Gannett Co., Inc. (including USA TODAY): Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The registrant is Gannett Co., Inc.; USA TODAY is part of its media portfolio. Dollar amounts below are in millions unless noted.
Business context and reporting period
Gannett operates Publishing—including USA TODAY, U.S. local media and U.K. publisher Newsquest—and Digital Marketing Solutions (DMS), marketed under LOCALiQ. Its stated strategy emphasizes digital subscriptions and marketing services while managing a declining print business. Results are compared with 2020, a period materially affected by COVID-19.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $800.2 | $814.5 | $2,381.5 | $2,530.2 |
| Operating income (loss) | $31.1 | $1.5 | $84.5 | $(466.0) |
| Net income (loss) attributable to Gannett | $14.7 | $(31.3) | $(112.5) | $(548.3) |
| Adjusted EBITDA (non-GAAP) | $102.1 | $88.0 | $318.3 | $265.1 |
| Adjusted EBITDA margin (non-GAAP) | 12.8% | 10.8% | 13.4% | 10.5% |
| Operating cash flow | Not separately provided | Not separately provided | $133.3 | $74.3 |
Q3 basic and diluted earnings per share were $0.11 and $0.09, respectively; the comparable 2020 loss was $0.24 per share. Nine-month loss per share was $0.84 versus $4.17 in 2020. The nine-month 2021 GAAP loss includes a $126.6 non-cash charge on the convertible-notes derivative and $26.0 of debt-extinguishment losses. The 2020 comparison includes $393.4 of goodwill and intangible impairments.
Q3 print advertising revenue was $190.0, down from $208.0; digital advertising and marketing services revenue was $222.0, up from $197.2. Circulation revenue declined to $306.7 from $336.2. In Publishing, paid digital-only subscribers reached approximately 1.543 million, up 46% year over year.
At September 30, cash and cash equivalents were $141.3; cash, cash equivalents and restricted cash totaled $167.4. Current assets were $587.5 versus current liabilities of $713.3. Balance-sheet debt carrying amounts included $104.9 current debt, $741.6 long-term debt and $399.9 convertible debt. The 5-Year Term Loan had $899.4 of principal outstanding and a 9.5% effective interest rate. Gannett reported compliance with its loan covenants at quarter-end.
Material changes versus the prior comparable period
- Q3 revenue fell 2%; nine-month revenue fell 6%. Publishing revenue declined 2% in Q3 and 6% year to date, with circulation weakness partly offset by digital advertising growth and higher other revenue.
- Q3 operating income improved to $31.1 from $1.5, while nine-month operating results turned positive from a substantial loss, largely because 2020 included major impairment charges and 2021 expenses were lower.
- Q3 Adjusted EBITDA rose 16% to $102.1; nine-month Adjusted EBITDA rose 20% to $318.3. Publishing Q3 Adjusted EBITDA decreased 7% to $101.0, while DMS increased to $15.0 from $4.2.
- Nine-month operating cash flow increased by $59.1. Management attributed the improvement mainly to lower interest paid and severance payments and PPP funding, partly offset by working-capital timing and higher pension contributions.
- Interest expense decreased to $34.6 in Q3 and $109.4 for nine months, from $58.1 and $173.9, respectively, reflecting refinancing and lower debt balances.
Outlook, management commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expected approximately $13.9 of capital expenditures for the remainder of 2021 and said it forecast sufficient liquidity for ongoing needs.
- Management’s five-year strategic target is 10 million paid digital-only subscribers. It cited continued digital marketing growth, print optimization and investment in growth initiatives. The company reported more than 160 virtual or live events through Q3 and announced a July 2021 strategic alliance with Tipico related to sports betting.
- On October 15, 2021, after quarter-end, Gannett issued $400 of 6.00% first-lien notes due 2026 and entered a $516 five-year senior secured term loan, using proceeds to repay the 5-Year Term Loan. Total debt outstanding after closing was $1.416 billion. Management estimated approximately $31.2 of fourth-quarter debt-extinguishment loss and other fees.
- COVID-19 remained a near-term risk to advertising, events and single-copy newspaper sales. Management also cited secular print declines, reduced consumer engagement from pandemic-period highs, constrained newsprint supply, higher newsprint and delivery costs, inflation, and reliance on Google for DMS media purchases.
- The quarterly dividend remained suspended, with no current intention to reinstate it. Debt covenants restrict dividends and other transactions; leverage may constrain investment flexibility and increase sensitivity to operating cash flow declines.
- The company received $16.4 of PPP funding during the nine-month period and recognized forgiveness of $15.1 in Q3 as reductions to operating costs and SG&A. The remaining $1.3 was reported in other long-term liabilities; forgiveness had been requested.
- Disclosure controls were reported ineffective because of a previously identified material weakness in internal control over financial reporting. Remediation was ongoing and had not yet been concluded effective.
- Management did not expect current or threatened legal proceedings to have a material adverse effect, while acknowledging that future adverse outcomes could affect results.
Investor verification priorities
- Track whether digital advertising and paid digital subscriptions continue to offset declines in print advertising, print circulation and total Publishing revenue.
- Review the post-quarter refinancing terms, debt service requirements, covenant headroom, cash generation and the estimated $31.2 refinancing-related fourth-quarter charge.
- Separate recurring operating performance from non-GAAP adjustments, PPP forgiveness, derivative revaluation, impairments, asset-sale effects and restructuring costs.
- Monitor newsprint availability and cost, distribution expense, inflation, events recovery and any renewed COVID-19 disruption.
- Confirm progress and independent testing of the internal-control remediation plan, and whether the material weakness is ultimately resolved.
- Assess potential dilution and cash settlement obligations under the 2027 convertible notes, as well as dividend restrictions and other debt covenants.