Gannett Co., Inc. (USA TODAY Network) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. The filing is by Gannett Co., Inc., which operates USA TODAY and the USA TODAY Network.
Business context and results
Gannett operates Gannett Media, including its U.S. and U.K. publishing businesses, and Digital Marketing Solutions (DMS), marketed under LocaliQ. Its stated strategy is to grow recurring digital businesses while managing the ongoing decline in print.
- Revenue: $668.9 million, down 11% from $748.1 million. Advertising and marketing services fell 9% to $340.8 million; circulation fell 16% to $241.3 million. Print advertising declined 15%, print circulation 21%, while digital-only circulation revenue increased 19% and DMS revenue increased 3%.
- Profitability: Operating income was $20.0 million, versus an operating loss of $2.0 million. Net income attributable to Gannett was $10.3 million, or $0.07 per diluted share, compared with a $3.0 million loss, or $0.02 loss per share. The quarter included a $17.7 million gain on asset sales and a $17.3 million income tax benefit.
- Margins: GAAP operating margin was approximately 3.0%, compared with negative 0.3% a year earlier. Adjusted EBITDA, a non-GAAP measure, was $62.9 million, down from $64.2 million; its margin increased to 9.4% from 8.6%.
- Segments: Gannett Media revenue decreased 12% to $589.1 million and Adjusted EBITDA decreased 17% to $57.3 million. DMS revenue increased 3% to $112.8 million and Adjusted EBITDA increased 4% to $11.7 million.
- Cash flow: Operating cash flow was $6.7 million, down from $32.4 million. Investing activities provided $20.7 million, largely reflecting asset-sale proceeds; financing activities used $38.6 million. Cash, cash equivalents and restricted cash ended the quarter at $93.6 million, including $83.1 million of unrestricted cash and cash equivalents.
Debt, liquidity and financial position
- Debt carrying value was approximately $1.13 billion at March 31, 2023, including $397.6 million under the senior secured term loan, $323.8 million of 2026 Senior Notes and $405.6 million of 2027 convertible notes. The balance-sheet carrying amount of convertible debt also includes the remaining 2024 notes.
- Gannett made $31.3 million of term-loan prepayments, including scheduled amortization, during the quarter. Interest expense rose to $28.3 million from $26.0 million, mainly due to higher rates on the variable-rate term loan.
- Current assets were $450.9 million and current liabilities were $559.6 million. The term loan requires at least $30 million of unrestricted cash at quarter-end; the company reported compliance with debt covenants and obligations.
- Management said it expects adequate resources to meet working-capital needs, debt obligations and required capital expenditures for at least the next 12 months, while cautioning that further revenue declines or economic deterioration could weaken cash flow and liquidity.
Changes, outlook and risks
- Revenue contraction reflected secular print declines and weaker advertising demand amid macroeconomic uncertainty, as well as lower print subscriber volumes. Paid digital-only subscriptions increased 15.4% to approximately 2.02 million.
- Lower operating expenses, including reduced compensation and distribution costs, helped offset lower revenue. The reported operating-income improvement also benefited from a larger asset-sale gain: $17.7 million versus $2.8 million in Q1 2022. Adjusted EBITDA nevertheless declined.
- Management cited inflation, interest rates, banking and broader economic volatility, foreign-exchange movements, and consumer price sensitivity as ongoing risks. It expects continued pressure from print declines and believes cost reductions are important to offset them.
- Capital expenditures for the remainder of 2023 were expected to total approximately $31.2 million. No specific revenue or earnings guidance was provided in the filing. The company said it did not anticipate common-stock repurchases during 2023.
- Other notable items: the company repurchased $6.1 million principal amount of 2026 Senior Notes at a discount, recognizing a $0.9 million gain; recorded $12.1 million of integration and reorganization costs; and reported $50.7 million of unrecognized tax benefits. Management did not believe current or threatened legal proceedings were reasonably likely to have a material adverse effect, but noted outcomes remain uncertain.
Key facts for investors to verify
- Whether digital subscription growth and DMS expansion can offset continuing print-circulation and advertising declines.
- How much of reported earnings and operating improvement reflects recurring performance versus the asset-sale gain and unusually large tax benefit.
- Whether operating cash generation can support debt service, scheduled amortization and planned capital spending; monitor unrestricted cash against the $30 million covenant minimum.
- Exposure to higher variable interest rates: the filing estimates a 150-basis-point increase would have reduced quarterly income and cash flow by approximately $1.5 million.
- Potential dilution from the 2027 convertible notes: 97.1 million shares were excluded from diluted EPS as antidilutive; the filing also describes a maximum conversion scenario of approximately 287.2 million shares.
- Progress on restructuring, asset monetization, tax matters and any changes to management’s stated liquidity outlook.