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A. H. BELO CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following information should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes filed as part of this report. All dollar amounts are presented in thousands, except per share amounts, unless the context requires otherwise. OVERVIEW A. H. Belo (NYSE trading symbol: AHC), headquartered in Dallas, Texas, is a leading local news and information publishing company with commercial printing, distribution and direct mail capabilities, as well as businesses with expertise in emerging media and digital marketing. With a continued focus on extending the Company's media platform, A. H. Belo is able to deliver news and information in innovative ways to new audiences with diverse interests and lifestyles. The Company publishes The Dallas Morning News (www.dallasnews.com), Texas' leading newspaper and winner of nine Pulitzer Prizes; the Denton Record-Chronicle (www.dentonrc.com), a daily newspaper operating in Denton, Texas, and various niche publications targeting specific audiences. A. H. Belo offers digital marketing solutions through 508 Digital and Your Speakeasy, LLC and its investments include Classified Ventures, LLC, owner of cars.com, and Wanderful Media, LLC, owner of FindnSave.com. A. H. Belo intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect its financial statements. Certain current and prior year amounts have been recast to reflect the discontinued operations related to The Providence Journal and The Press-Enterprise as discussed on page 22. Amounts in Management's Discussion and Analysis reflect continuing operations of the Company unless otherwise noted. The results from continuing operations consist primarily of The Dallas Morning News and corporate operations. Overview of Second Quarter 2014 Significant Transactions This section contains a discussion and analysis of net operating revenue, expense and other information relevant to an understanding of results of operations for the three and six months ended June 30, 2014 and 2013. Second quarter and year-to-date results for 2014 compared to 2013 reflect improvements in net operating revenue trends. For the first time since the 2008 spin-off of the Company from its former parent company, year-over-year quarterly revenue increased. Net operating revenue for the three and six months ended June 30, 2014, increased (decreased) by 0.2 percent and (1.2) percent, respectively, from the same periods in 2013. These improved trends are primarily due to growth in the Company's printing and marketing services revenues. The Company continues its efforts to diversify revenues through leveraging its brand, its personnel and its infrastructure in both organic new product development and in pursuit of acquisitions of related marketing services companies. In March 2014, The Dallas Morning News began printing the Fort Worth Star-Telegram, a major metropolitan newspaper, at its Plano, Texas production facility. The agreement between The Dallas Morning News, Inc. and Star-Telegram, Inc. is for an initial term of 10 years and has a renewal option to extend the contract. In 2013 and 2014, the Company renewed efforts to optimize print circulation revenue by increasing print subscription rates. These rate increases, implemented at the The Dallas Morning News, have offset declines in circulation volumes. In April 2014, Classified Ventures, an equity method investee, sold its apartments.com business unit for $585,000. The Company received a cash distribution of $18,861 for its portion of the net sales proceeds and recorded a gain of approximately $18,532 in the second quarter of 2014. The Company expects related federal income taxes to be minimal as a result of previously incurred net operating losses and is finalizing its estimate of state taxes. Losses in 2014 include a $934 impairment charge related to the Company's investment in Wanderful Media, reducing the carrying value of the investment to $3,364. The Company determined that an other-than-temporary decline in the value of the investment occurred after evaluating the estimated fair value of the investee as determined by an independent valuation specialist. The Company attributes the impairment primarily to a decline in business related to Wanderful Media's legacy products. The Company believes the carrying value of this investment as of June 30, 2014, is recoverable based on the investment's future business prospects and an additional contribution of $1,909 was made in the second quarter of 2014. A. H. Belo Corporation