NEW YORK TIMES CO
ITEM 1. BUSINESS
INTRODUCTION
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 - Management’s 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:
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The New York Times Media Group, which includes The New York Times (“The Times”), the International Herald Tribune (the “IHT”), NYTimes.com and related businesses;
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the New England Media Group, which includes The Boston Globe (the “Globe”), Boston.com, the Worcester Telegram & Gazette (the “T&G”), the T&G’s Web site, Telegram.com and related businesses; and
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the Regional Media Group, which includes 14 daily newspapers in Alabama, California, Florida, Louisiana, North Carolina and South Carolina, their Web sites, other print publications and related businesses.
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.
NEWS MEDIA GROUP
The News Media Group segment consists of The New York Times Media Group, the New England Media Group and the Regional Media Group.
Advertising Revenue
A significant portion of the News Media Group’s 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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The New York Times Media Group
The New York Times
The Times, a daily (Monday through Saturday) and Sunday newspaper, commenced publication in 1851.
Circulation
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 Times’s 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.
Advertising
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.
Production and Distribution
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 Times’s 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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International Herald Tribune
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 IHT’s 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 France’s 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 Times’s 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 - Management’s 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.
Other Businesses
The New York Times Media Group’s other businesses include:
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The New York Times Index, which produces and licenses The New York Times Index, a print publication,
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Digital Archive Distribution, which licenses electronic archive databases to resellers of that information in the business, professional and library markets, and
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The New York Times News Services Division, which is made up of Syndication Sales and Business Development. Syndication Sales transmits articles, graphics and photographs from The Times, the Globe and other publications to almost 1,500 newspapers, magazines and Web sites in 90 countries worldwide. Business Development principally comprises Photo Archives, The New York Times Store, Book Development and Rights & Permissions.
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-FM’s call letters and Web site from us for $11.5 million. We used the proceeds from the sale to pay outstanding debt.
New England Media Group
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 - Management’s Discussion and Analysis of Financial Condition and Results of Operation” for more information on our strategic plan for the Globe.
Circulation
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 Globe’s 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 Globe’s 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&G’s average net paid weekday and Sunday circulation, for the years ended December 27, 2009, and December 28, 2008, are shown below:
Advertising
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.
Production and Distribution
In the second quarter of 2009, we completed the consolidation of the Globe’s 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 Globe’s subscription circulation was delivered by a third-party service in 2009.
Boston.com
The Globe’s 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.
Regional Media Group
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 California’s 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.
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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.
ABOUT GROUP
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.com’s 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 Group’s revenues, is principally derived from an arrangement with Google under which third-party advertising is placed on the About Group’s Web sites.
FOREST PRODUCTS INVESTMENTS AND OTHER JOINT VENTURES
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 - Management’s 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 AbitibiBowater’s paper mill in Clermont, Quebec. Malbaie is wholly dependent upon AbitibiBowater for its pulp, which is purchased by Malbaie from AbitibiBowater’s 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.
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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.
RAW MATERIALS
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):
(1) The Times and the Globe use coated, supercalendered or other paper for The New York Times Magazine, T: The New York Times Style Magazine and the Globe’s Sunday Magazine.
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.
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COMPETITION
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 IHT’s key competitors include all international sources of English language news, including The Wall Street Journal’s 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.
EMPLOYEES
We had approximately 7,665 full-time equivalent employees as of December 27, 2009.
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Labor Relations
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 - Management’s 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.
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ITEM 1A. RISK FACTORS
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
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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 Google’s ability to place third-party advertising on the About Group’s Web sites may have an adverse effect on the About Group’s 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.com’s 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.com’s 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),
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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 & Poor’s and Moody’s 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.
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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 plan’s 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:
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consolidation in the North American newsprint industry, which has reduced the number of suppliers;
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declining newsprint supply as a result of paper mill closures and conversions to other grades of paper; and
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other factors that adversely impact supplier profitability, including increases in operating expenses caused by raw material and energy costs, and a rise in the value of the Canadian dollar, which adversely affects Canadian suppliers, whose costs are incurred in Canadian dollars but whose newsprint sales are priced in U.S. dollars.
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
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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 Globe’s 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.
ITEM 3. LEGAL PROCEEDINGS
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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
P.16 2009 ANNUAL REPORT - Executive Officers
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
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 Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - THE NEW YORK TIMES COMPANY P.17
PERFORMANCE PRESENTATION
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 & Poor’s 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 issuer’s 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 Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES(1)
(1) Except as otherwise noted, all purchases were made pursuant to our publicly announced share repurchase program. On April 13, 2004, our Board of Directors authorized repurchases in an amount up to $400 million. As of February 17, 2010, we had authorization from our Board of Directors to repurchase an amount of up to approximately $91 million of our Class A Common Stock. Our Board of Directors has authorized us to purchase shares from time to time as market conditions permit. In 2009, we did not purchase any shares under this authorization, which is not subject to an expiration date.
(2) Includes 44,678 shares withheld from employees to satisfy tax withholding obligations upon the vesting of restricted shares awarded under our 1991 Executive Stock Incentive Plan. The shares were repurchased by us pursuant to the terms of the plan and not pursuant to our publicly announced share repurchase program.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - THE NEW YORK TIMES COMPANY P.19
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with “
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
EXECUTIVE OVERVIEW
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 Group’s main operating costs are employee-related costs and raw materials, primarily newsprint.
P.24 2009 ANNUAL REPORT - Management’s Discussion and Analysis of Financial Condition and Results of Operations
News Media Group revenues in 2009 by category and percentage share are below.
About Group
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 Group’s total advertising revenues in 2009. The About Group’s main operating costs are employee-related costs and content and hosting costs.
Joint Ventures
Our investments accounted for under the equity method are as follows:
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a 49% interest in Metro Boston, which publishes a free daily newspaper in the greater Boston area,
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a 49% interest in a Canadian newsprint company, Malbaie,
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a 40% interest in a partnership, Madison, operating a supercalendered paper mill in Maine,
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a 25% interest in quadrantONE, an online advertising network that sells bundled premium, targeted display advertising onto local newspaper and other Web sites, and
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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.
Business Environment
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:
Economic conditions
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
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,
Management’s 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.
Costs
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.”
Our Strategy
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.
Extending the reach of our brands
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.
Strengthening our digital businesses
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.
Diversifying our revenue streams
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.com’s 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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
we believe that our pricing plans and policies must reflect this vision.
Restructuring our cost base
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 Globe’s printing facilities, increasing circulation prices and reducing compensation and headcount. The strategic plan involved extensive negotiations with the Globe’s 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).
Managing and rebalancing our portfolio of businesses
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.
Evaluating our pension-related obligations
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
Management’s 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.
Expectations
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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Overview
The following table presents our consolidated financial results.
* Represents an increase or decrease in excess of 100%.
Management’s Discussion And Analysis of Financial Condition and Results of Operations - THE NEW YORK TIMES COMPANY P.29
Revenues
Revenues by reportable segment and for the Company as a whole were as follows:
News Media Group
Advertising, circulation and other revenues by division of the News Media Group and for the Group as a whole were as follows:
Advertising Revenue
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 - Management’s 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.
Management’s 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
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 - Management’s 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
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 Times’s archives, which was discontinued in September 2007, offset in part by rental income from the lease of six floors in our New York headquarters.
About Group
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.
Operating Costs
Below are charts of our consolidated operating costs.
Components of Consolidated
Operating Costs
Consolidated Operating
Costs as a Percentage of Revenues
Management’s Discussion and Analysis of Financial Condition and Results of Operations - THE NEW YORK TIMES COMPANY P.33
Operating costs were as follows:
Production Costs
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.
Selling, General and Administrative Costs
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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Depreciation and Amortization
Consolidated depreciation and amortization by reportable segment, Corporate and the Company as a whole, were as follows:
Beginning in 2009, we began to allocate Corporate’s 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 Group’s 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.
Segment Operating Costs
The following table sets forth consolidated costs by reportable segment, Corporate and the Company as a whole.
News Media Group
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).
About Group
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
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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.
Corporate
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).
Other Items
Pension Withdrawal Expense
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.
Net Pension Curtailment Gain
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.
Loss on Leases and Other
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 - Management’s 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.
Net Gain/(Loss) on Sale of Assets
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.
Impairment of Assets
There were no impairment charges in connection with our 2009 annual impairment test, which was completed in the fourth quarter. However, the Regional Media Group’s 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 group’s 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 Group’s 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 Group’s 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.
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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.
Operating Profit/(Loss)
Consolidated operating profit/(loss) by reportable segment, Corporate and the Company as a whole, were as follows:
* Represents an increase or decrease in excess of 100%.
We discuss the reasons for the year-to-year changes in each segment’s and Corporate’s operating profit in the “Revenues,” “Operating Costs,” and “Other Items” sections above.
P.38 2009 ANNUAL REPORT - Management’s Discussion and Analysis of Financial Condition and Results of Operations
NON-OPERATING ITEMS
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.
Income Taxes
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.
Discontinued Operations
Radio Operations
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-FM’s 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.
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In April 2007, we sold WQEW-AM to Radio Disney, LLC (which had been providing substantially all of WQEW-AM’s 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.
Broadcast Media Group
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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Overview
The following table presents information about our financial position.
Financial Position Summary
(1) Short-term debt includes borrowings under revolving credit agreements, current portion of long-term debt and current portion of capital lease obligations. Long-term debt includes the long-term portion of capital lease obligations.
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:
-
reducing our debt to allow for financing flexibility in the future; and
-
making acquisitions and investments that are both financially and strategically attractive.
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.
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We have taken and will continue to take steps to improve our liquidity. These actions include but are not limited to:
-
implementing various cost-cutting initiatives, as discussed above, including consolidating our operations; optimizing circulation revenues; reducing newsprint consumption; reducing employee-related costs; freezing pension plans; exiting multiemployer pension plans; and rationalizing our cost base relative to expected future revenue;
-
suspending our quarterly dividends on our Class A and Class B Common Stock in 2009;
-
exploring opportunities to raise capital, including entering into a private financing transaction for $250.0 million and entering into a sale-leaseback for part of the space we own in our New York headquarters building for $225.0 million;
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reducing outstanding debt by over $290 million from the balance at the end of 2008; and
-
selling certain assets, such as WQXR-FM, the TimesDaily and excess real estate, and exploring the sale of our investment in NESV.
In 2010, we expect our cash balance, cash provided from operations and third-party financing to be sufficient to meet our cash obligations.
Capital Resources
Sources and Uses of Cash
Cash flows by category were as follows:
* Represents an increase or decrease in excess of 100%.
Operating Activities
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.
Investing Activities
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 partner’s costs of $55 million in 2007.
Financing Activities
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 - Management’s 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.
Third-Party Financing
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.
Redemption of Debt
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.
Sale-Leaseback Financing
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%.
Medium-Term Notes
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.
Senior Unsecured Notes
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
Management’s 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 holder’s 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:
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incur or guarantee additional debt (other than certain refinancings of existing debt, borrowings available under existing credit agreements and certain other debt, in each case subject to the provisions of the securities purchase agreement), unless (1) the debt is incurred after March 31, 2010, and (2) immediately after the incurrence of the debt, our fixed charge coverage ratio for the most recent four full fiscal quarters is at least 2.75:1. For this purpose, the fixed charge coverage ratio for any period is defined as the ratio of consolidated EBITDA for such period (defined as consolidated net income in accordance with GAAP, plus interest, taxes, depreciation and amortization, non-cash items, including, without limitation, stock-based compensation expenses, and non-recurring expenses that reduce net income but that do not represent a cash item, minus tax credits and non-cash items increasing net income) to consolidated fixed charges for such period (defined as consolidated interest expense in accordance with GAAP, including the interest component of capital leases, plus, if applicable, dividends on any preferred stock or certain redeemable capital stock);
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create or incur liens with respect to any of our properties (subject to exceptions for customary permitted liens and liens securing debt in an amount less than 25% of adjusted stockholders’ equity, based on a formula set forth in the securities purchase agreement, which does not include accumulated other comprehensive loss and excludes the impact of one-time non-cash charges, minus the amount of guarantees of third-party debt); or
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transfer or sell assets, except for transfers or sales in the ordinary course of business, unless within 360 days of any such transfer or sale of assets, we use the net proceeds of such transfer or sale to repay outstanding senior debt or invest in a similar business, acquire properties or make capital expenditures. Any net proceeds from a transfer or asset sale not invested as described above will be deemed “excess proceeds.” When the amount of the excess proceeds exceeds $10 million, we will be required to make an offer to all holders of the senior unsecured notes to purchase the maximum aggregate principal amount of the senior unsecured notes that may be purchased with the “excess proceeds” at an offer price equal to 100% of such outstanding principal amount of the senior unsecured notes, plus accrued and unpaid interest, if any.
