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10-Q: GANNETT CO., INC.

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission. Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements that reflect our plans, estimates, and beliefs, all of which are based on our current expectations and could be affected by certain uncertainties, risks, and other factors described under Cautionary Note Regarding Forward-Looking Statements, Risk Factors, and elsewhere throughout this Quarterly Report, as well as the factors described in our Annual Report on Form 10-K for the year ended December 31, 2020, and subsequent periodic reports filed with the Securities and Exchange Commission, particularly under "Risk Factors." Our actual results could differ materially from those discussed in the forward-looking statements.

OVERVIEW

We are a subscription-led and digitally-focused media and marketing solutions company committed to empowering communities to thrive. We aim to be the premier source for clarity, connections and solutions within our communities. Our strategy is focused on driving audience growth and engagement by delivering deeper content experiences to our consumers, while offering the products and marketing expertise our advertisers desire. The execution of this strategy is expected to allow us to continue our evolution from a more traditional print media business to a digitally-focused content platform.

Our current portfolio of media assets includes USA TODAY, local media organizations in 46 states in the U.S., and Newsquest, a wholly-owned subsidiary operating in the United Kingdom ("U.K.") with more than 120 local media brands. We also own the digital marketing services companies ReachLocal, Inc.







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Through USA TODAY, our local property network, and Newsquest, we deliver high-quality, trusted content where and when consumers want to engage with it on virtually any device or platform. Additionally, we have strong relationships with hundreds of thousands of local and national businesses in both our U.S. and U.K. markets due to our large local and national sales forces and a robust advertising and digital marketing solutions product suite.

Business Trends

We have considered several industry trends when assessing our business strategy:

Print advertising continues to decline as the audience increasingly moves to digital platforms. We look to optimize our print operations to efficiently manage for this declining print audience. We are focused on converting the growing digital audience into digital-only subscribers to our publications.

Recent Developments

Debt Refinancing

On October 15, 2021, Gannett Holdings LLC ("Gannett Holdings"), our wholly-owned subsidiary, entered into a five-year senior secured term loan facility in an aggregate principal amount of $516 million (the "New Senior Secured Term Loan"). Also on October 15, 2021, Gannett Holdings completed a private offering of $400 million aggregate principal amount of 6.00% first lien notes due November 1, 2026 (the "2026 Senior Notes"). The proceeds of the New Senior Secured Term Loan, together with the net proceeds from the 2026 Senior Notes were applied towards the full repayment of our five-year, senior-secured term loan facility (the "5-Year Term Loan"). Please see the disclosure below under "Liquidity and Capital Resources - Debt Refinancing" and Note 15 - Subsequent events for further information regarding the debt refinancing.

Certain matters affecting comparability

The following items affect period-over-period comparisons from 2020 and will continue to affect period-over-period comparisons for future results:

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform to the current year presentation. In the fourth quarter of 2020, we re-aligned the breakout of the Publishing segment's Circulation revenues related to Digital-only circulation. As a result of this updated presentation, Print circulation revenues increased and Digital-only circulation revenues decreased $3.2 million and $10.7 million for the three and nine months ended September 30, 2020, respectively. There was no impact on reported total Publishing segment or consolidated Circulation revenues.

2027 Notes

At the Special Meeting of stockholders of the Company held on February 26, 2021 (the "Special Meeting"), our stockholders approved the issuance of the maximum number of shares of Common Stock issuable upon conversion of the 6.0% Table of Contents

Integration and reorganization costs

For the three and nine months ended September 30, 2021, we incurred Integration and reorganization costs of $13.6 million and $35.5 million, respectively, including $2.7 million and $10.9 million, respectively, related to severance activities and $11.0 million and $24.6 million, respectively, related to other costs, including those for the purpose of consolidating operations, systems implementation, and outsourcing of corporate functions.

For the three and nine months ended September 30, 2021, we ceased operations of four and 14 printing operations, respectively, as part of the synergy and ongoing cost reduction programs. As a result, we recognized accelerated depreciation of $1.1 million and $11.4 million during the three and nine months ended September 30, 2021, respectively.

For the three and nine months ended September 30, 2020, we incurred Integration and reorganization costs of $13.4 million and $74.0 million, respectively, including $7.3 million and $54.8 million, respectively, related to severance activities and $6.1 million and $19.2 million, respectively, related to other costs, including those for the purpose of consolidating operations.

