Business context and reporting period
The supplied filing is New Media Investment Group Inc.’s unaudited Form 10-Q for the quarter ended September 25, 2016; it does not identify USA TODAY Co., Inc. as the registrant. New Media owns and operates local media assets, including newspapers, websites and digital marketing services, across 527 markets in 36 states. Its operating segments are reported as one segment.
Financial performance and position
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $306.8 | $312.1 | $921.8 | $862.2 |
| Operating income | $10.6 | $14.6 | $34.4 | $36.7 |
| Net income | $2.8 | $6.1 | $17.1 | $11.2 |
| Diluted EPS | $0.06 | $0.14 | $0.38 | $0.25 |
| Adjusted EBITDA (non-GAAP) | $27.7 | $32.9 | $85.1 | $88.1 |
| Operating cash flow | Not provided for the quarter | $67.3 | $104.8 |
- Q3 revenue declined 1.7%; advertising fell 8.0%, partly offset by circulation growth of 4.2% and commercial printing and other growth of 14.7%. Same-store revenue declined 1.3%, including an 8.7% same-store advertising decline.
- Nine-month revenue rose 6.9%, reflecting $81.5 million of acquired-business revenue. Same-store revenue fell 3.2%; same-store advertising declined 8.7%, partly offset by circulation growth of 2.4% and commercial printing and other growth of 10.6%.
- Operating margin was approximately 3.5% in Q3 2016 versus 4.7% in Q3 2015, and 3.7% for the 2016 nine-month period versus 4.3% in 2015. Nine-month net income benefited from a $4.7 million income tax benefit, including a $9.5 million valuation-allowance release; Q3 tax expense was $0.5 million.
- Nine-month operating cash flow decreased $37.5 million, primarily due to lower working-capital cash contribution, including a decline in accrued expenses. Investing used $112.2 million, mainly for $107.7 million of acquisitions; financing used $47.2 million, principally dividends of $44.2 million.
- Cash and cash equivalents were $54.5 million at September 25, down from $146.6 million at December 27, 2015. Current assets were $235.5 million and current liabilities $184.1 million (current ratio approximately 1.28).
- Debt carrying value was $353.4 million, comprising $13.5 million current and $339.9 million long-term; scheduled principal was $363.7 million before original-issue discount and financing-cost deductions. Weighted-average credit-facility interest rate was 7.2%; no revolver borrowings were outstanding. The company reported covenant compliance. Debt fair value was estimated at $363.7 million.
- Dividends declared were $0.33 per share in Q3 and $0.99 per share for the first nine months. Cash dividends paid during the nine months were $44.2 million.
Changes, outlook and risks
- Q3 net income fell to $2.8 million from $6.1 million, alongside lower revenue and higher integration and reorganization costs ($5.2 million versus $1.6 million). Nine-month net income increased to $17.1 million from $11.2 million, despite lower operating income, aided by the tax benefit and lower interest expense.
- During the first nine months, the company acquired publications and businesses for approximately $107.2 million, financed from cash on hand. Goodwill increased $48.9 million. A September 30 subsequent acquisition was announced for $8.5 million plus working capital and assumed liabilities.
- Management expected 2016 capital expenditures of $10–$12 million and stated it expected adequate liquidity for at least the next 12 months. No numerical revenue or earnings guidance was provided. Management intends to distribute a substantial portion of free cash flow as dividends, subject to performance, board approval, liquidity, debt restrictions and other uses of cash. A $0.35-per-share Q3 dividend was announced after period-end.
- Management cites persistent print-advertising declines and industry migration to digital media; digital marketing services and events contributed to growth in commercial printing and other revenue. Cost reduction, operational consolidation and acquisitions remain central to its strategy. Restructuring costs are primarily severance; $3.9 million remained accrued and was expected to be paid within 12 months.
- Key risks include further advertising or circulation declines, acquisition integration and valuation risk, leverage and interest costs, limits on dividends under debt agreements, digital growth execution, and potential impairment of goodwill or mastheads if forecasts or market conditions weaken. Pension and postretirement plans were underfunded by $26.2 million. The company reported no material expected adverse effect from current or threatened legal proceedings, while acknowledging outcomes are uncertain.
- Related-party matters include a management agreement with Fortress affiliate FIG LLC: management fees of $7.2 million and incentive compensation of $5.0 million were recognized in the first nine months; $7.3 million of related fees remained accrued at quarter-end. The filing identifies potential conflicts of interest.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q is for New Media Investment Group Inc., not USA TODAY Co., Inc.
- Assess same-store advertising trends and whether digital services can offset continuing print declines.
- Reconcile earnings and cash generation, particularly the one-time tax valuation-allowance release and the year-over-year reduction in operating cash flow.
- Review debt maturities, the $10 million Florida facility due December 31, 2016, interest-rate exposure, covenant headroom and dividend restrictions.
- Evaluate acquisition integration, preliminary purchase-price allocations, and sensitivity of goodwill and masthead valuations to operating assumptions.
- Consider the sustainability of dividends relative to cash flow, debt service, acquisition spending and pension obligations.