and issued shares; 2006 - 832,622; 2005 – 834,242

 

83

 

83

 

Additional paid-in capital

 

68,053

 

55,148

 

Retained earnings

 

1,847,253

 

1,825,763

 

Common stock held in treasury, at cost

 

(283,026

)

(261,964

)

Accumulated other comprehensive loss, net of income taxes

 

(110,776

)

(117,876

)

 

 

 

 

 

 

Total stockholders’ equity

 

1,536,702

 

1,516,248

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

4,608,546

 

$

4,533,037

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



 

THE NEW YORK TIMES COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 2006

 

June 2005

 

 

 

(26 Weeks)

 

OPERATING ACTIVITIES

 

 

 

 

 

Net cash provided by operating activities

 

$

166,056

 

$

151,122

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(137,296

)

(95,811

)

Acquisitions

 

 

(413,316

)

Investments

 

 

(16,521

)

Net proceeds from sale of assets

 

 

183,173

 

Other investing proceeds/(payments)-net

 

620

 

(437

)

 

 

 

 

 

 

Net cash used in investing activities

 

(136,676

)

(342,912

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Commercial paper borrowings-net

 

7,525

 

79,525

 

Construction loan borrowings

 

24,446

 

 

Long-term obligations:

 

 

 

 

 

Increases

 

 

497,543

 

Reductions

 

(801

)

(322,683

)

Capital shares:

 

 

 

 

 

Issuances

 

4,398

 

5,136

 

Repurchases

 

(20,943

)

(35,101

)

Excess tax benefits from stock-based awards

 

745

 

2,426

 

Dividends paid to stockholders

 

(49,475

)

(46,618

)

Other financing proceeds-net

 

993

 

1,338

 

 

 

 

 

 

 

Net cash (used in)/provided by financing activities

 

(33,112

)

181,566

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(3,732

)

(10,224

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

242

 

(561

)

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year

 

44,927

 

42,389

 

Cash and cash equivalents at the end of the quarter

 

$

41,437

 

$

31,604

 

 

SUPPLEMENTAL DATA

 

Acquisitions

                  In March 2005, the Company acquired 100% of the outstanding common stock of About, Inc., a leading online consumer information provider, for approximately $410 million (see Note 2).

 

                  In February 2005, the Company acquired the North Bay Business Journal, a weekly publication targeting business leaders in California’s Sonoma, Napa and Marin counties, for approximately $3 million (see Note 2).

 

Investment

                  In March 2005, the Company invested $16.5 million to acquire a 49% interest in Metro Boston LLC, which publishes a free daily newspaper catering to young professionals in the Greater Boston area.

 

Other

                  The Company’s and its development partner’s interest in the Company’s new headquarters are approximately 58% and 42% (see Note 11).  Due to the Company’s majority interest, 100% of the financial position and results of operations of the building partnership are consolidated with those of the Company.  Cash capital expenditures attributable to the Company’s development partner’s interest in the Company’s new headquarters were approximately $41 million and $22 million in the first six months of 2006 and 2005.

 

See Notes to Condensed Consolidated Financial Statements.

 

5



 

THE NEW YORK TIMES COMPANY

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              General and Summary of Significant Accounting Policies

 

In the opinion of The New York Times Company’s (the “Company”) management, the Condensed Consolidated Financial Statements present fairly the financial position of the Company as of June 25, 2006 and December 25, 2005, and the results of operations and cash flows of the Company for the periods ended June 25, 2006 and June 26, 2005.  All adjustments necessary for a fair presentation have been included and are of a normal and recurring nature.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The Company’s Condensed Consolidated Financial Statements and related Notes should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2005.  Due to the seasonal nature of the Company’s business, operating results for the interim periods are not necessarily indicative of a full year’s operations.

 

As of June 25, 2006, the Company’s significant accounting policies, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 25, 2005, have not changed materially.

 

Unless specifically stated otherwise, all references to June 2006 and June 2005 refer to the Company’s fiscal periods ended, or the dates as of, June 25, 2006 and June 26, 2005, respectively.  All references to December 2005 refer to the Company’s fiscal year ended, or the date as of, December 25, 2005.  Certain reclassifications have been made to the prior periods to conform to classifications used as of and for the period ended June 2006.  The fiscal periods included herein comprise 13 weeks for the three-month periods and 26 weeks for the six-month periods.

 

Recent Accounting Pronouncements

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions (“tax positions”).  FIN 48 requires that the Company recognize in its financial statements the impact of a tax position if that tax position is more likely than not of being sustained on audit, based on the technical merits of the tax position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.  The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

 

2.              Goodwill and Other Intangible Assets

 

Goodwill is the excess of cost over the fair market value of tangible net assets acquired.  Goodwill is not amortized but tested for impairment annually or if certain circumstances indicate a possible impairment may exist, in accordance with Statement of Financial Accounting Standards (“FAS”) No. 142, Goodwill and Other Intangible Assets.

 

6



 

Other intangible assets acquired consist primarily of newspaper mastheads and licenses on various acquired properties, customer lists, as well as other assets.  Other intangible assets acquired that have indefinite lives (mastheads and licenses) are not amortized but tested for impairment annually or if certain circumstances indicate a possible impairment may exist.  Certain other intangible assets acquired (customer lists and other assets) are amortized over their estimated useful lives.

 

Based on independent valuations of About.com (acquired March 18, 2005) and North Bay Business Journal (“North Bay”) (acquired February 1, 2005) and a preliminary independent valuation of KAUT-TV (acquired November 3, 2005), the Company has allocated the excess of the purchase prices over the carrying value of the net assets acquired as follows: About.com- $343.4 million to goodwill and $62.2 million to other intangible assets (primarily content, customer lists and a contract); North Bay- $2.1 million to goodwill and $0.9 million to other intangible assets (primarily customer lists); KAUT-TV- $1.7 million to goodwill and $14.3 million to other intangible assets (primarily FCC licenses).  The goodwill for the acquisitions described above is tax-deductible.

