USA TODAY Co., Inc. — Filing Summary
Entity identification: The supplied 10-Q is filed by New Media Investment Group Inc. (NYSE: NEWM), not a registrant named USA TODAY Co., Inc. Financial information below is for New Media and its subsidiaries.
Business context and reporting period
The unaudited quarterly report covers the three and six months ended June 26, 2016, compared with the periods ended June 28, 2015. New Media operates local print and digital media businesses, including newspapers, websites, business publications, and digital marketing services. It reported one aggregated segment and described a portfolio spanning 530 markets in 36 states.
Unless stated otherwise, dollar figures below are in millions. The filing presents financial statements in thousands.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $314.8 | $299.5 | $614.9 | $550.1 |
| Operating income | $16.7 | $19.5 | $23.8 | $22.1 |
| Net income | $9.4 | $11.2 | $14.4 | $5.1 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $30.8 | $51.2 |
| Adjusted EBITDA (company-defined, non-GAAP) | $34.1 | $36.9 | $57.4 | $55.2 |
Q2 operating margin was approximately 5.3% versus 6.5%; six-month operating margin was approximately 3.9% versus 4.0%. Net margin was approximately 3.0% versus 3.7% in Q2 and 2.3% versus 0.9% for the six-month periods.
- Revenue mix: Q2 advertising was $174.2 million, circulation $104.1 million, and commercial printing and other $36.6 million. For six months, the amounts were $337.8 million, $208.0 million, and $69.2 million, respectively.
- Cash and liquidity: Cash and cash equivalents were $60.7 million at June 26, down from $146.6 million at December 27, 2015. Restricted cash was $3.2 million. Current assets were $244.1 million and current liabilities $172.5 million.
- Debt: Balance-sheet debt was $353.6 million, including $13.5 million classified as current; estimated fair value of outstanding debt was $364.5 million. The weighted-average interest rate was 7.2%, and no revolving credit facility borrowings were outstanding. The company reported compliance with its debt covenants.
- Dividends: Dividends declared were $0.33 per share in Q2 and $0.66 per share for the six-month period. Cash dividends paid in the first half totaled $29.5 million. A further $0.33-per-share dividend was announced after quarter-end.
- Other balance-sheet items: Goodwill was $214.3 million and net intangible assets $350.8 million. Pension and postretirement obligations were $26.4 million on the balance sheet; management disclosed the plans were underfunded by $27.5 million.
Material changes versus prior comparable periods
- Q2 revenue rose 5.1%, but operating income fell to $16.7 million from $19.5 million and net income fell to $9.4 million from $11.2 million. Six-month revenue grew 11.8% and net income increased to $14.4 million from $5.1 million.
- Acquisitions materially supported reported revenue. Management attributed $22.0 million of Q2 revenue increase to material acquisitions, while same-store revenue declined 3.2%. For six months, material acquisitions contributed $83.2 million, while same-store revenue declined 4.1%.
- Same-store advertising revenue declined 9.0% in Q2 and 9.3% for six months, reflecting print advertising weakness, particularly local retail and preprint. Same-store circulation revenue increased modestly, which management attributed in part to price increases despite lower print circulation volumes. Digital marketing services and events helped lift same-store commercial printing and other revenue.
- Operating costs and selling, general and administrative expenses increased in reported results, largely reflecting acquired businesses. Management also cited lower costs in remaining operations, including compensation and newsprint in Q2.
- Six-month operating cash flow declined by $20.4 million, mainly because working-capital cash contribution was lower, including a reduction in accrued expenses. Investing cash use was $85.2 million, primarily for acquisitions; financing cash use was $31.6 million, mainly for dividends and debt repayment.
- The six-month income tax benefit of $5.2 million included an $8.7 million valuation-allowance reduction, largely associated with deferred tax assets offsetting deferred tax liabilities from acquired entities. This tax benefit materially affected reported net income.
Outlook, commentary, risks, and unusual items
- Management expected 2016 capital expenditures of $10–$12 million, mainly for print-operation consolidation and system upgrades, and stated that liquidity should be adequate for at least the next 12 months. This is management’s expectation, not a guarantee.
- The company continued to pursue cost reductions, operational clustering, digital growth, and acquisitions. It acquired publications and digital-related businesses for an aggregate $82.5 million during the period, funded with cash on hand. After quarter-end, it agreed to acquire substantially all assets of Fayetteville Publishing Company for $18.0 million plus working capital, subject to customary closing conditions.
- Management intended to distribute a substantial portion of free cash flow through dividends, subject to board approval, financial performance, liquidity needs, acquisition opportunities, and credit-agreement restrictions. Future dividends are not assured.
- Principal risks include ongoing print advertising and circulation declines, economic weakness in concentrated regional markets, digital growth and audience monetization, acquisition integration and valuation, debt service and covenant constraints, newsprint costs and availability, pension funding, and potential goodwill or masthead impairment. The company reported no goodwill impairment in its second-quarter annual assessment, but warned that deterioration in economic conditions, cash-flow estimates, or industry multiples could lead to future impairment.
- The company reported no material changes to previously disclosed legal proceedings and did not expect current or threatened proceedings to have a material adverse effect, while noting that future adverse outcomes remain possible. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
- Related-party matters include a management agreement with FIG LLC, which recorded management and incentive fees in selling, general and administrative expense. The filing describes potential conflicts of interest involving the Manager and its affiliates. The Review-Journal management agreement terminated effective May 23, 2016.
Most important facts for investors to verify
- Confirm the registrant: this filing is for New Media Investment Group Inc., not USA TODAY Co., Inc.
- Assess whether same-store advertising declines continue and whether digital, circulation pricing, and other revenue can offset them.
- Separate acquisition-driven growth from underlying performance, and monitor integration costs and returns on acquired assets.
- Review cash generation, working-capital trends, debt maturities and interest costs, covenant headroom, and the capacity to fund dividends and acquisitions.
- Evaluate the sustainability of earnings excluding the substantial tax benefit from the valuation-allowance reduction.
- Track pension funding, impairment assumptions for goodwill and mastheads, and completion and funding of the proposed Fayetteville acquisition.
- Review the Manager’s fees, related-party transactions, and potential conflicts when evaluating governance and capital allocation.