For the three and nine months ended September 30, 2020, we ceased operations of 11 and 35 printing operations, respectively, as part of the ongoing cost reduction programs. As a result, we recognized accelerated depreciation of $9.3 million and $45.0 million during the three and nine months ended September 30, 2020, respectively.

Goodwill and intangible impairment

There were no goodwill and intangible impairments incurred for the three and nine months ended September 30, 2021.

There were no goodwill and intangible impairments incurred for the three months ended September 30, 2020. For the nine months ended September 30, 2020, we incurred goodwill and intangible impairments of $393.4 million, primarily due to the impact of the COVID-19 pandemic on our operations.

Foreign currency

Our U.K. publishing operations are conducted through our Newsquest subsidiary. In addition, our ReachLocal subsidiary has foreign operations in regions such as Canada, Australia/New Zealand and India. Earnings from operations in foreign regions are translated into U.S. dollars at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Translation fluctuations impact revenue, expense, and operating income results for international operations.

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Strategy

Our areas of strategic focus for 2021 include:

Accelerating digital subscriber growth

The broad reach of our newsroom network, linking leading national journalism at USA TODAY, our local property network in 46 states in the U.S., and Newsquest in the U.K. with more than 120 local media brands, gives us the ability to deepen our relationships with consumers at both the national and local levels. We bring consumers local news and information that impacts their day-to-day lives while keeping them informed of the national events that impact their country. We believe this local content is not readily obtainable elsewhere, and we are able to deliver that content to our customers across multiple print and digital platforms. As such, a key element of our consumer strategy is growing our paid digital-only subscriber base to 10 million subscribers over the next five years. We expect to do this through expansion of our current subscription products as well as through the launch of new digital subscription offerings tailored to specific users.

Driving digital marketing services growth by engaging more clients in a subscriber relationship

We have now achieved significant digital scale, with unique reach at both the national and local community levels. We expect to leverage our integrated sales structure and lead generation strategy to continue to aggressively expand our digital marketing services business into our local markets, both domestically and internationally. Given our extensive client base and volume of digital campaigns, we will also use data and insights to inform new and dynamic advertising products that we believe will deliver superior results.

Optimizing our traditional businesses across print and advertising

We will continue to drive the profitability of our traditional print operations through economies of scale, process improvements, and optimizations. We are focused on optimizing our pricing and improving customer service for our print subscribers. Print advertising continues to offer a compelling branding opportunity across our network due to our scale and unique reach at both the national and local community levels.

Prioritizing investments into growth businesses that have significant potential and support our vision

By leveraging our unique footprint, trusted brands, and media reach, we identify, experiment, and invest in potential growth businesses. USA TODAY NETWORK Ventures is a strong example of one such experiment that has grown significantly since its founding in 2015. During 2020, USA TODAY NETWORK Ventures was able to successfully pivot to holding its events virtually, hosting over 250 events. This success has continued in 2021, with over 160 events held through the end of the third quarter of 2021. While live events have resumed in 2021, the majority of events remain virtual. In addition, in connection with our company-wide priority to explore online gaming, in July 2021, we entered into an exclusive agreement with Tipico USA Technology, Inc. ("Tipico"), a U.S.-based subsidiary of European-based Tipico Group of Companies, the leading sports betting provider in Germany, utilizing their Tipico Sportsbook brand.

Impacts of the COVID-19 pandemic

As a result of the COVID-19 pandemic, we experienced a significant decline in Advertising and marketing services revenues, which accelerated the secular declines that we continue to experience. In addition, we continue to experience constraints on the sales of single copy newspapers, largely tied to business travel and in-person events. While we have seen operating trends improve since the second quarter of 2020, which represents the quarter that was most significantly impacted by the pandemic, we expect that the COVID-19 pandemic will continue to have a negative impact on our business and results of operations in the near-term, including lower revenues associated with events and lower sales of single copy newspapers, largely as a result of reduced business travel. If the COVID-19 pandemic were to revert to conditions that existed during 2020, including measures to help mitigate and control the spread of the virus, we would expect to experience further negative impacts in Advertising and marketing services revenues and Circulation revenues.