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 - Management’s 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.
Ratings
In April 2009, Standard & Poor’s lowered its rating on our senior unsecured debt to B+ from BB- and placed its rating on negative watch. In May 2009, Standard & Poor’s 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, Moody’s 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.
Contractual Obligations
The information provided is based on management’s 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.
(1) Includes estimated interest payments on long-term debt. See Note 7 of the Notes to the Consolidated Financial Statements for additional information related to our long-term debt.
(2) See Note 19 of the Notes to the Consolidated Financial Statements for additional information related to our capital and operating leases.
(3) Includes estimated benefit payments, net of plan participant contributions, under our Company-sponsored pension and other postretirement benefits plans. Payments for these plans have been estimated over a 10-year period; therefore the amounts included in the “Later Years” column only include payments for the period of 2015-2019. While benefit payments under these plans are expected to continue beyond 2019, we believe that an estimate beyond this period is impracticable. Benefit plans in the table above also include estimated payments for multiemployer pension plan withdrawal liabilities. See Notes 10 and 11 of the Notes to the Consolidated Financial Statements for additional information related to our pension benefits and other postretirement benefits plans.
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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 arm’s 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.
Off-Balance Sheet Arrangements
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 Times’s 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, management’s 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.
Long-Lived Assets
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 - Management’s 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 unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill.
The discounted cash flow analysis requires us to make various judgments, estimates and assumptions, many of which are interdependent, about future revenues, operating margins, growth rates, capital expenditures, working capital and discount rates. The starting point for the assumptions used in our discounted cash flow analysis is the annual long range financial forecast. The annual planning process that we undertake to prepare the long range financial forecast takes into consideration a multitude of factors including historical growth rates and operating performance, related industry trends, macroeconomic conditions, and marketplace data, among others. Assumptions are also made for perpetual growth rates for periods beyond the long range financial forecast period. Our estimates of fair value are sensitive to changes in all of these variables, certain of which relate to broader macroeconomic conditions outside our control.
The market approach analysis includes applying a multiple, based on comparable market transactions, to certain operating metrics of the reporting unit.
We compare the sum of the fair values of our reporting units to our market capitalization to determine whether our estimates of reporting unit fair value are reasonable.
Intangible assets that are not amortized (trade names) are tested for impairment at the asset level by comparing the fair value of the asset with its carrying amount. Fair value is calculated utilizing the relief-from-royalty method, which is based on applying a royalty rate, which would be obtained through a lease, to the cash flows derived from the asset being tested. The royalty rate is derived from market data. If the fair value exceeds the carrying amount, the asset is not considered impaired. If the carrying amount exceeds the fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying amount of the asset over the fair value of the asset.
All other long-lived assets (intangible assets that are amortized, such as customer lists, as well as property, plant and equipment) are tested for impairment at the asset group level associated with the lowest level of cash flows. An impairment exists if the carrying value of the asset i) is not recoverable (the carrying value of the asset is greater than the sum of undiscounted cash flows) and ii) is greater than its fair value.
The significant estimates and assumptions used by management in assessing the recoverability of goodwill, other intangible assets acquired and other long-lived assets are estimated future cash flows, discount rates, growth rates, as well as other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated results of the impairment tests can vary within a range of outcomes.
In addition to annual testing, management uses certain indicators to evaluate whether the carrying values of our long-lived assets may not be recoverable and an interim impairment test may be required. These indicators include i) current-period operating or cash flow declines combined with a history of operating or cash flow declines or a projection/forecast that demonstrates continuing declines in cash flow or an inability to improve our operations to forecasted levels, ii) a significant adverse change in the business climate, whether structural or technological and iii) a decline in our stock price and market capitalization.
Management has applied what it believes to be the most appropriate valuation methodology for its impairment testing. See Note 4 of the Notes to the Consolidated Financial Statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - THE NEW YORK TIMES COMPANY P.47
Retirement Benefits
Our pension and other postretirement benefit costs are accounted for using actuarial valuations. We are required to recognize the funded status of our defined benefit plans - measured as the difference between plan assets at fair value and the benefit obligation - on the balance sheet and to recognize changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost, within other comprehensive income, net of income taxes. As of December 27, 2009, our assets related to our qualified pension plans were measured at fair value.
We consider accounting for retirement plans critical to all of our operating segments because management is required to make significant subjective judgments about a number of actuarial assumptions, which include discount rates, health-care cost trend rates, salary growth, long-term return on plan assets and mortality rates. These assumptions may have an effect on the amount and timing of future contributions.
Depending on the assumptions and estimates used, the impact from our pension and other postretirement benefits could vary within a range of outcomes and could have a material effect on our Consolidated Financial Statements.
See “- Pensions and Other Postretirement Benefits” below for more information on our retirement benefits.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition provisions. Stock-based compensation cost is measured at the grant date, and for certain awards at the end of each reporting period based on the fair value of the award, and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock and expected dividends. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our Consolidated Financial Statements. See Note 16 of the Notes to the Consolidated Financial Statements for additional information regarding stock-based compensation expense.
Income Taxes
We consider accounting for income taxes critical to our operations because management is required to make significant subjective judgments in developing our provision for income taxes, including the determination of deferred tax assets and liabilities, and any valuation allowances that may be required against deferred tax assets.
Income taxes are recognized for the following: i) amount of taxes payable for the current year and ii) deferred tax assets and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes in the period of enactment.
We are also required to assess whether deferred tax assets shall be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our process includes collecting positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence and assessing, based on the evidence, whether it is more likely than not that the deferred tax assets will not be realized.
We recognize in our 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. This involves the identification of potential uncertain tax positions, the evaluation of tax law and an assessment of whether a liability for uncertain tax positions is necessary. Different conclusions reached in this assessment can have a material impact on the Consolidated Financial Statements.
We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which could require an extended period of time to resolve. 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 difficult to predict.
Self-Insurance
We self-insure for workers’ compensation costs, certain employee medical and disability benefits, and automobile and general liability claims. The recorded liabilities for self-insured risks are primarily calculated using actuarial methods. The liabilities include amounts for actual claims, claim growth and claims incurred but not yet reported. Actual experience,
P.48 2009 ANNUAL REPORT - Management’s Discussion and Analysis of Financial Condition and Results of Operations
including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The recorded liabilities for self-insured risks were approximately $77 million as of December 27, 2009 and $82 million as of December 28, 2008.
Accounts Receivable Allowances
Credit is extended to our advertisers and subscribers based upon an evaluation of the customers’ financial condition, and collateral is not required from such customers. We use prior credit losses as a percentage of credit sales, the aging of accounts receivable and specific identification of potential losses to establish reserves for credit losses on accounts receivable. In addition, we establish reserves for estimated rebates, returns, rate adjustments and discounts based on historical experience.
We consider accounting for accounts receivable allowances critical to all of our operating segments because of the significance of accounts receivable to our current assets and operating cash flows. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required, which could have a material effect on our Consolidated Financial Statements.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension Benefits
We sponsor several pension plans, participate in The New York Times Newspaper Guild pension plan, a joint Company and Guild-sponsored plan, and make contributions to several multiemployer pension plans in connection with collective bargaining agreements. These plans cover substantially all employees.
Our company-sponsored plans include qualified (funded) plans as well as non-qualified (unfunded) plans. These plans provide participating employees with retirement benefits in accordance with benefit formulas detailed in each plan. Our non-qualified plans provide enhanced retirement benefits to select members of management.
We also have a foreign-based pension plan for certain IHT employees (the “foreign plan”). The information for the foreign plan is combined with the information for U.S. non-qualified plans. The benefit obligation of the foreign plan is immaterial to our total benefit obligation.
The funded status of our qualified and non-qualified pension plans as of December 27, 2009 is as follows:
Our pension assets benefited from strong performance in 2009.
For accounting purposes on a GAAP basis, the underfunded status of our qualified pension plans improved by approximately $122 million from year-end 2008.
For funding purposes on an 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.
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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 operating 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.
Pension expense is calculated using a number of actuarial assumptions, including an expected long-term rate of return on assets (for qualified plans) and a discount rate. Our methodology in selecting these actuarial assumptions is discussed below.
In determining the expected long-term rate of return on assets, we evaluated input from our investment consultants, actuaries and investment management firms, including their review of asset class return expectations, as well as long-term historical asset class returns. Projected returns by such consultants and economists are based on broad equity and bond indices.
The expected long-term rate of return determined on this basis was 8.75% in 2009. We anticipate that our pension assets will generate long-term returns on assets of at least 8.75%. The expected long-term rate of return on plan assets is based on an asset allocation assumption of 65% to 75% with equity managers, with an expected long-term rate of return on assets of 10%, and 25% to 35% with fixed income/real estate managers, with an expected long-term rate of return on assets of 6%.
Our actual asset allocation as of December 27, 2009 was in line with our expectations. We regularly review our actual asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate.
Our plan assets had a rate of return of approximately 25% in 2009. We believe that an expected long-term rate of return of 8.75% is reasonable.
If we had decreased our expected long-term rate of return on our plan assets by 0.5% in 2009, pension expense would have increased by approximately $7 million in 2009 for our qualified pension plans. Our funding requirements would not have been materially affected.
In 2009 and 2008, we determined our discount rate using a Ryan ALM, Inc. Curve (“Ryan Curve”). The Ryan Curve was not available prior to 2008, when we utilized the Citigroup Pension Discount Curve. We switched to the Ryan Curve because it provides the bonds included in the curve and allows adjustments for certain outliers (e.g., bonds on “watch”). We believe that this additional information and flexibility allows us to calculate a better estimate of a discount rate.
To determine our discount rate, we project a cash flow based on annual accrued benefits. For active participants, the benefits under the respective pension plans are projected to the date of termination. The projected plan cash flow is discounted to the measurement date, which is the last day of our fiscal year, using the annual spot rates provided in the Ryan Curve. A single discount rate is then computed so that the present value of the benefit cash flow (on a projected benefit obligation basis as described above) equals the present value computed using the Ryan Curve rates.
The discount rate determined on this basis was 6.45% for our qualified plans and 6.55% for our non-qualified plans as of December 27, 2009.
If we had decreased the expected discount rate by 0.5% in 2009, pension expense would have increased by approximately $8 million for our qualified pension plans and approximately $1 million for our non-qualified pension plans. Our funding requirements would not have been materially affected.
We will continue to evaluate all of our actuarial assumptions, generally on an annual basis, and will adjust as necessary. Actual pension expense will depend on future investment performance, changes in future discount rates, the level of contributions we make and various other factors related to the populations participating in the pension plans.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information regarding our pension plans.
Other Postretirement Benefits
We provide health benefits to retired employees (and their eligible dependents) who are not covered by any collective bargaining agreements, if the employees meet specified age and service requirements. We no longer provide post-age 65 retiree medical benefits for employees who retire on or after March 1, 2009. We also contribute to a postretirement plan
P.50 2009 ANNUAL REPORT - Management’s Discussion and Analysis of Financial Condition and Results of Operations
under the provisions of a collective bargaining agreement. We accrue the costs of postretirement benefits during the employees’ active years of service and our policy is to pay our portion of insurance premiums and claims from our assets.
The annual postretirement expense was calculated using a number of actuarial assumptions, including a health-care cost trend rate and a discount rate. The health-care cost trend rate range decreased to 5% to 9% as of December 27, 2009, from 5% to 10% as of December 28, 2008. A 1% increase/decrease in the health-care cost trend rates range would result in an increase of approximately $1 million or a decrease of approximately $1 million in our 2009 service and interest costs, respectively, two factors included in the calculation of postretirement expense. A 1% increase/decrease in the health-care cost trend rates would result in an increase of approximately $10 million or a decrease of approximately $9 million, in our accumulated benefit obligation as of December 27, 2009. Our discount rate assumption for postretirement benefits is consistent with that used in the calculation of pension benefits. See “- Pension Benefits,” above for information on our discount rate assumption.