 

The preliminary purchase price allocation for the acquisition of KAUT-TV is subject to adjustment when additional information concerning asset and liability valuations is obtained.  The final asset and liability fair values may differ from those included in the Company’s Condensed Consolidated Balance Sheet as of June 2006; however, the changes are not expected to have a material effect on the Company’s Condensed Consolidated Financial Statements.

 

The changes in the carrying amount of Goodwill were as follows:

 

(Dollars in thousands)

 

News
Media
Group

 

Broadcast
Media
Group

 

About.
com

 

Total

 

Balance as of December 2005

 

$

1,055,648

 

$

40,544

 

$

343,689

 

$

1,439,881

 

Goodwill adjusted during year

 

 

1,131

 

(259

)

872

 

Foreign currency translation

 

3,868

 

 

 

3,868

 

Balance as of June 2006

 

$

1,059,516

 

$

41,675

 

$

343,430

 

$

1,444,621

 

 

Goodwill was adjusted in 2006 for changes to the purchase price allocations.  The foreign currency translation line item above reflects changes in Goodwill resulting from fluctuating exchange rates related to the consolidation of the International Herald Tribune (the “IHT”).

 

7



 

Other intangible assets acquired were as follows:

 

 

 

June 2006

 

December 2005

 

(Dollars in thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 


Net

 

Gross Carrying
Amount

 

Accumulated
Amortization

 


Net

 

Amortized other intangible assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

$

218,609

 

$

(165,242

)

$

53,367

 

$

218,584

 

$

(155,763

)

$

62,821

 

Other

 

55,690

 

(17,136

)

38,554

 

55,399

 

(12,556

)

42,843

 

Total

 

274,299

 

(182,378

)

91,921

 

273,983

 

(168,319

)

105,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized other intangible assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadcast licenses

 

233,704

 

 

233,704

 

233,895

 

 

233,895

 

Newspaper mastheads

 

72,349

 

 

72,349

 

71,547

 

 

71,547

 

Total

 

306,053

 

 

306,053

 

305,442

 

 

305,442

 

Total other intangible assets acquired

 

$

580,352

 

$

(182,378

)

$

397,974

 

$

579,425

 

$

(168,319

)

$

411,106

 

 

Certain amounts in the table above include the foreign currency translation adjustment related to the consolidation of the IHT.

 

As of June 2006, the remaining weighted-average amortization period is eight years for customer lists and six years for other intangible assets acquired included in the table above.

 

Amortization expense related to other intangible assets acquired that are subject to amortization was $14.0 million in the first six months of 2006, and is expected to be approximately $25 million for the fiscal year 2006.  Estimated annual amortization expense for the next five years related to these intangible assets is expected to be as follows:

 

(Dollars in thousands)
Year

 

Amount

 

2007

 

$

15,000

 

2008

 

12,200

 

2009

 

10,900

 

2010

 

10,700

 

2011

 

10,600

 

 

3.                                      Debt Obligations

 

The Company’s total debt, including commercial paper, capital lease obligations and the construction loan (see below), was $1.4 billion as of June 2006.

 

In December 2001, a wholly owned subsidiary of the Company and FC Lion LLC (a partnership between an affiliate of the Forest City Ratner Companies and an affiliate of ING Real Estate) became the sole members of The New York Times Building LLC, a partnership established for the purpose of constructing a 1.54 million square foot condominium office building (the “Building”) in New York City that will serve as the Company’s new headquarters.  In May 2006, The New York Times Building LLC began to borrow funds under its $320 million construction loan in connection with the construction of the Building (see Note 11).  As of June 2006, $24.4 million was outstanding under the construction loan, all attributable to the Company’s development partner.

 

The Company’s $600 million commercial paper program is supported by the revolving credit agreements described below.  Commercial paper issued by the Company is unsecured and can have maturities of up to 270 days.  The Company had $504.0 million in commercial paper outstanding as of June 2006, with an annual weighted-average interest rate of 5.2% and an average of 64 days to maturity from original issuance.

 

8



 

The primary purpose of the Company’s revolving credit agreements is to support the Company’s commercial paper program.  In addition, these revolving credit agreements provide a facility for the issuance of letters of credit.  In June 2006, the Company replaced its $270 million multi-year credit agreement with a $400 million credit agreement maturing in June 2011.  Of the total $800 million available under the two revolving credit agreements ($400 million credit agreement maturing in May 2009 and $400 million credit agreement maturing in June 2011), the Company has issued letters of credit of approximately $32 million.  The remaining balance of approximately $768 million supports the Company’s commercial paper program discussed above.  There were no borrowings outstanding under the revolving credit agreements as of June 2006 or December 2005.

 

Any borrowings under the revolving credit agreements bear interest at specified margins based on the Company’s credit rating, over various floating rates selected by the Company.

 

The revolving credit agreements each contain a covenant that requires a specified level of stockholders’ equity.  As of June 2006, the amount of stockholders’ equity in excess of the required levels was approximately $448 million.

 

The Company’s five-year 5.350% notes aggregating $50 million mature on April 16, 2007 and its five-year 4.625% notes aggregating $52 million mature on June 25, 2007.  As a result, the Company reclassified these notes from “Long-term debt” to “Current portion of long-term debt and capital lease obligations” in the Company’s Condensed Consolidated Balance Sheet as of June 2006.

 

“Interest expense, net” in the Company’s Condensed Consolidated Statements of Income was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

Interest expense

 

$

18,661

 

$

15,194

 

$

35,979

 

$

28,008

 

Loss from extinguishment of debt(a)

 

 

 

 

4,767

 

Interest income

 

(2,247

)

(896

)

(4,203

)

(1,740

)

Capitalized interest

 

(3,180

)

(2,454

)

(6,018

)

(4,943

)

Interest expense, net

 

$

13,234

 

$

11,844

 

$

25,758

 

$

26,092

 

 


(a) The Company redeemed all of its $71.9 million 8.25% debentures in March 2005.

