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 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 premiere 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. ("ReachLocal"), UpCurve, Inc. ("UpCurve"), and WordStream, Inc. ("WordStream") which are marketed under the LOCALiQ brand, and run the largest media-owned events business in the U.S., USA TODAY NETWORK Ventures.
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.
•Small and medium-sized businesses ("SMBs") are facing an increasingly complex marketing environment and need to create digital presence to capture audience online. We offer a broad suite of DMS products that offer a single, unified solution to meet their digital marketing needs.
•Consumers are looking for experience-based, emotional connections and communities. USA TODAY NETWORK Ventures was designed to celebrate local communities and create opportunities for meaningful in-person and virtual experiences.
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 $3.9 million for the three months ended March 31, 2020. 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% 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 three months ended March 31, 2021.
Integration and reorganization costs
For the three months ended March 31, 2021, we incurred Integration and reorganization costs of $13.4 million, $7.1 million related to severance activities and $6.3 million related to other costs, including those for the purpose of consolidating operations.
For the three months ended March 31, 2021, we ceased operations of eight printing operations as part of the synergy and ongoing cost reduction programs. As a result, we recognized accelerated depreciation of $9.2 million during the three months ended March 31, 2021.
For the three months ended March 31, 2020, we incurred Integration and reorganization costs of $28.3 million, including $21.2 million related to severance activities and $7.1 million related to other costs, including those for the purpose of consolidating operations.
In the three months ended March 31, 2020, we ceased operations of 14 printing operations as part of the ongoing cost reduction programs. As a result, we recognized accelerated depreciation of $24.7 million during the three months ended March 31, 2020.
Foreign currency
Our U.K. publishing operations are conducted through its 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.
Outlook for 2021
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. In addition, we consider it a company-wide priority to explore online gaming and we expect to invest in advertising, marketing, promotions, events, and services in this area.
Impacts of the COVID-19 pandemic
As a result of the COVID-19 pandemic, we continue to experience decreased demand for our advertising and digital marketing services, commercial print and distribution services, as well as reductions in and constraints on in-person events and the sales of single copy newspapers. 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.
As a result, 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 Protection Program, suspension of the quarterly dividend and refinancing of our debt, as well as reductions in discretionary spending. In addition, we are continuing with our previously disclosed plan to monetize non-core assets.
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
Consolidated Summary
A summary of our segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands, except per share amounts
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
|
|
|
|
$
|
699,585
|
|
|
$
|
858,150
|
|
|
$
|
(158,565)
|
|
|
(18)
|
%
|
Digital Marketing Solutions
|
|
|
|
|
|
|
102,281
|
|
|
121,281
|
|
|
(19,000)
|
|
|
(16)
|
%
|
Corporate and other
|
|
|
|
|
|
|
3,074
|
|
|
3,009
|
|
|
65
|
|
|
2
|
%
|
Intersegment eliminations
|
|
|
|
|
|
|
(27,856)
|
|
|
(33,758)
|
|
|
5,902
|
|
|
(17)
|
%
|
Total operating revenues
|
|
|
|
|
|
|
777,084
|
|
|
948,682
|
|
|
(171,598)
|
|
|
(18)
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
|
|
|
|
$
|
657,230
|
|
|
$
|
830,530
|
|
|
$
|
(173,300)
|
|
|
(21)
|
%
|
Digital Marketing Solutions
|
|
|
|
|
|
|
101,104
|
|
|
122,730
|
|
|
(21,626)
|
|
|
(18)
|
%
|
Corporate and other
|
|
|
|
|
|
|
38,665
|
|
|
59,002
|
|
|
(20,337)
|
|
|
(34)
|
%
|
Intersegment eliminations
|
|
|
|
|
|
|
(27,856)
|
|
|
(33,758)
|
|
|
5,902
|
|
|
(17)
|
%
|
Total operating expenses
|
|
|
|
|
|
|
769,143
|
|
|
978,504
|
|
|
(209,361)
|
|
|
(21)
|
%
|
Operating income (loss)
|
|
|
|
|
|
|
7,941
|
|
|
(29,822)
|
|
|
37,763
|
|
|
***
|
Non-operating expenses
|
|
|
|
|
|
|
159,751
|
|
|
41,805
|
|
|
117,946
|
|
|
***
|
Loss before income taxes
|
|
|
|
|
|
|
(151,810)
|
|
|
(71,627)
|
|
|
(80,183)
|
|
|
***
|
(Benefit) provision for income taxes
|
|
|
|
|
|
|
(9,109)
|
|
|
8,979
|
|
|
(18,088)
|
|
|
***
|
Net loss
|
|
|
|
|
|
|
$
|
(142,701)
|
|
|
$
|
(80,606)
|
|
|
$
|
(62,095)
|
|
|
77
|
%
|
Net loss attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
(385)
|
|
|
(454)
|
|
|
69
|
|
|
(15)
|
%
|
Net loss attributable to Gannett
|
|
|
|
|
|
|
$
|
(142,316)
|
|
|
$
|
(80,152)
|
|
|
$
|
(62,164)
|
|
|
78
|
%
|
Loss per share attributable to Gannett - basic
|
|
|
|
|
|
|
$
|
(1.06)
|
|
|
$
|
(0.61)
|
|
|
$
|
(0.45)
|
|
|
74
|
%
|
Loss per share attributable to Gannett - diluted
|
|
|
|
|
|
|
$
|
(1.06)
|
|
|
$
|
(0.61)
|
|
|
$
|
(0.45)
|
|
|
74
|
%
|
*** 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 which are 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 $777.1 million for three months ended March 31, 2021, a decrease of $171.6 million compared to the three months ended March 31, 2020.
For the Publishing segment, Operating revenues decreased $158.6 million compared to the three months ended March 31, 2020, driven by lower Advertising and marketing services revenues of $89.3 million, including both print and digital, lower Circulation revenues of $49.3 million and lower Other revenues of $20.0 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 such as search advertising offered through and delivered by our DMS segment. Circulation revenues are derived principally from home delivery and single copy sales of our publications and distribution of our publications on our digital platforms. Other revenues are derived mainly from commercial printing, distribution arrangements, revenues from our events business and digital syndication and affiliate revenues.