See Notes 10 and 11 of the Notes to the Consolidated Financial Statements for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which amends previous guidance related to the accounting for revenue arrangements with multiple deliverables. The guidance specifically addresses how consideration should be allocated to the separate units of accounting. The guidance is effective for fiscal years beginning on or after June 15, 2010, and will apply to our 2011 fiscal year. The guidance can be applied prospectively to new or materially modified arrangements after the effective date or retrospectively for all periods presented, and early application is permitted. We are currently evaluating the impact of adopting this guidance on our financial statements.
In June 2009, the FASB issued guidance that amends the consolidation guidance applicable to variable interest entities. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. While we are currently evaluating the impact of adopting this guidance, we do not believe it will have a material impact on our financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk is principally associated with the following:
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Interest rate fluctuations related to our debt obligations are managed by balancing the mix of variable versus fixed-rate borrowings. Based on the variable-rate debt included in our debt portfolio, a 75 basis point increase in interest rates would have resulted in additional interest expense of $1.4 million (pre-tax) in 2009 and $2.6 million (pre-tax) in 2008.
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Newsprint is a commodity subject to supply and demand market conditions. We have equity investments in two paper mills, which provide a partial hedge against price volatility. The cost of raw materials, of which newsprint expense is a major component, represented 7% of our total operating costs in 2009 and 9% in 2008. Based on the number of newsprint tons consumed in 2009 and 2008, a $10 per ton increase in newsprint prices would have resulted in additional newsprint expense of $2.5 million (pre-tax) in 2009 and $3.2 million (pre-tax) in 2008.
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A significant portion of our employees are unionized and our results could be adversely affected if labor negotiations were to restrict our ability to maximize the efficiency of our operations. In addition, if we experienced labor unrest, our ability to produce and deliver our most significant products could be impaired.
See Notes 3, 6, 7 and 19 of the Notes to the Consolidated Financial Statements.
P.52 2009 ANNUAL REPORT - Quantitative and Qualitative Disclosures about Market Risk
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE NEW YORK TIMES COMPANY 2009 FINANCIAL REPORT
INDEX
PAGE
Management’s Responsibilities Report
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Statements of Operations for the years ended December 27, 2009, December 28, 2008 and December 30, 2007
Consolidated Balance Sheets as of December 27, 2009 and December 28, 2008
Consolidated Statements of Cash Flows for the years ended December 27, 2009, December 28, 2008 and December 30, 2007
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 27, 2009, December 28, 2008 and December 30, 2007
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
2. Acquisitions and Dispositions
3. Inventories
4. Impairment of Assets
5. Goodwill and Other Intangible Assets
6. Investments in Joint Ventures
7. Debt
8. Other
9. Fair Value Measurements
10. Pension Benefits
11. Other Postretirement Benefits
12. Other Liabilities
13. Income Taxes
14. Discontinued Operations
15. Earnings/(Loss) Per Share
16. Stock-Based Awards
17. Stockholders’ Equity
18. Segment Information
19. Commitments and Contingent Liabilities
20. Subsequent Events
Quarterly Information (Unaudited)
Schedule II - Valuation and Qualifying Accounts for the three years ended December 27, 2009
Financial Statements and Supplementary Data - THE NEW YORK TIMES COMPANY P.53
MANAGEMENT’S RESPONSIBILITIES REPORT
The Company’s consolidated financial statements were prepared by management, who is responsible for their integrity and objectivity. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and, as such, include amounts based on management’s best estimates and judgments.
Management is further responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company follows and continuously monitors its policies and procedures for internal control over financial reporting to ensure that this objective is met (see “Management’s Report on Internal Control Over Financial Reporting” below).
The consolidated financial statements were audited by Ernst & Young LLP, an independent registered public accounting firm, in 2009, 2008 and 2007. Its audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and its report is shown on page 56.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent registered public accounting firm, internal auditors and management to discuss specific accounting, financial reporting and internal control matters. Both the independent registered public accounting firm and the internal auditors have full and free access to the Audit Committee. Each year the Audit Committee selects, subject to ratification by stockholders, the firm which is to perform audit and other related work for the Company.
THE NEW YORK TIMES COMPANY
THE NEW YORK TIMES COMPANY
BY:
JANET L. ROBINSON
BY:
JAMES M. FOLLO
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
February 22, 2010
February 22, 2010
P.54 2009 ANNUAL REPORT - Management’s Responsibilities Report
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 27, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 27, 2009.
The Company’s independent registered public accounting firm, Ernst & Young LLP, that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 27, 2009, which is included on page 57 in this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting - THE NEW YORK TIMES COMPANY P.55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of
The New York Times Company
New York, NY
We have audited the accompanying consolidated balance sheets of The New York Times Company as of December 27, 2009 and December 28, 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 27, 2009. Our audit also included the financial statement schedule listed at Item 15(A)(2) of The New York Times Company’s 2009 Annual Report on Form 10-K. These financial statements and schedule are the responsibility of The New York Times Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The New York Times Company at December 27, 2009 and December 28, 2008, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 27, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
As discussed in Note 11 to its consolidated financial statements, in 2008 The New York Times Company adopted accounting guidance originally issued in Emerging Issues Task Force No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (codified in Accounting Standards Codification (“ASC”) Topic 715, “Compensation-Retirement Benefits”). As discussed in Note 1 to the financial statements, in 2009 The New York Times Company adopted accounting guidance originally issued in Financial Accounting Standards Board Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (codified in ASC Topic 810, “Consolidation”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The New York Times Company’s internal control over financial reporting as of December 27, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2010 expressed an unqualified opinion thereon.
New York, New York
February 22, 2010
P.56 2009 ANNUAL REPORT - Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
The New York Times Company
New York, NY
We have audited The New York Times Company’s internal control over financial reporting as of December 27, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The New York Times Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on The New York Times Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The New York Times Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2009 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The New York Times Company as of December 27, 2009 and December 28, 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 27, 2009 and our report dated February 22, 2010 expressed an unqualified opinion thereon.
New York, New York
February 22, 2010
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting - THE NEW YORK TIMES COMPANY P.57
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to the Consolidated Financial Statements
P.58 2009 ANNUAL REPORT - Consolidated Statements of Operations
CONSOLIDATED STATEMENTS OF OPERATIONS - continued
See Notes to the Consolidated Financial Statements
Consolidated Statements of Operations - THE NEW YORK TIMES COMPANY P.59
CONSOLIDATED BALANCE SHEETS
See Notes to the Consolidated Financial Statements
P.60 2009 ANNUAL REPORT - Consolidated Balance Sheets
CONSOLIDATED BALANCE SHEETS - continued
See Notes to the Consolidated Financial Statements
Consolidated Balance Sheets - THE NEW YORK TIMES COMPANY P.61
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to the Consolidated Financial Statements
P.62 2009 ANNUAL REPORT - Consolidated Statements of Cash Flows
SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flow Information
Acquisitions, Dispositions and Investments
-
See Notes 2 and 6 of the Notes to the Consolidated Financial Statements.
Non-Cash
-
In 2007, as part of the purchase and sale of the Company’s Edison, N.J., facility (see Note 8 to the Consolidated Financial Statements), the Company terminated its existing capital lease agreement. This resulted in the reversal of the related assets (approximately $86 million) and capital lease obligation (approximately $69 million).
-
Accrued capital expenditures included in “Accounts payable” in the Company’s Consolidated Balance Sheets were approximately $4 million in 2009, $18 million in 2008 and $46 million in 2007.
See Notes to the Consolidated Financial Statements.
Supplemental Disclosures to Consolidated Statements of Cash Flows - THE NEW YORK TIMES COMPANY P.63
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See Notes to the Consolidated Financial Statements
P.64 2009 ANNUAL REPORT - Consolidated Statements of Changes in Stockholders’ Equity
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued
See Notes to the Consolidated Financial Statements
Consolidated Statements of Changes in Stockholders’ Equity - THE NEW YORK TIMES COMPANY P.65
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued
See Notes to the Consolidated Financial Statements
P.66 2009 ANNUAL REPORT - Consolidated Statements of Changes in Stockholders’ Equity
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
The New York Times Company (the “Company”) is a diversified media company currently including newspapers, Internet businesses, investments in paper mills and other investments (see Note 6). The Company’s major source of revenue is advertising, predominantly from its newspaper business. The newspapers generally operate in the Northeast, Southeast and California markets in the United States.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries after elimination of all significant intercompany transactions.
The portion of the net income or loss and equity of a subsidiary attributable to the owners of a subsidiary other than the Company (a noncontrolling interest) is included within net income or loss in the Company’s Consolidated Statements of Operations and as a component of consolidated stockholders’ equity in the Company’s Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity.
Fiscal Year
The Company’s fiscal year end is the last Sunday in December. Fiscal years 2009, 2008 and 2007 each comprise 52 weeks. The Company’s fiscal years ended as of December 27, 2009, December 28, 2008 and December 30, 2007.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Credit is extended to the Company’s advertisers and subscribers based upon an evaluation of the customer’s financial condition, and collateral is not required from such customers. Allowances for estimated credit losses, rebates, returns, rate adjustments and discounts are generally established based on historical experience.
Inventories
Inventories are stated at the lower of cost or current market value. Inventory cost is generally based on the last-in, first-out (“LIFO”) method for newsprint and the first-in, first-out (“FIFO”) method for other inventories.
Investments
Investments in which the Company has at least a 20%, but not more than a 50%, interest are generally accounted for under the equity method. Investment interests below 20% are generally accounted for under the cost method, except if the Company could exercise significant influence, the investment would be accounted for under the equity method. The Company has an investment interest below 20% in a limited liability company which is accounted for under the equity method (see Note 6).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method over the shorter of estimated asset service lives or lease terms as follows: buildings, building equipment and improvements - 10 to 40 years; equipment - 3 to 30 years. The Company capitalizes interest costs and certain staffing costs as part of the cost of constructing major facilities and equipment.
The Company evaluates whether there has been an impairment of long-lived assets, primarily property, plant and equipment, if certain circumstances indicate that a possible impairment may exist. These assets are tested for impairment at the asset group level associated with the lowest level of cash flows. An impairment exists if the carrying value of the asset i) is not recoverable (the carrying value of the asset is greater than the sum of undiscounted cash flows) and ii) is greater than its fair value.
Goodwill and Intangible Assets Acquired
Goodwill is the excess of cost over the fair value of tangible and other intangible net assets acquired. Goodwill is not amortized but tested for impairment annually or in an interim period if certain circumstances indicate a possible impairment may exist. The Company’s annual impairment testing date is the first day of its fiscal fourth quarter.
Other intangible assets acquired consist primarily of trade names on various acquired properties, customer lists, content and other assets. Other intangible assets acquired that have indefinite lives (primarily trade names) are not amortized but tested for impairment annually or in an interim period if certain circumstances indicate a possible impairment may exist. Certain other intangible assets acquired (customer lists, content and other
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.67
assets) are amortized over their estimated useful lives and tested for impairment if certain circumstances indicate an impairment may exist.
The Company tests for goodwill impairment at the reporting unit level, which are the Company’s operating segments. Separate financial information about these segments is regularly evaluated by the Company’s 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, the Company generally weighs the results of the discounted cash flow model more heavily than the market approach because the discounted cash flow model is specific to the Company’s 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 unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill.
The discounted cash flow analysis requires the Company to make various judgments, estimates and assumptions, many of which are interdependent, about future revenues, operating margins, growth rates, capital expenditures, working capital and discount rates. The starting point for the assumptions used in the Company’s discounted cash flow analysis is the annual long range financial forecast. The annual planning process that the Company undertakes to prepare the long range financial forecast takes into consideration a multitude of factors including historical growth rates and operating performance, related industry trends, macroeconomic conditions, and marketplace data, among others. Assumptions are also made for perpetual growth rates for periods beyond the long range financial forecast period. The Company’s estimates of fair value are sensitive to changes in all of these variables, certain of which relate to broader macroeconomic conditions outside the Company’s control.