 

4.                              Derivative Instruments

 

In the first quarter of 2006, the Company entered into a forward starting interest rate swap agreement (“forward starting swap agreement”) designated as a cash-flow hedge as defined under FAS No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”).  The forward starting swap agreement, which has a notional amount totaling $50.0 million, is intended to lock in a fixed interest rate on the issuance of debt expected in December 2006.  As of June 2006, the fair value of the forward starting swap agreement resulted in an unrealized gain of $2.3 million that was recorded in “Other current assets” and “Accumulated other comprehensive loss, net of income taxes” in the Company’s Condensed Consolidated Balance Sheet.  There was no amount recognized in earnings related to the forward starting swap agreement.

 

In March 2006 and December 2005, the Company terminated forward starting swap agreements designated as cash-flow hedges as defined under FAS 133 because the debt for which these agreements were entered into was not issued.  The termination of these agreements resulted in a gain of $3.4 million, of which $3.0

 

9



 

million was unrealized and $0.4 million was recognized in earnings.  The Company expects to amortize the unrealized gain of $3.0 million into earnings over the maturity period of debt that it expects to issue in December 2006 as discussed above.

 

5.          Common Stock

 

During the first half of 2006, the Company repurchased 0.8 million shares of its Class A Common Stock under its stock repurchase program at a cost of $20.9 million.  The average price of these repurchases was $25.33 per share.

 

On April 18, 2006, the Company’s Board of Directors (the “Board”) authorized a $.01 per share increase in the quarterly dividend on the Company’s Class A and Class B Common Stock to $.175 per share from $.165 per share effective with the June 2006 dividend.

 

On June 15, 2006, the Board declared a dividend of $.175 per share on the Company’s Class A and B Common Stock.  The dividend is payable on September 13, 2006, to shareholders of record on September 1, 2006.  The estimated dividend payable of approximately $25 million is included in “Accounts payable” in the Company’s Condensed Consolidated Balance Sheet as of June 2006.

 

6.             Pension and Postretirement Benefits

 

Pension

The components of net periodic pension cost of all Company-sponsored pension plans were as follows:

 

 

 

Three Months Ended

 

 

 

June 2006

 

June 2005

 



(Dollars in thousands)

 


Qualified
Plans

 

Non-
Qualified
Plans

 



All Plans

 


Qualified
Plans

 

Non-
Qualified
Plans

 



All Plans

 

Service cost

 

$

10,076

 

$

588

 

$

10,664

 

$

9,362

 

$

569

 

$

9,931

 

Interest cost

 

17,925

 

3,015

 

20,940

 

16,887

 

2,831

 

19,718

 

Expected return on plan assets

 

(23,525

)

 

(23,525

)

(20,930

)

 

(20,930

)

Amortization of prior service cost

 

89

 

17

 

106

 

101

 

17

 

118

 

Recognized actuarial loss

 

4,419

 

1,664

 

6,083

 

4,600

 

1,193

 

5,793

 

Curtailment(a)

 

512

 

 

512

 

 

 

 

Net periodic pension cost

 

$

9,496

 

$

5,284

 

$

14,780

 

$

10,020

 

$

4,610

 

$

14,630

 

 

 

 

Six Months Ended

 

 

 

June 2006

 

June 2005

 



(Dollars in thousands)

 


Qualified
Plans

 

Non-
Qualified
Plans

 



All Plans

 


Qualified
Plans

 

Non-
Qualified
Plans

 



All Plans

 

Service cost

 

$

20,395

 

$

1,176

 

$

21,571

 

$

18,724

 

$

1,138

 

$

19,862

 

Interest cost

 

35,821

 

6,030

 

41,851

 

33,774

 

5,662

 

39,436

 

Expected return on plan assets

 

(47,009

)

 

(47,009

)

(41,860

)

 

(41,860

)

Amortization of prior service cost

 

190

 

34

 

224

 

202

 

34

 

236

 

Recognized actuarial loss

 

9,099

 

3,328

 

12,427

 

9,200

 

2,386

 

11,586

 

Curtailment(a)

 

512

 

 

512

 

 

 

 

Net periodic pension cost

 

$

19,008

 

$

10,568

 

$

29,576

 

$

20,040

 

$

9,220

 

$

29,260

 

 


(a)         The staff reduction programs implemented in 2005 resulted in a curtailment because the future working lifetime of impacted employees was reduced for one of the Company’s plans.

 

The Company did not make any contributions to its pension plans in the first half of 2006.  Although the Company does not have any minimum funding requirements in 2006 (under the Employee

 

10



 

Retirement Income Security Act of 1974, as amended, and Internal Revenue Code requirements), it may elect to make a contribution.  The amount of the contribution, if any, would be based on the results of the January 1, 2006, valuation, market performance and interest rates in 2006 as well as other factors.  Assuming that the Company achieves an 8.75% return on pension assets, that interest rates are stable and that there are no material changes to the Company’s benefits structure in 2006, it expects to make contributions in the fourth quarter of 2006 of approximately the same amount as the contributions made in 2005.  In December 2005, the Company made tax-deductible contributions of $47.3 million to its qualified pension plans.

 

Postretirement Benefits

 

The components of net periodic postretirement benefit cost were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

Service cost

 

$

1,885

 

$

1,730

 

$

3,770

 

$

3,460

 

Interest cost

 

3,028

 

3,053

 

6,056

 

6,106

 

Amortization of prior service cost

 

(1,543

)

(1,293

)

(3,086

)

(2,586

)

Recognized actuarial loss

 

787

 

659

 

1,574

 

1,318

 

Net periodic postretirement cost

 

$

4,157

 

$

4,149

 

$

8,314

 

$

8,298

 

 

Pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003, through December 2005, the Company integrated its postretirement benefit plan with Medicare (the “Integration Method”).  Under this option, benefits paid by the Company are offset by Medicare.  Beginning in 2006, the Company elected to receive the Medicare retiree drug subsidy instead of the benefit under the Integration Method.

 

In February 2006 the Company announced amendments to its postretirement benefit plan effective January 1, 2007, such as the elimination of retiree-medical benefits to new employees.  The amendments will reduce the future obligations and expense under this plan.

 

7.                                      Other

 

Staff Reductions

 

The Company recognized staff reduction charges of $9.1 million in the second quarter of 2006 and $18.4 million in the first six months of 2006.  In the second quarter and first six months of 2005, the Company recognized a staff reduction charge of $10.0 million.  Most of the charges in 2006 and 2005 were recognized at the News Media Group.  These charges are recorded in “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.  As of June 2006, the Company had a staff reduction liability of approximately $15 million included in “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheet.