For the DMS segment, Operating revenues decreased $19.0 million compared to the three months ended March 31, 2020, driven by lower Advertising and marketing services revenues of $14.9 million and lower Other revenues of $4.1 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, Google-suite offerings, and software-as-a-service solutions. Other revenues in our DMS segment are derived from cloud offerings and software licensing.
For the Corporate and Other category, Operating revenues were relatively flat compared to the three months ended March 31, 2020. Revenues at our Corporate and Other category are primarily driven by third party newsprint sales.
Operating expenses
Total Operating expenses were $769.1 million for the three months ended March 31, 2021, a decrease of $209.4 million compared to the three months ended March 31, 2020. 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;
•Selling, general and administrative expenses include labor, payroll, outside services, and benefits costs;
•Depreciation and amortization;
•Integration and reorganization costs include severance charges and other costs, including those for the purpose of consolidating our operations (i.e., facility consolidation expenses and integration-related costs);
•Other operating expenses include third-party debt expenses as well as acquisition-related costs;
•Gains or losses on the sale or disposal of assets; and
•Impairment charges, including costs incurred related to goodwill, intangible assets and property, plant and equipment.
For the three months ended March 31, 2021, Operating expenses at our Publishing segment decreased $173.3 million compared to the three months ended March 31, 2020, reflecting a decrease in Operating costs of $87.1 million, a decrease in Selling, general and administrative expenses of $64.6 million, a decrease in Depreciation and amortization of $20.6 million, and a decrease in Integration and reorganization costs of $6.0 million, partially offset by an increase in Loss on the sale or disposal of assets of $4.1 million and an increase in Asset impairments of $0.8 million.
For the three months ended March 31, 2021, Operating expenses at our DMS segment decreased $21.6 million compared to the three months ended March 31, 2020, reflecting a decrease in Selling, general and administrative expenses of $16.9 million, a decrease in Operating costs of $4.0 million, and a decrease in Integration and reorganization costs of $1.2 million, partially offset by an increase in Depreciation and amortization of $0.5 million.
For the three months ended March 31, 2021, Operating expenses at Corporate and other decreased $20.3 million compared to the three months ended March 31, 2020, due to a decrease in Selling, general and administrative expenses of $15.7 million, a decrease in Integration and reorganization costs of $7.6 million, and a decrease in Operating costs of $1.8 million, partially offset by an increase in Other operating expenses of $4.6 million.
Refer to the discussion of segment results below for further information.
Non-operating (income) expense
Interest expense: For the three months ended March 31, 2021, Interest expense was $39.5 million compared to $57.9 million for the three months ended March 31, 2020. The decrease in interest expense was mainly due to a lower effective interest rate driven by the refinancing of the Company's five-year, senior-secured 11.5% term loan facility with Apollo Capital Management, L.P. (the "Acquisition Term Loan") in the first quarter of 2021 and a lower debt balance compared to the same period in 2020.
Loss on early extinguishment of debt: For the three months ended March 31, 2021, Loss on early extinguishment of debt was $19.4 million compared to $0.8 million for the three months ended March 31, 2020. The loss for the three months ended March 31, 2021 was mainly due to the payoff of the Acquisition Term Loan in the first quarter of 2021.
Non-operating pension income: For the three months ended March 31, 2021, Non-operating pension income was $23.9 million compared to $18.5 million for the three months ended March 31, 2020. The increase in non-operating pension income was primarily due to an increase in the expected return on plan assets held by the Gannett Retirement Plan and lower interest costs on benefit obligations.
Loss on Convertible notes derivative: For the three months ended March 31, 2021, Loss on Convertible notes derivative was $126.6 million, due to the increase in the fair value of the derivative liability as a result of the increase in the Company's stock price.
Other non-operating items, net: Non-operating items, net, are driven by certain items that fall outside of our normal business operations. For the three months ended March 31, 2021, Non-operating items, net was expense of $1.9 million compared to $1.6 million income in the same period in 2020.
Provision (benefit) for income taxes
The following table summarizes our Loss before income taxes and income tax accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
2021
|
|
2020
|
Loss before income taxes
|
|
|
|
|
$
|
(151,810)
|
|
|
$
|
(71,627)
|
|
(Benefit) provision for income taxes
|
|
|
|
|
(9,109)
|
|
|
8,979
|
|
Effective tax rate
|
|
|
|
|
6.0
|
%
|
|
***
|
*** Our effective tax rate for the period was not meaningful.
The benefit for income taxes for the three months ended March 31, 2021 was mainly impacted by the pre-tax net loss generated during the quarter. The benefit for income taxes for the three months ended March 31, 2021 was calculated using the estimated annual effective tax rate of 43.4%. The estimated annual effective tax rate is based on a projected tax expense for the full year. The tax benefit for the three months ended March 31, 2021 is lower than the 21% statutory Federal rate due to the impact of the derivative revaluation, partially offset by the creation of valuation allowances on non-deductible interest expense carryforwards as well as state income tax and foreign tax expense.
Our effective tax rate for the three months ended March 31, 2020, was not meaningful. The rate was primarily impacted by non-deductible officers' compensation, state income tax expense and foreign income tax expense.
Net loss attributable to Gannett and diluted loss per share attributable to Gannett
For the three months ended March 31, 2021, Net loss attributable to Gannett and diluted loss per share attributable to Gannett were $142.3 million and $1.06, respectively, compared to $80.2 million and $0.61 for the three months ended March 31, 2020, respectively. The change reflects the various items discussed above.