Second Quarter 2014 on Form 10-Q PAGE 15 -------------------------------------------------------------------------------- Table of Contents The Company declared and paid a special divided of $1.50 per share in the second quarter of 2014 in order to return to shareholders cash held by the Company which exceeded forecasted liquidity requirements for operations, investing and financing activities. The special dividend resulted in payments of $33,819, to shareholders and holders of RSUs. In addition to the above, the following significant transactions and events affected A. H. Belo's results of operations and financial position during the second quarter of 2014. • Required contributions of $2,186 were made to the A. H. Belo Pension Plans in the second quarter of 2014, reflecting an increase from the $1,940 of contributions made in the second quarter of 2013. • A quarterly dividend of $0.08 per share, or $1,805, was recorded and paid to shareholders of record and holders of RSUs. The Company also announced in May 2014 a dividend of $0.08 per share payable on September 5, 2014, to shareholders of record and holders of RSUs as of the close of business on August 15, 2014. • The Company purchased 124,857 of its Series A common shares during the quarter through open market transactions for $1,443. PAGE 16 A. H. Belo Corporation Second Quarter 2014 on Form 10-Q -------------------------------------------------------------------------------- Table of Contents RESULTS OF CONTINUING OPERATIONS The table below sets forth the components of A. H. Belo's net operating revenue. Three Months Ended June 30, Six Months Ended June 30, Percent Percent Percent Percent of Total Percentage of Total of Total Percentage of Total 2014 Revenue Change 2013 Revenue 2014 Revenue Change 2013 Revenue Advertising and marketing services $ 40,251 58.2 % (4.7 )% $ 42,223 61.1 % $ 77,977 58.3 % (4.8 )% $ 81,886 60.6 % Display 13,383 (7.1 )% 14,409 24,781 (12.8 )% 28,418 Classified 5,841 (8.6 )% 6,390 11,910 (4.7 )% 12,500 Preprint 13,242 (4.9 )% 13,926 25,778 (4.8 )% 27,083 Digital 7,785 3.8 % 7,498 15,508 11.7 % 13,885 Circulation 21,227 30.6 % (0.1 )% 21,257 30.8 % 42,239 31.6 % - % 42,237 31.2 % Printing and distribution 7,783 11.2 % 37.9 % 5,643 8.1 % 13,437 10.1 % 21.0 % 11,106 8.2 % $ 69,261 100.0 % 0.2 % $ 69,123 100.0 % $ 133,653 100.0 % (1.2 )% $ 135,229 100.0 % Advertising and Marketing Services Revenue Advertising and marketing services revenue decreased by 4.7 percent and 4.8 percent for the three and six months ended June 30, 2014, respectively, primarily due to lower display, classified and preprint advertising revenue. The Company has responded to the continuing decline in print advertising revenues through the development of new business offerings providing marketing services to small and middle market companies. These services provided by 508 Digital and Speakeasy, which commenced operations in 2012, offset 76 percent and 69 percent of realized declines in advertising revenues for the three and six months ended June 30, 2014. As the Company expects print advertising revenues to sustain continued challenges in future periods, additional opportunities to develop or acquire new businesses will be sought which will complement existing assets and resources and leverage from the Company's brand equity. Display - Revenue decreased for the three months ended June 30, 2014, due to lower retail advertising driven by volume declines in most categories except sporting goods and other, partially offset by improved rates in most categories; and lower general advertising due to volume declines in all categories except technology, partially offset by rate increases in technology and other. Revenue decreased for the six months ended June 30, 2014, due to lower retail advertising due to volume declines in most categories except sporting goods, partially offset by improved rates in electronics and sporting goods; and lower general advertising due to volume declines in all categories except technology, partially offset by rate increases in technology, automotive and other. Classified - Revenue decreased for the three months ended June 30, 2014, due to volume declines in all categories, offset by higher rates in all categories except other and automotive. Revenue decreased for the six months ended June 30, 2014, due to volume declines in all categories, offset by rate increases in all categories except other. Preprint - Revenue decreased for the three and six months ended June 30, 2014, due to a decline in the volume of preprint newspaper inserts, consistent with