 

Discovery Times Channel

 

In April 2006, the Company exercised its right to require Discovery Communications, Inc. (“DCI”) to purchase its 50% investment in the Discovery Times Channel, a digital cable channel.  As part of the initial investment in the channel, this right was exercisable following the fourth anniversary of the investment.  By contract, the sale price is determined by a formula, with a floor of $80 million and a ceiling of $135 million.  The Company is currently negotiating the price with DCI and expects to complete the transaction before the end of

 

11



 

the year.  The Company’s investment in the channel was approximately $105 million as of June 2006.  Based on the sale price, the Company will record a gain or loss, depending on whether the price is higher or lower than the investment balance.

 

WQEW Sale

 

One of the Company’s New York City radio stations, WQEW-AM (“WQEW”), receives revenues under a time brokerage agreement with ABC, Inc. (“ABC”), that provides substantially all of WQEW’s programming.  Under a separate option agreement, ABC has the right to acquire WQEW at the end of 2006 and, in the first quarter of 2006, ABC notified the Company of its intention to exercise this right.  The sale is currently scheduled to close in the first quarter of 2007 with a purchase price of $40 million and is subject to Federal Communications Commission approval.  At closing, the Company will recognize a significant portion of the sale price as a gain because the net book value of WQEW’s net assets being sold are nominal.

 

Sale of Assets

 

In the first quarter of 2005, the Company recognized a $122.9 million pre-tax gain resulting from the

sale of its current headquarters in New York City ($114.5 million) and the sale of property in Sarasota, Florida ($8.4 million).

 

Other Current Assets

 

In the second quarter of 2006, the Company’s development partner began to repay the Company for its share of costs associated with the Building that the Company previously paid on the development partner’s behalf (see Note 11).  The remaining amount due to the Company of approximately $110 million is expected to be fully repaid within one year, and therefore this amount was reclassified from “Miscellaneous assets” to “Other current assets” in the Condensed Consolidated Balance Sheet as of June 2006.

 

8.                                      Earnings Per Share

 

Basic and diluted earnings per share have been computed as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands, except per share data)

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

Basic earnings per share computation:

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

Net income

 

$

61,313

 

$

60,815

 

$

96,268

 

$

171,864

 

Denominator

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

144,792

 

145,524

 

144,978

 

145,696

 

Basic earnings per share

 

$

.42

 

$

.42

 

$

.66

 

$

1.18

 

Diluted earning per share computation:

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

Net income

 

$

61,313

 

$

60,815

 

$

96,268

 

$

171,864

 

Denominator

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

144,792

 

145,524

 

144,978

 

145,696

 

Incremental shares for assumed exercise of securities

 

151

 

479

 

188

 

681

 

Total shares

 

144,943

 

146,003

 

145,166

 

146,377

 

Diluted earnings per share

 

$

.42

 

$

.42

 

$

.66

 

$

1.17

 

 

The difference between basic and diluted shares is primarily due to the assumed exercise of stock options included in the diluted earnings per share computation.

 

12



 

Stock options with exercise prices that exceeded the average fair market value of the Company’s Common Stock had an antidilutive effect and, therefore, were excluded from the computation of diluted earnings per share.  Approximately 30 million stock options with exercise prices ranging from $25.05 to $48.54 were excluded from the computation in the second quarter and first six months of 2006.  Approximately 27 million stock options with exercise prices ranging from $33.75 to $48.54 were excluded from the computation in the second quarter of 2005, and approximately 25 million stock options with exercise prices ranging from $36.31 to $48.54 were excluded from the computation in the first six months of 2005.

 

9.          Comprehensive Income

 

Comprehensive income for the Company includes foreign currency translation adjustments, unrealized derivative gains/(losses) on cash-flow hedges, unrealized gains/(losses) on marketable securities and “Net income” reported in the Company’s Condensed Consolidated Statements of Income.

 

Comprehensive income was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

Net income

 

$

61,313

 

$

60,815

 

$

96,268

 

$

171,864

 

Foreign currency translation adjustments

 

4,253

 

(11,038

)

5,102

 

(9,001

)

Unrealized derivative gain/(loss) on cash-flow hedges

 

2,556

 

(518

)

2,932

 

(356

)

Unrealized (loss)/gain on marketable securities

 

(24

)

8

 

36

 

(118

)

Reclassification adjustment for realized loss included in net income

 

468

 

 

468

 

 

Income tax (charge)/benefit

 

(1,255

)

121

 

(1,438

)

101

 

Comprehensive income

 

$

67,311

 

$

49,388

 

$

103,368

 

$

162,490

 

 

The “Accumulated other comprehensive loss, net of income taxes” in the Company’s Condensed Consolidated Balance Sheets was net of a deferred income tax benefit of approximately $95 million as of June 2006 and approximately $97 million as of December 2005.

 

10.                       Segment Statements of Income

 

The Company’s reportable segments consist of the News Media Group, the Broadcast Media Group and About.com.  These segments are evaluated regularly by key management in assessing performance and allocating resources.

 

Below is a description of the Company’s reportable segments:

 

News Media Group (consisting of The New York Times Media Group, which includes The New York Times (“The Times”), NYTimes.com, the IHT and two New York City radio stations; the New England Media Group, which includes The Boston Globe (the “Globe”), Boston.com and the Worcester Telegram & Gazette; and the Regional Media Group, which includes 14 daily newspapers and their related digital operations).

 

13



 

Broadcast Media Group (consisting of nine network-affiliated television stations and their related digital operations).

 

About.com (an online consumer information provider).

