Bulletin
Investor Alert

Aug. 6, 2021, 11:45 a.m. EDT

10-Q: GANNETT CO., INC.

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(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 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 and elsewhere throughout this Table of Contents

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.

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.

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 $3.6 million and $7.5 million for the three and six months ended June 30, 2020, respectively. There was no impact on reported total Publishing segment or consolidated Circulation revenues.

Table of Contents

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% Senior Secured Convertible Notes due 2027 (the "2027 Notes"). As a result, the conversion option can be share-settled in full and qualified for equity classification. Upon reclassification, the conversion feature was adjusted to fair value as of the stockholder approval date and the increase in the fair value resulted in a non-cash loss of $126.6 million due primarily to an increase in our stock price from December 31, 2020. The non-cash loss was recorded in Non-operating expense in the condensed consolidated statements of operations and comprehensive income (loss) for the six months ended June 30, 2021. As of June 30, 2021, the deferred tax asset related to the embedded conversion feature of the 2027 Notes was reclassified to Equity as a reduction to Additional paid-in-capital and reduced the carrying amount of the equity component of the 2027 Notes to $283.7 million.

Integration and reorganization costs

For the three and six months ended June 30, 2021, we incurred Integration and reorganization costs of $8.4 million and $21.8 million, respectively, including $1.1 million and $8.2 million, respectively, related to severance activities and $7.3 million and $13.6 million, respectively, related to other costs, including those for the purpose of consolidating operations.

For the three and six months ended June 30, 2021, we ceased operations of two and ten 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 $10.3 million during the three and six months ended June 30, 2021, respectively.

For the three and six months ended June 30, 2020, we incurred Integration and reorganization costs of $32.3 million and $60.6 million, respectively, including $25.7 million and $47.5 million, respectively, related to severance activities and $6.6 million and $13.0 million, respectively, related to other costs, including those for the purpose of consolidating operations.

For the three and six months ended June 30, 2020, we ceased operations of ten and 24 printing operations, respectively, as part of the ongoing cost reduction programs. As a result, we recognized accelerated depreciation of $11.0 million and $35.8 million during the three and six months ended June 30, 2020, respectively.

Goodwill and intangible impairment

During the second quarter of 2021, we (i) compared the fair value of each reporting unit to its carrying amount, which resulted in the fair value of all the reporting groups being in excess of their carrying values and (ii) compared the fair value of each indefinite-lived asset to its carrying amount, which resulted in the fair value of each indefinite-lived asset being in excess of its carrying value. As such, for the three and six months ended June 30, 2021, we did not incur any goodwill and intangible impairments in connection with our annual impairment analysis.

For the three and six months ended June 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.

Table of Contents

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 are now of 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 90 events held through the end of the second 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. 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 in-person events and sales of single copy newspapers as a result of continued restrictions and 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.

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, we have received $16.4 million in PPP funding in support of certain of our locations that were meaningfully affected by the COVID-19 pandemic. As of June 30, 2021, PPP loans of $16.4 million are included in Other long-term liabilities in the condensed consolidated balance sheets and in Operating activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2021. Interest expense related to PPP funding was immaterial for the three and six months ended June 30, 2021. Management intends to apply for forgiveness of the PPP loans in accordance with applicable guidelines.

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
        Consolidated Summary
        A summary of our segment results is presented below:
                                                       Three months ended June 30,                                                  Six months ended June 30,
        In thousands, except per                                                     Change                                                                        Change
        share amounts                  2021               2020                 $                 %                 2021                 2020                  $                %
        Operating revenues:
        Publishing                 $ 724,545          $  695,893          $  28,652                4  %       $ 1,424,130          $ 1,554,043          $ (129,913)            (8) %
        Digital Marketing
        Solutions                    110,037              94,563             15,474               16  %           212,318              215,844              (3,526)            (2) %
        Corporate and other            1,705               2,398               (693)             (29) %             4,779                5,407                (628)           (12) %
        Intersegment eliminations    (32,012)            (25,854)            (6,158)              24  %           (59,868)             (59,611)               (257)             -  %
        Total operating revenues     804,275             767,000             37,275                5  %         1,581,359            1,715,683            (134,324)            (8) %
        Operating expenses:
        Publishing                   654,255           1,045,492           (391,237)             (37) %         1,311,485            1,876,021            (564,536)           (30) %
        Digital Marketing
        Solutions                    105,035             140,403            (35,368)             (25) %           206,139              263,135             (56,996)           (22) %
        Corporate and other           31,552              44,583            (13,031)             (29) %            70,217              103,586             (33,369)           (32) %
        Intersegment eliminations    (32,012)            (25,854)            (6,158)              24  %           (59,868)             (59,611)               (257)             -  %
        Total operating expenses     758,830           1,204,624           (445,794)             (37) %         1,527,973            2,183,131            (655,158)           (30) %
        Operating income (loss)       45,445            (437,624)           483,069                 ***            53,386             (467,448)            520,834               ***
        Non-operating expenses,
        net                           13,044              34,483            (21,439)             (62) %           172,795               76,286              96,509               ***
        Income (loss) before
        income taxes                  32,401            (472,107)           504,508                 ***          (119,409)            (543,734)            424,325            (78) %
        Provision (benefit) for
        income taxes                  17,692             (34,276)            51,968                 ***             8,583              (25,297)             33,880               ***
        Net income (loss)             14,709            (437,831)           452,540                 ***          (127,992)            (518,437)            390,445            (75) %
        Net loss attributable to
        redeemable noncontrolling
        interests                       (406)               (938)               532              (57) %              (791)              (1,392)                601            (43) %
        Net income (loss)
        attributable to Gannett    $  15,115          $ (436,893)         $ 452,008                 ***       $  (127,201)         $  (517,045)         $  389,844            (75) %
        Income (loss) per share
        attributable to Gannett -
        basic                      $    0.11          $    (3.32)         $    3.43                 ***       $     (0.95)         $     (3.95)         $     3.00            (76) %
        Income (loss) per share
        attributable to Gannett -
        diluted                    $    0.10          $    (3.32)         $    3.42                 ***       $     (0.95)         $     (3.95)         $     3.00            (76) %
        


