NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
April 1, 2018
|
|
December 31, 2017
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
67,026
|
|
|
$
|
43,056
|
|
Restricted cash
|
3,106
|
|
|
3,106
|
|
Accounts receivable, net of allowance for doubtful accounts of $7,815 and $5,998 at April 1, 2018 and December 31, 2017, respectively
|
133,852
|
|
|
151,692
|
|
Inventory
|
22,273
|
|
|
18,654
|
|
Prepaid expenses
|
27,920
|
|
|
23,378
|
|
Other current assets
|
25,595
|
|
|
23,311
|
|
Total current assets
|
279,772
|
|
|
263,197
|
|
Property, plant, and equipment, net of accumulated depreciation of $182,318 and $171,395 at April 1, 2018 and December 31, 2017, respectively
|
358,539
|
|
|
373,123
|
|
Goodwill
|
243,673
|
|
|
236,555
|
|
Intangible assets, net of accumulated amortization of $74,743 and $67,588 at April 1, 2018 and December 31, 2017, respectively
|
413,756
|
|
|
403,493
|
|
Other assets
|
9,130
|
|
|
7,178
|
|
Total assets
|
$
|
1,304,870
|
|
|
$
|
1,283,546
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
12,124
|
|
|
$
|
2,716
|
|
Accounts payable
|
19,263
|
|
|
15,750
|
|
Accrued expenses
|
77,755
|
|
|
97,027
|
|
Deferred revenue
|
95,215
|
|
|
88,164
|
|
Total current liabilities
|
204,357
|
|
|
203,657
|
|
Long-term liabilities:
|
|
|
|
Long-term debt
|
396,510
|
|
|
357,195
|
|
Deferred income taxes
|
7,988
|
|
|
8,080
|
|
Pension and other postretirement benefit obligations
|
25,177
|
|
|
25,462
|
|
Other long-term liabilities
|
16,258
|
|
|
14,759
|
|
Total liabilities
|
650,290
|
|
|
609,153
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.01 par value, 2,000,000,000 shares authorized; 53,580,827 shares issued and 53,390,913 shares outstanding at April 1, 2018; 53,367,853 shares issued and 53,226,881 shares outstanding at December 31, 2017
|
536
|
|
|
534
|
|
Additional paid-in capital
|
664,805
|
|
|
683,168
|
|
Accumulated other comprehensive loss
|
(5,528
|
)
|
|
(5,461
|
)
|
Accumulated deficit
|
(3,417
|
)
|
|
(2,767
|
)
|
Treasury stock, at cost, 189,914 and 140,972 shares at April 1, 2018 and December 31, 2017, respectively
|
(1,816
|
)
|
|
(1,081
|
)
|
Total stockholders’ equity
|
654,580
|
|
|
674,393
|
|
Total liabilities and stockholders’ equity
|
$
|
1,304,870
|
|
|
$
|
1,283,546
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
April 1, 2018
|
|
March 26, 2017
|
Revenues:
|
|
|
|
Advertising
|
$
|
163,259
|
|
|
$
|
155,564
|
|
Circulation
|
129,991
|
|
|
110,806
|
|
Commercial printing and other
|
47,515
|
|
|
41,154
|
|
Total revenues
|
340,765
|
|
|
307,524
|
|
Operating costs and expenses:
|
|
|
|
Operating costs
|
196,389
|
|
|
177,790
|
|
Selling, general, and administrative
|
118,819
|
|
|
106,202
|
|
Depreciation and amortization
|
19,247
|
|
|
17,604
|
|
Integration and reorganization costs
|
2,430
|
|
|
2,370
|
|
Impairment of long-lived assets
|
—
|
|
|
6,485
|
|
(Gain) loss on sale or disposal of assets
|
(3,171
|
)
|
|
88
|
|
Operating income (loss)
|
7,051
|
|
|
(3,015
|
)
|
Interest expense
|
8,352
|
|
|
7,218
|
|
Other income
|
(520
|
)
|
|
(217
|
)
|
Loss before income taxes
|
(781
|
)
|
|
(10,016
|
)
|
Income tax benefit
|
(116
|
)
|
|
(6,331
|
)
|
Net loss
|
$
|
(665
|
)
|
|
$
|
(3,685
|
)
|
Loss per share:
|
|
|
|
Basic:
|
|
|
|
Net loss
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
Diluted:
|
|
|
|
Net loss
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
Dividends declared per share
|
$
|
0.37
|
|
|
$
|
0.35
|
|
Comprehensive loss
|
$
|
(732
|
)
|
|
$
|
(3,657
|
)
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in capital
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated deficit
|
|
Treasury stock
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance at December 31, 2017
|
53,367,853
|
|
|
$
|
534
|
|
|
$
|
683,168
|
|
|
$
|
(5,461
|
)
|
|
$
|
(2,767
|
)
|
|
140,972
|
|
|
$
|
(1,081
|
)
|
|
$
|
674,393
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(665
|
)
|
|
—
|
|
|
—
|
|
|
(665
|
)
|
Net actuarial loss and prior service cost, net of income taxes of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
Restricted share grants
|
212,974
|
|
|
2
|
|
|
223
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
225
|
|
Non-cash compensation expense
|
—
|
|
|
—
|
|
|
1,163
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,163
|
|
Restricted share forfeiture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,216
|
|
|
—
|
|
|
—
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,726
|
|
|
(735
|
)
|
|
(735
|
)
|
Common stock cash dividend
|
—
|
|
|
—
|
|
|
(19,749
|
)
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
(19,734
|
)
|
Balance at April 1, 2018
|
53,580,827
|
|
|
$
|
536
|
|
|
$
|
664,805
|
|
|
$
|
(5,528
|
)
|
|
$
|
(3,417
|
)
|
|
189,914
|
|
|
$
|
(1,816
|
)
|
|
$
|
654,580
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
April 1, 2018
|
|
March 26, 2017
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(665
|
)
|
|
$
|
(3,685
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
19,247
|
|
|
17,604
|
|
Non-cash compensation expense
|
1,163
|
|
|
831
|
|
Non-cash interest expense
|
504
|
|
|
696
|
|
Deferred income taxes
|
(92
|
)
|
|
(5,065
|
)
|
(Gain) loss on sale or disposal of assets
|
(3,171
|
)
|
|
88
|
|
Impairment of long-lived assets
|
—
|
|
|
6,485
|
|
Pension and other postretirement benefit obligations
|
(369
|
)
|
|
(422
|
)
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable, net
|
19,409
|
|
|
13,688
|
|
Inventory
|
(3,169
|
)
|
|
592
|
|
Prepaid expenses
|
(3,888
|
)
|
|
(3,932
|
)
|
Other assets
|
(1,289
|
)
|
|
(480
|
)
|
Accounts payable
|
3,030
|
|
|
3,511
|
|
Accrued expenses
|
(17,573
|
)
|
|
(13,295
|
)
|
Deferred revenue
|
4,027
|
|
|
1,563
|
|
Other long-term liabilities
|
1,499
|
|
|
69
|
|
Net cash provided by operating activities
|
18,663
|
|
|
18,248
|
|
Cash flows from investing activities:
|
|
|
|
Acquisitions, net of cash acquired
|
(29,409
|
)
|
|
(21,709
|
)
|
Purchases of property, plant, and equipment
|
(1,929
|
)
|
|
(2,400
|
)
|
Proceeds from sale of real estate and other assets
|
9,207
|
|
|
292
|
|
Net cash used in investing activities
|
(22,131
|
)
|
|
(23,817
|
)
|
Cash flows from financing activities:
|
|
|
|
Borrowings under term loans
|
49,750
|
|
|
—
|
|
Payment of debt issuance costs
|
(500
|
)
|
|
—
|
|
Repayments under term loans
|
(1,031
|
)
|
|
(10,877
|
)
|
Payment of offering costs
|
—
|
|
|
(431
|
)
|
Purchase of treasury stock
|
(735
|
)
|
|
(607
|
)
|
Payment of dividends
|
(20,046
|
)
|
|
(18,876
|
)
|
Net cash provided by (used in) financing activities
|
27,438
|
|
|
(30,791
|
)
|
Net increase (decrease) in cash and cash equivalents
|
23,970
|
|
|
(36,360
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
46,162
|
|
|
175,652
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
70,132
|
|
|
$
|
139,292
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(1) Unaudited Financial Statements
The accompanying unaudited condensed consolidated financial statements of New Media Investment Group Inc. and its subsidiaries (together, the “Company” or “New Media”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and applicable provisions of Regulation S-X, each as promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in comprehensive annual financial statements presented in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations.