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

June 2006

 

June 2005

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

News Media Group

 

$

800,190

 

$

795,934

 

$

1,581,181

 

$

1,569,100

 

Broadcast Media Group

 

39,112

 

37,184

 

71,066

 

68,501

 

About.com (from March 18, 2005)

 

19,446

 

11,951

 

38,273

 

13,051

 

Total

 

$

858,748

 

$

845,069

 

$

1,690,520

 

$

1,650,652

 

 

 

 

 

 

 

 

 

 

 

OPERATING PROFIT (LOSS)

 

 

 

 

 

 

 

 

 

News Media Group

 

$

93,144

 

$

107,236

 

$

161,455

 

$

198,545

 

Broadcast Media Group

 

9,685

 

9,165

 

12,882

 

13,216

 

About.com (from March 18, 2005)

 

7,309

 

2,514

 

14,873

 

2,656

 

Corporate

 

(11,065

)

(12,373

)

(21,861

)

(22,749

)

Gain on Sale of Assets

 

 

 

 

122,946

 

Total

 

$

99,073

 

$

106,542

 

$

167,349

 

$

314,614

 

 

 

 

 

 

 

 

 

 

 

Net income from joint ventures

 

8,770

 

3,138

 

10,737

 

2,890

 

Interest expense, net

 

13,234

 

11,844

 

25,758

 

26,092

 

Income from non-compete agreement

 

 

1,250

 

 

2,500

 

Income before income taxes and minority interest

 

94,609

 

99,086

 

152,328

 

293,912

 

Income taxes

 

33,540

 

38,110

 

56,397

 

121,768

 

Minority interest in net loss/(income) of subsidiaries

 

244

 

(161

)

337

 

(280

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61,313

 

$

60,815

 

$

96,268

 

$

171,864

 

 

See Note 7 for information regarding staff reduction charges recorded in 2006 and 2005.

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for a discussion of the Company’s reportable segments.

 

11.                               Contingent Liabilities

 

New Headquarters Building

 

The Company is in the process of constructing the Building in New York City that will serve as its new headquarters.  In December 2001, a wholly owned subsidiary of the Company (“NYT”) and FC Lion LLC (a partnership between an affiliate of the Forest City Ratner Companies and an affiliate of ING Real Estate, “FC”) became the sole members of The New York Times Building LLC (the “Building Partnership”), a partnership established for the purpose of constructing the Building.  In June 2006, Forest City Ratner Companies announced that it would purchase the ownership interest of ING Real Estate.

 

The Building Partnership is a New York limited liability company and a separate and distinct legal entity from the Company. NYT’s and FC’s percentage interests in the Building Partnership are approximately 58% and 42%.  Due to the Company’s majority interest, 100% of the financial position and results of operations of the Building Partnership are consolidated with those of the Company, and FC’s minority interest in the Building

 

14



 

Partnership is included in “Minority Interest” in the Company’s Condensed Consolidated Balance Sheets as of June 2006 and December 2005, and in “Minority interest in net loss/(income) of subsidiaries” in the Condensed Consolidated Statements of Income for the periods ended June 2006 and June 2005.

 

In December 2001, the Building Partnership entered into a land acquisition and development agreement (“LADA”) for the Building site with a New York State agency, which subsequently acquired title to the site through a condemnation proceeding.  Pursuant to the LADA, the Building Partnership was required to fund all costs of acquiring the Building site, including the purchase price of approximately $86 million, and certain additional amounts (“excess site acquisition costs”) to be paid in connection with the condemnation proceeding.  NYT and FC were required to post letters of credit for these acquisition costs.  As of June 2006, approximately $14 million remained undrawn on a letter of credit posted by the Company on behalf of NYT and approximately $11 million remained undrawn on a letter of credit posted by Forest City Enterprises, Inc. (“FCE”) on behalf of FC.

 

On September 24, 2003, the Building Partnership obtained vacant possession of the Building site, and the New York State agency leased the site to the Building Partnership under a 99-year lease (the “Ground Lease”).  Under the terms of the Ground Lease, no fixed rent is payable, but the Building Partnership is required to make payments in lieu of real estate taxes (“PILOT”), pay percentage (profit) rent with respect to retail portions of the Building, and make certain other payments over the term of the Ground Lease.  The Building Partnership receives credits for its excess site acquisition costs against 85% of the PILOT payments.  The Ground Lease gives the Building Partnership or its designee the option to purchase the Building site after 29 years for nominal consideration.

 

In August 2004, the Building Partnership commenced construction of the Building and, under the Ground Lease, is required to complete construction of the Building’s core and shell within 36 months following construction commencement, subject to certain extensions.  The Company and FCE have guaranteed the Building Partnership’s obligation to complete construction of the Building in accordance with the Ground Lease.

 

Pursuant to the Operating Agreement of the Building Partnership, dated December 12, 2001, and amended June 25, 2004 (the “Operating Agreement”), the funds for construction of the Building are being provided through a construction loan and capital contributions of NYT and FC.  On June 25, 2004, the Building Partnership closed a construction loan with Capmark Finance, Inc. (formerly GMAC Commercial Mortgage Corporation) (the “construction lender”), which is providing a loan of up to $320 million (the “construction loan”), secured by the Building, for construction of the Building’s core and shell as well as other development costs.  NYT elected not to borrow any portion of its share of the total costs of the Building through this construction loan and, instead, has made and will make capital contributions to the Building Partnership for its share of Building costs.  FC’s share of the total costs of the Building are being funded through capital contributions and the construction loan.

 

Under the terms of the Operating Agreement and the construction loan, NYT was required to fund all of its construction equity related to construction of the core and shell as well as other development costs prior to the funding of the construction loan.  In May 2006, NYT completed the funding of its required construction equity and FC began drawing down on the construction loan to pay its share of the costs (see Note 3).   Because NYT funded its construction equity first, a portion of its funds was used to fund FC’s share of Building costs (the “FC funded

 

15



 

share”) prior to commencement of funding of the construction loan.  The FC funded share bears interest at the construction loan rate and is being repaid to NYT out of construction loan draws (see Note 7).  FC’s interest in the Building Partnership has been pledged to NYT to secure repayment of the FC funded share.

 

The construction loan, made through a building loan agreement and a project loan agreement, bears interest at an initial annual rate of LIBOR plus 265 basis points and will mature on July 1, 2008, subject to the Building Partnership’s right to extend the maturity date for two six-month periods upon the satisfaction of certain terms and conditions.  FCE has provided the construction lender with a guaranty of completion with respect to the Building conditioned upon the availability of the construction loan and NYT construction capital contributions.  In addition, the Company has provided the construction lender with a guaranty of NYT’s obligation to complete the interior construction of the NYT portions of the Building.

