Business context and reporting period
Gannett Co., Inc., publisher of USA TODAY and operator of local and U.K. media brands and LOCALiQ, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. It reports two segments: Gannett Media (formerly Publishing) and Digital Marketing Solutions (DMS). The company describes its strategy as shifting toward a subscription-led, digitally focused media and marketing business.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $748.7 million | $804.3 million | $1,496.7 million | $1,581.4 million |
| Operating income (loss) | $(21.2) million | $45.4 million | $(23.2) million | $53.4 million |
| Net income (loss) attributable to Gannett | $(53.7) million | $15.1 million | $(56.7) million | $(127.2) million |
| Diluted EPS | $(0.39) | $0.10 | $(0.41) | $(0.95) |
| Adjusted EBITDA and margin (non-GAAP) | $50.9 million; 6.8% | $115.8 million; 14.4% | $115.0 million; 7.7% | $216.2 million; 13.7% |
| Cash provided by operating activities | Not separately presented in the supplied filing text | $1.7 million | $92.6 million |
Q2 advertising and marketing services revenue fell 9% to $383.6 million; circulation revenue declined 11% to $274.6 million; and other revenue increased 22% to $90.4 million. Print advertising fell 14%, while digital advertising and marketing services declined 4%. Digital-only circulation revenue grew 35% to $32.5 million, supported by approximately 1.87 million paid digital-only subscribers, up 35% year over year.
At June 30, cash and cash equivalents were $87.3 million, or $99.5 million including restricted cash. Total debt principal was $1.344 billion and its reported carrying value was $1.221 billion; balance-sheet current and long-term debt plus convertible debt also total approximately $1.221 billion. Current liabilities were $605.4 million and current assets were $487.5 million. The company reported compliance with its debt covenants, including a $30 million minimum unrestricted-cash requirement. Six-month cash, cash equivalents and restricted cash decreased $44.1 million to $99.5 million.
Material changes versus the prior comparable period
- Q2 revenue declined 7%; operating results swung from $45.4 million of income to a $21.2 million loss, and net results swung from $15.1 million of income to a $53.7 million loss. Adjusted EBITDA fell 56% and its margin contracted from 14.4% to 6.8%.
- Gannett Media Q2 revenue decreased 8% to $664.8 million; segment Adjusted EBITDA fell to $50.9 million from $114.2 million. DMS revenue increased 7% to $118.0 million and Adjusted EBITDA rose 14% to $14.3 million.
- For the first half, revenue decreased 5%, while operating cash flow fell from $92.6 million to $1.7 million. Management attributed the cash-flow decline primarily to lower deferred-revenue cash receipts, lower accounts payable, higher net tax payments and the absence of prior-year PPP funding.
- Interest expense declined to $26.1 million for Q2 and $52.1 million for the first half, mainly reflecting lower debt balances. The first-half 2021 comparison included a $126.6 million noncash convertible-note derivative loss; no such loss was recorded in 2022.
Outlook, management commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects adequate capital and liquidity for at least the next 12 months, while warning that further economic deterioration or faster revenue declines could weaken operating cash flow and liquidity.
- Management cited accelerating print advertising and circulation declines, consumer price sensitivity, inflation in labor, fuel, newsprint and delivery, supply-chain constraints, rising interest rates, foreign-exchange movements, and continuing pandemic-related effects on events and single-copy sales. It plans cost reductions, print optimization, digital subscriber growth and DMS expansion.
- Restructuring and integration costs were $15.7 million in Q2 and $27.1 million in the first half, including severance. Accelerated depreciation was $5.5 million and $10.2 million, respectively. The annual impairment assessment found no impairment, but the Domestic Gannett Media reporting unit’s fair-value cushion over carrying value fell from 126% in the 2021 test to 22% in 2022.
- The Q2 tax provision was $22.2 million despite a pretax loss of $31.5 million; management cited valuation allowances on interest-expense carryforwards, a revised annual tax-rate estimate and U.K. tax items. Unrecognized tax benefits were approximately $46.5 million, and possible changes within 12 months could not be estimated.
- Debt remains substantial and includes variable-rate term loans. The term loan’s effective rate was 6.3%; management warned that leverage and debt covenants may constrain operating flexibility and cash available for investment. The company repurchased approximately $3.1 million of stock under a $100 million authorization and stated it had no current intention to reinstate dividends. Planned capital expenditures for the rest of 2022 were approximately $21 million.
- After quarter-end, Gannett disclosed a new four-year Tipico media partnership, effective August 1, 2022, following termination of the prior agreement. Tipico is to pay media fees and a warrant repurchase price totaling approximately $14.7 million over the term, plus payments for certain qualified player referrals.
- Management said current and threatened legal proceedings are not expected to have a material adverse effect, while acknowledging that future adverse outcomes could affect results. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether print revenue declines and inflationary cost pressures continue to erode Gannett Media profitability and consolidated margins.
- Whether digital-only subscriber growth and DMS expansion can offset print declines, including the effects of introductory subscription offers and lower average revenue per user.
- Operating cash generation, unrestricted cash relative to the $30 million covenant minimum, and debt repayment capacity as interest rates rise.
- The assumptions behind the reduced Domestic Gannett Media impairment cushion and any sensitivity to revenue, cash-flow or discount-rate changes.
- The final documented Tipico agreement and the timing and conditions of its stated payments; also review the company’s non-GAAP Adjusted EBITDA reconciliation alongside GAAP results.