We have implemented, and continue to implement, measures to reduce costs and preserve cash flow. These measures include, evaluating and applying for all governmental relief programs for which we are eligible, including the Paycheck Table of Contents

In connection with the CARES Act, the Company received PPP funding in support of certain of our locations that were meaningfully affected by the COVID-19 pandemic totaling $16.4 million, which was included in Operating activities in the condensed consolidated statements of cash flows for the nine months ended September 30, 2021. As permitted under the CARES Act, during the third quarter of 2021, the Company received forgiveness of such loans totaling $15.1 million, which was recognized in earnings in the condensed consolidated statements of operations and comprehensive income (loss) as an offset to Operating costs of $11.1 million and Selling, general, and administrative expenses of $4.0 million. As of September 30, 2021, the remaining PPP loans of $1.3 million were included in Other long-term liabilities in the condensed consolidated balance sheets. Management has applied for forgiveness of the remaining PPP loans in accordance with applicable guidelines. Interest expense related to PPP funding was immaterial for the three and nine months ended September 30, 2021. Seasonality

Our revenues are subject to moderate seasonality, due primarily to fluctuations in advertising volumes. Advertising and marketing services revenues for our Publishing segment are typically highest in the fourth quarter, due to holiday and seasonal advertising, and lowest in the first quarter, following the holiday season. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.

RESULTS OF OPERATIONS

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        Consolidated Summary
        A summary of our segment results is presented below:
                                                             Three months ended September 30,                                              Nine months ended September 30,
        In thousands, except per share                                                          Change                                                                       Change
        amounts                                 2021                  2020                $                 %                2021                 2020                  $                %
        Operating revenues:
        Publishing                       $    715,807             $ 732,226          $ (16,419)             (2) %       $ 2,139,937          $ 2,286,268          $ (146,331)            (6) %
        Digital Marketing Solutions           116,771               105,443             11,328              11  %           329,089              321,287               7,802              2  %
        Corporate and other                     1,649                 2,732             (1,083)            (40) %             6,428                8,140              (1,712)           (21) %
        Intersegment eliminations             (34,042)              (25,862)            (8,180)             32  %           (93,910)             (85,472)             (8,438)            10  %
        Total operating revenues              800,185               814,539            (14,354)             (2) %         2,381,544            2,530,223            (148,679)            (6) %
        Operating expenses:
        Publishing                            657,561               684,788            (27,227)             (4) %         1,969,046            2,560,811            (591,765)           (23) %
        Digital Marketing Solutions           110,573               109,209              1,364               1  %           316,712              372,341             (55,629)           (15) %
        Corporate and other                    34,991                44,924             (9,933)            (22) %           105,208              148,509             (43,301)           (29) %
        Intersegment eliminations             (34,042)              (25,862)            (8,180)             32  %           (93,910)             (85,472)             (8,438)            10  %
        Total operating expenses              769,083               813,059            (43,976)             (5) %         2,297,056            2,996,189            (699,133)           (23) %
        Operating income (loss)                31,102                 1,480             29,622                ***            84,488             (465,966)            550,454               ***
        Non-operating expenses, net            13,573                29,830            (16,257)            (54) %           186,368              106,119              80,249             76  %
        Income (loss) before income
        taxes                                  17,529               (28,350)            45,879                ***          (101,880)            (572,085)            470,205            (82) %
        Provision (benefit) for income
        taxes                                   2,984                 3,098               (114)             (4) %            11,567              (22,200)             33,767               ***
        Net income (loss)                      14,545               (31,448)            45,993                ***          (113,447)            (549,885)            436,438            (79) %
        Net loss attributable to
        redeemable noncontrolling
        interests                                (142)                 (188)                46             (24) %              (933)              (1,580)                647            (41) %
        Net income (loss) attributable
        to Gannett                       $     14,687             $ (31,260)         $  45,947                ***       $  (112,514)         $  (548,305)         $  435,791            (79) %
        Income (loss) per share
        attributable to Gannett - basic  $       0.11             $   (0.24)         $    0.35                ***       $     (0.84)         $     (4.17)         $     3.33            (80) %
        Income (loss) per share
        attributable to Gannett -
        diluted                          $       0.09             $   (0.24)         $    0.33                ***       $     (0.84)         $     (4.17)         $     3.33            (80) %
        


*** Indicates an absolute value percentage change greater than 100.

Intersegment eliminations in the preceding table represent digital advertising marketing services revenues and expenses associated with products sold by our U.S. local publishing sales teams but fulfilled by our DMS segment. When discussing segment results, these revenues and expenses are presented gross but are eliminated in consolidation.