 

By the end of September 2006, the Building will be converted to a leasehold condominium, and each of NYT and FC will acquire ownership of their respective leasehold condominium units.  The Building Partnership will remain in effect until substantial completion of the Building’s core and shell.

 

Under the terms of the Operating Agreement and the construction loan, the lien of the construction loan will be released from the NYT condominium units upon substantial completion of the Building’s core and shell but will remain upon the FC condominium units until the construction loan is repaid in full.  If FC is unable to obtain other financing to repay the construction loan upon substantial completion of the Building’s core and shell, the Company is required to make a loan (the “extension loan”) to FC of approximately $119.5 million to pay a portion of the construction loan balance.  The extension loan will have a maturity date of five years following substantial completion of the core and shell of the Building, bear interest at 1% per annum in excess of the construction loan rate, and be secured by a second mortgage lien on the FC condominium units.

 

Actual and anticipated capital expenditures in connection with the Building, net of proceeds from the sale of the Company’s existing headquarters, including both core and shell and interior construction costs, are detailed in the table below.

 

Capital Expenditures
(Dollars in millions)

 

NYT

 

FC

 

Total

 

2001-2005

 

$241

 

$184

 

$425

 

2006

 

$240-$270

 

$125-$135

 

$365-$405

 

2007

 

$120-$128

 

$93-$103

 

$213-$231

 

Total

 

$601-$639

 

$402-$422

 

$1,003-$1,061

 

Less: net sale proceeds(a)

 

$106

 

 

$106

 

Total, net of sale proceeds

 

$495-$533

(b)

$402-$422

 

$897-$955

(b)

 


(a)       Represents cash proceeds from the sale of the Company’s existing headquarters (see Note 7), net of income taxes and transaction costs.  This amount is not net of the Company’s rental payments associated with the leaseback.

(b)       Includes estimated capitalized interest and salaries in the range of $45 to $55 million.

 

16



 

Third-Party Guarantees

 

The Company has outstanding guarantees on behalf of a third party that provides circulation customer service, telemarketing and home-delivery services for The Times and the Globe (the “circulation servicer”), and on behalf of two third parties that provide printing and distribution services for The Time’s National Edition (the “National Edition printers”).  In accordance with accounting principles generally accepted in the United States of America, the contingent obligations related to these guarantees are not reflected in the Company’s Condensed Consolidated Balance Sheets as of June 2006 and December 2005.

 

The Company has guaranteed the payments under the circulation servicer’s credit facility and any miscellaneous costs related to any default thereunder (the “credit facility guarantee”).  The total amount of the credit facility guarantee was $20 million as of June 2006.  The amount outstanding under the credit facility, which expired and was renewed in April 2006, was approximately $18 million as of June 2006.  The credit facility guarantee was made by the Company to allow the circulation servicer to obtain more favorable financing terms.  The circulation servicer has agreed to reimburse the Company for any amounts the Company pays under the credit facility guarantee and has granted the Company a security interest in all of its assets to secure repayment of any amounts the Company pays under the credit facility guarantee.

 

In addition, the Company has guaranteed the payments of two property leases of the circulation servicer and any miscellaneous costs related to any default thereunder (the “property lease guarantees”).  The total amount of the property lease guarantees was approximately $3 million as of June 2006.  One property lease expires in June 2008 and the other property lease expires in May 2009.  The property lease guarantees were made by the Company to allow the circulation servicer to obtain space to conduct business.

 

The Company would have to perform the obligations of the circulation servicer under the credit facility and property lease guarantees if the circulation servicer defaulted under the terms of its credit facility or lease agreements.

 

The Company has guaranteed a portion of the payments of an equipment lease of a National Edition printer and any miscellaneous costs related to any default thereunder (the “equipment lease guarantee”).  The total amount of the equipment lease guarantee was approximately $2 million as of June 2006.  The equipment lease expires in March 2011.  The Company made the equipment lease guarantee to allow the National Edition printer to obtain lower cost of lease financing.

 

The Company has also guaranteed certain debt of one of the two National Edition printers and any miscellaneous costs related to any default thereunder (the “debt guarantee”).  The total amount of the debt guarantee was approximately $6 million as of June 2006.  The debt guarantee, which expires in May 2012, was made by the Company to allow the National Edition printer to obtain a lower cost of borrowing.

 

The Company has obtained a secured guarantee from a related party of the National Edition printer to repay the Company for any amounts that it would pay under the debt guarantee.  In addition, the Company has a security interest in the equipment that was purchased by the National Edition printer with the funds it received from its debt issuance, as well as other equipment and real property.

 

The Company would have to perform the obligations of the National Edition printers under the equipment lease and debt guarantees if the National Edition printers defaulted under the terms of their

 

17



 

equipment leases or debt agreements.

 

Other

 

The Company also has letters of credit of approximately $34 million, which are required by insurance companies, to provide support for the Company’s workers’ compensation liability.  The workers’ compensation liability is included in the Company’s Condensed Consolidated Balance Sheet as of June 2006.

 

There are various legal actions that have arisen in the ordinary course of business and are now pending against the Company.  These actions are generally 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 these actions with legal counsel to the Company that the ultimate liability that might result from these actions would not have a material adverse effect on the Company’s Condensed Consolidated Financial Statements.

 

12.          Subsequent Events

 

On July 18, 2006, the Company announced plans to consolidate its New York metro area printing of The Times into its newest production plant in Queens, New York, and sublease its older Edison, New Jersey, plant.  The Company also announced that it would reduce the web width for all editions of The Times from 54 inches to 48 inches, with the printed page decreasing from 13.5 by 22 inches to 12 by 22 inches.  The plant consolidation and web-width reduction is expected to be completed in the second quarter of 2008.  Both plants will remain fully operational until then, at which time the Company expects to have sublease arrangements for the Edison plant.

