Gannett Co., Inc. — Q2 2021 Form 10-Q
Entity note: The supplied filing is for Gannett Co., Inc., which identifies USA TODAY as part of its media portfolio; it is not filed under the name “USA TODAY Co., Inc.” The quarter ended June 30, 2021. Amounts below are in U.S. dollars.
Business context and reporting period
Gannett describes itself as a subscription-led, digitally focused media and marketing company. Its businesses include USA TODAY, local U.S. media, U.K. publisher Newsquest, and LOCALiQ digital marketing services. It reports Publishing and Digital Marketing Solutions (DMS) segments.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $804.3 million | $767.0 million | $1,581.4 million | $1,715.7 million |
| Operating income (loss) | $45.4 million | $(437.6) million | $53.4 million | $(467.4) million |
| Net income (loss) attributable to Gannett | $15.1 million | $(436.9) million | $(127.2) million | $(517.0) million |
| Diluted earnings (loss) per share | $0.10 | $(3.32) | $(0.95) | $(3.95) |
| Adjusted EBITDA (non-GAAP) | $115.8 million | $78.0 million | $216.2 million | $177.1 million |
| Adjusted EBITDA margin (non-GAAP) | 14.4% | 10.2% | 13.7% | 10.3% |
- Q2 revenue rose 5% year over year, led by advertising and marketing services, up 18% to $420.1 million. Circulation fell 9% to $310.3 million. Within Publishing, digital-only circulation revenue rose 40% to $24.0 million; paid digital-only subscribers reached approximately 1.4 million, up 41% year over year.
- For the first half, revenue declined 8%. Print advertising fell 13% to $394.1 million and circulation declined 11% to $635.7 million; digital advertising and marketing services rose 7% to $414.3 million.
- Q2 GAAP results improved sharply against the pandemic-affected prior-year quarter, which included $393.4 million of goodwill and intangible impairments. No such impairment was recorded in Q2 2021. First-half 2021 net loss includes a $126.6 million noncash loss from remeasurement of the 2027 notes’ conversion feature.
- Operating cash flow was $92.6 million in the first half, versus $24.6 million a year earlier. Investing provided $7.2 million; financing used $121.0 million. Cash, cash equivalents and restricted cash totaled $186.1 million at June 30; balance-sheet cash and cash equivalents were $158.6 million.
- At June 30, reported current assets were $597.8 million and current liabilities $693.1 million. Total liabilities were $2.446 billion. Term-loan principal outstanding was $990.5 million at an effective rate of 9.5%; the 2027 convertible notes had $497.1 million principal outstanding. The balance sheet reported $823.0 million long-term debt, $106.6 million current debt, and $397.0 million convertible debt.
Material changes and financing
- In February 2021, Gannett refinanced its 11.5% acquisition term loan with a five-year, $1.045 billion senior secured term loan maturing in 2026. Interest is LIBOR plus 7% or an alternate base rate plus 6%; quarterly amortization begins September 30, 2021. The company made $54.5 million of term-loan prepayments in the first half.
- The new loan requires at least $30 million of unrestricted cash at each quarter-end and certain mandatory repayments, including specified asset-sale proceeds and year-end cash above $100 million. Gannett reported compliance with covenants at June 30, 2021.
- After shareholder approval in February, the 2027 notes’ conversion feature was reclassified from a derivative liability to equity. The notes are convertible at an initial $5.00 per share and may create substantial dilution; the filing estimates up to 294.2 million shares under a specified conversion scenario.
- Shareholders approved a rights plan intended to protect tax attributes, including approximately $543.5 million of federal net operating losses reported at December 31, 2020. The plan generally applies at ownership thresholds beginning at 4.99% and runs through April 5, 2023.
Outlook, management commentary and risks
- Management expects to fund operations from operating cash flow and says it currently forecasts sufficient liquidity, while cautioning that a COVID-19 resurgence could materially harm liquidity and debt-service capacity. It gave no specific revenue or earnings guidance in the supplied filing.
- Planned 2021 priorities include growing paid digital-only subscriptions to 10 million over five years, expanding DMS, optimizing print operations, and investing in growth businesses. Capital expenditures for the remainder of 2021 were expected to be approximately $24.1 million.
- Management said COVID-19 continued to weigh on in-person events and single-copy newspaper sales; renewed restrictions could further reduce advertising revenue. Other cited pressures include secular print advertising and circulation declines, newsprint supply and transport constraints, labor shortages, competition, and reliance on Google for DMS media purchases.
- The quarterly dividend remains suspended, with no current intention to reinstate it; debt terms also restrict dividends. Gannett received $16.4 million in PPP loans and intends to seek forgiveness. It also deferred $41.6 million of 2020 employer payroll taxes, with repayment scheduled across 2021 and 2022.
- Disclosure controls were reported ineffective because of a previously identified material weakness in internal control over financial reporting. Remediation was ongoing and had not yet been deemed complete.
- Management reported no material expected adverse effect from current legal proceedings, while noting that future adverse outcomes could materially affect results. It did not consider the disclosed environmental matter reasonably likely to become a material liability.
Important facts for investors to verify
- Whether digital advertising and subscriber growth can offset ongoing declines in print advertising and circulation.
- Cash generation after interest, pension contributions, working-capital needs, capital expenditures, and required debt repayments; also confirm unrestricted cash against the $30 million covenant minimum.
- The scale and terms of potential dilution or cash obligations under the 2027 convertible notes, including conversion adjustments and repurchase provisions.
- Progress in remediating the material weakness and any subsequent changes in control effectiveness.
- Whether COVID-19 effects, newsprint availability, labor constraints, and PPP-loan forgiveness or deferred payroll-tax repayments change the company’s outlook or liquidity.