GANNETT CO., INC. (Exact Name of Registrant As Specified in Its Charter)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 24, 2006 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-6961 GANNETT CO., INC. (Exact name of registrant as specified in its charter) Delaware 16-0442930 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 7950 Jones Branch Drive, McLean, Virginia 22107-0910 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (703) 854-6000. 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 ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x The total number of shares of the registrant’s Common Stock, $1 par value, outstanding as of October 16, 2006, was 234,314,846. PART I. FINANCIAL INFORMATION Items 1 and 2. Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS Unless stated otherwise, as in the section titled “Discontinued Operations”, all of the information contained in Management’s Discussion and Analysis of Operations relates to continuing operations. Therefore, the results of The (Boise) Idaho Statesman, and two newspapers in the state of Washington: The (Olympia) Olympian, and The Bellingham Herald which were disposed of in an asset exchange during the third quarter of 2005, are excluded from third quarter and year-to-date 2005 results from continuing operations. Operating Summary During the quarter ended September 25, 2005, Knight Ridder, Inc. sold its newspaper interests in Detroit to Gannett and MediaNews Group and the two publishers formed the Detroit Newspaper Partnership, L.P. MediaNews Group acquired The Detroit News from Gannett and Gannett acquired the Detroit Free Press. Beginning August 1, 2005, Detroit’s results have been fully consolidated in the financial statements of Gannett along with a minority interest charge for MediaNews Group’s interest. Prior to that date, the results from the company’s 50% interest in Detroit had been reported in other revenues. As a result of the change in the company’s ownership of the Detroit newspaper operations, which required a change in accounting from the equity method to full consolidation, significant variances in reported revenues and expenses for the third quarter of 2006 and first nine months of 2006 compared with the same periods in 2005 have resulted. On December 25, 2005, the company completed the expansion and reorganization, with MediaNews Group, of the Texas-New Mexico Newspapers Partnership. The company’s ownership interest in the partnership was reduced and MediaNews Group became the managing partner. Results for the Texas- New Mexico Partnership are no longer consolidated in the company’s financial statements. The company’s 40.6% interest in the partnership’s results is now included in other revenues in the Consolidated Statements of Income. This change in ownership and the attendant change in accounting also affect revenue and expense comparisons on an as reported basis. On June 26, 2006, the company completed the acquisition of KTVD-TV in Denver, which created the company’s second duopoly. On August 7, 2006, the company announced it had completed the acquisition of WATL-TV in Atlanta, which created the company’s third duopoly. To provide better comparisons of operating results in light of these and other transactions, the Newspaper Results section and Broadcasting Results section, below, provide pro forma amounts and discussion when comparing our third quarter and first nine months of 2006 results to the same periods in 2005. The company also began reporting stock-based compensation expense in the first quarter of 2006 as required by Statement of Financial Accounting Standards No. 123(R). Total non-cash compensation expense was $10.3 million ($6.4 million after tax or $0.03 per share) in the third quarter and $34.4 million ($21.3 million after tax or $0.09 per share) for the first nine months of 2006. Refer to Note 3 “Stock-based compensation” in the Notes to Condensed Consolidated Financial Statements for further information concerning this matter. Earnings from continuing operations per diluted share were $1.11 for the third quarter of 2006 and $3.40 for the year-to-date 2006 compared with $1.13 for the third quarter of 2005 and $3.49 for the year-to-date 2005. Net income per diluted share, on a generally accepted accounting principles (“GAAP”) basis, was $1.11 for the third quarter of 2006 compared to $1.22 for the comparable period in 2005. Net income per diluted share for the nine months was $3.40 for 2006 and $3.62 for 2005. Earnings from operations of the discontinued businesses, excluding the gain on disposition, per diluted share were $0.01 for the third quarter of 2005 and $0.06 for the year-to-date 2005. In the third quarter of 2005 Gannett also reported earnings per diluted share of $0.08 for the gain on the disposition of these properties. Operating revenues rose 2.7% to $1.91 billion in the third quarter and 5.1% to $5.83 billion in the first nine months, reflecting the full consolidation of Detroit newspaper operations beginning on August 1, 2005 and the deconsolidation of Texas-New Mexico Partnership operations effective December 26, 2005. If Gannett had owned the same properties on the same basis for the full quarter and year-to-date periods in 2005 as in 2006, revenues from continuing operations would have been slightly higher in the third quarter and year-to-date 2006. 2 Operating income was $455.0 million for the third quarter of 2006 and $473.2 million for the third quarter of 2005. Operating income decreased from $1.47 billion for the year-to-date 2005 to $1.41 billion for the year-to-date 2006. Income from continuing operations was $261.4 million for the third quarter of 2006 and $807.2 million year-to-date compared to $274.6 million and $868.0 million for the same periods last year. Higher newsprint, interest and stock- based compensation expense tempered the company’s results for the third quarter 2006. In addition to these factors, the company’s results for year-to-date in 2006 were also impacted by a lower UK exchange rate. Expenses for the quarter and year-to-date 2005 include the benefit of a curtailment of retiree medical and life insurance coverage for certain US employees. Newspaper Results Acquisitions and other transactions affecting newspaper comparisons include the Tallahassee Democrat acquired in late August 2005, the reorganization and full consolidation of the Detroit newspapers since August 2005, Mint Magazine acquired in July 2005, PointRoll, Inc., acquired in June 2005, Hometown Communications Network, Inc., acquired in late March 2005 and the expansion and reorganization of the Texas-New Mexico Newspapers Partnership on December 25, 2005. (Refer to Note 4 “Acquisitions, investments and dispositions” in the Notes to Condensed Consolidated Financial Statements for further information concerning these matters.) Reported newspaper publishing revenues increased $19.8 million or 1% for the third quarter of 2006, as compared to the third quarter of 2005, and rose by $225.6 million or 5% for the year-to-date, primarily due to the Detroit newspaper transaction. Assuming the company had owned the same properties as of September 24, 2006 for all periods presented, newspaper publishing revenues would have decreased less than 1% for the third quarter and for the nine months ended 2006, as compared to the same periods in 2005. Domestic advertising revenues decreased 1% on a pro forma basis for the third quarter and increased 1% for the nine months ended 2006, as compared to the same periods in 2005. On a constant currency basis, pro forma newspaper advertising revenue decreased 2% for the third quarter and 1% year-to-date. The average exchange rate used to translate UK newspaper results from Sterling to U.S. dollars increased 4% from 1.79 for the third quarter 2005 to 1.87 for the third quarter 2006, and decreased 2% from 1.85 for the year-to-date 2005 to 1.81 for the year- to-date 2006. Newspaper operating revenues are derived principally from advertising and circulation sales, which accounted for 75% and 18%, respectively, of total newspaper revenues for both the third quarter and year-to-date 2006. Advertising revenues include amounts derived from advertising placed with newspaper related internet products. Other publishing revenues are mainly earnings from the company’s 50% owned joint operating agency in Tucson (and Detroit for the first eight months of 2005), revenue from PointRoll and earnings from its 19.49% equity interest in the California Newspapers Partnership and its 40.6% equity interest in the Texas-New Mexico Newspapers Partnership (for the first nine months of 2006).