Publishing segment
A summary of our Publishing segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
|
|
|
|
|
|
|
|
$
|
314,310
|
|
|
$
|
403,636
|
|
|
$
|
(89,326)
|
|
|
(22)
|
%
|
Circulation
|
|
|
|
|
|
|
|
|
325,436
|
|
|
374,720
|
|
|
(49,284)
|
|
|
(13)
|
%
|
Other
|
|
|
|
|
|
|
|
|
59,839
|
|
|
79,794
|
|
|
(19,955)
|
|
|
(25)
|
%
|
Total operating revenues
|
|
|
|
|
|
|
|
|
699,585
|
|
|
858,150
|
|
|
(158,565)
|
|
|
(18)
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
431,801
|
|
|
518,859
|
|
|
(87,058)
|
|
|
(17)
|
%
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
166,203
|
|
|
230,813
|
|
|
(64,610)
|
|
|
(28)
|
%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
46,387
|
|
|
66,957
|
|
|
(20,570)
|
|
|
(31)
|
%
|
Integration and reorganization costs
|
|
|
|
|
|
|
|
|
7,326
|
|
|
13,309
|
|
|
(5,983)
|
|
|
(45)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
833
|
|
|
—
|
|
|
833
|
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale or disposal of assets
|
|
|
|
|
|
|
|
|
4,680
|
|
|
592
|
|
|
4,088
|
|
|
***
|
Total operating expenses
|
|
|
|
|
|
|
|
|
657,230
|
|
|
830,530
|
|
|
(173,300)
|
|
|
(21)
|
%
|
Operating income
|
|
|
|
|
|
|
|
|
$
|
42,355
|
|
|
$
|
27,620
|
|
|
$
|
14,735
|
|
|
53
|
%
|
*** Indicates an absolute value percentage change greater than 100.
Operating revenues
The following table provides the breakout of Operating revenues by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Local and national print
|
|
|
|
|
|
|
|
|
$
|
117,399
|
|
|
$
|
173,170
|
|
|
$
|
(55,771)
|
|
|
(32)
|
%
|
Classified print
|
|
|
|
|
|
|
|
|
75,797
|
|
|
94,449
|
|
|
(18,652)
|
|
|
(20)
|
%
|
Print advertising
|
|
|
|
|
|
|
|
|
193,196
|
|
|
267,619
|
|
|
(74,423)
|
|
|
(28)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital media
|
|
|
|
|
|
|
|
|
79,557
|
|
|
86,497
|
|
|
(6,940)
|
|
|
(8)
|
%
|
Digital marketing services
|
|
|
|
|
|
|
|
|
28,353
|
|
|
30,539
|
|
|
(2,186)
|
|
|
(7)
|
%
|
Digital classified
|
|
|
|
|
|
|
|
|
13,204
|
|
|
18,981
|
|
|
(5,777)
|
|
|
(30)
|
%
|
Digital advertising and marketing services
|
|
|
|
|
|
|
|
|
121,114
|
|
|
136,017
|
|
|
(14,903)
|
|
|
(11)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
|
|
|
|
|
|
|
|
314,310
|
|
|
403,636
|
|
|
(89,326)
|
|
|
(22)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print circulation
|
|
|
|
|
|
|
|
|
302,257
|
|
|
358,918
|
|
|
(56,661)
|
|
|
(16)
|
%
|
Digital-only circulation
|
|
|
|
|
|
|
|
|
23,179
|
|
|
15,802
|
|
|
7,377
|
|
|
47
|
%
|
Circulation
|
|
|
|
|
|
|
|
|
325,436
|
|
|
374,720
|
|
|
(49,284)
|
|
|
(13)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
59,839
|
|
|
79,794
|
|
|
(19,955)
|
|
|
(25)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
|
|
|
|
|
|
$
|
699,585
|
|
|
$
|
858,150
|
|
|
$
|
(158,565)
|
|
|
(18)
|
%
|
For the three months ended March 31, 2021, Local and national print advertising revenues and Classified print advertising revenues decreased $55.8 million and $18.7 million, respectively, compared to the three months ended March 31, 2020. The overall decline in Print advertising was driven by secular industry trends impacting all categories and impacts from the COVID-19 pandemic. The decline in Local and national print advertising revenues was driven by lower advertising volume and a decline in advertiser inserts. Classified print advertising revenues declined due to reduced spend in legal, real estate, automotive and employment classified advertisements.
For the three months ended March 31, 2021, Digital media, Digital marketing services and Digital classified revenues decreased $6.9 million, $2.2 million, and $5.8 million, respectively, compared to the three months ended March 31, 2020. The decrease in Digital media revenues was driven by lower local digital media spend and lower page views compared to the prior year which reflected coverage of the COVID-19 pandemic and lower digital classified revenue.
For the three months ended March 31, 2021, Print circulation revenues decreased $56.7 million and Digital-only circulation revenues increased $7.4 million, compared to the three months ended March 31, 2020. The decline in Print circulation revenues was driven by a reduction in the volume of home delivery subscribers and a decline in single copy sales reflecting the overall secular trends impacting the industry as well as the impact of the COVID-19 pandemic on businesses that buy and sell copies of our publications. The increase in Digital-only circulation revenues was driven by an increase of 37% in digital-only subscribers to approximately 1.2 million as of March 31, 2021, as well as an increase in average revenue per customer due to mix in subscribers with introductory trial periods during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
For the three months ended March 31, 2021, Other revenues decreased $20.0 million compared to the three months ended March 31, 2020, due to declines in the commercial print and delivery business, driven by overall secular trends impacting the industry and a decline in event revenues due to the absence of in-person events in the first quarter of 2021 compared to the same period in the prior year as a result of the COVID-19 pandemic. In addition, the Company continues to experience decreased demand for commercial print.
Operating expenses
For the three months ended March 31, 2021, Operating costs decreased $87.1 million compared to the three months ended March 31, 2020. The following table provides the breakout of the decrease in Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Newsprint and ink
|
|
|
|
|
|
|
|
|
$
|
28,271
|
|
|
$
|
40,305
|
|
|
$
|
(12,034)
|
|
|
(30)
|
%
|
Distribution
|
|
|
|
|
|
|
|
|
96,105
|
|
|
106,952
|
|
|
(10,847)
|
|
|
(10)
|
%
|
Compensation and benefits
|
|
|
|
|
|
|
|
|
147,118
|
|
|
181,108
|
|
|
(33,990)
|
|
|
(19)
|
%
|
Outside services
|
|
|
|
|
|
|
|
|
68,764
|
|
|
85,832
|
|
|
(17,068)
|
|
|
(20)
|
%
|
Other
|
|
|
|
|
|
|
|
|
91,543
|
|
|
104,662
|
|
|
(13,119)
|
|
|
(13)
|
%
|
Total operating costs
|
|
|
|
|
|
|
|
|
$
|
431,801
|
|
|
$
|
518,859
|
|
|
$
|
(87,058)
|
|
|
(17)
|
%
|
For the three months ended March 31, 2021, Newsprint and ink costs decreased $12.0 million compared to the three months ended March 31, 2020 driven by declines in print circulation and print advertising volumes, lower paper prices, and page count reductions driven by efficiency initiatives in printing operations.
