USA TODAY Co., Inc. — 2019 Q2 10-Q Summary
Issuer clarification: The supplied filing is for New Media Investment Group Inc. (NYSE: NEWM), not an issuer named USA TODAY Co., Inc. New Media later described its proposed acquisition of Gannett, which owned the USA TODAY NETWORK. The filing covers the quarter ended June 30, 2019; comparisons are with the quarter ended July 1, 2018. Amounts below are in millions unless noted.
Business context and reporting period
New Media operated local newspapers, websites, digital marketing and business services, commercial printing, and events businesses across 612 markets and 39 states. It reported one aggregated business segment. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $404.4 | $388.8 | $792.0 | $729.6 |
| Operating income | $12.2 | $23.3 | $10.7 | $30.4 |
| Net income (loss) | $2.6 | $11.7 | $(6.7) | $11.0 |
| Adjusted EBITDA (non-GAAP) | $37.1 | $43.6 | $58.0 | $70.4 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $57.7 | $57.6 |
- Q2 revenue rose 4.0%; six-month revenue rose 8.6%, primarily from acquisitions. Q2 advertising revenue fell 1.5%, while circulation and commercial printing and other revenue increased 4.4% and 21.4%, respectively.
- Operating margin declined to approximately 3.0% from 6.0% in Q2 and to 1.4% from 4.2% for the six-month period. Q2 diluted EPS was $0.05 versus $0.20; six-month diluted EPS was $(0.10) versus $0.20.
- Six-month investing cash outflow was $37.2 million, including $39.4 million for acquisitions and $4.9 million of capital expenditures. Financing cash outflow was $50.1 million, chiefly reflecting $46.1 million in dividends and $11.3 million of term-loan repayments. Cash, cash equivalents, and restricted cash declined $29.6 million to $23.2 million.
- At June 30, cash and cash equivalents were $20.0 million; restricted cash was $3.2 million. Total current assets were $244.7 million and current liabilities $242.4 million. Reported debt was $438.0 million, including $434.7 million long-term and $3.3 million current; revolving-credit borrowings of $8.0 million are also disclosed in the debt note. Revolver availability was $31.5 million.
- The company declared dividends of $0.38 per share for Q2; dividends declared for the first six months totaled $0.76 per share. Management reported compliance with credit-facility covenants, including a maximum leverage ratio of 3.25:1.00.
Material changes versus the prior comparable period
- Despite higher revenue, operating income fell by about 48% in Q2 and 65% for the six-month period; six-month results shifted from net income to a net loss. Management cited higher acquisition-related costs, expenses, interest, restructuring, impairment, and asset-disposal losses.
- Q2 operating costs increased 7.2% and SG&A increased 2.5%. Management said acquisition costs were partly offset by lower compensation, delivery, and newsprint costs in continuing operations. Interest expense increased, primarily due to higher interest rates.
- Six-month operating cash flow was essentially flat year over year. Acquisition cash outlays were substantially lower than in the first half of 2018 ($39.4 million versus $149.6 million).
- Adoption of lease-accounting guidance added $109.5 million of operating lease right-of-use assets and $116.9 million of lease liabilities at June 30; prior-period balance-sheet amounts were not restated.
Outlook, management commentary, risks, and unusual items
- Management expected 2019 capital expenditures of $12–$13 million and said liquidity would be adequate for working capital, debt obligations, and required capital spending for at least the next 12 months. It cited cost reductions, asset sales, and digital, business-services, and events initiatives as responses to industry pressure.
- On August 5, 2019, after quarter-end, New Media agreed to acquire Gannett for $12.06 per share, or approximately $1.4 billion at announcement. Gannett shareholders were to receive $6.25 cash and 0.5427 New Media shares per share; expected ownership of the combined company was approximately 49.5% for Gannett shareholders. Closing was expected before December 31, 2019, subject to stockholder and regulatory approvals and other conditions.
- Apollo committed to a $1.792 billion first-lien term loan to fund the merger consideration, refinance existing debt, and pay related costs. The proposed facility carried a fixed 11.5% rate, a five-year term, and fees equal to 6.5% of principal at closing. Definitive documentation was not finalized; financing was conditional, including on at least $40 million of combined-company unrestricted cash at closing. The merger agreement had no financing condition. Management estimated approximately $80 million of merger-related severance and change-in-control payments, primarily related to Gannett pension plans.
- New Media reported a $2.5 million six-month impairment charge tied to facility closures, plus $2.6 million of accelerated depreciation. It closed three print publications and nine print facilities during the period. The annual impairment test found the newspaper reporting unit’s fair value exceeded carrying value by less than 10%; no impairment was recorded, but management warned further charges could follow if conditions or cash-flow assumptions weaken.
- Principal risks include secular declines in print advertising and circulation, local economic weakness, acquisition integration and merger execution, debt and interest costs, dividend sustainability, and the possibility that digital initiatives will not offset print declines. Legal proceedings were described as not expected to have a material adverse effect, though future outcomes remain uncertain.
- Management stated disclosure controls were effective at quarter-end. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flows.
Important facts for investors to verify
- Confirm the issuer identity and whether this New Media filing is the intended filing for the requested company.
- Review subsequent merger developments, including approvals, final financing terms, closing conditions, and actual financing costs.
- Assess whether operating cash generation can sustain dividends, debt service, capital spending, and the proposed merger’s funding needs.
- Track same-store advertising and circulation trends separately from acquisition-driven growth, and test whether digital and other revenue gains offset print declines.
- Review the narrow impairment headroom, facility-closure costs, and the final purchase-price allocations for recent acquisitions.
- Reconcile the debt-note borrowings and balance-sheet debt presentation, and monitor covenant compliance, revolver availability, and interest-rate exposure.