 

As part of the plant consolidation, the Company expects a workforce reduction of approximately 250 full-time equivalent employees.  The Company plans to facilitate the reductions through a variety of severance and buyout packages.  The Company expects to record one-time charges for severance and buyouts and certain other expenses related to the consolidation, but is not able at this time to estimate the charges.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

EXECUTIVE OVERVIEW

 

Our Business

 

The New York Times Company is a leading media and news organization with a portfolio of premier properties serving our audiences through print, broadcast, online and mobile technology.  Building on our 155-year history of excellence in journalism, we are continuing our evolution into a multiplatform media organization by developing the skills, discipline and flexibility to compete in an increasingly digital world.

 

To benefit all of our shareholders, our goals are to:

                  grow revenues across our existing businesses and platforms,

                  create new online products in key content areas through internal development or prudent acquisitions,

                  institutionalize a forward-looking research and development capability that will enable us to anticipate and capitalize on changes in media usage,

                  reduce costs and improve the efficiency and effectiveness of our operations and

                  achieve growth in operating margins.

 

The business model for each of our segments is summarized below:

 

News Media Group (consisting of The New York Times Media Group, which includes The New York Times (“The Times”), NYTimes.com, the International Herald Tribune (the “IHT”) and two New York City radio stations; the New England Media Group, which includes The Boston Globe (the “Globe”), Boston.com and the Worcester Telegram & Gazette; and the Regional Media Group, which includes 14 daily newspapers and their related digital operations).  The News Media Group derives advertising revenues by offering advertisers a means to promote their brands, products and services to the buying public in print, online and through radio.  The News Media Group also derives circulation revenues by offering the public timely news and editorial materials and advertisements.  Other revenues, which make up the remainder of revenues, primarily consist of revenues from wholesale delivery operations, news services and direct marketing.  The News Media Group’s main operating expenses are employee-related costs and raw materials, primarily newsprint.

 

Broadcast Media Group (consisting of nine network-affiliated television stations and their related digital operations).  The Broadcast Media Group derives almost all of its revenues (98% in the first half of 2006) from the sale of commercial time to advertisers.  The Broadcast Media Group’s main operating expenses are employee-related costs and programming costs.

 

About.com acquired March 18, 2005 (an online consumer information provider).  About.com generates revenues through display advertising relevant to the adjacent content, cost-per-click advertising (sponsored links in which About.com is paid when a user clicks on the ad) and e-commerce (including sales lead generation).  Almost all of its revenues (95% in the first half of 2006) are derived from the sale of advertisements (display and cost-per-click advertising).  Cost-per-click advertising accounts for 53% of About.com’s total advertising revenues. About.com does not charge a subscription fee for access to its Web site.  About.com’s main operating expenses are employee-related costs and content and hosting costs.

 

19



 

Joint Ventures. Our long-term strategy is also pursued through our equity investments, which are:

 

      a 49% interest in Metro Boston LLC,

 

      a 49% interest in a Canadian newsprint company, Donohue Malbaie Inc., and a 40% interest in a partnership, Madison Paper Industries, operating a supercalendered paper mill in Maine, and

 

      a 16.7% interest in New England Sports Ventures, which owns the Boston Red Sox, Fenway Park and approximately 80% of the New England Sports Network, a regional cable sports network.

 

We also have a 50% interest in the Discovery Times Channel (“DTC”), a digital cable television channel (see below).

 

Recent Developments

 

Plant Consolidation and Web-Width Reduction

 

On July 18, 2006, we announced plans to consolidate our New York metro area printing of The Times into our newest production plant in Queens, New York, and sublease our older Edison, New Jersey, plant.  We also announced that we would reduce the web width for all editions of The Times from 54 inches to 48 inches, with the printed page decreasing from 13.5 by 22 inches to 12 by 22 inches.  The plant consolidation and web-width reduction is expected to be completed in the second quarter of 2008.  Both plants will remain fully operational until then, at which time we expect to have sublease arrangements for the Edison plant.

 

Capital expenditures for the plant consolidation and web-width reduction are expected to total approximately $150 million. Of that amount, approximately $20 million is expected in 2006 and the balance in 2007 and the first half of 2008.  These initiatives are expected to save more than $42 million annually ($30 million in lower operating costs and $12 million from the web-width reduction due to decreased newsprint consumption) and avoid the need for approximately $50 million in capital investment at the Edison plant over the next ten years.  As part of the plant consolidation, we expect a workforce reduction of approximately 250 full-time equivalent employees. We plan to facilitate the reductions through a variety of severance and buyout packages.  We expect to record one-time charges for severance and buyouts and certain other expenses related to the consolidation, but we are not able at this time to estimate these charges.

 

Discovery Times Channel

 

In April 2006, we exercised our right to require Discovery Communications, Inc. (“DCI”) to purchase our 50% investment in DTC.  As part of the initial investment in the channel, this right was exercisable following the fourth anniversary of the investment.  By contract, the sale price is determined by a formula, with a floor of $80 million and a ceiling of $135 million.  We are currently negotiating the price with DCI and expect to complete the transaction before the end of the year.  Our investment in the channel was approximately $105 million as of June 25, 2006.  Based on the sale price, we will record a gain or loss, depending on whether the price is higher or lower than the investment balance.

 

20



 

WQEW Sale

 

One of our New York City radio stations, WQEW-AM (“WQEW”), receives revenues under a time brokerage agreement with ABC, Inc. (“ABC”), that provides substantially all of WQEW’s programming.  Under a separate option agreement, ABC has the right to acquire WQEW at the end of 2006 and, in the first quarter of 2006, ABC notified us of its intention to exercise this right.  The sale is currently scheduled to close in the first quarter of 2007 with a purchase price of $40 million and is subject to Federal Communications Commission approval.  At closing, we will recognize a significant portion of the sale price as a gain because the

net book value of WQEW’s net assets being sold are nominal.

 

2006 Highlights

 

Below are highlights for the second quarter and first six months of 2006.  See the remaining portion of this discussion for more details on the items discussed below.

 

                  Advertising revenues grew 1.0% in the second quarter and 2.4% in the first six months of 2006 compared with the same periods last year, mainly due to growth in online revenues and the inclusion of About.com (acquired March 18, 2005) for the first six months.