The market approach analysis includes applying a multiple, based on comparable market transactions, to certain operating metrics of the reporting unit.
The Company compares the sum of the fair values of the Company’s reporting units to the Company’s market capitalization to determine whether the Company’s estimates of reporting unit fair value are reasonable.
Intangible assets that are not amortized (trade names) are tested for impairment at the asset level by comparing the fair value of the asset with its carrying amount. Fair value is calculated utilizing the relief-from-royalty method, which is based on applying a royalty rate, which would be obtained through a lease, to the cash flows derived from the asset being tested. The royalty rate is derived from market data. If the fair value exceeds the carrying amount, the asset is not considered impaired. If the carrying amount exceeds the fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying amount of the asset over the fair value of the asset.
All other long-lived assets (intangible assets that are amortized, such as customer lists) are tested for impairment at the asset group level associated with the lowest level of cash flows. An impairment exists if the carrying value of the asset i) is not recoverable (the carrying value of the asset is greater than the sum of undiscounted cash flows) and ii) is greater than its fair value.
The significant estimates and assumptions used by management in assessing the recoverability of goodwill, other intangible assets acquired and other long-lived assets are estimated future cash flows, discount rates, growth rates, as well as other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated results of the impairment tests can vary within a range of outcomes.
In addition to annual testing, management uses certain indicators to evaluate whether the carrying values of its long-lived assets may not be recoverable and an interim impairment test may be required. These indicators include i) current-period operating or cash flow declines combined with a history of operating or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve
P.68 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
its operations to forecasted levels, ii) a significant adverse change in the business climate, whether structural or technological and iii) a decline in the Company’s stock price and market capitalization.
Management has applied what it believes to be the most appropriate valuation methodology for its impairment testing. See Note 4.
Self-Insurance
The Company self-insures for workers’ compensation costs, certain employee medical and disability benefits, and automobile and general liability claims. The recorded liabilities for self-insured risks are primarily calculated using actuarial methods. The liabilities include amounts for actual claims, claim growth and claims incurred but not yet reported. The recorded liabilities for self-insured risks were approximately $77 million as of December 27, 2009 and $82 million as of December 28, 2008.
Pension and Other Postretirement Benefits
The Company sponsors several pension plans, participates in The New York Times Newspaper Guild pension plan, a joint Company and Guild-sponsored plan, and makes contributions to several others, in connection with collective bargaining agreements, that are considered multiemployer pension plans. These plans cover substantially all employees.
The Company recognizes the funded status of its defined benefit pension plans - measured as the difference between plan assets and the benefit obligation - on the balance sheet and recognizes changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost, within other comprehensive income, net of income taxes. The Company’s assets related to its qualified pension plans are measured at fair value. See Notes 10 and 11 for additional information regarding pension and other postretirement benefits.
Revenue Recognition
-
Advertising revenue is recognized when advertisements are published or placed on the Company’s Web sites or, with respect to certain Web advertising, each time a user clicks on certain ads, net of provisions for estimated rebates, rate adjustments and discounts.
-
The Company recognizes a rebate obligation as a reduction of revenue, based on the amount of estimated rebates that will be earned and claimed, related to the underlying revenue transactions during the period. Measurement of the rebate obligation is estimated based on the historical experience of the number of customers that ultimately earn and use the rebate.
-
Rate adjustments primarily represent credits given to customers related to billing or production errors and discounts represent credits given to customers who pay an invoice prior to its due date. Rate adjustments and discounts are accounted for as a reduction of revenue, based on the amount of estimated rate adjustments or discounts related to the underlying revenue during the period. Measurement of rate adjustments and discount obligations are estimated based on historical experience of credits actually issued.
-
Circulation revenue includes newsstand and subscription revenue. Newsstand revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from subscription revenue are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.
-
Other revenue is recognized when the related service or product has been delivered.
Income Taxes
Income taxes are recognized for the following: i) amount of taxes payable for the current year and ii) deferred tax assets and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes in the period of enactment.
The Company assesses whether its deferred tax assets shall be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s process includes collecting positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence and assessing, based on the evidence, whether it is more likely than not that the deferred tax assets will not be realized.
The Company recognizes 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. This involves the identification of potential uncertain tax positions, the evaluation of tax law and an assessment of whether a liability for uncertain tax positions is necessary. Different conclusions reached in this assessment can have a material impact on the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.69
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which could require an extended period of time to resolve. Until formal resolutions are reached between the Company and the tax authorities, the timing and amount of a possible audit settlement for uncertain tax benefits is difficult to predict.
Stock-Based Compensation
The Company establishes fair value for its stock-based awards to determine their cost and recognizes the related expense over the appropriate vesting period. The Company recognizes compensation expense for stock options, cash-settled restricted stock units, stock-settled restricted stock units, restricted stock, stock under the Company’s Employee Stock Purchase Plan (“ESPP”), awards under a Long Term Incentive Plan (“LTIP”) and stock appreciation rights (together “Stock-Based Awards”). See Note 16 for additional information related to stock-based compensation expense.
Earnings/(Loss) Per Share
Basic earnings/(loss) per share is calculated by dividing net earnings/(loss) available to common stockholders by the weighted-average common shares outstanding. Diluted earnings/(loss) per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including outstanding warrants and the effect of shares issuable under the Company’s stock-based incentive plans if such effect is dilutive.
Foreign Currency Translation
The assets and liabilities of foreign companies are translated at year-end exchange rates. Results of operations are translated at average rates of exchange in effect during the year. The resulting translation adjustment is included as a separate component in the Stockholders’ Equity section of the Consolidated Balance Sheets, in the caption “Accumulated other comprehensive loss, net of income taxes.”
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Financial Statements. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which amends previous guidance related to the accounting for revenue arrangements with multiple deliverables. The guidance specifically addresses how consideration should be allocated to the separate units of accounting. The guidance is effective for fiscal years beginning on or after June 15, 2010, and will apply to the Company’s 2011 fiscal year. The guidance can be applied prospectively to new or materially modified arrangements after the effective date or retrospectively for all periods presented, and early application is permitted. The Company is currently evaluating the impact of adopting this guidance on its financial statements.
In June 2009, the FASB issued guidance that amends the consolidation guidance applicable to variable interest entities. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. While the Company is currently evaluating the impact of adopting this guidance, the Company does not believe it will have a material impact on its financial statements.
2. Acquisitions and Dispositions
Acquisitions
Winter Haven News Chief
In March 2008, the Company acquired certain assets of the Winter Haven News Chief (“News Chief”), a regional newspaper in Winter Haven, Fla., for $2.5 million. The operating results of the News Chief are included in the results of the Regional Media Group, which is part of the News Media Group. The News Chief acquisition was complementary to the Company’s Lakeland Ledger newspaper. Based on a final valuation of the News Chief, the Company has allocated the excess of the respective purchase price over the fair value of the net assets acquired of $1.3 million to goodwill and $0.6 million to other intangible assets (primarily customer lists).
The following acquisitions and investments all further expand the Company’s online content and functionality as well as continue to diversify the Company’s online revenue base.
Epsilen, LLC
In September 2009, the Company purchased additional Class A units of Epsilen, LLC (“Epsilen,”
P.70 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
formerly BehNeem, LLC), increasing its total investment to $4.7 million for a 57% ownership interest.
In March 2008, the Company purchased additional Class A units of Epsilen, increasing its total investment to $4.3 million for a 53% ownership interest. The Epsilen Environment is a hosted online education solution featuring ePortfolios, global networking and learning management tools. The operating results of Epsilen are consolidated in the results of The New York Times Media Group, which is part of the News Media Group. Based on a final valuation of Epsilen, the Company has allocated the excess of the purchase price over the fair value of the net assets acquired of $3.1 million to goodwill.
ConsumerSearch, Inc.
In May 2007, the Company acquired ConsumerSearch, Inc. (“ConsumerSearch”), a leading online aggregator and publisher of reviews of consumer products, for approximately $33 million. ConsumerSearch.com includes product comparisons and recommendations and added a new functionality to the About Group. Based on a final valuation of ConsumerSearch, the Company has allocated the excess of the purchase price over the fair value of the net liabilities assumed of $24.1 million to goodwill and $15.4 million to other intangible assets. The goodwill for the ConsumerSearch acquisition is not tax-deductible. The intangible assets consist of its trade name, customer relationships, content and proprietary technology.
UCompareHealthCare.com
In March 2007, the Company acquired UCompareHealthCare.com, which provides dynamic Web-based interactive tools to enable users to measure the quality of certain healthcare services, for $2.3 million. The Company paid approximately $1.8 million in 2007 and $0.5 million in 2008. UCompareHealthCare.com expanded the About Group’s online health channel. Based on a final valuation of UCompareHealthCare.com, the Company has allocated the excess of the purchase price over the fair value of the net assets acquired of $1.5 million to goodwill and $0.8 million to other intangible assets. The goodwill for the UCompareHealthCare.com acquisition is tax-deductible. The intangible assets consist of content and proprietary technology.
The Company’s Consolidated Financial Statements include the operating results of these acquisitions subsequent to their date of acquisition.
The acquisitions in 2008 and 2007 were funded through a combination of short-term and long-term debt. Pro forma statements of operation have not been presented because the effects of the acquisitions were not material to the Company’s Consolidated Financial Statements for the periods presented herein.
Dispositions
In April 2009, the Company sold the TimesDaily, a daily newspaper located in Florence, Ala. and its Web site, TimesDaily.com, for $11.5 million. The Company recognized a gain on the sale of $0.3 million in April 2009.
3. Inventories
Inventories as shown in the accompanying Consolidated Balance Sheets were as follows:
Inventories are stated at the lower of cost or current market value. Cost was determined utilizing the LIFO method for 70% of inventory in 2009 and 71% of inventory in 2008. The excess of replacement or current cost over stated LIFO value was approximately $3 million as of December 27, 2009 and $10 million as of December 28, 2008. The remaining portion of inventory is accounted for under the FIFO method.
4. Impairment of Assets
There were no impairment charges in connection with the Company’s 2009 annual impairment test, which was completed in the fourth quarter. However, the Regional Media Group’s 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, the Company 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 group’s cost structure, plays a significant role in calculating the fair value of the Regional Media Group.
The Company estimated a 2% annual growth rate to arrive at a “normalized” residual year representing the perpetual cash flows of the Regional
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.71
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. The Company 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, the Company considered the weighted average cost of capital for comparable companies.
The Company believes that if the Regional Media Group’s projected cash flows are not met during 2010, a goodwill impairment charge could be reasonably likely in 2010.
In the fourth quarter of 2009, the Company 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, the Company 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. The Company 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, the Company 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.
The Company 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 Group’s 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.
The carrying value of the Company’s investment in Metro Boston was written down to fair value because the business had experienced lower-than-expected growth and the Company 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.”
The Company’s 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 International Herald Tribune (the “IHT”) masthead. This 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, the Company’s 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 the Company’s 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.
P.72 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
The impairment charges included in “Impairment of assets” and “Net income/(loss) from joint ventures” in the Consolidated Statements of Operations, are presented below by asset.
5. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill in 2009 and 2008 were as follows:
Goodwill disposed during 2009 was related to the sales of the TimesDaily and WQXR-FM (see Notes 2 and 14). Goodwill acquired in this table is related to the acquisitions discussed in Note 2. The foreign currency translation line item reflects changes in goodwill resulting from fluctuating exchange rates related to the consolidation of the IHT.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.73
Other intangible assets acquired were as follows:
The table above includes other intangible assets related to the acquisitions discussed in Note 2 and certain amounts include the foreign currency translation adjustment related to the consolidation of the IHT.
As of December 27, 2009, the remaining weighted-average amortization period is seven years for content, six years for customer lists and three years for other intangible assets acquired included in the table above.
Amortization expense related to amortized other intangible assets acquired was $8.2 million in 2009, $11.5 million in 2008 and $14.6 million in 2007. Amortization expense for the next five years related to these intangible assets is expected to be as follows:
6. Investments in Joint Ventures
As of December 27, 2009, the Company’s investments in joint ventures consisted of equity ownership interests in the following entities:
The Company’s investments above are accounted for under the equity method, and are recorded in “Investments in joint ventures” in the Company’s Consolidated Balance Sheets. The Company’s proportionate shares of the operating results of its investments are recorded in “Net income/(loss) from joint ventures” in the Company’s Consolidated Statements of Operations and in “Investments in joint ventures” in the Company’s Consolidated Balance Sheets.
