USA TODAY Co., Inc. quarterly report, Q3 FY2018

Business context and reporting period

This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are to the periods ended September 24, 2017. The filing identifies the registrant as New Media Investment Group Inc. and its subsidiaries, not USA TODAY Co., Inc. New Media operates local print and digital media, advertising, commercial printing, events, and digital marketing services, serving 558 markets in 37 states.

Key financial metrics

Q3 operating margin was approximately 0.7%, versus 3.6% a year earlier. The Q3 net loss attributable to New Media was $6.1 million, or $0.10 per share; nine-month attributable income was $4.9 million, or $0.09 per share. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.

Cash and cash equivalents were $56.7 million at September 30, 2018, with an additional $3.1 million restricted; total current assets were $281.8 million and current liabilities $225.4 million. Debt carrying value was $407.7 million, including $11.1 million current debt. Scheduled principal was approximately $415.3 million before unamortized discount and financing costs. The weighted average interest rate was 8.49%; no revolving credit borrowings were outstanding. The company reported compliance with its debt covenants.

Changes versus the prior comparable periods

• Q3 revenue rose 19.9%; nine-month revenue rose 17.1%. Management attributed the increases primarily to acquisitions. Advertising, circulation, and commercial printing and other revenue all increased, while underlying print advertising and circulation trends remained pressured.
• Q3 operating income declined despite higher revenue, as operating costs, SG&A, depreciation and amortization, and integration costs increased. Q3 net loss widened year over year.
• Nine-month net results improved from a $27.3 million loss to $5.2 million income, partly reflecting the absence of the prior-year $27.4 million goodwill and masthead impairment and $4.8 million debt-extinguishment loss.
• Nine-month operating cash flow fell $8.8 million to $72.0 million. Investing outflow rose to $150.0 million, mainly due to $155.2 million of acquisition spending, net of cash acquired. Financing provided $91.7 million, including approximately $110.7 million from a share offering and $49.8 million of term-loan borrowings, partly offset by $64.4 million of dividends.
• The company completed 14 acquisitions for aggregate consideration of approximately $159.0 million and recorded preliminary acquisition goodwill of $63.9 million. It also issued 6.9 million shares in April 2018, raising approximately $110.7 million net of offering costs.

Outlook, commentary, risks and unusual items

• Management expects adequate liquidity for working capital, borrowing obligations, and required capital expenditures for at least 12 months. Expected 2018 capital expenditures were $12–14 million. The filing provides no specific revenue or earnings guidance.
• Management describes ongoing declines in same-store print revenue and profitability, citing migration to digital media and weakness in local advertising categories. Cost reductions, facility consolidation, and growth in digital marketing and business services are intended to offset pressure, but their success is uncertain.
• Q3 integration and reorganization costs were $9.1 million, compared with $2.2 million a year earlier; nine-month costs were $13.2 million. Restructuring included a voluntary severance program and closures of print publications and printing operations. The company recorded $1.1 million of long-lived asset impairment and $3.6 million of accelerated depreciation during the nine-month period.
• Newsprint inventory costs were affected by price increases, which management said were driven largely by government tariffs. Other key risks include continued advertising and circulation declines, acquisition integration and valuation, interest costs and debt restrictions, and the company’s ability to sustain dividends and execute its digital strategy.
• The company’s pension and postretirement plans were underfunded by $24.3 million at September 30, 2018. It reported no material expected adverse effect from current or threatened legal proceedings, while noting that future outcomes remain unpredictable.
• A $0.38-per-share third-quarter dividend was announced after quarter-end, payable November 20, 2018. Future dividends remain subject to board approval, financial performance, liquidity, and debt restrictions. The company also acquired a publication for $12.5 million plus working capital on October 1, 2018.
• The 2018 goodwill assessment found no impairment after the reporting-unit reorganization. Management cautioned that weaker conditions or cash-flow and valuation assumptions could lead to future impairment charges. Adoption of the lease standard was expected to materially affect the balance sheet through recognition of operating-lease assets and liabilities.

Important facts for investors to verify

1. Confirm the issuer and security: this filing is for New Media Investment Group Inc., notwithstanding the USA TODAY Co., Inc. request metadata.
2. Separate acquisition-driven growth from underlying performance; track same-store advertising, circulation, and digital-services trends.
3. Assess whether operating cash generation can support acquisition spending, debt service, capital needs, and dividends; review the $8 million Alabama debt maturity in March 2019 and the larger 2022 term-loan maturity.
4. Review Adjusted EBITDA reconciliations and the scale and recurrence of integration, restructuring, and other excluded expenses.
5. Monitor acquisition integration, preliminary fair-value allocations, goodwill and masthead assumptions, newsprint costs, pension funding, and the effects of lease accounting.