For the three months ended March 31, 2021, Distribution costs decreased $10.8 million compared to the three months ended March 31, 2020 due to declines in print circulation and print advertising volumes as well as the decline in commercial print and delivery.
For the three months ended March 31, 2021, Compensation and benefits costs decreased $34.0 million compared to the three months ended March 31, 2020 due to the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020 in connection with the COVID-19 pandemic, including headcount reductions, as well as a reduction in costs associated with ongoing integration efforts.
For the three months ended March 31, 2021, Outside services costs, which includes outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees, decreased $17.1 million compared to the three months ended March 31, 2020 due to the declines in Advertising and marketing services revenues and Print circulation revenues, the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020 in connection with the COVID-19 pandemic, and a reduction in costs associated with ongoing integration efforts.
For the three months ended March 31, 2021, Other costs, which primarily includes travel, and facility and equipment costs, decreased $13.1 million compared to the three months ended March 31, 2020, due to a reduction in costs associated with ongoing integration efforts and cost containment initiatives.
For the three months ended March 31, 2021, Selling, general and administrative expenses decreased by $64.6 million compared to the three months ended March 31, 2020. The following table provides the breakout of the decrease in Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Compensation and benefits
|
|
|
|
|
|
|
|
|
$
|
89,710
|
|
|
$
|
113,527
|
|
|
$
|
(23,817)
|
|
|
(21)
|
%
|
Outside services
|
|
|
|
|
|
|
|
|
10,718
|
|
|
13,123
|
|
|
(2,405)
|
|
|
(18)
|
%
|
Other
|
|
|
|
|
|
|
|
|
65,775
|
|
|
104,163
|
|
|
(38,388)
|
|
|
(37)
|
%
|
Total Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
$
|
166,203
|
|
|
$
|
230,813
|
|
|
$
|
(64,610)
|
|
|
(28)
|
%
|
For the three months ended March 31, 2021, Compensation and benefits costs decreased $23.8 million compared to the three months ended March 31, 2020 due to the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020 in connection with the COVID-19 pandemic, including headcount reductions, as well as a reduction in costs associated with ongoing integration efforts.
For the three months ended March 31, 2021, Outside services costs, which includes professional and outside services, decreased $2.4 million compared to the three months ended March 31, 2020 due to declines in activity and cost containment initiatives.
For the three months ended March 31, 2021, Other costs decreased $38.4 million compared to the three months ended March 31, 2020 due to lower facility related costs, lower bad debt expense and the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020 in connection with the COVID-19 pandemic.
For the three months ended March 31, 2021, Depreciation and amortization expenses decreased $20.6 million compared to the three months ended March 31, 2020 due to a decrease in accelerated depreciation of $15.4 million as a result of fewer print facility shutdowns and strategic dispositions of real estate during the period related to ongoing cost reduction programs.
For the three months ended March 31, 2021, Integration and reorganization costs decreased $6.0 million compared to the three months ended March 31, 2020 due to a decrease in severance costs of $5.1 million. For the three months ended March 31, 2021, severance costs were primarily related to facility consolidation activities. For the three months ended March 31, 2020, severance costs were related to acquisition-related synergies and the consolidation of the business due to our acquisition of Gannett Co., Inc. (which was renamed Gannett Media Corp. and is referred to as "Legacy Gannett") in the fourth quarter of 2019.
For the three months ended March 31, 2021, Loss on the sale or disposal of assets increased $4.1 million compared to the three months ended March 31, 2020 driven by the sale of assets in the first quarter of 2021 as part of the Company’s plan to monetize non-core assets.
Publishing segment Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Net income attributable to Gannett
|
|
|
|
|
|
|
|
|
$
|
66,213
|
|
|
$
|
33,840
|
|
|
$
|
32,373
|
|
|
96
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
11
|
|
|
18
|
|
|
(7)
|
|
|
(39)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating pension income
|
|
|
|
|
|
|
|
|
(23,878)
|
|
|
(5,321)
|
|
|
(18,557)
|
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating expense (income), net
|
|
|
|
|
|
|
|
|
394
|
|
|
(463)
|
|
|
857
|
|
|
***
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
46,387
|
|
|
66,957
|
|
|
(20,570)
|
|
|
(31)
|
%
|
Integration and reorganization costs
|
|
|
|
|
|
|
|
|
7,326
|
|
|
13,309
|
|
|
(5,983)
|
|
|
(45)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
833
|
|
|
—
|
|
|
833
|
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale or disposal of assets
|
|
|
|
|
|
|
|
|
4,680
|
|
|
592
|
|
|
4,088
|
|
|
***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
|
|
|
|
|
|
242
|
|
|
1,996
|
|
|
(1,754)
|
|
|
(88)
|
%
|
Adjusted EBITDA (non-GAAP basis)
|
|
|
|
|
|
|
|
|
$
|
102,208
|
|
|
$
|
110,928
|
|
|
$
|
(8,720)
|
|
|
(8)
|
%
|
Net income attributable to Gannett margin
|
|
|
|
|
|
|
|
|
9.5
|
%
|
|
3.9
|
%
|
|
|
|
|
Adjusted EBITDA margin (non-GAAP basis)(a)
|
|
|
|
|
|
|
|
|
14.6
|
%
|
|
12.9
|
%
|
|
|
|
|
*** Indicates an absolute value percentage change greater than 100.
(a)We define Adjusted EBITDA margin as Adjusted EBITDA divided by total Operating revenues.
Adjusted EBITDA for our Publishing segment was $102.2 million for the three months ended March 31, 2021, a decrease of $8.7 million compared to the three months ended March 31, 2020. The decrease was primarily attributable to the changes discussed above.