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

Table of Contents

Operating revenues

Total Operating revenues were $804.3 million and $1.581 billion for three and six months ended June 30, 2021, respectively, an increase of $37.3 million and a decrease of $134.3 million compared to the three and six months ended June 30, 2020, respectively, for the reasons described below.

For the Publishing segment, Operating revenues increased $28.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, reflecting higher Advertising and marketing services revenues of $49.2 million, including both print and digital, and higher Other revenues of $11.8 million, partially offset by lower Circulation revenues of $32.4 million. For the six months ended June 30, 2021, Operating revenues decreased $129.9 million compared to the six months ended June 30, 2020 due to lower Advertising and marketing services revenues of $40.1 million, reflecting lower print and higher digital revenues, lower Circulation revenues of $81.7 million, and lower Other revenues of $8.1 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 derived mainly from commercial printing, distribution arrangements, revenues from our events business, digital content syndication and affiliate revenues and third party newsprint sales.

For the DMS segment, Operating revenues increased $15.5 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, reflecting higher Advertising and marketing services revenues of $20.2 million, partially offset by lower Other revenues of $4.8 million. For the six months ended June 30, 2021, Operating revenues decreased $3.5 million compared to the six months ended June 30, 2020, reflecting higher Advertising and marketing services revenues of $5.3 million, which were more than offset by lower Other revenues of $8.8 million. 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.

For the Corporate and other category, Operating revenues decreased $0.7 million and $0.6 million during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. Revenues at our Corporate and other category are primarily driven by cloud offerings and software licensing.

Operating expenses

Total Operating expenses were $758.8 million and $1.528 billion for the three and six months ended June 30, 2021, respectively, a decrease of $445.8 million and $655.2 million compared to the three and six months ended June 30, 2020, respectively. Operating expenses consist primarily of the following:

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

For the three months ended June 30, 2021, Operating expenses at our Publishing segment decreased $391.2 million compared to the three months ended June 30, 2020, reflecting a decrease in Operating costs of $6.7 million, a decrease in Depreciation and amortization of $20.1 million, a decrease in Integration and reorganization costs of $20.8 million, a decrease in Asset impairments of $6.9 million, and a decrease in Goodwill and intangible impairments of $352.9 million, partially offset by an increase in Selling, general and administrative expenses of $9.9 million and an increase in Loss on the sale or disposal of Table of Contents

For the three months ended June 30, 2021, Operating expenses at our DMS segment decreased $35.4 million compared to the three months ended June 30, 2020, reflecting a decrease in Goodwill and intangible impairments of $40.5 million, a decrease in Selling, general and administrative expenses of $6.1 million, a decrease in Integration and reorganization costs of $2.8 million and a decrease in Loss on the sale or disposal of assets of $1.0 million, partially offset by an increase in Operating costs of $11.2 million, and an increase in Depreciation and amortization of $3.8 million. For the six months ended June 30, 2021, Operating expenses at our DMS segment decreased $57.0 million compared to the six months ended June 30, 2020, reflecting a decrease in Goodwill and intangible impairments of $40.5 million, a decrease in Selling, general and administrative expenses of $23.0 million, a decrease in Integration and reorganization costs of $4.0 million and a decrease in Loss on the sale or disposal of assets of $1.1 million, partially offset by an increase in Operating costs of $7.2 million and an increase in Depreciation and amortization of $4.3 million.

For the three months ended June 30, 2021, Operating expenses at Corporate and other decreased $13.0 million compared to the three months ended June 30, 2020, reflecting a decrease in Selling, general and administrative expenses of $9.1 million, a decrease in Depreciation and amortization of $1.8 million, and a decrease in Other operating expenses of $1.6 million. For the six months ended June 30, 2021, Operating expenses at Corporate and other decreased $33.4 million compared to the six months ended June 30, 2020, due to a decrease in Selling, general and administrative expenses of $24.8 million, a decrease in Integration and reorganization costs of $7.9 million, a decrease in Depreciation and amortization of $1.6 million, and a decrease in Operating costs of $1.9 million, partially offset by an increase in Other operating expenses of $3.0 million.

Refer to the discussion of segment results below for further information.

Non-operating (income) expense

Interest expense: For the three and six months ended June 30, 2021, Interest expense was $35.3 million and $74.8 million, respectively, compared to $57.9 million and $115.8 million for the three and six months ended June 30, 2020, respectively. The decrease in interest expense for the three and six months ended June 30, 2021 was mainly due to a lower effective interest rate driven by the refinancing of our five-year, senior-secured 11.5% term loan facility with Apollo Capital Management, L.P. (the "Acquisition Term Loan") in the first . . .

Aug 06, 2021

COMTEX_391097945/2041/2021-08-06T11:44:33

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2021 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.