Management believes that the accompanying condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial condition, results of operations, changes in stockholders' equity and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended
December 31, 2017
, included in the Company’s Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Media was formed as a Delaware corporation on June 18, 2013. New Media was capitalized by and issued
1,000
common shares to Newcastle Investment Corp. (“Newcastle”). New Media had no operations until November 26, 2013, when it assumed control of GateHouse Media, Inc. ("GateHouse") and Local Media Group Holdings LLC. GateHouse was determined to be the predecessor to New Media, as the operations of GateHouse comprise substantially all of the business operations of the combined companies. Newcastle owned approximately
84.6%
of New Media until February 13, 2014, upon which date Newcastle distributed the shares that it held in New Media to its shareholders on a pro rata basis.
The Company’s operating segments (Eastern US Publishing ("East"), Central US Publishing ("Central"), Western US Publishing ("West"), and BridgeTower) are aggregated into
one
reportable business segment.
The newspaper industry and the Company have experienced declining revenue and profitability over the past several years. As a result, the Company has implemented, and continues to implement, plans to reduce costs and preserve cash flow. This includes cost-reduction programs and the sale of non-core assets. The Company believes these initiatives along with cash provided by operating activities will provide it with the financial resources necessary to invest in the business and provide sufficient cash flow to enable the Company to meet its commitments. However, the Company recognized goodwill and mastheads impairments during the second quarter of 2017. Refer to Note 5 for further discussion.
Long-Lived Asset Impairment
As part of the ongoing cost reduction programs, the Company is consolidating print facilities, and during the three months ended
March 26, 2017
, the Company ceased printing operations at
four
facilities. As a result, the Company recognized an impairment charge related to retired equipment of
$6,485
during that period. There were no such facility consolidations during the three months ended April 1, 2018.
Reclassifications
Certain amounts in the prior period's condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC Topic 606"). ASC Topic 606 replaces all current U.S. GAAP guidance for revenue recognition and eliminates industry-specific guidance. The new standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations” (ASU 2016-08), which amends ASC Topic 606 and clarifies the implementation guidance on principal versus agent considerations. The Company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective approach. Refer to Note 10 for the discussion of the impact of the adoption of the new standard.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), “Leases (Topic 842)", which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset on the Company’s balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The Company intends to adopt the standard on January 1, 2019 and apply any practical expedients available to it upon adoption. The Company continues to evaluate the effect that ASU 2016-02 will have on the consolidated financial statements, but it expects the ASU will have a material effect on the Consolidated Balance Sheets due to the recognition of certain operating leases as both right-of-use assets and lease liabilities.
In November 2016, the FASB issued ASU No. 2016-18, “Restricted Cash” (Topic 230), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The Company adopted this standard on January 1, 2018 using a retrospective transition method. The impact of the new standard is that the Company’s consolidated statements of cash flows now present the change in a combined amount for both restricted and unrestricted cash and cash equivalents for all periods presented.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations - Clarifying the Definition of a Business” (Topic 805), which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this standard on January 1, 2018 and will apply the standard prospectively to determine whether certain future transactions should be accounted for as acquisitions of assets or businesses.
In March 2017, the FASB issued ASU No. 2017-07 “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (Topic 715), which provides guidance that requires an employer to report the service cost component separate from the other components of net benefit pension costs. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The Company adopted the standard on January 1, 2018 using a retrospective transition method. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). This ASU provides entities the option to reclassify tax effects to retained earnings from AOCI which are impacted by the Tax Cuts and Jobs Act (“TCJA”). The ASU is effective for fiscal years beginning after December 15, 2018 but early adoption is permitted. The Company has a full valuation allowance for all tax benefits related to AOCI and therefore there are no tax effects to be reclassified to retained earnings for the year ended December 31, 2017. Accordingly, the Company will not elect to reclassify the income tax effects of the TCJA from AOCI to retained earnings under this accounting standard.
All other issued and not yet effective accounting standards are not relevant to the Company.
(2) Acquisitions and Dispositions
2018 Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on March 31, 2018, March 6, 2018, February 28, 2018, February 23, 2018, and February 7, 2018 (“2018 Acquisitions”), which included
two
daily newspapers,
six
weekly publications, and cloud services and digital platforms, for an aggregate purchase price of
$25,755
, including estimated working capital. The acquisitions were financed from cash on hand. The rationale for the acquisitions was primarily due to the attractive nature, as applicable, of the newspaper assets and digital platforms, and their cash flows combined with cost-saving and revenue-generating opportunities available.
The Company accounted for the 2018 Acquisitions under the acquisition method of accounting for those acquisitions determined to meet the definition of a business. The net assets, including goodwill, have been recorded in the consolidated balance sheet at their fair values in accordance with Accounting Standards Codification ("ASC") 805, “Business Combinations” (“ASC 805”). The fair value determination of the assets acquired and liabilities assumed are preliminary based upon all information currently available to us and are subject to working capital and other adjustments and the completion of valuations to determine the fair market value of the tangible and intangible assets. The final calculation of working capital and other adjustments and determination of fair values for tangible and intangible assets may result in different allocations among the various asset classes from those set forth below and any such differences could be material.
The 2018 Acquisitions that were determined to be asset acquisitions were measured at the fair value of the consideration transferred on the acquisition date. Intangible assets acquired in an asset acquisition have been recognized in accordance with ASC 350 “Intangibles - Goodwill and Other”. Goodwill is not recognized in an asset acquisition.
The following table summarizes the preliminary determination of fair values of the assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
2,719
|
|
Other assets
|
35
|
|
Property, plant and equipment
|
3,101
|
|
Advertiser relationships
|
4,163
|
|
Subscriber relationships
|
4,164
|
|
Customer relationships
|
7,692
|
|
Mastheads
|
1,508
|
|
Goodwill
|
6,429
|
|
Total assets
|
29,811
|
|
Current liabilities
|
4,056
|
|
Net assets
|
$
|
25,755
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. Three basic approaches were used to determine value: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets).
The weighted average amortization periods for recently acquired amortizable intangible assets are equal to or similar to the periods presented in Note 5.
The Company recorded approximately
$33
of selling, general and administrative expenses for acquisition-related costs for the 2018 Acquisitions during the
three
months ended
April 1, 2018
.
For tax purposes, the amount of goodwill that is expected to be deductible is
$6,429
.
2017 Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on November 6, 2017, October 30, 2017, October 2, 2017, July 6, 2017, June 30, 2017, February 10, 2017, and January 31, 2017 (“2017 Acquisitions”), which included
four
business publications,
22
daily newspapers,
34
weekly publications,
24
shoppers, two customer relationship management solutions providers, a social media app and an event production business for an aggregate purchase price of
$165,053
, including working capital. The acquisitions were financed from cash on hand. The
rationale for the acquisitions was primarily due to the attractive nature, as applicable, of the newspaper assets and event production business, and cash flows combined with cost-saving and revenue-generating opportunities available.
The Company accounted for the 2017 Acquisitions under the acquisition method of accounting. The net assets, including goodwill, have been recorded in the consolidated balance sheet at their fair values in accordance with ASC 805. The fair value determination of the assets acquired and liabilities assumed are preliminary based upon all information available to us at the present time and are subject to working capital and other adjustments and subject to the completion of valuations to determine the fair market value of these tangible and intangible assets. The final calculation of working capital and other adjustments and determination of fair values for tangible and intangible assets may result in different allocations among the various asset classes from those set forth below and any such differences could be material.
