Business context and reporting period
Gannett Co., Inc. (NYSE: GCI) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. Gannett owns USA TODAY, local and U.K. media businesses, and digital marketing services operations. The filing is by Gannett Co., Inc., not a separate USA TODAY Co. The November 2019 acquisition of Legacy Gannett materially changed the business: the 2019 comparison periods largely reflect legacy New Media and are not directly comparable with 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $814.5 million | $376.6 million | $2,530.2 million | $1,168.6 million |
| Operating income (loss) | $1.5 million | $(1.9) million | $(466.0) million | $8.8 million |
| Net loss attributable to Gannett | $(31.3) million | $(18.5) million | $(548.3) million | $(24.8) million |
| Diluted loss per share | $(0.24) | $(0.31) | $(4.17) | $(0.41) |
| Adjusted EBITDA (non-GAAP) | $88.0 million | $44.9 million | $265.1 million | $125.1 million |
Calculated operating margin was approximately 0.2% for Q3 2020 and negative 18.4% for the first nine months. Adjusted EBITDA margin, a non-GAAP measure, was approximately 10.8% and 10.5%, respectively; it excludes interest, impairments, integration costs and other items and should not be treated as operating cash flow or GAAP earnings.
- Revenue mix: Q3 advertising and marketing services revenue was $405.2 million, circulation $336.2 million, and other revenue $73.2 million. Revenue growth versus 2019 primarily reflects the acquired Legacy Gannett operations; management also cited adverse COVID-19 impacts and ongoing declines in traditional publishing.
- Cash flow: Operating cash flow was $74.3 million for the first nine months, versus $98.5 million in 2019. Investing cash outflow was $2.0 million and financing cash outflow $37.5 million. Cash, cash equivalents and restricted cash ended the period at $223.9 million, including $189.0 million of cash and cash equivalents.
- Debt and liquidity: Balance-sheet current debt was $15.2 million, long-term debt $1,616.0 million and convertible debt $3.3 million. The Apollo Term Loan had $1.729 billion principal outstanding, matures November 2024 and generally carries an 11.5% stated rate; its effective rate was 12.9%. The company reported compliance with loan covenants, including a $20 million minimum unrestricted-cash requirement. Current assets were $626.3 million and current liabilities $610.2 million.
- Margins and expenses: Q3 operating expenses were $813.1 million, including $58.1 million of interest expense. Nine-month expenses included $393.4 million of goodwill and intangible impairments and $74.0 million of integration and reorganization costs.
Material changes versus the prior comparable period
Reported revenue and Adjusted EBITDA rose substantially, mainly because 2020 includes Legacy Gannett for the full period while 2019 does not. In the first nine months, Gannett recorded a $549.9 million net loss, including $393.4 million of goodwill and intangible impairments, versus a $25.7 million net loss in 2019. The impairment charges followed lower estimated fair values amid COVID-19 and market conditions. Interest expense increased to $173.9 million from $30.4 million, principally because of the larger, higher-cost acquisition debt. Operating cash flow declined by $24.3 million, with higher interest and severance payments among the cited factors.
Cash dividends were suspended in April 2020; none were declared for the quarter or nine-month period, compared with $0.38 per share for Q3 2019 and $1.14 for the first nine months of 2019. After quarter-end, the company closed sales of non-core and real estate assets, including BridgeTower Media, for approximately $100 million in proceeds.
Outlook, management commentary, risks and unusual items
- Management’s priorities include integrating Legacy Gannett, realizing synergies, reducing debt through operating cash flow and asset monetization, and developing digital marketing, digital subscriptions and events. It aims to return to revenue growth over three to five years, but provided no quantified earnings or revenue guidance.
- Management expected COVID-19 to continue weighing on near-term results. Advertising, digital marketing, commercial print and distribution, events, and single-copy newspaper sales were affected. Cost actions included furloughs, compensation reductions, discretionary-spending cuts, pension-contribution deferrals and CARES Act payroll-tax deferrals; management said these steps would not fully offset pandemic impacts.
- The company planned a voluntary severance offer in Q4 2020 and expected to record related costs. It had ceased operations at 35 printing facilities during the first nine months, resulting in $45.0 million of accelerated depreciation.
- Key risks include high debt service, restrictive covenants and required excess-cash-flow and asset-sale repayments; continued print advertising and circulation declines; COVID-19 and economic uncertainty; execution of acquisition synergies; impairment risk; and reliance of Marketing Solutions on Google. The Apollo loan’s leverage provisions also gave Apollo the right to appoint one voting director as of September 30.
- Disclosure controls were reported ineffective because of a previously identified material weakness in revenue-recognition controls. Remediation was ongoing; management had not concluded the weakness was remediated.
- Legal proceedings and an environmental investigation were described, but management did not expect current or threatened proceedings to have a material adverse effect. The filing notes outcomes remain uncertain.
Important facts for investors to verify
- How much revenue and Adjusted EBITDA growth is organic rather than attributable to the Legacy Gannett acquisition, and how comparable are the reported periods?
- Whether operating cash flow can cover interest, required term-loan repayments, pension contributions and operating needs as pandemic conditions evolve.
- Progress on integration, cost savings and planned asset monetization, including use of the approximately $100 million of post-quarter sale proceeds.
- Whether the material weakness in revenue-recognition controls is remediated and controls operate effectively.
- The sustainability of digital subscriber and marketing growth, and ongoing exposure to print declines, Google-related business risks and further impairment charges.
- Whether and when dividends could resume, considering liquidity needs and debt-agreement restrictions.