| • FORM 10-Q • RATIO OF EARNINGS TO FIXED CHARGES • RULE 13A-14(A)/15D-14(A) CERTIFICATION • RULE 13A-14(A)/15(D)-14(A) CERTIFICATION • CERTIFICATION PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 • CERTIFICATION PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 24, 2012 Commission file number 1-5837 THE NEW YORK TIMES COMPANY (Exact name of registrant as specified in its charter)
620 EIGHTH AVENUE, NEW YORK, NEW YORK (Address of principal executive offices) 10018 (Zip Code) Registrant’s telephone number, including area code 212-556-1234 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x Number of shares of each class of the registrant’s common stock outstanding as of July 27, 2012 (exclusive of treasury shares):
PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE NEW YORK TIMES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
See Notes to Condensed Consolidated Financial Statements. 2 THE NEW YORK TIMES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (In thousands)
See Notes to Condensed Consolidated Financial Statements. 3 THE NEW YORK TIMES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
See Notes to Condensed Consolidated Financial Statements. 4 THE NEW YORK TIMES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS-(Continued) (In thousands, except share and per share data)
See Notes to Condensed Consolidated Financial Statements. 5 THE NEW YORK TIMES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
See Notes to Condensed Consolidated Financial Statements. 6 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION In the opinion of The New York Times Company’s (the “Company”) management, the Condensed Consolidated Financial Statements present fairly the financial position of the Company as of June 24, 2012, and December 25, 2011, and the results of operations and cash flows of the Company for the periods ended June 24, 2012, and June 26, 2011. The Company and its consolidated subsidiaries are referred to collectively as “we,” “us” or “our.” All adjustments necessary for a fair presentation have been included and are of a normal and recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by accounting principles generally accepted in the United States of America have been condensed or omitted from these interim financial statements. These financial statements, therefore, should be read in conjunction with the Consolidated Financial Statements and related Notes included in our Annual Report on Form 10-K for the year ended December 25, 2011. Due to the seasonal nature of our business, operating results for the interim periods are not necessarily indicative of a full year’s operations. The fiscal periods included herein comprise 13 weeks for the second-quarter periods and 26 weeks for the full six-month periods. For comparability, certain prior-year amounts have been reclassified to conform with the 2012 presentation, specifically reclassifications related to a discontinued operation (see Note 12). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES As of June 24, 2012, our significant accounting policies, which are detailed in our Annual Report on Form 10-K for the year ended December 25, 2011, have not changed materially. We report components of comprehensive income in two separate but consecutive statements consisting of an income statement followed by a separate statement of comprehensive income/(loss) in accordance with the Financial Accounting Standard Board’s amended guidance on the presentation of comprehensive income. The new guidance was effective for us in the first quarter of 2012. NOTE 3. SHORT-TERM INVESTMENTS We have short-term investments, with original maturities of longer than 3 months, in U.S. Treasury securities and commercial paper as of June 24, 2012, and in U.S. Treasury securities as of December 25, 2011. Since we have the intention and ability to hold these investments to maturity, they are classified as held-to-maturity and are reported at amortized cost. The carrying value of the short-term investments was $279.9 million as of June 24, 2012, which included approximately $270 million in U.S. Treasury securities and approximately $10 million in commercial paper, and $104.8 million in U.S. Treasury securities as of December 25, 2011. The short-term investments have remaining maturities of about 1 month to 8 months as of June 24, 2012. See Note 9 for information regarding the fair value of our short-term investments. 7 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 4. IMPAIRMENT OF ASSETS About Group Goodwill is not amortized but tested for impairment annually or in an interim period if certain circumstances indicate a possible impairment may exist. Our policy is to perform our annual goodwill impairment test in the fourth quarter of our fiscal year. However, due to certain impairment indicators at the About Group, we performed an interim impairment test as of June 24, 2012. The interim impairment test resulted in a $194.7 million estimated non-cash charge in the second quarter of 2012 for the impairment of goodwill at the About Group. Any change to the estimate of the impairment charge will be recorded in the third quarter of 2012 when we complete the impairment test. While we saw improvements in total advertising trends for the About Group in the second quarter of 2012 compared with first-quarter 2012 levels, our expectations for future operating results and cash flows in the long-term are lower than our previous estimates primarily driven by a reassessment of the sustainability of our estimated long-term growth rate for display advertising. The reduction in our estimated long-term growth rate resulted in the carrying value of the net assets being greater than their fair value, and therefore a write-down of goodwill to its fair value was required. The fair value of the About Group’s goodwill was the residual fair value after allocating the total fair value of the About Group to its other assets, net of liabilities. See Note 9 for information regarding the fair value of goodwill. Assets Held for Sale In the second quarter of 2011, we classified certain assets as held for sale at The New York Times Media Group, primarily of 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, which was part of the News Media Group reportable segment. The carrying value of these assets was greater than their fair value, less cost to sell, resulting in an impairment of certain intangible assets and property totaling $9.2 million. The impairment charge reduced the carrying value of intangible assets to $0 and the property to a nominal value. In October 2011, we completed the sale of Baseline, which resulted in a nominal gain. NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS ACQUIRED The following tables display the carrying amount of goodwill and other intangible assets acquired as of June 24, 2012 and December 25, 2011. The table below includes goodwill impaired during the second quarter of 2012 at the About Group (see Note 4). The changes in the carrying amount of goodwill were as follows:
8 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) Other intangible assets acquired were as follows:
Amortization expense related to other intangible assets acquired that are subject to amortization was $2.5 million in the first six months of 2012 and is expected to be $2.2 million for the remainder of fiscal year 2012. Amortization expense for the next five years related to these intangible assets is expected to be as follows:
NOTE 6. INVESTMENTS Equity Method Investments As of June 24, 2012, our investments in joint ventures consisted of equity ownership interests in the following entities:
Cost Method Investments In February 2012, we sold 100 of our units in Fenway Sports Group for an aggregate price of $30.0 million (pre-tax gain of $17.8 million in the first quarter of 2012) and in May 2012, we completed the sale of our remaining 210 units for an aggregate price of $63.0 million (pre-tax gain of $37.8 million in the second quarter of 2012). These sales resulted in a pre-tax gain of $55.6 million in 2012. Effective with the February 2012 sale, given our reduced ownership level and lack of influence on the operations of Fenway Sports Group, we changed the accounting for this investment from the equity method to the cost method in the first quarter of 2012. Therefore, starting in February 2012, we no longer recognized our proportionate share of the operating results of Fenway Sports Group in joint venture results in our Condensed Consolidated Statements of Operations. 9 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) In the first quarter of 2012, we recorded a non-cash impairment charge of $4.9 million to reduce the carrying value of certain investments to fair value. The impairment charge was primarily related to our investment in Ongo Inc., a consumer service for reading and sharing digital news and information from multiple publishers. See Note 9 for additional information regarding the fair value of these investments. In the first quarter of 2011, we sold a minor portion of our interest in Indeed.com, a job listing aggregator, resulting in a pre-tax gain of $5.9 million. We retain a substantial portion of our initial interest in Indeed.com. Available-for-Sale Security In connection with the initial public offering of Brightcove, Inc. in the first quarter of 2012, changes in the fair value of our investment in Brightcove, Inc. (available-for-sale security) are recognized as unrealized gains or losses within “Miscellaneous assets” and “Accumulated other comprehensive loss” in our Condensed Consolidated Balance Sheet. As of June 24, 2012, we recognized an unrealized gain of $3.6 million ($2.1 million after-tax). See Note 9 for additional information regarding the fair value of our investment in Brightcove, Inc. NOTE 7. DEBT OBLIGATIONS As of June 24, 2012, our current indebtedness included senior notes and a sale-leaseback of a portion of our New York headquarters. Our total debt and capital lease obligations consisted of the following:
See Note 9 for information regarding the fair value of our long-term debt. As of June 24, 2012, there were $0 outstanding borrowings under our $125.0 million asset-backed 5-year revolving credit facility. Interest Expense, Net “Interest expense, net” in our Condensed Consolidated Statements of Operations was as follows:
10 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 8. OTHER Severance Costs We recognized severance costs of $1.8 million in the second quarter of 2012 and $7.1 million in the first six months of 2012. These costs were recognized at the News Media Group and Corporate and are recorded in “Selling, general and administrative costs” in our Condensed Consolidated Statements of Operations. As of June 24, 2012, we had a severance liability of approximately $12 million included in “Accrued expenses” in our Condensed Consolidated Balance Sheet. Accelerated Depreciation In the first quarter of 2012, we recorded a $6.7 million charge for accelerated depreciation for certain assets at the Worcester Telegram & Gazette’s (“T&G”) facility in Millbury, Mass., associated with the consolidation of most of T&G’s printing into The Boston Globe’s (the “Globe”) facility in Boston, Mass., which was completed early in the second quarter of 2012. NOTE 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. Assets Measured and Recorded at Fair Value on a Recurring Basis The following table summarizes our financial assets measured at fair value on a recurring basis as of June 24, 2012:
Certain financial assets are valued using market prices on the active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. In the first quarter of 2012, the common stock of Brightcove, Inc. (available-for-sale security) began to trade on an active market (see Note 6). 11 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) Assets Measured and Recorded at Fair Value on a Non-Recurring Basis Certain non-financial assets, such as goodwill, other intangible assets, property, plant and equipment and certain investments, are only recorded at fair value if an impairment charge is recognized. The following table presents non-financial assets that were measured and recorded at fair value on a non-recurring basis and the impairment loss recorded during 2012 on those assets:
The impairment charge in the second quarter of 2012 was related to goodwill at the About Group (see Note 4). The total fair value of the About Group was determined using a discounted cash flow model (present value of future cash flows). We estimated a 3.5% annual growth rate to arrive at a residual year representing the perpetual cash flows of the About Group. The residual year cash flow was capitalized to arrive at the terminal value of the About Group. Utilizing a discount rate of 15.0%, the present value of the cash flows during the projection period and terminal value were aggregated to estimate the fair value of the About Group. In our 2011 annual impairment test, we had assumed a 5.0% annual growth rate and a 13.8% discount rate. In determining the appropriate discount rate, we considered the weighted-average cost of capital for comparable companies. The impairment charge in the first quarter of 2012, which was primarily related to our investment in Ongo Inc., was due to events that reduced the fair value of our investments (see Note 6). We determined the fair value of these investments using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable companies. The income approach includes the use of a discounted cash flow model. Financial Instruments Disclosed, But Not Recorded, at Fair Value Our short-term investments, which include U.S. Treasury securities and commercial paper, are recorded at amortized cost (see Note 3). As of June 24, 2012 and December 25, 2011, the amortized cost approximated fair value because of the short-term maturity and highly liquid nature of these investments. We classified these investments as Level 2 since the fair value estimates are based on market observable inputs for investments with similar terms and maturities. The carrying value of our long-term debt was approximately $694 million as of June 24, 2012 and $692 million as of December 25, 2011. The fair value of our long-term debt was approximately $824 million as of June 24, 2012 and $800 million as of December 25, 2011. We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). 12 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFITS Pension Single-Employer Plans The components of net periodic pension cost of all Company-sponsored defined benefit pension plans and The New York Times Newspaper Guild pension plan, a joint Company and Guild-sponsored plan, were as follows:
Pursuant to an amendment to a collective bargaining agreement covering the mailers of The New York Times (“The Times”), we froze such mailers’ benefit accruals under a Company-sponsored pension plan. This resulted in a remeasurement and curtailment of the pension plan in the first quarter of 2012, which reduced the underfunded status of the plan by approximately $3 million. This amount is recognized within “Accumulated other comprehensive loss” in our Condensed Consolidated Balance Sheet as of June 24, 2012. In 2012, we expect to make mandatory contributions of approximately $47 million (of which approximately $24 million was made in the first six months of 2012), primarily contractual contributions to The New York Times Newspaper Guild pension plan. In addition to contractual contributions to The New York Times Newspaper Guild pension plan and our minimum funding requirements, we may make discretionary contributions in 2012 to our Company-sponsored qualified pension plans depending on cash flows, pension asset performance, interest rates and other factors. Multiemployer Plans In the second quarter of 2011, certain employees of the Globe represented by a union ratified amendments to their collective bargaining agreement, which resulted in a partial withdrawal from a multiemployer pension plan. We recorded an estimated $4.2 million charge related to our withdrawal obligation under this multiemployer pension plan. 13 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) Other Postretirement Benefits The components of net periodic postretirement benefit income were as follows:
In the first quarter of 2012, we sold the Regional Media Group (see Note 12). The sale significantly reduced the expected years of future service for current employees, resulting in a remeasurement and curtailment of a postretirement benefit plan. We recognized a curtailment gain of $27.2 million in the first quarter of 2012. The curtailment gain is included in the gain on the sale within “(Loss)/income from discontinued operations, net of income taxes” in the Condensed Consolidated Statement of Operations. NOTE 11. INCOME TAXES We had an income tax benefit of $36.5 million (effective tax rate of 30.4%) in the second quarter of 2012 and an income tax benefit of $32.5 million (effective tax rate of 31.5%) in the first six months of 2012. A lower tax rate applied to the charge for the impairment of goodwill at the About Group and the size of the charge relative to our total pre-tax loss from continuing operations had an unfavorable impact on the effective tax rate in both periods. We had an effective tax rate of 16.5% in the second quarter of 2011 and 8.6% in the first six months of 2011. The effective tax rate for the second quarter and first six months of 2011 was favorably impacted by adjustments to reduce our reserve for uncertain tax positions and state law changes. NOTE 12. DISCONTINUED OPERATIONS On January 6, 2012, we completed the sale of the Regional Media Group, consisting of 16 regional newspapers, other print publications and related businesses, to Halifax Media Holdings LLC for approximately $140 million in cash. The net after-tax proceeds from the sale, including a tax benefit, were approximately $150 million, which we are using for general corporate purposes. The sale resulted in an after-tax gain of $25.7 million (including post-closing adjustments recorded in the second quarter of 2012 totaling $4.5 million). The results for the Regional Media Group, which had previously been included in the News Media Group reportable segment, have been classified as discontinued operations for all periods presented. 14 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) The following table summarizes the results of operations for the Regional Media Group presented as discontinued operations.