Digital Marketing Solutions segment
A summary of our Digital Marketing Solutions segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
|
|
|
|
|
|
|
$
|
101,376
|
|
|
$
|
116,283
|
|
|
$
|
(14,907)
|
|
|
(13)
|
%
|
Other
|
|
|
|
|
|
|
|
905
|
|
|
4,998
|
|
|
(4,093)
|
|
|
(82)
|
%
|
Total operating revenues
|
|
|
|
|
|
|
|
102,281
|
|
|
121,281
|
|
|
(19,000)
|
|
|
(16)
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
69,278
|
|
|
73,254
|
|
|
(3,976)
|
|
|
(5)
|
%
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
23,831
|
|
|
40,734
|
|
|
(16,903)
|
|
|
(41)
|
%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
7,829
|
|
|
7,331
|
|
|
498
|
|
|
7
|
%
|
Integration and reorganization costs
|
|
|
|
|
|
|
|
166
|
|
|
1,388
|
|
|
(1,222)
|
|
|
(88)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale or disposal of assets
|
|
|
|
|
|
|
|
—
|
|
|
23
|
|
|
(23)
|
|
|
(100)
|
%
|
Total operating expenses
|
|
|
|
|
|
|
|
101,104
|
|
|
122,730
|
|
|
(21,626)
|
|
|
(18)
|
%
|
Operating income (loss)
|
|
|
|
|
|
|
|
$
|
1,177
|
|
|
$
|
(1,449)
|
|
|
$
|
2,626
|
|
|
***
|
*** Indicates an absolute value percentage change greater than 100.
Operating revenues
For the three months ended March 31, 2021, Advertising and marketing services revenues decreased $14.9 million compared to the three months ended March 31, 2020, primarily due to the absence of $9.2 million in the first quarter of 2021 as a result of the change in media rebate programs as well as declines in the international business, offset by growth in the core ReachLocal business.
For the three months ended March 31, 2021, Other revenues decreased $4.1 million compared to the three months ended March 31, 2020 due to the absence of revenues related to systems integration services associated with a business we divested in the fourth quarter of 2020.
Operating expenses
For the three months ended March 31, 2021, Operating costs decreased $4.0 million compared to the three months ended March 31, 2020. The following table provides the breakout of the decrease in Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Compensation and benefits
|
|
|
|
|
|
|
|
|
8,135
|
|
|
13,629
|
|
|
(5,494)
|
|
|
(40)
|
%
|
Outside services
|
|
|
|
|
|
|
|
|
58,691
|
|
|
55,007
|
|
|
3,684
|
|
|
7
|
%
|
Other
|
|
|
|
|
|
|
|
|
2,452
|
|
|
4,618
|
|
|
(2,166)
|
|
|
(47)
|
%
|
Total operating costs
|
|
|
|
|
|
|
|
|
$
|
69,278
|
|
|
$
|
73,254
|
|
|
$
|
(3,976)
|
|
|
(5)
|
%
|
For the three months ended March 31, 2021, Compensation and benefits costs decreased $5.5 million compared to the three months ended March 31, 2020 due to the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020, including headcount reductions, as well as a reduction in costs associated with ongoing integration efforts.
For the three months ended March 31, 2021, Outside services costs, which includes professional and outside services, paid search and ad serving and feature services, increased $3.7 million compared to the three months ended March 31, 2020 due to an increase in expenses associated with third-party media fees.
For the three months ended March 31, 2021, Selling, general and administrative expenses decreased $16.9 million compared to the three months ended March 31, 2020. The following table provides the breakout of Selling, general and administrative expenses by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Compensation and benefits
|
|
|
|
|
|
|
|
|
$
|
18,062
|
|
|
$
|
35,773
|
|
|
$
|
(17,711)
|
|
|
(50)
|
%
|
Outside services
|
|
|
|
|
|
|
|
|
1,443
|
|
|
2,284
|
|
|
(841)
|
|
|
(37)
|
%
|
Other
|
|
|
|
|
|
|
|
|
4,326
|
|
|
2,677
|
|
|
1,649
|
|
|
62
|
%
|
Total Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
$
|
23,831
|
|
|
$
|
40,734
|
|
|
$
|
(16,903)
|
|
|
(41)
|
%
|
For the three months ended March 31, 2021, Compensation and benefits costs decreased $17.7 million compared to the three months ended March 31, 2020, due to the benefit in the first quarter of 2021 of cost containment initiatives implemented in the second half of 2020, including headcount reductions associated with ongoing integration efforts.
For the three months ended March 31, 2021, Integration and reorganization costs decreased $1.2 million compared to the three months ended March 31, 2020 due to lower severance costs of $1.4 million. For the three months ended March 31, 2020, severance costs were related to acquisition-related synergies and the consolidation of the business due to the acquisition of Legacy Gannett in the fourth quarter of 2019.
Digital Marketing Solutions segment Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Net income (loss) attributable to Gannett
|
|
|
|
|
|
|
$
|
1,081
|
|
|
$
|
(5,073)
|
|
|
$
|
6,154
|
|
|
***
|
Other non-operating income, net
|
|
|
|
|
|
|
96
|
|
|
3,624
|
|
|
(3,528)
|
|
|
(97)
|
%
|
Depreciation and amortization
|
|
|
|
|
|
|
7,829
|
|
|
7,331
|
|
|
498
|
|
|
7
|
%
|
Integration and reorganization costs
|
|
|
|
|
|
|
166
|
|
|
1,388
|
|
|
(1,222)
|
|
|
(88)
|
%
|
Net loss on sale or disposal of assets
|
|
|
|
|
|
|
—
|
|
|
23
|
|
|
(23)
|
|
|
(100)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
|
|
|
|
—
|
|
|
594
|
|
|
(594)
|
|
|
(100)
|
%
|
Adjusted EBITDA (non-GAAP basis)
|
|
|
|
|
|
|
$
|
9,172
|
|
|
$
|
7,887
|
|
|
$
|
1,285
|
|
|
16
|
%
|
Net income (loss) attributable to Gannett margin
|
|
|
|
|
|
|
1.1
|
%
|
|
(4.2)
|
%
|
|
|
|
|
Adjusted EBITDA margin (non-GAAP basis)(a)
|
|
|
|
|
|
|
9.0
|
%
|
|
6.5
|
%
|
|
|
|
|
*** Indicates an absolute value percentage change greater than 100.
(a)We define Adjusted EBITDA margin as Adjusted EBITDA divided by total Operating revenues.
Adjusted EBITDA for our Digital Marketing Solutions segment was $9.2 million for the three months ended March 31, 2021, compared to $7.9 million in three months ended March 31, 2020, primarily attributable to the changes discussed above.
Corporate and other category
For the three months ended March 31, 2021, Corporate and other operating revenues were $3.1 million compared to $3.0 million in the three months ended March 31, 2020.
