Business context and reporting period
The filing is a Form 10-Q for the three months ended March 27, 2016. The registrant named in the filing is New Media Investment Group Inc., not USA TODAY Co., Inc.; verify that this is the intended filing. New Media owns local media and publishing businesses across 521 markets and 35 states, with print, digital and local marketing products. Its three publishing regions are reported as one segment.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $300.1 million | $250.6 million |
| Operating income / margin | $7.0 million / 2.3% | $2.6 million / 1.0% |
| Income (loss) before taxes | $(0.2) million | $(6.4) million |
| Net income (loss) | $5.0 million | $(6.1) million |
| Net margin | 1.7% | (2.4)% |
| Operating cash flow | $9.8 million | $25.1 million |
| Adjusted EBITDA (non-GAAP) | $23.3 million | $18.3 million |
- Revenue increased 19.7%, but included $61.3 million from acquisitions; same-store revenue fell $16.1 million, or 5.1%.
- Same-store advertising declined 9.6%; same-store circulation increased 1.4%, partly reflecting price increases. Digital marketing revenue rose $1.5 million, or 29%, in the reported comparison.
- Net income included a $5.1 million income tax benefit, mainly from releasing a valuation allowance against deferred tax assets associated with acquired entities. Before tax, the company recorded a loss.
- Cash and cash equivalents were $79.4 million at March 27, down $67.2 million from year-end; restricted cash was another $3.2 million. Working capital was $83.7 million, based on current assets of $256.3 million less current liabilities of $172.7 million.
- Debt principal was $365.4 million; balance-sheet debt carrying value was $353.6 million, including current and long-term portions. The weighted-average credit agreement rate was 7.2%; no revolving-credit borrowings were outstanding. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Operating income improved by $4.4 million and the net result moved from a $6.1 million loss to $5.0 million of income. Lower interest expense and lower integration/reorganization costs helped; the tax benefit was a material contributor to reported net income.
- Revenue growth was acquisition-led. The company reported $59.5 million of acquisitions during the quarter, financed with cash, while same-store revenue continued to decline.
- Operating cash flow decreased $15.2 million, primarily due to less cash from working capital, including lower accrued expenses. Investing outflow was $61.1 million, mainly for acquisitions; financing outflow was $16.0 million, mainly dividends.
- Cash dividends declared were $0.33 per share, versus $0.30 per share in the prior-year quarter. The company repurchased no shares under a public plan; 23,109 shares were withheld to cover employee tax withholding.
Outlook, commentary, risks and unusual items
- Management expected adequate liquidity for working capital, debt obligations and required capital expenditures for at least the next 12 months. Planned 2016 capital expenditures were $10–12 million, primarily for print-operation consolidation and system upgrades. No earnings or revenue guidance was provided.
- Management described Q1 and Q3 as seasonally weaker advertising quarters and Q2 and Q4 as stronger. It intends to pursue local-media and digital acquisitions, cost reductions, digital growth and quarterly dividends, subject to performance, board approval and debt restrictions.
- Management highlighted secular print advertising declines, digital migration, regional economic exposure, acquisition integration, newsprint costs, pension funding, leverage and dividend capacity as risks. Goodwill and masthead impairment could arise if forecasts or market conditions deteriorate; the company reported no impairment indicators at quarter-end.
- Pension and postretirement obligations rose to $26.9 million, primarily due to liabilities assumed in an acquisition. The company expected a further $1.2 million of pension contributions during the fiscal year.
- The company agreed in April 2016 to acquire substantially all Journal Multimedia assets for $18 million plus working capital and assumed liabilities, subject to customary closing conditions. The Review-Journal management agreement was scheduled to terminate May 23, 2016.
- Management did not expect current or threatened legal proceedings to have a material adverse effect, while acknowledging that outcomes are inherently uncertain. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and filing match the intended issuer: this 10-Q is for New Media Investment Group Inc.
- Separate acquisition-driven reported growth from continuing same-store declines, particularly in print advertising; assess whether digital growth can offset them.
- Assess earnings quality: Q1 net income was reported despite a pre-tax loss, largely because of the discrete tax benefit.
- Review cash conversion, acquisition spending, dividend payments and the ability to service debt, including the $10 million debt maturity due in December 2016.
- Check the final purchase-price allocations for the 2016 acquisitions, the Journal Multimedia transaction’s completion, and any subsequent changes in pension, impairment or liquidity assessments.