Metro Boston
The Company owns a 49% interest in Metro Boston. The Company recorded non-cash charges of $5.6 million in 2008 and $7.1 million in 2007 related to write-downs of this investment. These charges are included in “Net income/(loss) from joint ventures” in the Company’s Consolidated Statements of Operations.
Malbaie & Madison
The Company also has investments in a Canadian newsprint company, Malbaie, and a partnership operating a supercalendered paper mill in Maine, Madison (together, the “Paper Mills”).
The Company and Myllykoski Corporation, a Finnish paper manufacturing company, are partners through subsidiary companies in Madison. The Company’s percentage ownership of Madison, which represents 40%, is through an 80%-owned consolidated subsidiary. Myllykoski Corporation owns a 10% interest in Madison through a 20%
P.74 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
noncontrolling interest in the consolidated subsidiary of the Company.
The Company received distributions from Malbaie of $2.8 million in 2009, $4.7 million in 2008 and did not receive any distributions in 2007.
The Company received distributions from Madison of $26.0 million in 2008 and $3.0 million in 2007. There were no distributions in 2009.
The News Media Group purchased newsprint and supercalendered paper from the Paper Mills at competitive prices. Such purchases aggregated approximately $39 million in 2009, $68 million in 2008 and $66 million in 2007.
quadrantONE
The Company owns a 25% interest in quadrantONE, an online advertising network that sells bundled premium, targeted display advertising onto local newspaper and other Web sites.
NESV
The Company owns 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. The Company is exploring the possible sale of its ownership interest in NESV.
The following tables present summarized information for the Company’s unconsolidated joint ventures. Summarized unaudited condensed combined balance sheets of the Company’s unconsolidated joint ventures were as follows as of:
Summarized unaudited condensed combined income statements of the Company’s unconsolidated joint ventures were as follows for the years ended:
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.75
7. Debt
Debt consists of the following:
Redemption of Debt
In April 2009, the Company settled the redemption of all $250.0 million outstanding aggregate principal amount of its 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.
Sale-Leaseback Financing
In March 2009, an affiliate of the Company entered into an agreement to sell and simultaneously lease back a portion of its leasehold condominium interest in the Company’s headquarters building located at 620 Eighth Avenue in New York City (“Condo Interest”). The sale price for the Condo Interest was $225.0 million. The Company has 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 the Company has three renewal options that could extend the term for an additional 20 years.
The transaction is accounted for as a financing transaction. As such, the Company 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%.
Medium-Term Notes
In February 2009, the Company repurchased all $49.5 million aggregate principal amount of its 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, the Company repurchased a total of $5.0 million aggregate principal amount of its 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.
P.76 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Senior Unsecured Notes
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”), the Company 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 shares of the Company’s Class A Common Stock at a price of $6.3572 per share. The warrants are exercisable at the holder’s 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 the Company’s Class A Common Stock (excluding the warrants). Each Investor purchased an equal number of notes and warrants.
The Company 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 the Company’s 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%.
The Company has 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, the Company may at its 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) the ability of the Company and its subsidiaries to:
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incur or guarantee additional debt (other than certain refinancings of existing debt, borrowings available under existing credit agreements and certain other debt, in each case subject to the provisions of the securities purchase agreement), unless (1) the debt is incurred after March 31, 2010, and (2) immediately after the incurrence of the debt, the Company’s fixed charge coverage ratio for the most recent four full fiscal quarters is at least 2.75:1. For this purpose, the fixed charge coverage ratio for any period is defined as the ratio of consolidated EBITDA for such period (defined as consolidated net income in accordance with GAAP, plus interest, taxes, depreciation and amortization, non-cash items, including, without limitation, stock-based compensation expenses, and non-recurring expenses of the Company that reduce net income but that do not represent a cash item, minus tax credits and non-cash items increasing net income) to consolidated fixed charges for such period (defined as consolidated interest expense in accordance with GAAP, including the interest component of capital leases, plus, if applicable, dividends on any preferred stock or certain redeemable capital stock);
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create or incur liens with respect to any of its properties (subject to exceptions for customary permitted liens and liens securing debt in an amount less than 25% of adjusted stockholders’ equity, based on a formula set forth in the securities purchase agreement, which does not include accumulated other comprehensive loss and excludes the impact of one-time non-cash charges, minus the amount of guarantees of third-party debt); or
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transfer or sell assets, except for transfers or sales in the ordinary course of business, unless within 360 days of any such transfer or sale of assets, the Company uses the net proceeds of such transfer or sale to repay outstanding senior debt or invest in a similar business, acquire properties or make capital expenditures. Any net proceeds from a transfer or asset sale not invested as described above will be deemed “excess proceeds.” When the amount of the “excess proceeds” exceeds $10 million, the Company will be required to make an offer to all holders of the senior unsecured notes to purchase the maximum aggregate principal amount of the senior unsecured notes that may be purchased with the “excess proceeds” at an offer price equal to 100% of such outstanding principal amount of the senior unsecured notes, plus accrued and unpaid interest, if any.
The Company was in compliance with these covenants as of December 27, 2009.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.77
Revolving Credit Agreements
The Company’s $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. The Company had a second $400.0 million credit agreement that expired in May 2009. The Company did not renew this facility as management believes 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 its financing needs through the expiration of that credit facility.
Any borrowings under the revolving credit agreement bear interest at specified margins based on the Company’s credit rating, over various floating rates selected by the Company. The amount available under the Company’s 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.
Long-Term Debt
Based on borrowing rates currently available for debt with similar terms and average maturities, the fair value of the Company’s long-term debt was approximately $907 million as of December 27, 2009 and approximately $474 million as of December 28, 2008.
The aggregate face amount of maturities of long-term debt over the next five years and thereafter is as follows:
Interest expense, net, as shown in the accompanying Consolidated Statements of Operations was as follows:
8. Other
Loss on Leases and Other
The total loss on leases and other recorded in 2009 was $34.6 million.
In 2009, the Company recorded a loss of $22.8 million for the present value of remaining rental payments under leases, for property previously occupied by City & Suburban Delivery Systems, Inc. (”City & Suburban”), in excess of rental income under potential subleases. The Company 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, the Company 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.
P.78 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
The total lease liability was approximately $24 million as of December 27, 2009. The loss on abandoned leases may be further adjusted as the Company finalizes any subleases or other transactions to utilize or exit the vacant properties.
In the fourth quarter of 2009, the Company also recorded a $3.5 million charge for the early termination of a third-party printing contract.
Sale of Assets
In 2009, the Company sold certain surplus real estate assets at the Regional Media Group and recorded a gain on the sales totaling $5.2 million.
Loan Issuance
In 2009, the Company made a one-year secured term loan of approximately $13 million to a third party that provides home-delivery services for The New York Times (“The Times”) and the Globe and circulation customer services for The Times. The Company had previously guaranteed the payments under the circulation service provider’s credit facility for approximately $20 million to enable it to obtain more favorable financing terms (see Note 19). However, the credit facility, which expired in April 2009, and the Company’s guarantee were replaced by the Company loan. The circulation service provider has agreed to pay the Company interest at an annual rate of 13% and has granted a security interest in all of its assets to secure the payment of the loan. The circulation service provider has repaid $1.5 million, and therefore the amount outstanding as of December 27, 2009 is $11.5 million.
City & Suburban Closure
In January 2009, the Company 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. With this change, the Company moved to a distribution model similar to that of The Times’s national edition. 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 the Company’s 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.
As of December 27, 2009, total costs recorded to close City & Suburban were approximately $64 million, of which approximately $31 million was recorded in 2009 and approximately $33 million was recorded in 2008 (principally consisting of $29 million in severance costs). In 2009, the costs included the $22.8 million estimated loss on leases and a $5.3 million charge for a multiemployer pension plan withdrawal liability (see Note 10).
Severance Costs
The Company recognized severance costs of $53.9 million in 2009, $81.0 million in 2008 and $35.4 million in 2007. Most of the charges in 2009, 2008 and 2007 were recognized at the News Media Group related to various initiatives and are recorded in “Selling, general and administrative costs” in the Company’s Consolidated Statements of Operations. The Company had a severance liability of $35.3 million and $50.2 million included in “Accrued expenses” in the Company’s Consolidated Balance Sheet as of December 27, 2009 and December 28, 2008, respectively, of which the majority of the December 27, 2009 balance will be paid in 2010.
Consolidation of Printing Plants
The Company completed the consolidation of the Globe’s printing facility in Billerica, Mass., into its Boston, Mass., facility in the second quarter of 2009. As of December 27, 2009, total costs recorded in connection with the consolidation were approximately $29 million, of which approximately $25 million was recorded in 2009 (approximately $13 million in severance costs, approximately $6 million in accelerated depreciation and approximately $6 million in moving costs) and approximately $4 million was recorded in 2008 (for accelerated depreciation).
Capital expenditures to consolidate the Globe’s printing operations into one printing plant were approximately $5 million, of which the majority was incurred in 2009.
The Company consolidated the printing operations of a facility it leased in Edison, N.J., into its facility in College Point, N.Y. As part of the consolidation, the Company purchased the Edison, N.J., facility and then sold it, with two adjacent properties it already owned, to a third party. The purchase and sale of the Edison, N.J., facility closed in the second quarter of 2007, relieving the Company 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, the Company recognized a loss of $68.2 million in 2007. This loss is recorded in “Net gain/(loss) on sale of assets” in the Company’s Consolidated Statements of Operations.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.79
The Edison, N.J., facility was closed in March 2008. The costs to close the Edison facility were approximately $89 million, principally consisting of accelerated depreciation charges (approximately $69 million), severance costs (approximately $15 million) and plant restoration costs (approximately $5 million).
9. Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The transaction would be in the principal or most advantageous market for the asset or liability, based on assumptions that a market participant would use in pricing the asset or liability.
The fair value hierarchy consists of three levels:
Level 1 - quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 - unobservable inputs for the asset or liability.
As of December 27, 2009, the Company had assets related to its qualified pension plans measured at fair value. The required disclosures regarding such assets are presented within Note 10. The Company does not have any other assets or liabilities recognized at fair value. The disclosure of the fair value of the Company’s long-term debt is included in Note 7.
10. Pension Benefits
The Company sponsors several pension plans, participates in The New York Times Newspaper Guild pension plan, a joint Company and Guild-sponsored plan, and makes contributions to several multiemployer plans in connection with collective bargaining agreements. These plans cover substantially all employees.
The Company-sponsored plans include qualified (funded) plans as well as non-qualified (unfunded) plans. These plans provide participating employees with retirement benefits in accordance with benefit formulas detailed in each plan. The Company’s non-qualified plans provide enhanced retirement benefits to select members of management.
The Company also has a foreign-based pension plan for certain IHT employees (the “foreign plan”). The information for the foreign plan is combined with the information for U.S. non-qualified plans. The benefit obligation of the foreign plan is immaterial to the Company’s total benefit obligation.
During 2009, the Company made the following changes to certain of its pension plans resulting in a net pension curtailment gain of $54.0 million.
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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 plan prior to January 1, 2010, were not affected. The Company also froze a non-qualified 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 defined benefit plans resulted in a curtailment gain of $56.7 million.
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Froze a Company-sponsored qualified pension plan in connection with ratified amendments to a collective bargaining agreement covering the Newspaper Guild of the Globe. The amendments resulted in a curtailment loss of $2.5 million.
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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.
During 2009, the Company negotiated changes to its status under certain multiemployer pension plans resulting in a pension withdrawal obligation expense of $78.9 million.
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Employees of the Globe represented by various unions ratified amendments to their collective bargaining agreements that allowed the Company to withdraw or partially withdraw from various multiemployer pension plans. The withdrawals resulted in withdrawal liabilities to the respective plans for the Company's proportionate share of any unfunded vested benefits. The Company recorded a $73.6 million charge for the present value of estimated future payments under the pension withdrawal liabilities. The Company’s 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 the Company to
P.80 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
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 the Company. 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). The Company’s estimate assumes a payment period of approximately 20 years.