(1) The income tax benefit in 2011 was unfavorably impacted because a portion of the goodwill impairment was non-deductible. (2) The income tax benefit for the first six months of 2012 includes a tax deduction for goodwill triggered upon the sale. The following table summarizes the assets and liabilities held for sale as of December 25, 2011.
(1) Included in “Accrued expenses” in our Condensed Consolidated Balance Sheet as of December 25, 2011. 15 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 13. (LOSS)/EARNINGS PER SHARE Basic and diluted (loss)/earnings per share have been computed as follows:
The difference between basic and diluted shares is that diluted shares include the dilutive effect of the assumed exercise of outstanding securities. Our stock options and warrants could have the most significant impact on diluted shares. Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the market value of our Class A common stock, because their inclusion would have an anti-dilutive effect on per share amounts. The number of stock options that were excluded from the computation of diluted earnings per share, because they were anti-dilutive, were approximately 18 million in the second quarter and first six months of 2012 and approximately 20 million in the second quarter and first six months of 2011. A total of 15.9 million warrants were excluded from the computation of diluted earnings per share in the second quarter and first six months of 2012 because they were anti-dilutive. 16 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 14. SUPPLEMENTAL STOCKHOLDERS’ EQUITY INFORMATION Stockholders’ equity is summarized as follows:
17 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 15. SEGMENT INFORMATION Our 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. Below is a description of our reportable segments: News Media Group The News Media Group consists of The New York Times Media Group, which includes The Times, the International Herald Tribune, NYTimes.com, and related businesses; and the New England Media Group, which includes the Globe, BostonGlobe.com, Boston.com, the T&G, Telegram.com, and related businesses. About Group The About Group consists of About.com, ConsumerSearch.com, CalorieCount.com and related businesses. Our Statements of Operations by segment and Corporate were as follows:
(1) In the first quarter of 2012, we recorded a $6.7 million charge for accelerated depreciation for certain assets at the T&G’s facility in Millbury, Mass., associated with the consolidation of most of T&G’s printing into the Globe’s facility in Boston, Mass., which was completed early in the second quarter of 2012. In the second quarter of 2011, we recorded a $9.2 million impairment charge for certain assets held for sale at The New York Times Media Group, and a $4.2 million charge for a pension withdrawal obligation under a multiemployer pension plan at the Globe, which are both part of the News Media Group reportable segment. (2) In the second quarter of 2012, we recorded a $194.7 million estimated non-cash impairment charge for goodwill at the About Group. 18 THE NEW YORK TIMES COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) NOTE 16. CONTINGENT LIABILITIES Restricted Cash We were required to maintain $24.3 million of restricted cash as of June 24, 2012 subject to certain collateral requirements primarily for obligations under our workers’ compensation programs. Other There are various legal actions that have arisen in the ordinary course of business and are now pending against us. 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 our legal counsel that the ultimate liability that might result from these actions would not have a material adverse effect on our Condensed Consolidated Financial Statements. 19 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations We are a leading global, multimedia news and information company that currently includes newspapers, digital businesses, investments in paper mills and other investments. We classify our businesses based on our operating strategies into two reportable segments, the News Media Group and the About Group. Our segments and divisions are: News Media Group (consisting of 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; and the New England Media Group, which includes The Boston Globe (the “Globe”), BostonGlobe.com, Boston.com, the Worcester Telegram & Gazette (the “T&G”), Telegram.com, and related businesses. The News Media Group generates revenues principally from advertising and circulation. Other revenues primarily consist of revenues from news services/syndication, commercial printing, rental income, digital archives and direct mail advertising services. The News Media Group’s main operating costs are employee-related costs and raw materials, primarily newsprint. About Group (consisting of About.com, ConsumerSearch.com, CalorieCount.com and related businesses). 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). Almost all of its revenues (95% in the first six months of 2012) are derived from the sale of cost-per-click and display advertising. Cost-per-click advertising accounted for 57% of the About Group’s total advertising revenues in the first six months of 2012. 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:
During the second quarter and first six months of 2012, total revenues increased 0.6% and 0.2%, respectively, compared with the same prior-year periods, driven primarily by growth in circulation revenues, offset by declines in advertising revenues. The advertising marketplace remained challenging. Total advertising revenues declined in the second quarter of 2012, although the rate of decline moderated from the level experienced in the first quarter of 2012, due primarily to improved digital advertising revenue trends at the About Group. Compared with the prior-year periods, total advertising revenues decreased 6.8% and 7.5% in the second quarter and first six months of 2012, respectively, as both print and digital advertising revenues experienced declines. Print advertising revenues decreased 8.0% and 7.6% in the second quarter and first six months of 2012, respectively. Digital advertising revenues decreased 4.0% and 7.2% in the second quarter and first six months of 2012, respectively. We expect total advertising revenue trends in the third quarter of 2012 to improve from second-quarter 2012 levels due to better digital advertising performance across our Company. At the News Media Group, advertising revenues decreased 6.6% in the second quarter of 2012 compared with the same prior-year period, due to an 8.0% reduction in print advertising revenues and a 1.6% decline in digital advertising revenues, which were similar to the trends experienced in the first quarter of 2012. Compared with the same prior-year period, advertising revenues decreased 6.3% in the first six months of 2012, due to a 7.6% reduction in print advertising revenues and a 1.9% decline in digital advertising revenues. Digital advertising revenue trends at the News Media Group in the second quarter of 2012 improved compared with first-quarter 2012 levels, but digital advertising continued to experience pressure due to a decrease in spending, particularly in the technology category at The New York Times Media Group, and market factors including the weak economic climate and an increasingly competitive landscape. About Group advertising revenues decreased 8.9% in the second quarter and 16.7% in the first six months of 2012 compared with the same prior-year periods, mainly due to lower display and cost-per-click advertising revenues, although trends improved compared with first-quarter levels particularly for cost-per-click advertising. On the display side, the About Group continues to face competition and an uneven economic environment, although it has made progress in the rebuilding of About.com’s sales team. While total display advertising revenues declined 14% in the second quarter of 2012 compared with the same prior-year period, the rate of decline for display advertising revenues moderated from first-quarter levels. Compared with the prior-year period, cost-per-click advertising revenues declined 5% in the second quarter of 2012, reflecting lower click-through rates. This decline reflected a moderation from first-quarter 2012 declines as a result of modest growth in page views and cost-per-click advertising rates. We expect cost-per-click advertising in the third quarter of 2012 to benefit from cycling through a Google algorithm change that negatively affected ConsumerSearch’s traffic beginning in July 2011. Although, as discussed further below, we recorded a non-cash charge with respect to the About Group in the second quarter of 20 2012, the Group continues to execute on its turnaround strategy and we expect its performance to meaningfully improve in the second half of 2012, with display advertising and cost-per-click advertising revenues projected to return to positive growth. Our results for the second quarter and first six months of 2012 reflect strong growth in circulation revenues as we continue to execute on our digital strategy, expanding our digital subscription base and further developing this consumer revenue stream. Compared with the prior-year periods, circulation revenues increased 8.3% and 9.0% in the second quarter and first six months of 2012, respectively, mainly as the addition of digital subscription offerings and the increase in home-delivery and weekday single-copy prices in January 2012 at The Times offset a decline in print copies sold across the News Media Group. We expect circulation revenues to increase in the mid- to high-single digits in the third quarter of 2012 because of growth in digital subscriptions as well as from the print price increases implemented earlier in 2012. Paid subscribers to digital subscription packages, e-readers and replica editions of The Times and the IHT totaled approximately 509,000 as of the end of the second quarter of 2012, an increase of approximately 12% since March 18, 2012, which was the one-year anniversary of NYTimes.com’s digital subscription launch. Paid digital subscribers to BostonGlobe.com and the Globe’s e-readers and replica editions totaled approximately 23,000 as of the end of the second quarter of 2012, an increase of approximately 28% since March 18, 2012. In total, paid subscribers to our digital products across our Company were approximately 532,000 as of the end of the second quarter of 2012. Although in March 2012 we cycled past the first full year of digital subscription packages at The Times, we believe there is more opportunity for further growth