The following table summarizes the fair values of the assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
20,870
|
|
Other assets
|
108
|
|
Property, plant and equipment
|
49,645
|
|
Noncompete agreements
|
532
|
|
Advertiser relationships
|
34,077
|
|
Subscriber relationships
|
26,926
|
|
Customer relationships
|
5,638
|
|
Software
|
704
|
|
Mastheads
|
9,902
|
|
Goodwill
|
37,890
|
|
Total assets
|
186,292
|
|
Current liabilities
|
21,100
|
|
Other long-term liabilities
|
139
|
|
Total liabilities
|
21,239
|
|
Net assets
|
$
|
165,053
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. Three basic approaches were used to determine value: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets).
The weighted average amortization periods for recently acquired amortizable intangible assets are equal to or similar to the periods presented in Note 5.
The Company recorded approximately
$978
of selling, general and administrative expenses for acquisition-related costs for the 2017 Acquisitions.
For tax purposes, the amount of goodwill that is expected to be deductible is
$37,890
.
Dispositions
On February 27, 2018, the Company sold a parcel of land and building located in Framingham, Massachusetts for a sale price of
$9,264
, and recognized a pre-tax gain of approximately
$3,337
, net of selling expenses, which is included in (gain) loss on sale or disposal of assets on the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss during the three months ended April 1, 2018.
On June 2, 2017, the Company completed its sale of the
Mail Tribune,
located in Medford, Oregon, for approximately
$14,700
, including working capital. As a result, a pre-tax gain of approximately
$5,400
, net of selling expenses, is included in (gain) loss on sale or disposal of assets on the Consolidated Statement of Operations and Comprehensive Loss during the year ended December 31, 2017 since the disposition did not qualify for treatment as a discontinued operation.
(3) Share-Based Compensation
The Company recognized compensation cost for share-based payments of
$1,163
and
$831
during the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively. The total compensation cost not yet recognized related to non-vested Restricted Stock Grants (“RSGs”) pursuant to the Company’s Nonqualified Stock Option and Incentive Award Plan as of
April 1, 2018
was
$5,675
, which is expected to be recognized over a weighted average period of
2.33
years through February 2021. As of
April 1, 2018
, the aggregate intrinsic value of unvested RSGs was
$6,468
.
RSG activity during the
three
months ended
April 1, 2018
was as follows:
|
|
|
|
|
|
|
|
|
Number of RSGs
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2017
|
342,264
|
|
|
$
|
16.86
|
|
Granted
|
199,966
|
|
|
16.36
|
|
Vested
|
(158,661
|
)
|
|
18.17
|
|
Forfeited
|
(6,216
|
)
|
|
16.48
|
|
Unvested at April 1, 2018
|
377,353
|
|
|
$
|
16.05
|
|
Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company elected to recognize share-based compensation expense for the number of awards that are ultimately expected to vest. The Company’s estimated forfeitures are based on historical forfeiture rates. Estimated forfeitures are reassessed periodically, and the estimate may change based on new facts and circumstances.
(4) Restructuring
Over the past several years, in furtherance of the Company’s cost-reduction and cash-preservation plans outlined in Note 1, the Company has engaged in a series of individual restructuring programs, designed primarily to right-size the Company’s employee base, consolidate facilities and improve operations, including those of recently acquired entities. These initiatives impact all of the Company’s geographic regions and are often influenced by the terms of union contracts within the region. All costs related to these programs, which primarily include severance expense, are accrued at the time of the program announcement or over the remaining service period.
Accrued restructuring costs are included in accrued expenses on the Unaudited Condensed Consolidated Balance Sheets. The activity in accrued restructuring costs for the
three
months ended
April 1, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Related Costs
|
|
Other
Costs
(1)
|
|
Total
|
Balance at December 31, 2017
|
$
|
717
|
|
|
$
|
366
|
|
|
$
|
1,083
|
|
Restructuring provision included in Integration and Reorganization
|
1,515
|
|
|
915
|
|
|
2,430
|
|
Cash payments
|
(1,396
|
)
|
|
(1,090
|
)
|
|
(2,486
|
)
|
Balance at April 1, 2018
|
$
|
836
|
|
|
$
|
191
|
|
|
$
|
1,027
|
|
|
|
(1)
|
Other costs primarily include costs to consolidate operations.
|
The accrued restructuring reserve balance is expected to be paid out over the next twelve months.
The following table summarizes the costs incurred and cash paid in connection with these restructuring programs for the
three
months ended
April 1, 2018
and
March 26, 2017
.
|
|
|
|
|
|
|
|
|
|
Three months ended April 1, 2018
|
|
Three months ended March 26, 2017
|
Severance and related costs
|
$
|
1,515
|
|
|
$
|
2,225
|
|
Other costs
|
915
|
|
|
145
|
|
Cash payments
|
(2,486
|
)
|
|
(2,114
|
)
|
(5) Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2018
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
$
|
213,157
|
|
|
$
|
40,668
|
|
|
$
|
172,489
|
|
Customer relationships
|
38,269
|
|
|
5,674
|
|
|
32,595
|
|
Subscriber relationships
|
122,034
|
|
|
22,996
|
|
|
99,038
|
|
Other intangible assets
|
10,866
|
|
|
5,405
|
|
|
5,461
|
|
Total
|
$
|
384,326
|
|
|
$
|
74,743
|
|
|
$
|
309,583
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
243,673
|
|
|
Mastheads
|
104,173
|
|
|
Total
|
$
|
347,846
|
|
|
|
|
|
December 31, 2017
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
$
|
208,995
|
|
|
$
|
37,046
|
|
|
$
|
171,949
|
|
Customer relationships
|
30,576
|
|
|
5,094
|
|
|
25,482
|
|
Subscriber relationships
|
117,870
|
|
|
20,814
|
|
|
97,056
|
|
Other intangible assets
|
10,866
|
|
|
4,634
|
|
|
6,232
|
|
Total
|
$
|
368,307
|
|
|
$
|
67,588
|
|
|
$
|
300,719
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
236,555
|
|
|
Mastheads
|
102,774
|
|
|
Total
|
$
|
339,329
|
|
|
As of
April 1, 2018
, the weighted average amortization periods for amortizable intangible assets are
14.8
years for advertiser relationships,
12.7
years for customer relationships,
13.9
years for subscriber relationships and
4.7
years for other intangible assets. The weighted average amortization period in total for all amortizable intangible assets is
14.0
years.
Amortization expense for the
three
months ended
April 1, 2018
and
March 26, 2017
was
$7,155
and
$5,602
, respectively. Estimated future amortization expense as of
April 1, 2018
, is as follows:
|
|
|
|
|
For the following fiscal years:
|
|
2018 (nine months remaining)
|
$
|
23,275
|
|
2019
|
29,118
|
|
2020
|
28,064
|
|
2021
|
27,885
|
|
2022
|
26,319
|
|
Thereafter
|
174,922
|
|
Total
|
$
|
309,583
|
|
The changes in the carrying amount of goodwill for the period from
December 31, 2017
to
April 1, 2018
are as follows:
|
|
|
|
|
Balance at December 31, 2017, net of accumulated impairments of $25,641
|
$
|
236,555
|
|
Goodwill acquired in business combinations
|
6,429
|
|
Measurement period adjustments
|
689
|
|
Balance at April 1, 2018, net of accumulated impairments of $25,641
|
$
|
243,673
|
|
The Company’s annual impairment assessment is made on the last day of its fiscal second quarter.
The Company performed its annual assessment for possible impairment of the carrying value of goodwill and indefinite-lived intangible assets as of June 25, 2017. As a result of this assessment, the Company recorded a goodwill impairment totaling
$25,641
in two of its reporting units, Central and West, during the three months ended June 25, 2017. This impairment was primarily attributable to continuing economic pressures in the newspaper industry and a decline in the Company’s stock price, and represented a full impairment of the goodwill then recorded in the West reporting unit and a partial impairment of the goodwill recorded in the Central reporting unit. In addition, the Company recorded a partial impairment of the carrying value of mastheads, totaling
$1,807
, in the West reporting unit in the same period.
