USA TODAY Co., Inc. — 2017 Q2 Form 10-Q summary
Registrant identification: The supplied filing is for New Media Investment Group Inc., not USA TODAY Co., Inc. It covers the quarter ended June 25, 2017, and the six months then ended; comparative periods ended June 26, 2016. Amounts below are in millions unless stated otherwise.
Business context
New Media operates local print and digital media, advertising, and small-business marketing services across 555 markets in 36 states. Its strategy combines cost reductions and digital growth with acquisitions of local media assets. The company reports one aggregated business segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $322.9 | $314.8 | $630.4 | $614.9 |
| Operating income (loss) | ($6.5) | $16.7 | ($9.3) | $23.8 |
| Net income (loss) | ($21.7) | $9.4 | ($25.4) | $14.4 |
| Adjusted EBITDA | $39.7 | $34.1 | $61.0 | $57.4 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $49.6 | $30.8 |
- Q2 revenue increased 2.6%; first-half revenue increased 2.5%. Advertising declined 3.9% in Q2 and 4.4% in the first half, while circulation and commercial printing and other revenue rose. Management attributed most of the latter increase to digital marketing services and events.
- Q2 operating margin was approximately negative 2.0%, versus positive 5.3% a year earlier; first-half operating margin was approximately negative 1.5%, versus positive 3.9%. Q2 net margin was approximately negative 6.7%.
- Reported losses included $27.4 million of goodwill and mastheads impairment in Q2 and $6.5 million of long-lived asset impairment in the first half. The filing reports first-half tax expense of $1.6 million despite the pretax loss, including an $8.6 million increase in the deferred-tax valuation allowance.
- Adjusted EBITDA is a company-defined non-GAAP measure. The company reported that it rose year over year, but it excludes items including interest, taxes, depreciation and amortization, and non-cash impairments; it is not a substitute for GAAP earnings or cash flow.
- First-half operating cash flow rose $18.8 million year over year. Management attributed the change to higher non-cash adjustments and working-capital contributions, partly offset by weaker operating results.
Balance sheet, debt and capital allocation
- At June 25, cash and cash equivalents were $154.3 million, restricted cash $3.4 million, current assets $344.3 million and current liabilities $179.0 million. Cash was down from $172.2 million at December 25, 2016.
- Debt carrying value was approximately $342.9 million: $4.4 million current and $338.5 million long term. The filing gives outstanding scheduled principal of $351.0 million, including $8.0 million under the Halifax Alabama facility; the main credit agreement’s weighted-average rate was 7.29%. No revolving-credit borrowings were outstanding, and the company reported covenant compliance.
- First-half investing cash outflow was $12.2 million, including $22.1 million for acquisitions, partly offset by $14.7 million of asset-sale proceeds. Financing cash outflow was $55.3 million, including $37.5 million of dividends, $11.8 million of term-loan repayments and $5.0 million of share repurchases.
- The board authorized repurchases of up to $100 million over 12 months; the company repurchased 391,120 shares for $5.0 million in Q2. The declared quarterly dividend was $0.35 per share.
Material changes, outlook and unusual items
- The company sold the Mail Tribune on June 2 for approximately $14.7 million, recognizing a pretax gain of about $5.4 million. It also acquired publications and an event business for $21.4 million during the first half. After quarter-end, it acquired Calkins Media assets for $17.5 million plus working capital.
- During the first half, printing operations ceased at 11 facilities, leading to impairment charges and accelerated depreciation. Management expected approximately $1.4 million of additional accelerated depreciation in Q3.
- After quarter-end, on July 14, the credit agreement was amended to extend term-loan maturity to July 2022 and revolver maturity to July 2021, and to provide $20 million of additional term loans. The filing does not state the resulting interest rate or provide updated post-amendment debt balances.
- Management expected 2017 capital expenditures of $11 million to $13 million and stated it expected adequate liquidity for at least the next 12 months. No specific revenue or earnings guidance was provided. Management intends to pursue digital growth, acquisitions and cost reductions, while acknowledging continuing print-revenue pressure.
- Goodwill impairment reflected continuing newspaper-industry pressures and a declining stock price. Management used revenue and EBITDA projections, discount rates of 16%–17% and a 1% terminal growth rate; it warned further impairment could arise if conditions or estimates worsen.
- Key risks include secular declines in print advertising and circulation, execution and integration risks in digital initiatives and acquisitions, debt service and covenant restrictions, dividend sustainability, regional economic weakness, and dependence on the external manager. Fortress’s pending merger with SoftBank was also identified as a potential uncertainty; the company’s independent directors approved consent to assignment of the management agreement.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated current legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Confirm the issuer identity: this filing names New Media Investment Group Inc., despite the request identifying USA TODAY Co., Inc.
- Assess whether digital and circulation growth can offset continuing advertising declines, including the underlying organic or same-store trends.
- Review the assumptions and headroom in the goodwill and mastheads impairment analysis, and the possibility of additional charges.
- Verify post-amendment borrowing, pricing, maturity, covenant capacity and liquidity after the $20 million incremental term loan.
- Evaluate the sustainability of the $0.35 quarterly dividend and the $100 million repurchase authorization against cash generation, debt obligations and acquisition spending.
- Distinguish recurring operating cash generation from the effects of non-cash impairments, working-capital changes and asset-sale proceeds.