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The Company recognized a $5.3 million charge for the present value of future payments under a pension withdrawal liability in connection with the closing of its subsidiary, City & Suburban. The Company’s total future payments are approximately $7 million.
Net Periodic Pension Cost
The components of net periodic pension (income)/costs were as follows:
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.81
Other changes in plan assets and benefit obligations recognized in other comprehensive income were as follows:
The estimated actuarial loss and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next fiscal year is approximately $19 million and $1 million, respectively.
Contributions made to multiemployer pension plans are in accordance with the formula in the relevant collective bargaining agreements. Pension cost for these plans is not reflected above and was approximately $12 million in 2009 and $15 million in 2008 and 2007. In addition, the Company recorded total pension withdrawal liabilities in 2009 of $78.9 million, as discussed above.
The amount of cost recognized for defined contribution benefit plans was approximately $14 million for 2009, $13 million for 2008 and $15 million for 2007.
P.82 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Benefit Obligation and Plan Assets
The changes in the benefit obligation and plan assets and other amounts recognized in other comprehensive loss were as follows:
(1) The “Pension benefits obligation” of approximately $815 million in the Company’s Consolidated Balance Sheet as of December 27, 2009, includes the noncurrent liabilities related to the qualified and non-qualified plans of $735 million, in the table above, as well as approximately $80 million of pension withdrawal liabilities under multiemployer pension plans.
The accumulated benefit obligation for all pension plans was $1.87 billion and $1.78 billion as of December 27, 2009 and December 28, 2008, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets was as follows:
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.83
Assumptions
Weighted-average assumptions used in the actuarial computations to determine benefit obligations for the Company’s qualified pension plans were as follows:
The rate of increase in compensation levels as of December 27, 2009, is applicable only for qualified pension plans that have not been frozen.
Weighted-average assumptions used in the actuarial computations to determine net periodic pension cost for the Company’s qualified plans were as follows:
Weighted-average assumptions used in the actuarial computations to determine benefit obligations for the Company’s non-qualified plans were as follows:
The rate of increase in compensation levels as of December 27, 2009, is applicable only for the non-qualified pensions plans that have not been frozen.
Weighted-average assumptions used in the actuarial computations to determine net periodic pension cost for the Company’s non-qualified plans were as follows:
In 2009 and 2008, the Company determined its discount rate using a Ryan ALM, Inc. Curve (“Ryan Curve”). The Ryan Curve was not available prior to 2008, when the Company utilized the Citigroup Pension Discount Curve. The Company switched to the Ryan Curve because it provides the bonds included in the curve and allows adjustments for certain outliers (e.g., bonds on “watch”). The Company believes that this additional information and flexibility allows it to calculate a better estimate of a discount rate.
To determine its discount rate, the Company projects a cash flow based on annual accrued benefits. For active participants, the benefits under the respective pension plans are projected to the date of termination. The projected plan cash flow is discounted to the measurement date, which is the last day of the Company’s fiscal year, using the annual spot rates provided in the Ryan Curve. A single discount rate is then computed so that the present value of the benefit cash flow (on a projected benefit obligation basis as described above) equals the present value computed using the Ryan Curve rates.
In determining the expected long-term rate of return on assets, the Company evaluated input from its investment consultants, actuaries and investment management firms, including their review of asset class return expectations, as well as long-term historical asset class returns. Projected returns by such consultants and economists are based on broad equity and bond indices.
Plan Assets
Company-Sponsored Pension Plans
The assets underlying the Company-sponsored qualified pension plans are managed by professional investment managers. These investment managers are selected and monitored by a pension investment committee, composed of senior finance, legal and human resources executives who are appointed by the Finance Committee of the Board of Directors of the Company. The Finance Committee is responsible for adopting and enforcing the investment policy and strategy, communicating guidelines with respect to investments and performance objectives and adopting rules regarding the selection and retention of qualified advisors and investment managers.
Contributions are made by the Company on a basis determined by the actuaries in accordance with the funding requirements and limitations of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code.
P.84 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Investment Policy and Strategy
The primary long-term investment objective, in accordance with the Company’s “Liability Driven Investing” approach, is for assets to produce a total rate of return that exceeds the growth of the Company’s pension liabilities. Additionally, a further objective shall be to produce a total rate of return in excess of inflation by at least 4.0%.
The intermediate-term objective for the assets is to outperform each of the capital markets in which assets are invested, net of costs, measured over a complete market cycle. Overall fund performance is compared to a Target Allocation Index based on the target allocations and comparable portfolios with similar investment objectives.
Asset Allocation Guidelines
The following asset allocation guidelines apply to the assets of Company-sponsored pension plans:
The weighted-average asset allocations of the Company’s sponsored pension plans by asset category, as of December 27, 2009, were as follows:
The specified target allocation of assets and ranges set forth above are maintained and reviewed on a periodic basis by management of the Company. The Company may direct the transfer of assets between investment managers in order to rebalance the portfolio in accordance with asset allocation ranges above to accomplish the investment objectives for the pension plan assets.
The New York Times Newspaper Guild Pension Plan
The assets underlying The New York Times Newspaper Guild pension plan are managed by investment managers. The investment managers are selected and monitored by the Board of Trustees of the Newspaper Guild of New York and are provided the authority to manage the investment assets of The New York Times Newspaper Guild pension plan, including acquiring and disposing of assets, subject to the certain guidelines.
Investment Policy and Strategy
Assets of The New York Times Newspaper Guild pension plan are to be invested in a manner that is consistent with the fiduciary standards set forth by ERISA, the provisions of The New York Times Newspaper Guild pension plan’s Trust Agreement and all other relevant laws. The objective is to achieve a rate of return after inflation of 3% while avoiding excess volatility, achieve a long-term rate of return that meets or exceeds the assumed actuarial rate and maintain sufficient income and liquidity to fund benefit payments.
Asset Allocation Guidelines
The following asset allocations guidelines apply to the assets of The New York Times Newspaper Guild pension plan:
The specified target allocation of assets and ranges set forth above are maintained and reviewed on a periodic basis by the Trustees. The Trustees will take the necessary actions to rebalance The New York Times Newspaper Guild pension plan within the established targets.
The New York Times Newspaper Guild pension plan’s weighted-average asset allocations by asset category, as of December 27, 2009, were as follows:
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.85
Fair Value of Plan Assets
The fair value of the assets underlying the Company-sponsored qualified pension plans and The New York Times Newspaper Guild pension plan by asset category are as follows:
(1) The underlying assets of the common/collective funds are primarily comprised of equity and fixed income securities. The fair value in the above table represents the Company’s ownership share of the net asset value of the underlying funds.
(2) Represents investments that are not backed by the full faith and credit of the United States government.
Level 1 and Level 2 Investments
Where quoted prices are available in an active market for identical assets, such as equity securities traded on an exchange, transactions for the asset occur with such frequency that the pricing information is available on an ongoing/daily basis. The Company, therefore, classifies these types of investments as Level 1 where the fair value represents the closing/last trade price for these particular securities.
For the Company’s investments where pricing data may not be readily available, fair values are estimated by using quoted prices for similar assets, in both active and not active markets, and observable inputs, other than quoted prices, such as interest rates and credit risk. The Company classifies these types of investments as Level 2 because it is able to reasonably estimate the fair value through inputs that are observable, either directly or indirectly.
Level 3 Investments
The Company has investments in private equity funds and a real estate investment fund that have been determined to be Level 3 investments, within the fair value hierarchy, because the inputs to determine fair value are considered unobservable.
The general valuation methodology used for the private equity investment funds is the market approach. The market approach utilizes prices and other relevant information such as similar market transactions, type of security, size of the position, degree of liquidity, restrictions on the disposition, latest round of financing data, current financial position and operating results among other factors.
The general valuation methodology used for the real estate investment fund is developed by a third-party appraisal. The appraisal is performed in accordance with guidelines set forth by the Appraisal Institute and take into account projected income and expenses of the property, as well as recent sales of similar properties.
P.86 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
As a result of the inherent limitations related to the valuations of the Level 3 investments, due to the unobservable inputs of the underlying funds, the estimated fair value may differ significantly from the values that would have been used had a market for those investments existed.
The reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) is as follows:
Cash Flows
The Company’s pension assets benefited from strong performance in 2009.
For accounting purposes on a GAAP basis, the underfunded status of the Company’s qualified pension plans improved by approximately $122 million from year-end 2008.
For funding purposes on an ERISA basis, the Company previously disclosed a January 1, 2009 underfunded status for its 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 the January 1, 2009 valuation. As of January 1, 2009, without the valuation relief, the Company’s underfunded status would have been approximately $535 million.
Based on preliminary results, the Company estimates a January 1, 2010 underfunded status of $420 million.
The Company does not have mandatory contributions to its sponsored qualified plans in 2010 due to existing funding credits. However, the Company may choose to make discretionary contributions in 2010 to address a portion of this funding gap. The Company currently expects to make contributions in the range of $60 to $80 million to its sponsored qualified plans but may adjust this range based on cash flows, pension asset performance, interest rates and other factors. The Company also expects to make contributions of approximately $22 to $28 million to The New York Times Newspaper Guild pension plan based on the Company’s contractual obligations.
The following benefit payments (net of plan participant contributions for non-qualified plans) under the Company’s pension plans, which reflect expected future services, are expected to be paid:
While benefit payments under these pension plans are expected to continue beyond 2019, the Company believes that an estimate beyond this period is impracticable.
11. Other Postretirement Benefits
The Company provides health benefits to retired employees (and their eligible dependents) who are not covered by any collective bargaining agreements, if the employees meet specified age and service requirements. The Company no longer provides post-age 65 retiree medical benefits for employees who retire on or after March 1, 2009. The Company also contributes to a postretirement plan under the provisions of a collective bargaining agreement. The Company accrues the costs of postretirement benefits during the employees’ active years of service and its policy is to pay its portion of insurance premiums and claims from Company assets.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.87
The components of net periodic postretirement (income)/costs were as follows:
The changes in the benefit obligations recognized in other comprehensive income were as follows:
The estimated actuarial loss and prior service credit that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is approximately $3 million and $16 million, respectively.
In connection with collective bargaining agreements, the Company contributes to several welfare plans. Contributions are made in accordance with the formula in the relevant agreement. Postretirement costs related to these welfare plans are not reflected above and were approximately $18 million in 2009, $22 million in 2008 and $23 million in 2007.
The changes in the benefit obligation and plan assets and other amounts recognized in other comprehensive loss were as follows:
P.88 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Weighted-average assumptions used in the actuarial computations to determine the postretirement benefit obligations were as follows:
Weighted-average assumptions used in the actuarial computations to determine net periodic postretirement cost were as follows:
The assumed health-care cost trend rates were as follows:
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one-percentage point change in assumed health-care cost trend rates would have the following effects:
The following benefit payments (net of plan participant contributions) under the Company’s postretirement plans, which reflect expected future services, are expected to be paid:
While benefit payments under these postretirement plans are expected to continue beyond 2019, the Company believes that an estimate beyond this period is impracticable.
The Company expects to receive cash payments of approximately $20 million related to the retiree drug subsidy from 2010 through 2019 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. The benefit payments in the above table are not reduced for the subsidy.
The Company accrues the cost of certain benefits provided to former or inactive employees after employment, but before retirement, during the employees’ active years of service. Benefits include life insurance, disability benefits and health-care continuation coverage. The accrued cost of these benefits amounted to $23.9 million as of December 27, 2009 and $21.6 million as of December 28, 2008.
Split-dollar Life Insurance Arrangement
In 2008, the Company recorded a liability, which is included in “Other Liabilities - Other” in the Company’s Consolidated Balance Sheet, for its existing benefits promised under its endorsement split-dollar life insurance plan of approximately $9 million through a cumulative-effect adjustment to retained earnings, net of tax of approximately $4 million. The Company no longer offers the benefits under the endorsement split-dollar life insurance plan.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.89
12. Other Liabilities
The components of the “Other Liabilities - Other” balance in the Company’s Consolidated Balance Sheets were as follows:
Deferred compensation consists primarily of deferrals under the Company’s deferred executive compensation plan (the “DEC Plan”). 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. Employees’ contributions earn income based on the performance of investment funds they select.