As of September 24, 2017, December 31, 2017, and April 1, 2018, the Company performed a review of potential impairment indicators noting that its financial results and forecast have not changed materially since the annual impairment assessment, and it was determined that no indicators of impairment were present. The Company will perform its annual assessment for possible impairment of the carrying value of goodwill and other indefinite-lived intangible assets as of July 1, 2018.
The newspaper industry and the Company have experienced declining same store revenue and profitability over the past several years. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, the Company may be required to record impairment charges in the future.
(6) Indebtedness
New Media Credit Agreement
On June 4, 2014, New Media Holdings II LLC (the “New Media Borrower”), a wholly owned subsidiary of New Media, entered into a credit agreement (the “New Media Credit Agreement”) among the New Media Borrower, New Media Holdings I LLC (“Holdings I”), the lenders party thereto, RBS Citizens, N.A. and Credit Suisse Securities (USA) LLC as joint lead arrangers and joint bookrunners, Credit Suisse AG, Cayman Islands Branch as syndication agent and Citizens Bank of Pennsylvania as administration agent which provided for (i) a
$200,000
senior secured term facility (the “Term Loan Facility” and any loan thereunder, including as part of the Incremental Facility, “Term Loans”), (ii) a
$25,000
senior secured revolving credit facility, with a
$5,000
sub-facility for letters of credit and a
$5,000
sub-facility for swing loans, (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facilities”) and (iii) the ability for the New Media Borrower to request one or more new commitments for term loans or revolving loans from time to time up to an aggregate total of
$75,000
(the “Incremental Facility”) subject to certain conditions. On June 4, 2014, the New Media Borrower borrowed
$200,000
under the Term Loan Facility (the “Initial Term Loans”). As of
April 1, 2018
,
$0
was drawn under the Revolving Credit Facility. The Term Loans mature on
July 14, 2022
and the maturity date for the Revolving Credit Facility is
July 14, 2021
. The New Media Credit Agreement was amended:
•
on September 3, 2014, to provide for additional term loans under the Incremental Facility in an aggregate principal amount of
$25,000
(the “2014 Incremental Term Loan”);
•
on November 20, 2014, to increase the amount of the Incremental Facility that may be requested after the date of the amendment from
$75,000
to
$225,000
;
•
on January 9, 2015, to provide for
$102,000
in additional term loans (the “2015 Incremental Term Loan”) and
$50,000
in additional revolving commitments (the “2015 Incremental Revolver”) under the Incremental Facility and to make certain amendments to the Revolving Credit Facility in connection with the purchase of the assets of Halifax Media;
•
on February 13, 2015, to provide for the replacement of the existing term loans under the Term Loan Facility (including the 2014 Incremental Term Loan and the 2015 Incremental Term Loan) with a new class of replacement term loans;
•
on March 6, 2015, to provide for
$15,000
in additional revolving commitments under the Incremental Facility;
•
on May 29, 2015, to provide for
$25,000
in additional term loans under the Incremental Facility;
•
on July 14, 2017, to (i) extend the maturity date of the outstanding term loans under the Term Loan Facility to
July 14, 2022
, (ii) extend the maturity date of the Revolving Credit Facility to
July 14, 2021
, (iii) provide for
$20,000
in additional term loans (the “2017 Incremental Term Loan”) under the Incremental Facility and (iv) increase the amount of the Incremental Facility that may be requested on or after the date of the amendment (inclusive of the 2017 Incremental Term Loan) to
$100,000
; and
•
on February 16, 2018, to provide for (i)
$50,000
in additional term loans under the Term Loan Facility and (ii) a
1.00%
prepayment premium for any prepayments of the Term Loans made in connection with certain repricing transactions effected within six months of the date of the amendment.
In connection with the February 16, 2018 amendment, the Company incurred approximately
$592
of fees and expenses, of which
$500
were capitalized in deferred financing costs and will be amortized over the term of the Term Loan Facility. The related third party fees of
$92
were expensed during the quarter as this amendment was determined to be a debt modification for accounting purposes. In addition, the Company recognized
$250
of original issue discount, which will also be amortized over the term of the Term Loan Facility.
In connection with the July 14, 2017 amendment, the Company incurred approximately
$6,605
of fees and expenses. There was one lender who had a significant change in the terms of the Term Loan Facility; the difference between the present value of the cash flows after this amendment and the present value of the cash flows before this amendment was more than
10%
. This portion of the transaction was accounted for as an extinguishment under ASC Subtopic 470-50, “Debt Modifications and Extinguishments”. Deferred fees and expenses of
$1,009
previously allocated to that lender were written off to loss on early extinguishment of debt. Additionally, the current fees of
$2,423
attributed to this lender were expensed to loss on early extinguishment of debt. The third party expenses of
$121
apportioned to the lender were capitalized. In addition,
$1,335
fees and expenses allocated to lenders that exited the facility were written off to loss on early extinguishment of debt. The remainder of this amendment was treated as a debt modification for accounting purposes. The consent fees of
$3,020
for the lenders other than the one mentioned above were capitalized and will be amortized over the term of the Term Loan Facility. The third party fees of
$606
related to these lenders were expensed. Additionally, the fees and expenses allocated to the Revolving Credit Facility of
$435
were capitalized as this component of the amendment was accounted for as a debt modification.
Borrowings under the Term Loan Facility bear interest, at the New Media Borrower’s option, at a rate equal to either (i) an adjusted Eurodollar rate, plus an applicable margin equal to
6.25%
per annum (subject to a floor of
1.00%
) or (ii) an adjusted base rate, plus an applicable margin equal to
5.25%
per annum (subject to a floor of
2.00%
). The New Media Borrower currently uses the Eurodollar rate option.
Borrowings under the Revolving Credit Facility bear interest, at the New Media Borrower’s option, at a rate equal to either (i) an adjusted Eurodollar rate, plus an applicable margin equal to
5.25%
per annum or (ii) an adjusted base rate, plus an applicable margin equal to
4.25%
per annum, with a step down based on achievement of a certain total leverage ratio. The New Media Borrower currently uses the Eurodollar rate option.
As of
April 1, 2018
, the New Media Credit Agreement had a weighted average interest rate of
8.13%
.
The Senior Secured Credit Facilities are unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrower (collectively, the “Guarantors”) and are required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. All obligations under the New Media Credit Agreement are secured, subject to certain exceptions, by substantially all of the New Media Borrower’s assets and the assets of the Guarantors.
Repayments made under the Term Loans are equal to
1.0%
annually of the original principal amount in equal
quarterly
installments for the life of the Term Loans, with the remainder due at maturity. The New Media Borrower is permitted to make voluntary prepayments at any time without premium or penalty, except in the case of prepayments made in connection with certain repricing transactions with respect to the Term Loans effected within six months of February 16, 2018, to which a
1.00%
prepayment premium applies.
The New Media Credit Agreement contains customary representations and warranties and affirmative covenants and negative covenants applicable to Holdings I, the New Media Borrower and the New Media Borrower's subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, dividends and other distributions, and events of default. The New Media Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of
3.25
to 1.00.
As of
April 1, 2018
, the Company is in compliance with all of the covenants and obligations under the New Media Credit Agreement.
Advantage Credit Agreements
In connection with the purchase of the assets of Halifax Media, which was completed on January 9, 2015, certain subsidiaries of the Company (the “Advantage Borrowers”) agreed to assume all of the obligations of Halifax Media and its affiliates in respect of each of (i) that certain Consolidated Amended and Restated Credit Agreement dated January 6, 2012 among Halifax Media Acquisition LLC, Advantage Capital Community Development Fund XXVIII, L.L.C., and Florida Community Development Fund II, L.L.C. (as amended, the “Halifax Florida Credit Agreement”) and (ii) that certain Credit Agreement dated June 18, 2013 between Halifax Alabama, LLC and Southeast Community Development Fund V, L.L.C. (the “Halifax Alabama Credit Agreement” and, together with the Halifax Florida Credit Agreement, the “Advantage Credit Agreements”), respectively (the debt under the Halifax Florida Credit Agreement, the “Advantage Florida Debt”; the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”). The
$10,000
outstanding balance under the Halifax Florida Credit Agreement was fully repaid on December 31, 2016.