For the three months ended March 31, 2021, Corporate and other operating expenses decreased $20.3 million compared to the three months ended March 31, 2020. The following table provides the breakout of the decrease in Corporate and Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
$
|
3,956
|
|
|
$
|
5,749
|
|
|
$
|
(1,793)
|
|
|
(31)
|
%
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
14,269
|
|
|
29,949
|
|
|
(15,680)
|
|
|
(52)
|
%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
3,887
|
|
|
3,736
|
|
|
151
|
|
|
4
|
%
|
Integration and reorganization costs
|
|
|
|
|
|
|
|
|
5,912
|
|
|
13,557
|
|
|
(7,645)
|
|
|
(56)
|
%
|
Other operating expenses
|
|
|
|
|
|
|
|
|
10,576
|
|
|
5,969
|
|
|
4,607
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale or disposal of assets
|
|
|
|
|
|
|
|
|
65
|
|
|
42
|
|
|
23
|
|
|
55
|
%
|
Total operating expenses
|
|
|
|
|
|
|
|
|
$
|
38,665
|
|
|
$
|
59,002
|
|
|
$
|
(20,337)
|
|
|
(34)
|
%
|
For the three months ended March 31, 2021, Corporate and other operating expenses decreased $20.3 million due to a decrease in Selling, general and administrative expenses of $15.7 million, mainly consisting of cost containment initiatives, a decrease in Integration and reorganization costs of $7.6 million, driven by a decrease in severance of $7.5 million due to the absence of costs that were incurred in the first quarter of 2020 related to acquisition-related synergies and the consolidation of the business due to the acquisition of Legacy Gannett in the fourth quarter of 2019. These decreases were offset by an increase in Other operating expenses of $4.6 million, which included $10.2 million of third-party fees related to the 5-Year Term Loan (defined below) expensed during three months ended March 31, 2021 compared to $6.0 million of Acquisition costs incurred during the three months ended March 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements are for working capital, debt obligations, and capital expenditures.
We expect to fund our operations through cash provided by operating activities. We expect we will have adequate capital resources and liquidity to meet our ongoing working capital needs, borrowing obligations, and all required capital expenditures.
Details of our cash flows are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
2021
|
|
2020
|
Net cash provided by operating activities
|
$
|
61,316
|
|
|
$
|
60,489
|
|
Net cash provided by (used for) investing activities
|
2,516
|
|
|
(3,419)
|
|
Net cash used for financing activities
|
(74,699)
|
|
|
(14,679)
|
|
Effect of currency exchange rate change on cash
|
314
|
|
|
1,554
|
|
(Decrease) increase in cash, cash equivalents and restricted cash
|
$
|
(10,553)
|
|
|
$
|
43,945
|
|
Cash flows provided by operating activities: Our largest source of cash provided by our operations is Advertising revenues primarily generated from Local and national advertising and marketing services revenues (retail, classified, and online). Additionally, we generate cash through circulation subscribers, commercial printing and delivery services to third parties, and events. Our primary uses of cash from our operating activities include compensation, newsprint, delivery, and outside services.
Our net cash flow provided by operating activities was $61.3 million for the three months ended March 31, 2021, compared to net cash provided by operating activities of $60.5 million for the three months ended March 31, 2020. The increase in net cash flow provided by operating activities was primarily due to an increase in working capital of $15.1 million due to the overall timing of payments and receipts and a decrease in severance payments of $9.9 million, partially offset by an increase in interest paid on the Acquisition Term Loan of $13.0 million, an increase in contributions to our pension and other postretirement benefit plans of $12.4 million and a decrease in tax refunds of $1.0 million.
Cash flows provided by (used for) investing activities: Cash flows provided by investing activities totaled $2.5 million for the three months ended March 31, 2021 compared to $3.4 million used for investing activities in the three months ended March 31, 2020. This increase was primarily due to a decrease in purchases of property, plant and equipment of $6.2 million.
Cash flows used for financing activities: Cash flows used for financing activities totaled $74.7 million for the three months ended March 31, 2021 compared to $14.7 million for the three months ended March 31, 2020. This increase was primarily due to an increase in net repayments under term loans of $26.1 million and payments of debt issuance costs of $33.9 million.
Senior Secured 5-Year Term Loan
On February 9, 2021, we entered into a five-year, senior-secured term loan facility with the lenders from time to time party thereto and Citibank, N.A., as collateral agent and administrative agent for the lenders, in an aggregate principal amount of $1.045 billion (the "5-Year Term Loan"). The 5-Year Term Loan matures on February 9, 2026 and, at the Company's option, bears interest at the rate of the London Interbank Offered Rate plus a margin equal to 7.00% per annum or an alternate base rate plus a margin equal to 6.00% per annum. Accordingly, we are required to dedicate a substantial portion of cash flow from operations to fund interest payments.
The proceeds from the 5-Year Term Loan were used to repay the remaining principal balance and accrued interest of $1.043 billion and $13.3 million, respectively, on the Acquisition Term Loan (the "Payoff") and to pay fees and expenses incurred to obtain the 5-Year Term Loan.
There were certain lenders that participated in both the Acquisition Term Loan and the new 5-Year Term Loan and their balances in the Acquisition Term Loan were deemed to be modified. The Company will continue to defer, over the new term, the deferred financing fees and original issue discount from the Acquisition Term Loan of $1.5 million and $34.7 million, respectively, related to those lenders. Further, certain lenders in the Acquisition Term Loan did not participate in the new 5-Year Term Loan and their balances in the Acquisition Term Loan were deemed to be extinguished. As a result, the Company recognized a Loss on early extinguishment of debt of $17.2 million as a result of the write-off of the remaining original issue discount and deferred financing fees related to those lenders. Third party fees of approximately $13.0 million were allocated to the new lenders in the 5-Year Term Loan on a pro-rata basis, and $20.9 million of original issue discount were capitalized and will be amortized over the term of the 5-Year Term Loan using the effective interest method. Third party fees of $10.2 million, that were allocated to the lenders whose balances were deemed to be modified, were expensed and recorded in Other operating expenses in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2021.