The Company invests deferred compensation in life insurance products designed to closely mirror the performance of the investment funds that the participants select. The Company’s investments in life insurance products are included in “Miscellaneous Assets” in the Company’s Consolidated Balance Sheets, and were $88.9 million as of December 27, 2009 and $108.8 million as of December 28, 2008.
Other liabilities in the preceding table above primarily include the Company’s tax contingency and worker’s compensation liability.
13. Income Taxes
Reconciliations between the effective tax rate on income/(loss) from continuing operations before income taxes and the federal statutory rate are presented below.
The components of income tax expense as shown in the Consolidated Statements of Operations were as follows:
P.90 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
State tax operating loss carryforwards (“loss carryforwards”) totaled $13.5 million as of December 27, 2009 and $9.5 million as of December 28, 2008. Such loss carryforwards expire in accordance with provisions of applicable tax laws and have remaining lives generally ranging from 4 to 20 years. Certain loss carryforwards are likely to expire unused. Accordingly, the Company has valuation allowances amounting to $1.2 million as of December 27, 2009 and $3.3 million as of December 28, 2008.
The components of the net deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets were as follows:
The Company assesses whether a valuation allowance should be established against deferred tax assets based on the consideration of both positive and negative evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. The Company evaluated its deferred tax assets for recoverability using a consistent approach that considers its three-year historical cumulative income (loss), including an assessment of the degree to which any such losses were due to items that are unusual in nature (e.g., impairments of non-deductible goodwill and intangible assets). The Company concluded that a valuation allowance is not required except for certain loss carryforwards.
Income tax benefits related to the exercise of equity awards reduced current taxes payable by $1.0 million in 2009, $0.7 million in 2008 and $2.9 million in 2007.
As of December 27, 2009, and December 28, 2008, “Accumulated other comprehensive loss, net of income taxes” in the Company’s Consolidated Balance Sheets and for the years then ended in the Consolidated Statements of Changes in Stockholders’ Equity was net of deferred tax assets of approximately $242 million and $278 million, respectively.
A reconciliation of unrecognized tax benefits is as follows:
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.91
The total amount of unrecognized tax benefits that would, if recognized, affect the effective income tax rate was approximately $46 million as of December 27, 2009 and approximately $61 million as of December 28, 2008.
The Company also recognizes accrued interest expense and penalties related to the unrecognized tax benefits within income tax expense or benefit. The total amount of accrued interest and penalties was approximately $28 million as of December 27, 2009, and approximately $35 million as of December 28, 2008. The total amount of accrued interest and penalties was a net benefit of $4.4 million in 2009 and expense of $0.4 million in 2008 and $5.6 million in 2007.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2000. Management believes that its accrual for tax liabilities is adequate for all open audit years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.
It is reasonably possible that certain income tax examinations may be concluded, or statutes of limitation may lapse, during the next twelve months, which could result in a decrease in unrecognized tax benefits of approximately $20 million that would, if recognized, impact the effective tax rate.
14. Discontinued Operations
Radio Operations
On October 8, 2009, the Company completed the sale of WQXR-FM, its New York City radio station, to subsidiaries of Univision Radio Inc. and WNYC Radio for a total of approximately $45 million. Univision Radio paid the Company $33.5 million to exchange the FCC 105.9 FM broadcast license and transmitting equipment for the Company’s license, equipment and stronger signal at 96.3 FM. At same time, WNYC Radio purchased the FCC license for 105.9 FM, all related transmitting equipment and WQXR-FM’s call letters and Web site from the Company for $11.5 million. The Company used the proceeds from the sale to pay outstanding debt. The Company recorded a pre-tax gain of approximately $35 million (approximately $19 million after tax) in 2009.
In April 2007, the Company sold WQEW-AM to Radio Disney, LLC (which had been providing substantially all of WQEW-AM’s programming through a time brokerage agreement) for $40.0 million. The Company 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. However, with the sale of WQXR-FM, both radio stations (“Radio Operations”) were required to be reported as discontinued operations for all periods presented.
Broadcast Media Group
On May 7, 2007, the Company sold its Broadcast Media Group, which consisted of nine network-affiliated television stations, their related Web sites and digital operating center, for approximately $575 million. The Company recognized a pre-tax gain on the sale of approximately $190 million (approximately $94 million after tax) in 2007. 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.
The results of operations of the Broadcast Media Group and the Radio Operations are presented as discontinued operations in the Company’s Consolidated Financial Statements. The operating results of the Broadcast Media Group was previously a separate reportable segment and the Radio Operations were previously consolidated in the results of The New York Times Media Group, which is part of the News Media Group.
P.92 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
The results of operations of the Radio Operations and the Broadcast Media Group presented as discontinued operations are summarized below.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.93
15. Earnings/(Loss) Per Share
Basic and diluted earnings/(loss) per share were as follows:
The difference between basic and diluted shares is that diluted shares include the dilutive effect of the assumed exercise of outstanding securities. The Company’s stock options and warrants, issued in connection with the Company’s senior unsecured notes could have a significant impact on diluted shares.
In 2008 securities that could potentially be dilutive were not included in diluted shares because the loss from continuing operations made them anti-dilutive. Therefore, basic and diluted shares were the same.
The number of stock options that were excluded from the computation of diluted earnings per share because their exercise price exceeded the market value of the Company’s common stock (2009 and 2007) or because they were anti-dilutive due to a loss from continuing operations (2008) were approximately 29 million in 2009, 31 million in 2008 and 32 million in 2007. The stock option exercise prices ranged from $13.03 to $48.54.
16. Stock-Based Awards
Under the Company’s 1991 Executive Stock Incentive Plan (the “1991 Executive Stock Plan”) and the 1991 Executive Cash Bonus Plan (together, the “1991 Executive Plans”), the Board of Directors may authorize awards to key employees of cash, restricted and unrestricted shares of the Company’s Class A Common Stock (“Common Stock”), retirement units (stock equivalents) or such other awards as the Board of Directors deems appropriate.
The 2004 Non-Employee Directors’ Stock Incentive Plan (the “2004 Directors’ Plan”) provides for the issuance of up to 500,000 shares of Common Stock in the form of stock options or restricted stock awards. Under the 2004 Directors’ Plan, each nonemployee director of the Company has historically received annual grants of non-qualified stock options with 10-year terms to purchase 4,000 shares of Common Stock from the Company at the average market price of such shares on the date of grant. Restricted stock has not been awarded under the 2004 Directors’ Plan for the purpose of stock-based compensation.
The Company recognizes stock-based compensation expense for stock options, cash-settled restricted stock units, stock-settled restricted stock units, restricted stock, stock under the Company’s ESPP, LTIP awards and stock appreciation rights (together, “Stock-Based Awards”). Stock-based compensation expense was $20.4 million in 2009, $17.7 million in 2008 and $16.8 million in 2007.
Stock-based compensation expense is recognized over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service. The Company’s 1991 Executive Stock Plan and the 2004 Directors’ Plan provide that awards generally vest over a stated vesting period or upon the retirement of an employee or director, as the case may be.
The Company’s pool of excess tax benefits (“APIC Pool”) available to absorb tax deficiencies was approximately $36 million as of December 27, 2009.
P.94 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Stock Options and Stock Appreciation Rights
The 1991 Executive Stock Plan provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100% of the fair value of the Common Stock on the date of grant. Stock options have generally been granted with a 3-year vesting period and a 6-year term, or a 4-year or 3-year vesting period and a 10-year term. The stock options vest in equal annual installments.
The 2004 Directors’ Plan provides for grants of stock options to non-employee Directors at an option price per share of 100% of the fair value of Common Stock on the date of grant. Stock options are granted with a 1-year vesting period and a 10-year term. The Company’s Directors are considered employees for this purpose.
During 2009, the Company discovered that portions of previously awarded stock option grants exceeded that permitted to be granted to a single individual during any calendar year under the terms of the Company’s plans. A total of 250,000 options in 2008 and 200,000 options in 2009 granted in excess of applicable plan limits were determined to be null and void. The independent directors of the Company’s Board of Directors, after consultation with all non-management directors, approved the grant of deferred payment stock appreciation rights equal in number and on the same economic terms comparable to the void options. Stock appreciation rights are classified as liability awards because the Company incurs a liability, payable in cash, based on the fair value of the stock appreciation rights. These rights are measured at their fair value at the end of each reporting period utilizing the Black-Scholes valuation model and, therefore, will fluctuate based on the changes in the Company’s stock price.
Changes in the Company’s stock options in 2009 were as follows:
The total intrinsic value for stock options exercised was approximately $0.5 million in 2009 and $45,000 in 2007. There were no stock option exercises in 2008.
The fair value of the stock options granted was estimated on the date of grant using a Black-Scholes valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding) of stock options granted was estimated using the historical exercise behavior of employees for grants with a 10-year term. Stock options have historically been granted with this term, and therefore information necessary to make this estimate was available. The expected life of stock options granted with a 6-year term was determined using the average of the vesting period and term, an acceptable method. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, ending on the date of grant, and calculated on a monthly basis. The fair value for stock options granted with different vesting periods are calculated separately.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.95
Restricted Stock
The 1991 Executive Stock Plan also provides for grants of restricted stock. The Company did not grant restricted stock in 2009, 2008 or 2007, but rather granted restricted stock units (see below). The fair value of restricted stock is the average market price at date of grant.
Changes in the Company’s restricted stock in 2009 were as follows:
The intrinsic value of restricted stock vested was $1.4 million in 2009, $0.6 million in 2008 and $5.5 million in 2007.
Restricted Stock Units
The 1991 Executive Stock Plan also provides for grants of other awards, including restricted stock units. Restricted stock units granted in 2009 are “cash-settled,” while restricted stock units granted in 2008 and before are “stock-settled.” For “cash-settled” restricted stock units, each restricted stock unit represents the Company’s obligation to deliver to the holder cash, equivalent to the market value of the underlying shares of Common Stock upon vesting. For “stock-settled” restricted stock units, each restricted stock unit represents the Company’s obligation to deliver to the holder one share of Common Stock upon vesting.
In 2009, the Company granted cash-settled restricted stock units with a 3-year vesting period. The fair value of “cash-settled” and “stock-settled” restricted stock units is the average market price at date of grant. “Cash-settled” restricted stock units are classified as liability awards because the Company incurs a liability, payable in cash, based on the Company’s stock price. The cash-settled restricted stock unit is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the fluctuations in the Company’s stock price.
Changes in the Company’s cash-settled restricted stock units in 2009 were as follows:
The intrinsic value of restricted stock units vested was $0.1 million in 2009.
In 2008, the Company granted stock-settled restricted stock units with a 3-year vesting period. In 2007, the Company granted restricted stock units with a 3-year vesting period and a 5-year vesting period.
P.96 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Changes in the Company’s stock-settled restricted stock units in 2009 were as follows:
The intrinsic value of stock-settled restricted stock units vested was $0.5 million in 2009, $0.8 million in 2008 and $1.0 million in 2007.
ESPP
Under the Company’s ESPP, participating employees purchase Common Stock through payroll deductions. Employees may withdraw from an offering before the purchase date and obtain a refund of the amounts withheld through payroll deductions plus accrued interest.
In 2009, there was one 12-month ESPP offering with a purchase price set at a 15% discount of the average market price of the Common Stock on November 24, 2008 or December 28, 2009, whichever was lower. The purchase price was $5.30 for the 2009 offering. Approximately 700,000 shares were issued under the 2009 ESPP offering on December 29, 2009 (fiscal 2010).
The fair value of the offering was estimated on the date of grant using a Black-Scholes valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. Expected volatility was based on the historical volatility on the day of grant.
In 2008, there was one 12-month ESPP offering with a purchase price set at a 5% discount of the average market price on December 26, 2008. In 2007, there was one 12-month offering with an undiscounted purchase price, set at 100% of the average market price on December 28, 2007. With these terms, the ESPP was not considered a compensatory plan, and therefore compensation expense was not recorded for shares issued under the ESPP in 2008 and 2007.
LTIP Awards
The Company’s 1991 Executive Plans provide for grants of cash awards to key executives payable at the end of a multi-year performance period. The target award is determined at the beginning of the period and can increase to a maximum of 175% of the target or decrease to zero.