The Halifax Alabama Credit Agreement is in the principal amount of
$8,000
and bears interest at the rate of LIBOR plus
6.25%
per annum (with a minimum of
1%
LIBOR) payable quarterly in arrears, maturing on March 31, 2019. The Advantage Alabama Debt is secured by a perfected second priority security interest in all the assets of the Advantage Borrowers and certain other subsidiaries of the Company, subject to the limitation that the maximum amount of secured obligations is
$15,000
. The Advantage Alabama Debt is unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and is required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Alabama Debt is subordinated to the Senior Secured Credit Facilities pursuant to an intercreditor agreement.
The Halifax Alabama Credit Agreement contains covenants substantially consistent with those contained in the New Media Credit Agreement in addition to those required for compliance with the New Markets Tax Credit program. The Advantage Borrowers are permitted to make voluntary prepayments at any time without premium or penalty and are subject to customary mandatory prepayment events including from proceeds from asset sales and certain debt obligations.
The Halifax Alabama Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Advantage Borrowers and certain of the Company's subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The Halifax Alabama Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of
3.75
to 1.00. The Halifax Alabama Credit Agreement contains customary events of default.
As of
April 1, 2018
, the Company is in compliance with all of the covenants and obligations under the Halifax Alabama Credit Agreement.
Fair Value
The fair value of long-term debt under the Senior Secured Credit Facilities and the Advantage Alabama Debt was estimated at
$417,319
as of
April 1, 2018
, based on discounted future contractual cash flows and a market interest rate adjusted for necessary risks, including the Company’s own credit risk as there are no rates currently observable in publicly traded debt markets of similar risk, terms and average maturities. Accordingly, the Company’s long-term debt under the Senior Secured Credit Facilities is classified within Level 3 of the fair value hierarchy.
Payment Schedule
As of
April 1, 2018
, scheduled principal payments of outstanding debt are as follows:
|
|
|
|
|
2018 (nine months remaining)
|
$
|
2,062
|
|
2019
|
12,124
|
|
2020
|
4,124
|
|
2021
|
4,124
|
|
2022
|
394,885
|
|
|
417,319
|
|
Less: Current portion of long-term debt
|
12,124
|
|
Remaining original issue discount
|
3,787
|
|
Deferred financing costs
|
4,898
|
|
Long-term debt
|
$
|
396,510
|
|
For further information, see Note 9 to the Consolidated Financial Statements, “Indebtedness,” in the Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
(7) Related Party Transactions
As of December 29, 2013, Newcastle (an affiliate of FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC ("Fortress")) beneficially owned approximately
84.6%
of the Company’s outstanding common stock. On February 13, 2014, Newcastle completed the spin-off of the Company. On February 14, 2014, New Media became a separate, publicly traded company trading on the NYSE under the ticker symbol “NEWM”. As a result of the spin-off and listing, the fees included in the Management Agreement with the Company’s Manager became effective. As of
April 1, 2018
, Fortress and its affiliates owned approximately
1.3%
of the Company’s outstanding stock and approximately
39.5%
of the Company’s outstanding warrants. The Company’s Manager (or its affiliates) holds options to purchase
2,214,811
shares of the Company’s common stock as of
April 1, 2018
. During the
three
months ended
April 1, 2018
and
March 26, 2017
, Fortress and its affiliates were paid
$252
and
$239
in dividends, respectively.
In addition, the Company’s Chairman, Wesley Edens, is also a member of the board of directors of FIG LLC and a Principal, the Co-Chief Executive Officer and a member of the board of directors of Fortress. The Company does not pay Mr. Edens a salary or any other form of compensation.
On February 28, 2018, we acquired substantially all of the assets, consisting primarily of publications and related websites, of Holden Landmark Corporation ("Holden"), a Massachusetts corporation owned by the Company’s Chief Operating Officer, for
$1,225
plus working capital. The Company recognized revenue from Holden of
$77
and
$140
during the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively, which is included in commercial printing and other on the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Company’s Chief Executive Officer and Chief Financial Officer are employees of Fortress, and their salaries are paid by Fortress.
Management Agreement
On November 26, 2013, the Company entered into a management agreement with the Manager (as amended and restated, the “Management Agreement”). The Management Agreement requires the Manager to manage the Company’s business affairs subject to the supervision of the Company’s board of directors (the “Board of Directors” or "Board"). On March 6, 2015, the Company’s independent directors on the Board approved an amendment to the Management Agreement.
The Management Agreement had an initial three-year term and will be automatically renewed for one-year terms thereafter unless terminated either by the Company or the Manager. From the commencement date of "regular way" trading of the Company’s Common Stock on a major U.S. national securities exchange (the “Listing”), the Manager is (a) entitled to receive from the Company a management fee, (b) eligible to receive incentive compensation that is based on the Company’s performance and (c) eligible to receive options to purchase New Media Common Stock upon the successful completion of an offering of shares of the Company’s Common Stock or any shares of preferred stock with an exercise price equal to the price per share paid by the public or other ultimate purchaser in the offering, see Note 9. In addition, the Company is obligated to reimburse certain expenses incurred by the Manager. The Manager is also entitled to receive a termination fee from the Company under certain circumstances.
The Company recognized
$2,367
and
$2,896
for management fees and
$869
and
$0
for incentive compensation within selling, general and administrative expense during the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively. The Company paid to FIG LLC
$2,657
and
$4,350
in management fees and
$8,374
and
$5,915
in incentive compensation during the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively. In addition, the Company recognized expense reimbursement amounts of approximately
$444
and
$550
during the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively. The Company had an outstanding liability for all management agreement related fees of
$3,344
and
$2,680
at
April 1, 2018
and
December 31, 2017
, respectively, included in accrued expenses.
Registration Rights Agreement with Omega
The Company entered into a registration rights agreement (the “Omega Registration Rights Agreement”) with Omega Advisors, Inc. and its affiliates (collectively, “Omega”). Under the terms of the Omega Registration Rights Agreement, upon request by Omega the Company is required to use commercially reasonable efforts to file a resale shelf registration statement providing for the registration and sale on a continuous or delayed basis by Omega of its New Media Common Stock acquired in connection with the restructuring of GateHouse (the “Registrable Securities”) (the “Shelf Registration”), subject to customary exceptions and limitations. Omega is entitled to initiate up to three offerings or sales with respect to some or all of the Registrable Securities pursuant to the Shelf Registration.
Omega may only exercise its right to request Shelf Registrations if Registrable Securities to be sold pursuant to such Shelf Registration are at least
3%
of the then-outstanding New Media Common Stock.
(8) Income Taxes
Income tax expense includes Federal and state income taxes and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a full valuation allowance since it is more likely than not that a tax benefit will not be realized.
The Company recorded an income tax benefit of
$116
and
$6,331
for the
three
months ended
April 1, 2018
and
March 26, 2017
, respectively, using projected effective tax rates of approximately
20%
and
63%
, respectively. The 2017 projected effective tax rate of
63%
was primarily due to deferred tax liabilities attributable to indefinite lived intangible assets, which cannot be offset by deferred tax assets.