in this revenue stream and our subscriber count. Operating costs decreased 0.6% in the second quarter of 2012 compared with the same period in 2011 primarily due to lower professional fees and distribution costs, offset in part by higher compensation and various other costs. Operating costs increased 0.2% in the first six months of 2012 compared with the same prior-year period primarily due to higher compensation costs, depreciation and amortization expense, severance costs, content costs and various other costs offset in part by lower benefits expense, professional fees and outside printing costs. Our cost management efforts are focused on balancing our investments to support our digital and journalistic initiatives, while finding additional cost efficiencies across the organization. We expect operating costs to increase in the low- to mid-single digits in the third quarter of 2012. We plan to continue to invest in our digital capabilities and subscription acquisition efforts and in the About Group’s sales and marketing initiatives. We expect higher production costs from new commercial printing activity at the New England Media Group and higher variable compensation costs. We expect these costs to be partially offset by cost savings in our production and distribution operations, reduced support functions and the further leveraging of our centralized processes and resources. Our cash, cash equivalents and short-term investments were approximately $570 million as of June 24, 2012, an improvement of approximately $290 million since the end of 2011, largely due to the proceeds from the sales of the Regional Media Group and our interest in Fenway Sports Group, as well as cash flows from operations. Two priorities for cash remain managing the underfunded levels of our pension plans and paying off our $75.0 million 4.610% senior notes due at the beginning of the fourth quarter of 2012. As of June 24, 2012, our total debt and capital lease obligations were approximately $776 million and our total debt and capital lease obligations, net of cash, cash equivalents and short-term investments, or “net debt,” were approximately $206 million. We believe net debt provides a useful measure of our liquidity and overall debt position. As of June 24, 2012, we had no outstanding borrowings under our $125.0 million asset-backed five-year revolving credit facility. See the “Recent Developments” section for additional information on the sales of the Regional Media Group in the first quarter of 2012 and our ownership interest in Fenway Sports Group during the first six months of 2012. We expect the following on a pre-tax basis in 2012:
21 RECENT DEVELOPMENTS Impairment of Assets In the second quarter of 2012, we recorded an estimated $194.7 million non-cash impairment charge for goodwill at the About Group. While total advertising revenue trends for the About Group improved in the second quarter of 2012 compared with first-quarter levels and we expect to build on that progress in the second half of 2012, we have reduced our long-term display advertising growth and profitability assumptions for the About Group, which led to the impairment charge in the second quarter of 2012. See “Results of Operations – Other Items – Impairment of Assets” for additional information. Gain on Sale of Investments In February 2012, we sold 100 of our units in Fenway Sports Group for an aggregate price of $30.0 million (pre-tax gain of $17.8 million in the first quarter of 2012) and in May 2012, we completed the sale of our remaining 210 units for an aggregate price of $63.0 million (pre-tax gain of $37.8 million in the second quarter of 2012). These sales resulted in a pre-tax gain of $55.6 million in 2012. Sale of Regional Media Group – Discontinued Operations On January 6, 2012, we completed the sale of the Regional Media Group, consisting of 16 regional newspapers, other print publications and related businesses, to Halifax Media Holdings LLC for approximately $140 million in cash. The net after-tax proceeds from the sale, including a tax benefit, were approximately $150 million, which we are using for general corporate purposes. The sale resulted in an after-tax gain of $25.7 million (including post-closing adjustments recorded in the second quarter of 2012 totaling $4.5 million). The results for the Regional Media Group, which had previously been included in the News Media Group reportable segment, have been classified as discontinued operations for all periods presented. Accelerated Depreciation In the first quarter of 2012, we recorded a $6.7 million charge for accelerated depreciation for certain assets at the T&G’s facility in Millbury, Mass., associated with the consolidation of most of T&G’s printing into the Globe’s facility in Boston, Mass., which was completed early in the second quarter of 2012. Impairment of Investments In the first quarter of 2012, we recorded a non-cash impairment charge of $4.9 million to reduce the carrying value of certain investments to fair value. The impairment charge was primarily related to our investment in Ongo Inc., a consumer service for reading and sharing digital news and information from multiple publishers. 22 RESULTS OF OPERATIONS The following table presents our consolidated financial results.
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