 

                  Circulation revenues increased slightly in the second quarter and first six months of 2006 compared with the same periods last year due to growth at The New York Times Media Group and the Regional Media Group, partially offset by declines at the New England Media Group.

 

                  Other revenues increased 12.6% in the second quarter and 10.8% in the first six months of 2006 compared with prior-year periods, primarily due to the introduction of TimesSelect, a fee-based product that charges non-print subscribers for access to our columnists and archives, and higher commercial printing revenues.

 

                  Total costs and expenses grew 2.9% and 4.4% in the second quarter and first six months of 2006 compared with the prior-year periods.  Total costs and expenses included staff reduction expenses of $9.1 million and $18.4 million in the second quarter and first six months of 2006.  For the first six months of 2006 compared with the prior-year period, total costs and expenses grew in part because of the inclusion of About.com (acquired March 18, 2005).  About.com expenses were $23.4 million in the first six months of 2006 compared with $10.4 million in the first six months of 2005.

 

Excluding staff reduction expenses, costs and expenses were higher in the second quarter and first six months of 2006 compared with the prior-year periods because of increases in raw materials expense, benefits expense, distribution and outside printing expense and promotion expense.

 

21



 

                  Net income and diluted earnings per share were $61.3 million or $.42 per share in the second quarter and $96.3 million or $.66 per share in the first six months of 2006 compared with $60.8 million or $.42 per share and $171.9 million or $1.17 per share in the second quarter and first six months of 2005.

 

Included in net income and diluted earnings per share is the following:

 

2006

 

                  Staff reduction expenses of approximately $5 million after tax or $.04 per share in the second quarter of 2006 and approximately $10 million or $.07 per share in the first six months of 2006.

 

2005

 

                  Staff reduction expenses of approximately $6 million after tax or $.04 per share in the second quarter of 2005 and a gain of approximately $68 million or $.46 per share from the sale of assets in the first six months of 2005.

 

Trends and Uncertainties

 

Our Annual Report on Form 10-K for the year ended December 25, 2005, details trends and uncertainties applicable to our Company.  As of June 25, 2006, there have been no material changes in these trends and uncertainties.

 

2006 Expectations

 

The key financial measures for 2006 discussed in the table below are computed under accounting principles generally accepted in the United States of America (“GAAP”).

 

Item

 

2006 Expectation

Newsprint cost per ton

 

Growth rate expected to be 11% to 13%

Depreciation & amortization

 

$154 to $158 million(a)

Capital expenditures

 

$480 to $520 million(b)

Net income from joint ventures

 

$20 to $24 million

Interest expense

 

$51 to $55 million

Tax rate

 

39.2%


(a)       This estimate may change as a result of charges that may be incurred in connection with our plant consolidation.

 

(b)       Under GAAP, total capital expenditures reflected in our financial statements include our capital expenditures for our new headquarters building as well as those of our development partner:

 

Company*

 

$355 to $385 million

 

Development partner

 

$125 to $135 million

 

 

 

$480 to $520 million

 

 

* Includes $240 to $270 million for our new headquarters.

 

In addition, our revenues will include a full year of revenue from About.com, which is expected to have revenue growth above the industry average of 30% as well as double-digit operating profit growth.

 

22



 

RESULTS OF OPERATIONS

 

Overview

 

Unless specifically stated otherwise, all references to June 2006 and June 2005 refer to our fiscal periods ended, or the dates as of, June 25, 2006 and June 26, 2005, respectively.  All references to December 2005, unless specifically stated otherwise, refer to our fiscal year ended, or the date as of, December 25, 2005.

 

The following table presents our consolidated financial results on a GAAP basis.

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

% Change

 

June 2006

 

June 2005

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

577,984

 

$

572,363

 

1.0

 

$

1,132,611

 

$

1,106,142

 

2.4

 

Circulation

 

219,705

 

218,482

 

0.6

 

439,986

 

438,099

 

0.4

 

Other

 

61,059

 

54,224

 

12.6

 

117,923

 

106,411

 

10.8

 

Total revenues

 

858,748

 

845,069

 

1.6

 

1,690,520

 

1,650,652

 

2.4

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials

 

84,478

 

78,353

 

7.8

 

166,415

 

153,182

 

8.6

 

Wages and benefits

 

171,201

 

172,005

 

(0.5

)

347,578

 

348,913

 

(0.4

)

Other

 

135,893

 

128,518

 

5.7

 

271,413

 

253,712

 

7.0

 

Total production costs

 

391,572

 

378,876

 

3.4

 

785,406

 

755,807

 

3.9

 

Selling, general and administrative expenses

 

368,103

 

359,651

 

2.4

 

737,765

 

703,177

 

4.9

 

Total costs and expenses

 

759,675

 

738,527

 

2.9

 

1,523,171

 

1,458,984

 

4.4

 

Gain on sale of assets

 

 

 

N/A

 

 

122,946

 

N/A

 

OPERATING PROFIT

 

99,073

 

106,542

 

(7.0

)

167,349

 

314,614

 

(46.8

)

Net income from joint ventures

 

8,770

 

3,138

 

 

*

10,737

 

2,890

 

 

*

Interest expense, net

 

13,234

 

11,844

 

11.7

 

25,758

 

26,092

 

(1.3

)

Income from non-compete agreement

 

 

1,250

 

N/A

 

 

2,500

 

N/A

 

Income before income taxes and minority interest

 

94,609

 

99,086

 

(4.5

)

152,328

 

293,912

 

(48.2

)

Income taxes

 

33,540

 

38,110

 

(12.0

)

56,397

 

121,768

 

(53.7

)

Minority interest in net loss/(income) of subsidiaries

 

244

 

(161

)

 

*

337

 

(280

)

 

*

NET INCOME

 

$

61,313

 

$

60,815

 

0.8

 

$

96,268

 

$

171,864

 

(44.0

)


* Represents an increase or decrease in excess of 100%.

 

Revenues

 

Revenues by reportable segment and for the Company as a whole were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

June 2006

 

June 2005

 

% Change

 

June 2006

 

June 2005

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

News Media Group

 

$