The Company performs a quarterly assessment of its deferred tax assets and liabilities. ASC Topic 740, “Income Taxes” (“ASC 740”) limits the ability to use future taxable income to support the realization of deferred tax assets when a company has experienced a history of losses even if future taxable income were supported by detailed forecasts and projections.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are projected to become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company concluded that during the
three
months ended
April 1, 2018
, a net increase to the valuation allowance of
$69
is necessary to offset additional deferred tax assets (primarily the tax benefit of the net operating loss). All of this amount was recognized through the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
The realization of the remaining deferred tax assets is primarily dependent on their scheduled reversals. Any changes to deferred taxes may require an additional valuation allowance. Any increase or decrease in the valuation allowance could result in an increase or decrease in income tax expense in the period of adjustment.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (loss) for the year, projections of the proportion of income or loss, permanent and temporary differences, and an assessment of the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, or as additional information is obtained.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The Company recorded a tax benefit of
$4,200
during the year ended
December 31, 2017
which was primarily attributable to a re-measurement of deferred tax assets and deferred tax liabilities. The tax benefit was also attributable to a valuation allowance release of
$800
related to an alternative minimum tax credit that is refundable in 2021 or earlier. As of
December 31, 2017
, we made a reasonable estimate of the effects on the change in deferred tax balances under the TCJA. These amounts are provisional and subject to change as the determination of the impact of the income tax effects may require additional analysis and further interpretation of the TCJA from yet to be issued FASB guidance and U.S. Treasury regulations.
In addition, the TCJA imposes a new limit on interest expense deductions with respect to any debt outstanding on January 1, 2018. We have evaluated the effect of this rule and do not expect that the Company will be limited in its ability to claim interest expense deductions at this time although limitations may apply after 2021.
For the
three
months ended
April 1, 2018
, the difference between the expected tax benefit at a statutory rate of
21%
(
$164
) and the recorded tax benefit of
$116
is primarily attributable to the tax effect of the federal valuation allowance and other charges of
$48
.
The Company and its subsidiaries file a U.S. federal consolidated income tax return. The U.S. federal and state statute of limitations generally remains open for the 2013 tax year and beyond. The Company’s 2013 short tax year Federal returns were examined by the Internal Revenue Service with no changes made to the returns filed.
(9) Equity
Loss Per Share
The following table sets forth the computation of basic and diluted loss per share (“EPS”):
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
April 1, 2018
|
|
March 26, 2017
|
Numerator for loss per share calculation:
|
|
|
|
Net loss
|
$
|
(665
|
)
|
|
$
|
(3,685
|
)
|
Denominator for loss per share calculation:
|
|
|
|
Basic weighted average shares outstanding
|
52,934,640
|
|
|
53,186,746
|
|
Effect of dilutive securities:
|
|
|
|
Stock Options and Restricted Stock
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
52,934,640
|
|
|
53,186,746
|
|
For the
three
months ended
April 1, 2018
and
March 26, 2017
, the Company excluded
1,362,479
and
1,362,479
common stock warrants,
377,353
and
375,786
RSGs, and
2,214,811
and
2,307,562
stock options, respectively, from the computation of diluted income per share because their effect would have been antidilutive.
Equity
On May 17, 2017, the Board of Directors authorized the repurchase of up to
$100,000
of the Company's common stock ("Share Repurchase Program") over the next
12 months
. Under the Share Repurchase Program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions. During the three months ended June 25, 2017, the Company repurchased
391,120
shares at a weighted average price of $
12.77
per share for a total cost, including transaction costs, of
$5,001
. The shares were subsequently retired. The cost paid to acquire the shares in excess of par was recorded in additional paid-in capital in the consolidated balance sheet.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the
652,311
remaining options granted to the Manager in 2014 were equitably adjusted during the three months ended April 1, 2018 from $
14.37
to
$12.95
as a result of the 2017 return of capital distributions.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the
700,000
options granted to the Manager in 2015 were equitably adjusted during the three months ended April 1, 2018 from
$20.36
to
$18.94
as a result of the 2017 return of capital distributions.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the
862,500
options granted to the Manager in 2016 were equitably adjusted during the three months ended April 1, 2018 from $
16.00
to $
13.24
as a result of the 2017 return of capital distributions.
During the three months ended June 25, 2017, the Company issued
16,605
shares of its common stock to its Non-Officer Directors to settle a liability of
$225
for 2016 services.
During the three months ended April 1, 2018, the Company issued
13,008
shares of its common stock to its Non-Officer Directors to settle a liability of
$225
for 2017 services.
The following table includes additional information regarding the Manager stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value ($000)
|
Outstanding at December 31, 2017
|
2,214,811
|
|
|
$
|
4.08
|
|
|
$
|
16.90
|
|
|
7.7
|
|
$
|
2,245
|
|
Outstanding at April 1, 2018
|
2,214,811
|
|
|
$
|
4.08
|
|
|
$
|
14.96
|
|
|
7.4
|
|
$
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 1, 2018
|
1,837,311
|
|
|
|
|
$
|
15.31
|
|
|
7.2
|
|
$
|
4,625
|
|
Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component for the
three
months ended
April 1, 2018
and
March 26, 2017
are outlined below.
|
|
|
|
|
|
Net actuarial loss
and prior service
cost
(1)
|
For the three months ended April 1, 2018:
|
|
Balance at December 31, 2017
|
$
|
(5,461
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(67
|
)
|
Net current period other comprehensive income, net of taxes
|
(67
|
)
|
Balance at April 1, 2018
|
$
|
(5,528
|
)
|
For the three months ended March 26, 2017:
|
|
Balance at December 27, 2016
|
$
|
(3,977
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
Amounts reclassified from accumulated other comprehensive loss
|
28
|
|
Net current period other comprehensive income, net of taxes
|
28
|
|
Balance at March 26, 2017
|
$
|
(3,949
|
)
|
|
|
(1)
|
This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost. See Note 11.
|
The following table presents reclassifications out of accumulated other comprehensive loss for the
three
months ended
April 1, 2018
and
March 26, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated
Other Comprehensive Loss
|
|
|
|
Three months ended April 1, 2018
|
|
Three months ended March 26, 2017
|
|
Affected Line Item in the
Consolidated Statements
of Operations and
Comprehensive Loss
|
Amortization of unrecognized (gain) loss
|
$
|
(67
|
)
|
|
$
|
28
|
|
(1)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(67
|
)
|
|
28
|
|
|
(Loss) income before income taxes
|
Income tax expense
|
—
|
|
|
—
|
|
|
Income tax benefit
|
Amounts reclassified from accumulated other comprehensive loss, net of taxes
|
$
|
(67
|
)
|
|
$
|
28
|
|
|
Net (loss) income
|
|
|
(1)
|
This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost. See Note 11.
|
Dividends
During the
three
months ended
March 26, 2017
, the Company paid dividends of
$0.35
per share of Common Stock of New Media.
During the
three
months ended
April 1, 2018
, the Company paid dividends of
$0.37
per share of Common Stock of New Media.
(10) Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the previously applicable accounting standards under ASC Topic 605.
The adoption of ASC Topic 606 resulted in no change to accumulated deficit as of January 1, 2018. Revenue and expenses related to certain license agreements and recognized during the three months ended
April 1, 2018
decreased by
$1,420
as a result of applying ASC Topic 606.
Summary of Accounting Policies for Revenue Recognition
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are recognized as performance obligations that are satisfied either at a point in time, such as when an advertisement is published, or over time, such as customer subscriptions.
The Company’s unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss presents revenues disaggregated by revenue type. Sales taxes and other usage-based taxes are excluded from revenues.
Advertising Revenues
The Company generates advertising revenues primarily by delivering advertising in local publications including newspapers and websites. Advertising revenues are categorized as local retail, local classified, online and national. Revenue is recognized upon publication of the advertisement.
Circulation Revenues
Circulation revenues are derived from print and digital subscriptions as well as single copy sales at retail stores, vending racks and boxes. Circulation revenues from subscribers are generally billed to customers at the beginning of the subscription period and are typically recognized on a straight-line basis over the terms of the related subscriptions. The term of customer
subscriptions normally range from three to twelve months. Circulation revenues from single-copy income are recognized based on the date of publication, net of provisions for related returns.
Commercial Printing and Other Revenues
The Company provides commercial printing services to third parties as a means to generate incremental revenue and utilize excess printing capacity. These customers consist primarily of other publishers that do not have their own printing presses and do not compete with other GateHouse publications. The Company also prints other commercial materials, including flyers, business cards and invitations. Revenue is recognized upon delivery.