The 5-Year Term Loan will amortize in equal quarterly installments at a rate of 10% per annum (or, if the ratio of Total Indebtedness secured on an equal priority basis with the 5-Year Term Loan (net of Unrestricted Cash) to Consolidated EBITDA (as such terms are defined in the 5-Year Term Loan) is equal to or less than a specified ratio, 5% per annum) (the "Quarterly Amortization Installment"), beginning September 30, 2021. In addition, we will be required to repay the 5-Year Term Loan from time to time with (i) the proceeds of non-ordinary course asset sales and casualty and condemnation events, (ii) the proceeds of indebtedness that is not otherwise permitted under the 5-Year Term Loan and (iii) the aggregate amount of cash and cash equivalents on hand in excess of $100 million at the end of each fiscal year. The 5-Year Term Loan is subject to a requirement to have minimum unrestricted cash of $30 million as of the last day of each fiscal quarter. As of March 31, 2021, we were in compliance with all of the covenants and obligations under the 5-Year Term Loan.
As of March 31, 2021, we had $1.036 billion in aggregate principal outstanding under the 5-Year Term Loan with an effective interest rate of 9.4%.
Senior Secured Convertible Notes due 2027
On November 17, 2020, the Company entered into an Exchange Agreement with certain of the lenders (the "Exchanging Lenders") under the Acquisition Term Loan pursuant to which the Company and the Exchanging Lenders agreed to exchange $497.1 million in aggregate principal amount of the Company’s newly issued 6.0% Senior Secured Convertible Notes due 2027 (the "2027 Notes") for the retirement of an equal amount of term loans under the Acquisition Term Loan (the "Exchange"). The 2027 Notes were issued pursuant to an Indenture (the "Indenture") dated as of November 17, 2020, between the Company and U.S. Bank National Association, as trustee. The Indenture, as supplemented by the Second Supplemental Indenture, includes affirmative and negative covenants that are substantially consistent with the 5-Year Term Loan, as well as customary events of default.
In connection with the Exchange, the Company entered into an Investor Agreement with the holders of the 2027 Notes (the "Holders") establishing certain terms and conditions concerning the rights and restrictions on the Holders with respect to the Holders' ownership of the 2027 Notes.
Interest on the 2027 Notes is payable semi-annually in arrears. The 2027 Notes mature on December 1, 2027, unless earlier repurchased or converted. The 2027 Notes may be converted at any time by the holders into cash, shares of the Company’s Common Stock or any combination of cash and Common Stock, at the Company's election. The initial conversion rate is 200 shares of Common Stock per $1,000 principal amount of the 2027 Notes, which is equal to a conversion price of $5.00 per share of Common Stock (the "Conversion Price").
The conversion rate is subject to customary adjustment provisions as provided in the Indenture. In addition, the conversion rate will be subject to adjustment in the event of any issuance or sale of Common Stock (or securities convertible into Common Stock) at a price equal to or less than the Conversion Price in order to ensure that following such issuance or sale, the 2027 Notes would be convertible into approximately 42% of the Common Stock after giving effect to such issuance or sale assuming the initial principal amount of the 2027 Notes remains outstanding.
Upon the occurrence of a "Make-Whole Fundamental Change" (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time. If a "Fundamental Change" (as defined in the Indenture) occurs, the Company will be required to offer to repurchase the 2027 Notes at a repurchase price of 110% of the principal amount thereof.
Holders of the 2027 Notes will have the right to put up to approximately $100 million of the 2027 Notes at par on or after the date that is 91 days after the maturity date of the 5-Year Term Loan.
Under the Indenture, the Company can only pay cash dividends up to an agreed-upon amount, provided the ratio of consolidated debt to EBITDA (as such terms are defined in the Indenture) does not exceed a specified ratio. In addition, the Indenture provides that, at any time that the Company’s Total Gross Leverage Ratio (as defined in the Indenture) exceeds 1.5 and the Company approves the declaration of a dividend, the Company must offer to purchase a principal amount of 2027 Notes equal to the proposed amount of the dividend.
Until the four-year anniversary of the issuance date, the Company will have the right to redeem for cash up to approximately $99.4 million of the 2027 Notes at a redemption price of 130% of the principal amount thereof, with such amount reduced ratably by any principal amount of 2027 Notes that has been converted by the holders or redeemed or purchased by the Company.
The 2027 Notes are guaranteed by Gannett Holdings LLC and any subsidiaries of the Company (collectively, the "Guarantors") that guarantee the 5-Year Term Loan. The Notes are secured by the same collateral securing the 5-Year Term Loan. The 2027 Notes rank as senior secured debt of the Company and are secured by a second priority lien on the same collateral package securing the indebtedness incurred in connection with the 5-Year Term Loan.
For the three months ended March 31, 2021, no shares were issued upon conversion, exercise, or satisfaction of the required conditions. Refer to Note 10 — Supplemental equity information to the condensed consolidated financial statements for details on the convertible debt's impact to diluted earnings per share under the if-converted method.
Senior Convertible Notes due 2024
On April 9, 2018, Legacy Gannett completed an offering of 4.75% convertible senior notes, resulting in total aggregate principal of $201.3 million and net proceeds of approximately $195.3 million. Interest on the notes is payable semi-annually in arrears. The notes mature on April 15, 2024 with our earliest redemption date being April 15, 2022. The stated conversion rate of the notes is 82.4572 shares per $1,000 in principal or approximately $12.13 per share.
The Company's acquisition of Legacy Gannett constituted a Fundamental Change and Make-Whole Fundamental Change under the terms of the indenture governing the notes. At the acquisition date, the Company delivered to noteholders a notice offering the right to surrender all or a portion of their notes for cash on December 31, 2019. On December 31, 2019, we completed the redemption of $198.0 million in aggregate principal in exchange for cash.
The $3.3 million principal value of the remaining notes outstanding is reported as convertible debt in the condensed consolidated balance sheets. The effective interest rate on the notes was 6.05% as of March 31, 2021.
Additional information
We continue to evaluate the impacts of the COVID-19 pandemic on our results of operations and cash flows. As part of these measures, we have taken steps to manage cash outflow by rationalizing expenses and implementing various cost containment initiatives. These initiatives include, but are not limited to, strategic reductions in force, and the cancellation of certain non-essential expenditures. We continue to evaluate opportunities to manage the amount and timing of significant expenditures associated with vendors, creditors, and pension regulators.
In connection with these measures, we previously announced that the Board had determined it is in the best interest of the Company to preserve liquidity by suspending the quarterly dividend. We presently have no intention to reinstate the dividend, and there can be no assurance if or when we will resume paying dividends on a regular basis. In addition, the terms of our indebtedness, including our credit facility, the 5-Year Term Loan, and the Indenture for the 2027 Notes have terms that restrict our ability to pay dividends.