For awards granted for cycles beginning prior to 2006, the actual payment, if any, is based on a key performance measure, Total Shareholder Return (“TSR”). TSR is calculated as stock appreciation plus reinvested dividends. At the end of the period, the LTIP payment will be determined by comparing the Company’s TSR to the TSR of a predetermined peer group of companies. For awards granted for the cycle beginning in 2006, the actual payment, if any, will depend on two performance measures. Half of the award is based on the TSR of a predetermined peer group of companies during the performance period and half is based on the percentage increase in the Company’s revenue in excess of the percentage increase in operating costs during the same period. Achievement with respect to each element of the award is independent of the other. All payments are subject to approval by the Board’s Compensation Committee.
The LTIP awards based on TSR are classified as liability awards because the Company incurs a liability, payable in cash, indexed to the Company’s stock price. The LTIP award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the operating results and the performance of the Company’s TSR relative to the peer group’s TSR.
The fair value of the LTIP awards was calculated by comparing the Company’s TSR against a predetermined peer group’s TSR over the performance period. The payouts of the LTIP awards are based on relative performance; therefore, correlations in stock price performance among the peer group companies also factor into the valuation.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.97
There were no LTIP awards paid in 2009, 2008 and 2007 in connection with the performance period ending in 2008, 2007 or 2006.
For awards granted for the cycle beginning in 2007 and subsequent periods, the actual payment, if any, will no longer have a performance measure based on TSR. Thus, LTIP awards granted for the cycle beginning in 2007 and subsequent periods are not considered stock-based compensation.
As of December 27, 2009, unrecognized compensation expense related to the unvested portion of the Company’s Stock-Based Awards was approximately $8 million and is expected to be recognized over a weighted-average period of 1.3 years.
The Company generally issues shares for the exercise of stock options and ESPP from unissued reserved shares and issues shares for stock-settled restricted stock units and a Company stock match under a 401(k) plan from treasury shares.
Shares of Class A Common Stock reserved for issuance were as follows:
In addition to the shares available in the table above, there were approximately 825,000 shares as of December 27, 2009 and 826,000 shares as of December 28, 2008 of Class B Common Stock available for conversion into shares of Class A Common Stock.
17. Stockholders’ Equity
Shares of the Company’s Class A and Class B Common Stock are entitled to equal participation in the event of liquidation and in dividend declarations. The Class B Common Stock is convertible at the holders’ option on a share-for-share basis into Class A Common Stock. Upon conversion, the previously outstanding shares of Class B Common Stock are automatically and immediately retired, resulting in a reduction of authorized Class B Common Stock. As provided for in the Company’s Certificate of Incorporation, the Class A Common Stock has limited voting rights, including the right to elect 30% of the Board of Directors, and the Class A and Class B Common Stock have the right to vote together on the reservation of Company shares for stock options and other stock-based plans, on the ratification of the selection of a registered public accounting firm and, in certain circumstances, on acquisitions of the stock or assets of other companies. Otherwise, except as provided by the laws of the State of New York, all voting power is vested solely and exclusively in the holders of the Class B Common Stock.
The Adolph Ochs family trust holds approximately 90% of the Class B Common Stock and, as a result, has the ability to elect 70% of the Board of Directors and to direct the outcome of any matter that does not require a vote of the Class A Common Stock.
The Company repurchases Class A Common Stock under its stock repurchase program from time to time either in the open market or through private transactions. These repurchases may be suspended from time to time or discontinued. In 2009 and 2008, the Company did not repurchase any shares of Class A Common Stock pursuant to its stock repurchase program. The Company repurchased 0.1 million shares in 2007 at an average cost of $21.13 per share. The costs associated with these repurchases were $2.3 million in 2007.
The Board of Directors is authorized to set the distinguishing characteristics of each series of preferred stock prior to issuance, including the granting of limited or full voting rights; however, the consideration received must be at least $100 per share. No shares of preferred stock have been issued.
18. Segment Information
The Company’s reportable segments consist of the News Media Group and the About Group. These segments are evaluated regularly by key management in assessing performance and allocating resources.
P.98 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
Revenues, operating profit and identifiable assets of foreign operations are not significant. The About Group generated more than 50% of its revenue in 2009 through cost-per-click advertising which is principally derived from an arrangement with one customer.
Below is a description of the Company’s reportable segments:
News Media Group
The News Media Group consists of The New York Times Media Group, which includes The Times, the IHT, NYTimes.com, and related businesses; the New England Media Group, which includes the Globe, Boston.com, the Worcester Telegram & Gazette, Telegram.com and related businesses; and the Regional Media Group, which includes 14 daily newspapers, other print publications and related businesses.
About Group
The About Group consists of the Web sites of About.com, ConsumerSearch.com, UCompareHealthCare.com, Caloriecount.com and related businesses.
The Company’s Statements of Operations by segment and Corporate were as follows:
The News Media Group’s operating profit/(loss) includes:
-
2009 - a $78.9 million charge primarily for a pension withdrawal obligation under certain multiemployer pension plans, a $31.1 million charge for loss on leases, a $5.2 million gain on sale of assets, a $4.2 million charge for the impairment of assets due to the reduced scope of a systems project, $3.5 million charge for the early termination of a third-party printing contract and a $2.7 million curtailment loss,
-
2008 - a $197.9 million non-cash charge for the impairment of assets, and
-
2007 - a $68.2 million net loss from the sale of assets and an $11.0 million non-cash charge for the impairment of an intangible asset.
Corporate includes a pension curtailment gain of $56.7 million in 2009.
See Notes 4, 5, 8 and 10 for additional information regarding these items.
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.99
Advertising, circulation and other revenue, by division of the News Media Group, were as follows:
The Company’s segment and Corporate depreciation and amortization, capital expenditures and assets reconciled to consolidated amounts were as follows:
P.100 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
19. Commitments and Contingent Liabilities
Operating Leases
Operating lease commitments are primarily for office space and equipment. Certain office space leases provide for rent adjustments relating to changes in real estate taxes and other operating costs.
Rental expense amounted to approximately $26 million in 2009, $34 million in 2008 and $35 million in 2007. The approximate minimum rental commitments under non-cancelable leases as of December 27, 2009 were as follows:
Capital Leases
Future minimum lease payments for all capital leases, and the present value of the minimum lease payments as of December 27, 2009, were as follows:
Guarantees
The Company has outstanding guarantees on behalf of a third-party circulation service provider (the “circulation servicer”), and on behalf of two third parties that provide printing and distribution services for The Times’s National Edition (the “National Edition printers”). In accordance with GAAP, contingent obligations related to these guarantees are not reflected in the Company’s Consolidated Balance Sheets as of December 27, 2009 and December 28, 2008.
In April 2009, the Company’s guarantee for payments under the circulation servicer’s credit facility expired (see Note 8).
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 $1 million as of December 27, 2009. One property lease expires in May 2010 and the other expires in May 2012. The property lease guarantees were made by the Company to allow the circulation servicer to obtain space to conduct business.
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 $0.1 million as of December 27, 2009. The equipment lease expires in March 2011. The Company made the equipment lease guarantees to allow the National Edition printer to obtain lower cost 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 $3 million as of December 27, 2009. 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.
Other
The Company has letters of credit of approximately $67 million, primarily for obligations under the Company’s workers’ compensation program and for its New York headquarters.
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
Notes to the Consolidated Financial Statements - THE NEW YORK TIMES COMPANY P.101
ultimate liability that might result from these actions would not have a material adverse effect on the Company’s Consolidated Financial Statements.
20. Subsequent Events
The Company has evaluated subsequent events through February 22, 2010, the date on which these financial statements were issued.
P.102 2009 ANNUAL REPORT - Notes to the Consolidated Financial Statements
QUARTERLY INFORMATION (UNAUDITED)
As described in Note 14 of the Notes to the Consolidated Financial Statements, WQXR-FM’s results of operations have been presented as discontinued operations for all periods presented.
Quarterly Information - THE NEW YORK TIMES COMPANY P.103
Earnings/(loss) per share amounts for the quarters do not necessarily equal the respective year-end amounts for earnings or loss per share due to the weighted-average number of shares outstanding used in the computations for the respective periods. Earnings/(loss) per share amounts for the respective quarters and years have been computed using the average number of common shares outstanding.
The Company’s largest source of revenue is advertising. Seasonal variations in advertising revenues cause the Company’s quarterly consolidated results to fluctuate. The Company’s business has historically experienced second and fourth-quarter advertising volume that is generally higher than the first-quarter and third-quarter volume because economic activity tends to be lower during the winter and summer. The Company believes these seasonal trends were partially masked in 2009 and 2008 by volume declines principally attributable to the general economic slowdown.
P.104 2009 ANNUAL REPORT - Quarterly Information
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 27, 2009
(a) Deductions for the year ended December 30, 2007 included approximately $522 due to the sale of the Broadcast Media Group. See Note 14 of the Notes to Consolidated Financial Statements for additional information.
Schedule II - Valuation and Qualifying Accounts - THE NEW YORK TIMES COMPANY P.105
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Janet L. Robinson, our Chief Executive Officer, and James M. Follo, our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 27, 2009. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s report on internal control over financial reporting and the attestation report of our independent registered public accounting firm on our internal control over financial reporting are set forth in Item 8 of this Annual Report on Form 10-K and are incorporated by reference herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the quarter ended December 27, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
P.106 2009 ANNUAL REPORT
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE
GOVERNANCE
In addition to the information set forth under the caption “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K, the information required by this item is incorporated by reference to the sections titled “Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal Number 1 - Election of Directors,” “Interests of Related Persons in Certain Transactions of the Company,” “Board of Directors and Corporate Governance,” beginning with the section titled “Independent Directors,” but only up to and including the section titled “Audit Committee Financial Experts,” and “Board Committees” of our Proxy Statement for the 2010 Annual Meeting of Stockholders.
The Board has adopted a code of ethics that applies not only to our CEO and senior financial officers, as required by the SEC, but also to our Chairman and Vice Chairman. The current version of such code of ethics can be found on the Corporate Governance section of our Web site, http://www.nytco.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the sections titled “Compensation Committee,” “Directors’ Compensation,” “Directors’ and Officers’ Liability Insurance” and “Compensation of Executive Officers” of our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the sections titled “Compensation of Executive Officers - Equity Compensation Plan Information,” “Principal Holders of Common Stock,” “Security Ownership of Management and Directors” and “The 1997 Trust” of our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference to the sections titled “Interests of Related Persons in Certain Transactions of the Company,” “Board of Directors and Corporate Governance - Independent Directors,” “Board of Directors and Corporate Governance - Board Committees” and “Board of Directors and Corporate Governance - Policy on Transactions with Related Persons” of our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The information required by this item is incorporated by reference to the section titled “Proposal Number 3 - Selection of Auditors,” beginning with the section titled “Audit Committee’s Pre-Approval Policies and Procedures,” but only up to and not including the section titled “Recommendation and Vote Required” of our Proxy Statement for the 2010 Annual Meeting of Stockholders.
THE NEW YORK TIMES COMPANY P.107
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
As listed in the index to financial information in “Item 8 - Financial Statements and Supplementary Data.”
(2) Supplemental Schedules
The following additional consolidated financial information is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements set forth in “Item 8 - Financial Statements and Supplementary Data.” Schedules not included with this additional consolidated financial information have been omitted either because they are not applicable or because the required information is shown in the Consolidated Financial Statements.
Separate financial statements and supplemental schedules of associated companies accounted for by the equity method are omitted in accordance with the provisions of Rule 3-09 of Regulation S-X.
(3) Exhibits
An exhibit index has been filed as part of this Annual Report on Form 10-K and is incorporated herein by reference.
P.108 2009 ANNUAL REPORT
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 22, 2010
THE NEW YORK TIMES COMPANY
(Registrant)
BY:
/S/ KENNETH A. RICHIERI
Kenneth A. Richieri
Senior Vice President, General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
THE NEW YORK TIMES COMPANY P.109
Exhibit numbers 10.19 through 10.31 are management contracts or compensatory plans or arrangements.
P.110 2009 ANNUAL REPORT - Index to Exhibits
Index to Exhibits - THE NEW YORK TIMES COMPANY P.111
P.112 2009 ANNUAL REPORT - Index to Exhibits