Business context and reporting period
Gannett Co., Inc. (NYSE: GCI) filed this Form 10-Q for the quarter ended March 31, 2020. The filing covers the company that owns USA TODAY, its U.S. local media network, U.K. publisher Newsquest, and digital marketing businesses. Gannett acquired Legacy Gannett on November 19, 2019, so Q1 2020 includes the acquired operations while Q1 2019 largely reflects legacy New Media; reported year-over-year growth is therefore not a like-for-like measure.
Financial performance and position
- Revenue: $948.7 million, versus $387.6 million in Q1 2019. The increase primarily reflects acquired revenues. Digital advertising and marketing services were $219.2 million, or 23% of revenue.
- Profitability: Operating loss was $29.8 million, compared with a $1.4 million loss. Net loss was $80.6 million, or $0.61 per diluted share, versus a $9.4 million loss, or $0.15 per share. Interest expense rose to $57.9 million from $10.1 million.
- Adjusted EBITDA: $99.1 million, compared with $32.8 million. This is a non-GAAP measure and includes acquired operations; it should not be viewed as a substitute for GAAP results or cash flow.
- Cash flow: Operating cash flow was $60.5 million, versus $31.7 million. Investing activities used $3.4 million, and financing activities used $14.7 million. Cash and cash equivalents were $199.7 million at quarter-end; cash, cash equivalents, and restricted cash totaled $232.6 million.
- Debt and liquidity: Balance-sheet long-term debt was $1.633 billion, with $3.3 million of convertible debt. The Apollo term loan had approximately $1.7 billion principal outstanding, a stated rate of 11.5%, and an effective rate of 12.9%; it matures November 19, 2024. Current assets were $762.9 million and current liabilities $724.3 million. The company reported compliance with loan covenants, including a $20 million minimum unrestricted-cash requirement.
- Shareholder returns: No dividend was declared in Q1 2020, compared with $0.38 per share in Q1 2019. On April 1, 2020, the company announced suspension of its quarterly dividend to preserve liquidity.
Material changes versus the prior comparable period
Revenue and expenses increased substantially following the November 2019 acquisition. Management attributed much of the reported revenue growth to Legacy Gannett and other acquired operations; those acquisitions also added significant operating costs and depreciation. Interest expense increased with the larger debt balance and higher effective borrowing cost. Integration and reorganization costs rose to $28.3 million from $5.8 million. The company closed 14 printing facilities and recorded $24.7 million of accelerated depreciation. Q1 2020 operating results also began to reflect COVID-19-related weakness late in the quarter.
Outlook, risks and unusual items
- COVID-19: Management expected a significant near-term negative impact, potentially material, from reduced advertising and digital marketing demand, events, and single-copy and commercial newspaper distribution. Longer-term effects were described as highly uncertain. The company said cost reductions and available cash and operating cash flow were expected to help meet commitments, but might not fully offset the pandemic’s effects.
- Liquidity actions: Measures included dividend suspension, furloughs, compensation reductions, discretionary-spending cuts, asset monetization, and deferral of certain U.K. pension contributions. The company also planned to defer eligible employer payroll taxes under the CARES Act. Management cautioned that pandemic impacts could materially harm liquidity and debt-service capacity.
- Strategy: Priorities included integrating Legacy Gannett, achieving synergies, reducing leverage through cash flow and real-estate monetization, and developing digital marketing, digital subscriptions, events, and other growth businesses. The company targeted a return to revenue growth over three to five years, but provided no specific financial guidance.
- Debt constraints: The Apollo loan includes cash-flow and asset-sale prepayment requirements, dividend restrictions, and other covenants. A default could make debt immediately due. The company stated that it was compliant as of March 31.
- Controls: Disclosure controls were reported ineffective due to a previously identified material weakness in revenue-recognition controls. Remediation was ongoing; management had not concluded the weakness was resolved. The company said its rapid shift to remote work had not materially affected internal controls to date, while continuing to monitor them.
- Other notable matters: The company recorded no goodwill or masthead impairment in Q1, but warned that pandemic developments could change future impairment assumptions. On April 6, it adopted a rights plan intended to protect tax assets, including approximately $435 million of NOLs reported at December 31, 2019. The filing also describes an unresolved environmental investigation in Montgomery, Alabama and other litigation that management did not expect to have a material adverse effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- How much subsequent revenue and cash-flow performance reflects organic trends versus acquired businesses, and the trajectory of COVID-19 impacts.
- Cash available for operations and debt service, covenant headroom, required debt prepayments, and progress on asset monetization and deleveraging.
- Whether cost reductions and planned synergies are achieved without impairing revenue, content operations, or employee retention.
- Progress remediating the revenue-recognition material weakness and whether controls remain effective in the remote-work environment.
- Potential effects of the pandemic and market conditions on goodwill, mastheads, receivable collectability, pension obligations, and the ability to resume dividends.