USA TODAY Co., Inc. annual report, FY2016

Business context and reporting period

Registrant: The filing is New Media Investment Group Inc.’s Form 10-K for the 52-week fiscal year ended December 25, 2016, not a filing by “USA TODAY Co., Inc.” as stated in the request metadata. New Media owned local newspapers and related print, digital and business-service assets across 538 markets and 36 states. Its portfolio included 631 print publications, 538 websites and Propel, its digital marketing-services business.

Financial performance

MetricFY 2016FY 2015
Revenue$1,255.4 million$1,195.8 million
Operating income$61.4 million$103.4 million
Net income$31.6 million$67.6 million
Adjusted EBITDA (non-GAAP)$126.7 million$175.6 million
Cash from operations$98.4 million$115.3 million
Cash capital expenditures$10.6 million$10.2 million

FY 2016 operating margin was approximately 4.9% and net margin approximately 2.5%. The filing reports Q4 revenue of $333.6 million, operating income of $27.0 million and net income of $14.5 million; Q4 2015 revenue was also $333.6 million, while reported operating income and net income were $66.7 million and $56.4 million.

At year-end, cash and cash equivalents were $172.2 million, restricted cash $3.4 million, current assets $370.3 million and current liabilities $195.9 million (current ratio approximately 1.9). Debt carrying value was $353.2 million, including $14.4 million current and $338.9 million long-term; scheduled principal outstanding was $362.8 million before unamortized discount and financing costs. The revolving facility was undrawn. The term debt’s weighted-average rate was 7.19%; management reported compliance with debt covenants.

Material changes versus the prior comparable period

  • Revenue increased 5.0%, but acquisitions contributed $82.1 million; same-store revenue fell $32.8 million, or 2.5%.
  • Same-store advertising declined $63.0 million, or 8.4%. Same-store circulation rose $10.2 million, or 2.5%, and commercial printing and other revenue rose $20.0 million, or 15.6%.
  • Reported operating income fell to $61.4 million from $103.4 million. FY 2015 included a $57.1 million gain on the sale of the Las Vegas Review-Journal; FY 2016 recorded a $3.6 million loss on asset sales/disposals. FY 2015 also included a $4.8 million masthead impairment.
  • Net income and Adjusted EBITDA declined; operating cash flow was down $17.0 million. FY 2016 cash used in acquisitions was $137.5 million, compared with $431.1 million in FY 2015.
  • Digital and business-services revenue grew 13.7% to $123.9 million; Propel accounted for $53.0 million. Circulation revenue growth included $32.0 million from acquisitions.

Outlook, risks and unusual items

  • Management expected adequate liquidity for working capital, borrowing obligations and required capital expenditures for at least the next 12 months. It forecast 2017 capital expenditures of $11–13 million, mainly for print-operation consolidation and system upgrades; this is a forecast, not an earnings or revenue outlook.
  • Management’s strategy is to expand digital marketing and business services, improve consumer and SMB revenue, reduce costs, pursue acquisitions and return a substantial portion of free cash flow through dividends. The board retains discretion, and credit-agreement restrictions apply. The announced Q4 2016 dividend was $0.35 per share.
  • Key risks include secular print-advertising and circulation pressure, local economic weakness, digital competition and uncertain returns from Propel, acquisition/integration risk, leverage and covenant restrictions, interest-rate exposure, and reliance on the externally appointed Fortress manager. The filing noted Fortress’s announced pending merger with a SoftBank affiliate.
  • Management reported pension and postretirement plans underfunded by $26.1 million at year-end and estimated 2017 cash requirements of approximately $2.2 million. A 100-basis-point LIBOR change was estimated to affect annual interest expense by about $3.5 million.
  • Subsequent events: the company paid $10 million of Advantage Florida debt on December 30, 2016; acquired Wooster Republican Printing Company for $21.2 million plus working capital on January 31, 2017; and announced the $15.0 million sale of the Medford Mail Tribune, expected to close in Q1 2017.
  • Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded internal controls of the 2016 acquisitions from the year-end controls assessment; those acquired businesses represented $184.9 million of assets and $113.2 million of revenue.

Most important facts for investors to verify

  1. Confirm the issuer identity: the supplied filing is for New Media Investment Group Inc., not USA TODAY Co., Inc.
  2. Separate acquisition-driven growth from continuing trends; review same-store advertising declines and the contribution and profitability of Propel.
  3. Reconcile debt principal with its balance-sheet carrying value, scheduled payments, covenants and dividend capacity.
  4. Assess cash generation after acquisitions, dividends, capital expenditures and pension funding, rather than relying on Adjusted EBITDA alone.
  5. Review acquisition integration, the pending Medford disposition, pension assumptions, impairment sensitivity and the status of controls at acquired businesses.