the decline in circulation volumes. The decline was partially offset by higher volumes in home delivery mail advertisements. Digital - Revenue increased for the three and six months ended June 30, 2014, due to higher marketing services revenue associated with 508 Digital and Speakeasy, and also due to real estate and other classified advertising for the six months ended June 30, 2014. Marketing services revenue grew by $513 and $1,393 in the three and six months ended June 30, 2014, respectively, which reflects an 81.7 percent and 153.1 percent growth, respectively, over these recorded revenues in the same periods in 2013. Revenues also include the Company's niche publications which expand its advertising platform to nonsubscribers of The Dallas Morning News' core newspaper. This revenue is a component of total display, classified, preprint and digital revenue discussed above. In three months ended June 30, 2014 and 2013, advertising revenue for niche publications was $5,148 and $5,476, respectively. In six months ended June 30, 2014 and 2013, advertising revenue for niche publications was $10,674 and $10,985, respectively. Revenue remained relatively flat with slight decreases primarily due to a decline in preprint advertising. A. H. Belo Corporation Second Quarter 2014 on Form 10-Q PAGE 17 -------------------------------------------------------------------------------- Table of Contents Circulation Revenue Circulation revenue for the three and six months ended June 30, 2014, remained flat compared to 2013 primarily due to decreased volumes in home delivery and single copy sales mostly offset by higher home delivery rates as the Company continues to recover the costs of providing quality news coverage through strategic price increases. For the three and six months ended June 30, 2014, home delivery and single copy volumes decreased by an average of 8.6 percent and 12.2 percent, respectively. These declines were offset by home delivery and single copy average rate increases of 8.8 percent and 5.0 percent, respectively. Printing and Distribution Revenue Revenue increased 37.9 percent and 21.0 percent for the three and six months ended June 30, 2014, respectively, due to the commencement of printing services in March 2014 for the Fort Worth Star-Telegram, and due to expanded printing of local community newspapers. Revenue from the Star-Telegram provided $2,234 and $2,787 in additional revenue for the three and six months ended June 30, 2014, respectively, and is expected to add approximately $7,000 in printing and inserting revenues annually. These increases were partially offset by lower printing revenues associated with national publications. PAGE 18 A. H. Belo Corporation Second Quarter 2014 on Form 10-Q -------------------------------------------------------------------------------- Table of Contents Operating Costs and Expense from Continuing Operations The table below sets forth the components of the Company's operating expense. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 Change 2013 2014 Change 2013 Operating Costs and Expense Employee compensation and benefits $ 25,722 (3.7 )% $ 26,702 $ 53,886 (4.7 )% $ 56,538 Other production, distribution and operating costs 29,640 4.2 % 28,436 58,084 1.7 % 57,129 Newsprint, ink and other supplies 8,114 (5.6 )% 8,592 16,102 (5.9 )% 17,114 Depreciation 3,348 (15.5 )% 3,964 6,758 (13.8 )% 7,843 Amortization 30 - % 30 60 - % 60 Total operating costs and expense $ 66,854 (1.3 )% $ 67,724 $ 134,890 (2.7 )% $ 138,684 Employee compensation and benefits - Employee compensation and benefits decreased in the three and six months ended June 30, 2014, by $980 and $2,652, respectively. For these periods, savings included lower salary expense of $715 and $1,045, respectively, primarily due to headcount reductions at the Company's newspapers and corporate operations; lower sales commissions of $667 and $1,056, respectively, as a result of lower sales and changes to the commission structure in the fourth quarter of 2013; lower pension expense of $603 in the six months ended June 30, 2014, due to the Company fulfilling its obligation to accrue benefits for the PTS Plan at the end of the first quarter of 2013; and pension expense savings of $419 and 837 in the three and six months ended June 30, 2014, respectively, due to the expected return on increased plan assets and the balance of actuarial losses in accumulated other comprehensive loss falling below the corridor required for amortization. These reductions were partially offset by increased direct compensation and benefits of $328 and $472, respectively, associated with the commencement of printing operations for the Fort Worth Star-Telegram at the Company's Plano, Texas production facility. Other production, distribution and operating costs - Expense increased in the three and six months ended June 30, 2014, due to higher delivery costs to distribution centers and temporary labor costs of $1,033 and $1,413, respectively, associated with startup of printing operations for the Fort Worth Star-Telegram. Expenses were also higher due to higher third-party costs as the Company's marketing services operations continue to grow. These increases were partially offset by lower retail marketing expense and lower distribution costs associated for home delivery and single copy sales of Company newspapers, consistent with lower circulation volumes. The Company also realized lower property and sales tax expense in these periods due to negotiated refunds related to prior periods. Newsprint, ink and other supplies - Expense decreased in the three and six months ended June 30, 2014, due to reduced newsprint costs associated with lower circulation volumes of Company and certain third party newspapers. Newsprint consumption for the three months ended June 30, 2014 and 2013, was approximately 6,104 and 7,154 metric tons, respectively, and the average cost per metric ton of newsprint was $619 and $628, respectively. Newsprint consumption for the six months ended June 30, 2014 and 2013, was approximately 12,119 and 14,196 metric tons, respectively, and the average cost per metric ton of newsprint was $619 and $634, respectively. Supplement costs also decreased due to reduced outside publications for resell. These decreases were partially offset by higher ink and production materials costs associated with the commencement of printing operations for the Fort Worth Star-Telegram at the Company's Plano, Texas productions facility. Depreciation - Expense decreased in 2014 due to a lower depreciable asset base as capital expenditures continue to decline. Amortization - Expense was flat year-over-year. A. H. Belo Corporation Second Quarter 2014 on Form 10-Q PAGE 19 -------------------------------------------------------------------------------- Table of Contents Other The table below sets forth the other components of the Company's results of continuing operations. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2014 Change 2013 2014 Change 2013 Other Income (Expense), Net Gains on equity method investments, net $ 18,567 3,300.5 % $ 546 $ 18,159 1,558.4 % $ 1,095 Interest expense - (100.0 )% (8 ) - (100.0 )% (419 ) Other income (loss), net 141 107.4 % 68 258 816.7 % (36 ) Total other income, net $ 18,708 2,987 % $ 606 $ 18,417 2,778 % $ 640 Income Tax Provision $ 1,428 185.6 % $ 500 $ 2,319 134.5 % $ 989 Gains on equity method investments, net - Gains on equity method investments increased by $18,021 and $17,064 in the three and six months ended June 30, 2014, primarily due to an $18,532 gain related to Classified Ventures' sale of apartments.com. This gain was partially offset by a $934 impairment charge in the first quarter of 2014 related to the Company's investment in Wanderful Media. The Company determined that an other-than-temporary decline in the value of the investment occurred based on the Company's respective share of the estimated fair value of the investee. The Company attributes the impairment primarily to a decline in business related to Wanderful Media's legacy products. The Company believes the carrying value of this investment as of June 30, 2014, is recoverable based on the investment's future business prospects. Interest expense - In the first quarter of 2013, the Company amortized $401 of remaining debt issuance costs associated with the voluntary termination of the Company's credit agreement. Tax provision - Tax provision for 2014 and 2013 is primarily due to franchise and state income tax expense and changes in the valuation allowance. See the Condensed Consolidated Financial Statements, Note 8 - Income Taxes. Earnings and Adjusted Earnings before Interest, Taxes, Depreciation and Amortization from Continuing Operations In addition to net income (loss) from continuing operations, the Company also evaluates earnings before interest, taxes, depreciation and amortization ("EBITDA") which is presented for continuing operations by adjusting for discontinued operations and losses attributable to noncontrolling interests. Adjusted EBITDA is calculated, as applicable, by adding back to EBITDA non-cash impairment expense and net investment-related gains and losses. |