The Other Revenues category includes UpCurve, Inc. (“UpCurve”), formerly referred to as “Propel Business Services,” the Company's SMB solutions provider. UpCurve provides digital marketing and business services for small to medium sized businesses. Other Revenues also include GateHouse Live, the Company’s events business. A significant judgment management must make with respect to UpCurve revenue recognition is determining whether the Company is the principal or agent for certain licensing transactions. Under ASC Topic 606, the principal in the relationship is the entity that controls the specified goods or services. An entity may have control if (i) it is primarily responsible for fulfilling the promise to provide the good or service; (ii) it has inventory risk before or after the good or service has been transferred to the customer; or (iii) it has the discretion in establishing the price for the good or service. The Company has determined that UpCurve is the principal in the relationships for those transactions in which the goods or services are customized for the customer, and reports the related revenues on a gross basis. The Company has determined that UpCurve is the agent in the relationships for those transactions in which the Company resells the goods or services with no customization and reports these revenues on a net basis.
As a result of the change from gross to net reporting for certain licensing transactions, the Company’s commercial printing and other revenues, and operating expenses were both approximately
$1,420
lower in the three months ended
April 1, 2018
than the amounts that would have been reported under previously applicable accounting standards.
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations such as bundled print and digital subscriptions. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers or using expected cost plus margin.
Contract Balances
The Company records deferred revenues when cash payments are received in advance of the Company’s performance. The most significant unsatisfied performance obligation is the delivery of publications to subscription customers. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next three to twelve months in accordance with the terms of the subscriptions. The increase in the deferred revenue balance for the three months ended April 1, 2018 is primarily driven by acquisitions and cash payments received in advance of satisfying our performance obligations, partially offset by revenues recognized during the quarter. For the three month period ended
April 1, 2018
, the Company recognized approximately
$52,000
of revenues that were included in the deferred revenue balance as of
December 31, 2017
.
Our payment terms vary by the type and location of the customer and the products or services offered. The period between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company’s allowance for doubtful accounts is based upon several factors including the length of time the receivables are past due, historical payment trends and current economic factors. The Company recorded a reserve for expected impairment losses on receivables of
$2,850
and
$1,706
during the three months ended
April 1, 2018
and
March 26, 2017
, respectively. Impairment losses are recorded within the selling, general and administrative expenses in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.
Practical Expedients and Exemptions
The Company expenses sales commissions or other costs to obtain contracts when incurred because the amortization period is generally one year or less. These costs are recorded within selling, general and administrative expenses.
The Company does not disclose unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
(11) Pension and Postretirement Benefits
As a result of the Enterprise News Media LLC (in 2005), Copley Press, Inc. (in 2007), and Times Publishing Company (in 2016) acquisitions, the Company maintains
two
pension and several postretirement medical and life insurance plans which cover certain employees. The Company uses the accrued benefit actuarial method and best estimate assumptions to determine pension costs, liabilities and other pension information for defined benefit plans.
The George W. Prescott Company pension plan, assumed in the Enterprise News Media, LLC acquisition, was amended to freeze all future benefit accruals by December 31, 2008, except for a select group of union employees whose benefits were frozen during 2009. During 2008, the medical and life insurance benefits were frozen, and the plan was amended to limit future benefits to a select group of active employees under the Enterprise News Media, LLC postretirement medical and life insurance plan. Benefits under the postretirement medical and life insurance plan assumed with the Copley Press, Inc. acquisition are only available to Brush-Moore employees hired before January 1, 1976. The Times Publishing Company pension plan was frozen prior to the acquisition.
The following provides information on the pension plans and postretirement medical and life insurance plans for the
three
months ended
April 1, 2018
and
March 26, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
April 1, 2018
|
|
Three months ended
March 26, 2017
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Components of net periodic benefit costs:
|
|
|
|
|
|
|
|
Service cost
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
157
|
|
|
$
|
1
|
|
Interest cost
|
700
|
|
|
21
|
|
|
780
|
|
|
27
|
|
Expected return on plan assets
|
(1,062
|
)
|
|
—
|
|
|
(1,045
|
)
|
|
—
|
|
Amortization of unrecognized loss (gain)
|
67
|
|
|
27
|
|
|
44
|
|
|
(16
|
)
|
Total
|
$
|
(145
|
)
|
|
$
|
48
|
|
|
$
|
(64
|
)
|
|
$
|
12
|
|
For the
three
months ended
April 1, 2018
and
March 26, 2017
, the Company recognized a total of
$(97)
and
$(52)
in pension and other postretirement benefits, respectively. The service cost component is included within Operating Costs and the other components of net benefit cost are included within Other Income in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. During the
three
months ended
April 1, 2018
, the Company contributed
$107
to the pension plans. The Company is expected to pay an additional
$1,658
in employer contributions to the pension plans during the remainder of the current fiscal year.
(12) Fair Value Measurement
The Company measures and records in the accompanying condensed consolidated financial statements certain assets and liabilities at fair value on a recurring basis. ASC Topic 820 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs).
These inputs are prioritized as follows:
|
|
•
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs; and
|
|
|
•
|
Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop their own assumptions about how market participants price the asset or liability.
|
The valuation techniques that may be used to measure fair value are as follows:
|
|
•
|
Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
|
|
|
•
|
Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts;
|
|
|
•
|
Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
|
The following table provides information for the Company’s major categories of financial assets and liabilities measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Fair Value
Measurements
|
As of April 1, 2018
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
67,026
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
67,026
|
|
Restricted cash
|
3,106
|
|
|
—
|
|
|
—
|
|
|
3,106
|
|
Total
|
$
|
70,132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,132
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
43,056
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,056
|
|
Restricted cash
|
3,106
|
|
|
—
|
|
|
—
|
|
|
3,106
|
|
Total
|
$
|
46,162
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,162
|
|
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).
For the 2018 acquisitions and 2017 acquisitions the Company recorded the assets and liabilities under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their fair value. Property, plant and equipment was valued using Level 2 inputs, and intangible assets were valued using Level 3 inputs. Refer to Note 2 for discussion of the valuation techniques, significant inputs, assumptions utilized, and the fair value recognized.
During the quarter ended June 25, 2017, certain goodwill and mastheads were written down to their implied fair value using Level 3 inputs. The valuation techniques and significant inputs and assumptions utilized to measure fair value are discussed in Note 5.
Refer to Note 6 for the discussion on the fair value of the Company’s total long-term debt.
(13) Commitments and Contingencies
The Company is and may become involved from time to time in legal proceedings in the ordinary course of its business, including but not limited to with respect to such matters as libel, invasion of privacy, intellectual property infringement, wrongful termination actions and complaints alleging employment discrimination, and regulatory investigations and inquiries. In addition, the Company is involved from time to time in governmental and administrative proceedings concerning employment, labor, environmental and other claims. Insurance coverage mitigates potential loss for certain of these matters. Historically, such claims and proceedings have not had a material adverse effect on the Company’s condensed consolidated results of operations or financial position. Although the Company is unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, the Company does not expect its current and any threatened legal proceedings to have a material adverse effect on the Company’s business, financial position or consolidated results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on the Company’s financial results.
Restricted cash at
April 1, 2018
and
December 31, 2017
, in the aggregate amount of
$3,106
and
$3,106
, respectively, is used as cash collateral for certain business operations.
(14) Subsequent Events
Equity
During April 2018, the Company completed the sale of
6,900,000
shares of the Company's common stock, including
25,000
shares of the Company's common stock sold to an officer of the Company. The estimated net proceeds of the sale were approximately
$110,649
. For the purpose of compensating the Manager for its successful efforts in raising capital for the Company, in connection with this offering, the Company granted options to the Manager to purchase
690,000
shares of the Company’s common stock at a price of
$16.45
, which had an aggregate fair value of approximately
$1,408
as of the grant date. The assumptions used in an option valuation model to value the options were: a
2.8%
risk-free rate, a
8.0%
dividend yield,
28.1%
volatility and an expected life of
10
years.
On May 1, 2018, the Board of Directors authorized an extension of the Company’s previously announced Share Repurchase Program through May 18, 2019. Under the Share Repurchase Program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions.
