Business context and reporting period
Gannett Co., Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2022. Gannett owns USA TODAY, local media properties and U.K. publisher Newsquest, and operates LocaliQ digital marketing services. The filing identifies the registrant as Gannett Co., Inc., not USA TODAY Co., Inc.
Gannett reports two segments: Gannett Media (including domestic and U.K. publishing) and Digital Marketing Solutions (DMS). It describes its strategy as shifting toward a subscription-led, digitally focused media and marketing business.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $717.9 million | $800.2 million | $2,214.6 million | $2,381.5 million |
| Operating income (loss) | $(25.1) million | $31.1 million | $(48.3) million | $84.5 million |
| Net income (loss) attributable to Gannett | $(54.1) million | $14.7 million | $(110.8) million | $(112.5) million |
| Diluted earnings (loss) per share | $(0.39) | $0.09 | $(0.81) | $(0.84) |
| Adjusted EBITDA, non-GAAP | $51.9 million | $102.1 million | $166.9 million | $318.3 million |
| Adjusted EBITDA margin, non-GAAP | 7.2% | 12.8% | 7.5% | 13.4% |
| Cash provided by operating activities | Not separately stated for the quarter | $33.0 million | $133.3 million |
Q3 GAAP operating margin was approximately negative 3.5%, versus positive 3.9% a year earlier; net margin was approximately negative 7.5%, versus positive 1.8%. For the nine-month period, operating margin was approximately negative 2.2%, versus positive 3.5% in 2021. These percentages are calculated from reported figures.
At September 30, 2022, cash and cash equivalents were $124.9 million; current assets were $503.2 million and current liabilities $648.7 million. Total debt carrying value was approximately $1.20 billion, including $402.5 million of convertible debt; reported principal debt was $1.32 billion. Long-term debt included $91.1 million classified as current. The company reported compliance with its term-loan covenants and a minimum unrestricted cash requirement of $30 million.
Material changes versus the prior comparable period
- Q3 revenue declined 10% year over year; nine-month revenue declined 7%. Print advertising fell 16% in Q3 and 13% year to date; circulation fell 14% and 12%, respectively.
- Digital-only circulation revenue increased 34% in Q3 and 33% year to date. Paid digital-only subscribers, including introductory-offer subscribers, rose 28.5% to approximately 1.98 million.
- Q3 DMS revenue rose 3% and nine-month DMS revenue rose 6%; segment Adjusted EBITDA increased 4% and 12%, respectively. In contrast, Gannett Media Adjusted EBITDA fell 54% in Q3 and 48% year to date.
- Operating costs decreased, but savings were outweighed by lower revenue and substantially higher integration and reorganization costs: $33.3 million in Q3 and $60.5 million year to date.
- Nine-month operating cash flow fell to $33.0 million from $133.3 million, reflecting lower cash receipts, the absence of prior-year PPP funding, and higher taxes, partly offset by lower interest payments and pension contributions.
Outlook, commentary, risks and unusual items
- Management stated it expected adequate capital and liquidity for at least the next 12 months, while warning that a downturn or faster revenue declines could reduce operating cash flow and liquidity. No numerical revenue or earnings guidance was provided.
- Management cited inflation, higher interest rates, supply-chain disruption, foreign-exchange headwinds, and weaker advertiser spending and consumer price sensitivity. It noted longer DMS sales cycles and reduced print and digital advertising demand, and expected continued near-term pressure.
- Management expects continued print declines, while prioritizing digital subscriber growth, DMS expansion, print cost optimization and selected growth investments. It expected 2022 event revenue to increase year over year, with Q4 event revenue relatively flat; Q3 event revenue decreased 9.9% year over year.
- Expected remaining 2022 capital expenditures were approximately $9.5 million. The company said it had no current intention to reinstate a dividend.
- A pension annuity transaction transferred approximately $450 million of pension liabilities and related assets to insurers. A plan remeasurement reduced the net funded pension obligation by $99.9 million, primarily reflecting a higher discount rate; the transaction did not reduce participants’ benefits.
- Other comprehensive loss was $107.8 million for the first nine months, including pension-related and foreign-currency effects. The Domestic Gannett Media reporting unit’s estimated fair-value cushion over carrying value fell to 22% in the 2022 annual impairment test, from 126% in 2021; no impairment indicators were identified at September 30.
- In October 2022, Gannett agreed to repurchase $17.8 million principal amount of 2026 notes at 78% of par and expected a Q4 gain of approximately $3.0 million.
- Convertible notes carry potential dilution: the 2027 Notes’ initial conversion price is $5 per share, and the filing describes substantial potential share issuance under specified conversion terms. Their effective interest rate was 10.5%.
- Management highlighted the risk that continued declines, cost inflation, higher variable-rate borrowing costs, or unsuccessful cost controls could impair results and liquidity. The term loan and notes impose covenants and restrict certain payments. The filing also notes possible litigation outcomes, tax uncertainties and ongoing COVID-related risks.
Most important facts for investors to verify
- Whether print advertising and circulation declines continue to accelerate, and whether digital-only subscriber and DMS growth can offset them.
- Whether cost reductions can protect operating cash flow and margins despite inflation and elevated restructuring costs.
- Cash availability, debt maturities and amortization, covenant headroom, and sensitivity to rising rates on the variable-rate term loan.
- The magnitude and timing of pension contributions, the effects of the annuity transfer, and any further pension or currency-related changes in equity.
- Potential dilution and cash obligations under the convertible notes, and the actual economics of debt repurchases.
- Tax valuation allowances, unrecognized tax benefits, and any material developments in legal or other contingencies.