Operating revenues

Total Operating revenues were $800.2 million and $2.382 billion for three and nine months ended September 30, 2021, respectively, a decrease of $14.4 million and $148.7 million, respectively, compared to the three and nine months ended September 30, 2020, for the reasons described below.

For the Publishing segment, Operating revenues decreased $16.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, reflecting lower Circulation revenues of $29.5 million offset by higher Other revenues of $13.8 million. Advertising and marketing services revenues remained essentially flat for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, reflecting lower print revenues offset by higher digital revenues. For the nine months ended September 30, 2021, Operating revenues decreased $146.3 million compared to the nine months ended September 30, 2020 due to lower Circulation revenues of $111.1 million and lower Advertising and marketing services revenues of $40.8 million, partially offset by higher Other revenues of $5.6 million. Advertising and marketing services revenues are generated by the sale of local, national, and classified print advertising products, digital advertising offerings such as digital classified advertisements, digital media such as display advertisements run on our platforms as well as third-party sites, and digital marketing services delivered by our DMS segment. Circulation revenues are derived from home delivery, digital distribution and single copy sales of our publications. Other revenues are

For the DMS segment, Operating revenues increased $11.3 million and $7.8 million for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, reflecting higher Advertising and marketing services revenues of $16.0 million and $21.3 million, respectively, partially offset by lower Other revenues of $4.6 million and $13.5 million, respectively. Our DMS segment generates Advertising and marketing services revenues through multiple services, including search advertising, display advertising, search optimization, social media, website development, web presence products, customer relationship management, and software-as-a-service solutions.

Operating expenses

Total Operating expenses were $769.1 million and $2.297 billion for the three and nine months ended September 30, 2021, respectively, a decrease of $44.0 million and $699.1 million compared to the three and nine months ended September 30, 2020, respectively. Operating expenses consist primarily of the following:

Operating costs include labor, newsprint and delivery costs for the Publishing segment and the cost of online media acquired from third parties and costs to manage and operate our marketing solutions and technology infrastructure for the DMS segment;

For the three months ended September 30, 2021, Operating expenses at our Publishing segment decreased $27.2 million compared to the three months ended September 30, 2020, reflecting a decrease in Operating costs of $10.7 million, a decrease in Depreciation and amortization of $16.6 million, a decrease in Integration and reorganization costs of $1.6 million and a decrease in Loss on the sale or disposal of assets of $2.8 million, partially offset by an increase in Selling, general and administrative expenses of $3.0 million and an increase in Asset impairments of $1.4 million. For the nine months ended September 30, 2021, Operating expenses at our Publishing segment decreased $591.8 million compared to the nine months ended September 30, 2020, reflecting a decrease in Operating costs of $104.5 million, a decrease in Selling, general and administrative expenses of $51.7 million, a decrease in Depreciation and amortization of $57.3 million, a decrease in Integration and reorganization costs of $28.4 million, a decrease in Asset impairments of $4.6 million and a decrease in Goodwill and intangible impairments of $352.9 million, partially offset by an increase in Loss on the sale or disposal of assets of $7.7 million.

For the three months ended September 30, 2021, Operating expenses at our DMS segment increased $1.4 million compared to the three months ended September 30, 2020, reflecting an increase in Operating costs of $9.2 million and an increase in Depreciation and amortization of $1.2 million, partially offset by a decrease in Selling, general and administrative expenses of $8.9 million. For the nine months ended September 30, 2021, Operating expenses at our DMS segment decreased $55.6 million compared to the nine months ended September 30, 2020, reflecting a decrease in Selling, general and administrative expenses of $31.9 million, a decrease in Goodwill and intangible impairments of $40.5 million and a decrease in Integration and reorganization costs of $4.3 million, partially offset by an increase in Operating costs of $16.4 million and an increase in Depreciation and amortization of $5.6 million.

For the three months ended September 30, 2021, Operating expenses at Corporate and other decreased $9.9 million compared to the three months ended September 30, 2020, reflecting a decrease in Selling, general and administrative expenses of $11.2 million, a decrease in Other operating expenses of $1.9 million and a decrease in Operating costs of $1.4 million, partially offset by an increase in Depreciation and amortization of $2.2 million and an increase Integration and . . .

Nov 05, 2021

COMTEX_396391113/2041/2021-11-05T11:03:06

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