The CARES Act, enacted March 27, 2020, provides various forms of relief to companies impacted by the COVID-19 pandemic. As part of the relief available under the CARES Act, we deferred remittance of our 2020 Federal Insurance Contributions Act taxes as allowed by the legislation. The Company was able to defer $41.6 million of the employer portion of FICA taxes for payroll paid between March 27, 2020 and December 31, 2020. The Company will have until December 31, 2021, to pay 50% of the FICA deferral with the remaining 50% to be remitted on or before December 31, 2022.
For the Gannett Retirement Plan in the U.S., we have deferred our contractual contribution and negotiated a contribution payment plan of $5.0 million per quarter starting December 31, 2020 through the end of the September 30, 2022.
We expect our capital expenditures for the remainder of 2021 to total approximately $37.5 million. These capital expenditures are anticipated to be primarily comprised of projects related to digital product development, maintenance of our print and technology systems, and system upgrades.
Our leverage may adversely affect our business and financial performance and restricts our operating flexibility. The level of our indebtedness and our ongoing cash flow requirements may expose us to a risk that a substantial decrease in operating cash flows due to, among other things, continued or additional adverse economic developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our term loan. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological, and other changes in our industry and economic conditions generally.
Although we currently forecast sufficient liquidity, the ultimate impact of the COVID-19 pandemic remains uncertain and could have a material negative impact on the Company's liquidity and its ability to meet its ongoing obligations, including its obligations under the 5-Year Term Loan. As the implications of the COVID-19 pandemic continue to evolve, we will continue to closely monitor and explore additional opportunities to appropriately manage liquidity.
NON-GAAP FINANCIAL MEASURES
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position, or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.
Adjusted EBITDA and Adjusted EBITDA margin are a non-GAAP financial measures we believe offer a useful view of the overall operation of our businesses and may be different than similarly-titled measures used by other companies. We define Adjusted EBITDA as Net income (loss) attributable to Gannett before (1) Income tax expense (benefit), (2) Interest expense, (3) Gains or losses on the early extinguishment of debt, (4) Non-operating pension income (expense), (5) Loss on Convertible notes derivative, (6) Other non-operating items, including equity income, (7) Depreciation and amortization, (8) Integration and reorganization costs, (9) Asset impairments, (10) Goodwill and intangible impairments, (11) Gains or losses on the sale or disposal of assets, (12) Share-based compensation, (13) Other operating expenses, including third-party debt expenses and acquisition costs, (14) Gains or losses on the sale of investments and (15) certain other non-recurring charges. We define Adjusted EBITDA margin as Adjusted EBITDA divided by total Operating revenues.
Management’s use of Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA and Adjusted EBITDA margin are not measurements of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), or any other measure of performance or liquidity derived in accordance with GAAP. We believe these non-GAAP financial measures, as we have defined them, are helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. These measures provide an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal financial performance.
Adjusted EBITDA and Adjusted EBITDA margin provide us with measures of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, non-cash impairments, and interest expense associated with our capital structure. These metrics measure our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA and Adjusted EBITDA margin are metrics we use to review the financial performance of our business on a monthly basis.
We use Adjusted EBITDA and Adjusted EBITDA margin as measures of our day-to-day operating performance, which is evidenced by the publishing and delivery of news and other media and excludes certain expenses that may not be indicative of our day-to-day business operating results.
Limitations of Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA and Adjusted EBITDA margin have limitations as an analytical tool. They should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and Adjusted EBITDA margin and using these non-GAAP financial measures as compared to GAAP net income (loss) include: the cash portion of interest/financing expense, income tax (benefit) provision, and charges related to asset impairments, which may significantly affect our financial results.
Management believes these items are important in evaluating our performance, results of operations, and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
Adjusted EBITDA and Adjusted EBITDA margin are not alternatives to net income and margin as calculated and presented in accordance with GAAP. As such, they should not be considered or relied upon as a substitute or alternative for any such GAAP financial measures. We strongly urge you to review the reconciliation of Net loss attributable to Gannett to Adjusted EBITDA and Adjusted EBITDA margin along with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA and Adjusted EBITDA margin are not measures of financial performance under GAAP and are susceptible to varying calculations, the Adjusted EBITDA and Adjusted EBITDA margin measures as presented in this report may differ from and may not be comparable to similarly titled measures used by other companies.
The table below shows the reconciliation of Net loss attributable to Gannett to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
In thousands
|
|
|
|
|
2021
|
|
2020
|
Net loss attributable to Gannett
|
|
|
|
|
$
|
(142,316)
|
|
|
$
|
(80,152)
|
|
(Benefit) provision for income taxes
|
|
|
|
|
(9,109)
|
|
|
8,979
|
|
Interest expense
|
|
|
|
|
39,503
|
|
|
57,899
|
|
Loss on early extinguishment of debt
|
|
|
|
|
19,401
|
|
|
805
|
|
Non-operating pension income
|
|
|
|
|
(23,878)
|
|
|
(18,489)
|
|
Loss on Convertible notes derivative
|
|
|
|
|
126,600
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense, net
|
|
|
|
|
(1,875)
|
|
|
1,590
|
|
Depreciation and amortization
|
|
|
|
|
58,103
|
|
|
78,024
|
|
Integration and reorganization costs
|
|
|
|
|
13,404
|
|
|
28,254
|
|
Other operating expenses
|
|
|
|
|
10,576
|
|
|
5,969
|
|
Asset impairments
|
|
|
|
|
833
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net loss on sale or disposal of assets
|
|
|
|
|
4,745
|
|
|
657
|
|
Share-based compensation expense
|
|
|
|
|
3,423
|
|
|
11,577
|
|
Other items
|
|
|
|
|
1,055
|
|
|
3,956
|
|
Adjusted EBITDA (non-GAAP basis)
|
|
|
|
|
$
|
100,465
|
|
|
$
|
99,069
|
|
Net loss attributable to Gannett margin
|
|
|
|
|
(18.3)
|
%
|
|
(8.4)
|
%
|
Adjusted EBITDA margin (non-GAAP basis)
|
|
|
|
|
12.9
|
%
|
|
10.4
|
%
|