USA TODAY Co., Inc. quarterly report, Q2 FY2020

Business context and reporting period

Gannett Co., Inc. filed this Form 10-Q for the quarter and six months ended June 30, 2020. Gannett’s portfolio includes USA TODAY, local and U.K. media, and digital marketing businesses. The filing is by Gannett Co., Inc., not an entity named USA TODAY Co., Inc.

Comparisons with 2019 are not like-for-like: Gannett acquired Legacy Gannett, including the USA TODAY NETWORK, on November 19, 2019. Much of the reported revenue and expense increase reflects the acquired operations; COVID-19 adversely affected results during the quarter.

Financial results and position

• Revenue growth was driven primarily by the acquisition, partly offset by pandemic-related weakness. Q2 advertising and marketing services revenue was $356.9 million; circulation revenue was $342.6 million.
• Q2 operating results included $393.4 million of goodwill and intangible impairment charges, largely reflecting revised expectations amid COVID-19, and $32.3 million of integration and reorganization costs. Six-month figures included $60.6 million of integration and reorganization costs.
• Cash from operations was $24.6 million for the first six months, down from $57.7 million a year earlier. Capital expenditures were $22.2 million; cash interest paid was $125.3 million. Cash and cash equivalents at June 30 were $158.6 million; cash, cash equivalents and restricted cash totaled $189.2 million.
• At June 30, total current assets were $612.8 million and current liabilities were $588.1 million. Long-term debt on the balance sheet was $1,633.4 million, plus $3.3 million of convertible debt. The Apollo term loan had approximately $1.7 billion in principal outstanding and an effective interest rate of 12.9%.
• Total assets were $3.34 billion, down from $4.02 billion at year-end 2019; equity was $452.1 million, down from $981.4 million. Goodwill declined to $559.6 million from $914.3 million following impairment charges.

Changes, outlook, risks and unusual items

The 2019 acquisition substantially changed the company’s scale and capital structure, making reported year-over-year comparisons difficult to interpret as organic performance. Management cited declining demand for advertising, digital marketing, commercial printing and distribution, events, and single-copy newspaper sales during the pandemic. It expects COVID-19 to continue negatively affecting near-term results; the duration and longer-term effects remain uncertain. The filing provides no numerical earnings or revenue guidance.

Management’s 2020 priorities include integrating the acquired businesses, capturing synergies, reducing debt through operating cash flow and real estate monetization, and developing digital subscriptions, marketing services and events. Cost and cash-preservation actions included furloughs, compensation and discretionary-spending reductions, payroll-tax and pension-contribution deferrals, and suspension of the quarterly dividend. Management said it expected available cash, operating cash flow and relief measures to support commitments, while warning that these actions would not fully offset the pandemic’s impact and that liquidity could be materially affected.

• The Apollo senior-secured term loan matures November 19, 2024, generally bears 11.5% stated interest, and requires at least $20 million of unrestricted cash at each quarter-end. It also includes excess-cash-flow and asset-sale prepayment provisions. The company reported covenant compliance at June 30.
• The dividend was suspended in April 2020; management gave no assurance as to when regular payments would resume. Pension contributions were deferred or rescheduled, including $12 million of U.K. contributions deferred to 2021.
• Goodwill impairment was $362.4 million; the company also recorded $8.0 million of masthead impairment and a $23.0 million impairment of Newsquest customer-relationship intangibles. Further impairment is possible if assumptions or conditions worsen.
• Disclosure controls were reported ineffective because of a previously identified material weakness in revenue-recognition controls. Remediation was ongoing. Management said remote work had not materially affected financial reporting controls, while continuing to monitor the impact.
• Other important risks include print advertising and circulation declines, high debt service, uncertainty in achieving acquisition synergies, credit losses, reliance of Marketing Solutions on Google, foreign-exchange exposure, pension obligations and legal or environmental contingencies. The filing says current legal proceedings are not expected to have a material adverse effect, but outcomes are inherently uncertain.

Important facts for investors to verify

1. Separate acquired revenue and earnings from same-store trends, particularly the pandemic’s effect on advertising, circulation and digital marketing.
2. Assess cash generation against substantial interest costs, scheduled debt repayments, covenant requirements and the term loan’s cash-sweep provisions.
3. Track the pace and cash costs of integration, cost reductions, asset sales and pension contributions, and whether expected synergies are realized.
4. Review impairment assumptions and any subsequent changes in business outlook, goodwill or intangible-asset values.
5. Monitor remediation of the revenue-recognition material weakness, dividend status and any change in management’s liquidity assessment.