Acquisitions
On April 2, 2018, the Company completed the acquisition of the
Austin American-Statesman
and its niche publications and companion websites from Cox Media Group, LLC (“Cox”) for
$47,500
, plus working capital. We funded the acquisition with cash on hand. The
Austin American-Statesman
circulates in central Texas with a daily circulation of approximately
85
.
On April 11, 2018, the Company reached an agreement to purchase substantially all of the publishing and related assets of the
Akron Beacon Journal
from Black Press, Ltd. (“Black Press”) for
$16,000
, plus working capital. In a separate transaction, also on April 11, 2018, the Company agreed to sell substantially all of the publishing and related assets of GateHouse Media Alaska Holdings, Inc. to Black Press for
$2,000
, plus working capital. These amounts have been reclassified to assets held for sale, a component of other current assets, at April 1, 2018.
On May 1, 2018, the Company completed the acquisition of
The Palm Beach Post
and the
Palm Beach Daily News
, in addition to several niche publications and companion websites, from Cox Media Group, LLC for
$49,250
, plus working capital.
The Palm Beach Post
distributes in Palm Beach County and southern Martin County, Florida with daily and Sunday circulation of approximately
80
and
102
, respectively.
Dividends
On
May 3, 2018
, the Company announced a
first
quarter
2018
cash dividend of
$0.37
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend will be paid on
May 16, 2018
, to shareholders of record as of the close of business on
May 14, 2018
.
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Media Investment Group Inc. and its subsidiaries (“New Media”, “Company”, “we”, “us” or “our”). The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included herein, and with Part II, Item 1A, “Risk Factors.”
Overview
New Media supports small to mid-size communities by providing locally-focused print and digital content to its consumers and premier marketing and technology solutions for our small and medium businesses partners. We have a particular focus on owning and acquiring strong local media assets in small to mid-size markets. With our collection of assets, we focus on two large business categories: consumers and small to medium-sized businesses (“SMBs”).
Our portfolio of media assets today spans across 566 markets and 38 states. Our products include 684 community print publications, 566 websites and two yellow page directories. As of
April 1, 2018
, we reach over 23 million people per week and serve over 219,000 business customers.
We are focused on growing our consumer revenues primarily through our penetration into the local consumer market that values comprehensive local news and receives its news primarily from our products. We believe our rich local content, our strong media brands, and multiple platforms for delivering content will impact our reach to local consumers leading to growth in subscription income. We also believe our focus on smaller markets will allow us to be a leading provider of valuable, unique local news to consumers in those markets. We believe that one result of our local consumer penetration in these smaller markets will be transaction revenues as we link consumers with local businesses. For our SMB business category, we focus on leveraging our strong local media brands, our in-market sales force and our high consumer penetration rates with a variety of products and services that we believe will help SMBs expand their marketing, advertising and other digital lead generation platforms. We also believe our strong position in our local markets will allow us to develop other products that will be of value to our SMBs in helping them run and grow their businesses.
Our business strategy is to be the preeminent provider of local news, information, advertising, and digital and business services in the markets we operate in. We aim to grow our business organically through both our consumer and SMB strategies. We also plan to continue to pursue strategic acquisitions of high-quality local media and digital marketing assets at attractive valuation levels. Finally, we intend to distribute a portion of our free cash flow generated from operations or other sources as a dividend to stockholders through a quarterly dividend, subject to satisfactory financial performance, approval by our board of directors (the “Board of Directors” or "Board") and dividend restrictions in the New Media Credit Agreement (as defined below). The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s U.S. generally accepted accounting principles (“GAAP”) net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results.
We believe that our focus on owning and operating leading local content oriented media properties in small to mid-size markets puts us in a position to better execute on our strategy. We believe that being the leading provider of local news and information in the markets in which we operate and distributing that content across multiple print and digital platforms, gives us an opportunity to grow our audiences and reach. Further, we believe our strong local media brands and our market presence gives us the opportunity to expand our advertising and lead generation products with local business customers.
For our SMB category, we focus on leveraging our strong local media brands, our in-market sales force and our high consumer penetration rates with a variety of technology oriented products and services that solve acute pain points for SMBs. Central to this business strategy is our wholly-owned subsidiary UpCurve, Inc. ("UpCurve"). UpCurve provides two broad categories of services: ThriveHive, previously known as Propel Marketing, which provides marketing services for every SMB regardless of size, and UpCurve Cloud which offers cloud-based products with expert migration, integration, and support. ThriveHive is designed to offer a complete set of turn-key digital marketing and business services to SMBs that provide transparent results to the business owners. In 2016, we acquired a turn-key proprietary software application that enables SMB owners to run their own digital and contact marketing campaigns.
We launched the UpCurve products in 2012 and have seen rapid growth since then. We believe UpCurve, combined with our strong local brands and in-market sales force, is positioned to continue to be a key component to our overall organic growth strategy. The opportunity UpCurve aims to seize upon is as follows:
There were approximately 29.6 million SMBs in the U.S. in 2014 according to the U.S. Small Business Administration. Of these, approximately 29.0 million had 20 employees or fewer.
Many of the owners and managers of these SMBs do not have the resources or expertise to navigate the fast evolving digital marketing and cloud based service sectors, but are increasingly aware of the need to embrace the digital disruption to their business model.
We believe our local media properties and local sales infrastructure are uniquely positioned to sell these digital marketing and business services to local business owners and give us distinct advantages, including:
|
|
•
|
our strong and trusted local brands, with 85% of our daily newspapers having published local content for more than 100 years;
|
|
|
•
|
our ability to market through our print and online properties, driving branding and traffic; and
|
|
|
•
|
our more than 1,330 local, direct, in-market sales professionals with long standing relationships with small businesses in the communities we serve.
|
Our core products include:
|
|
•
|
144 daily newspapers with total paid circulation of approximately 1.5 million;
|
|
|
•
|
333 weekly newspapers (published up to three times per week) with total paid circulation of approximately 349,000 and total free circulation of approximately 2.2 million;
|
|
|
•
|
137 “shoppers” (generally advertising-only publications) with total circulation of approximately 3.2 million;
|
|
|
•
|
566 locally-focused websites, which extend our businesses onto the internet and mobile devices with approximately 295 million page views per month;
|
|
|
•
|
two yellow page directories, with a distribution of approximately 290,000, that cover a population of approximately 419,000 people;
|
|
|
•
|
70 business publications; and
|
|
|
•
|
UpCurve Cloud and ThriveHive digital marketing.
|
In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate.
GateHouse Live, our event business, was started in late 2015 to leverage our local brands to create world-class events in the markets we serve. GateHouse Live now produces over 250 annual events with a collective attendance over 300,000. Among our core event offerings are a variety of themed expos focused on target audiences, including men, women, seniors and young families. Other signature event series produced across many of our markets include one of the nation's largest high school sports recognition events and the official community's choice awards for dozens of markets across the country. GateHouse Live also offers white label event services for retailers and other media companies.
Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter and our third quarter, historically, are our weakest quarters of the year in terms of revenue. Correspondingly, our second and fourth fiscal quarters, historically, are our strongest quarters. We expect that this seasonality will continue to affect our advertising revenue in future periods.
We have experienced ongoing declines in same store print advertising revenue streams and increased volatility of operating performance, despite our geographic diversity, well-balanced portfolio of products, broad customer base and reliance on smaller markets. We may experience additional declines and volatility in the future. These declines in print advertising revenue have come with the shift from traditional media to the internet for consumers and businesses. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience. We are making investments in digital platforms, such as UpCurve, as well as online and mobile applications, to support our print publications in order to capture this shift as witnessed by our digital advertising and business services revenue growth, which more than doubled between 2013 and 2017.
Our operating costs consist primarily of labor, newsprint and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.
Compensation represents just under 50% of our expenses. Over the last few years, we have worked to drive efficiencies and centralization of work throughout our Company. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business strategy.
The Company’s operating segments (Eastern US Publishing, Central US Publishing, Western US Publishing, and BridgeTower) are aggregated into one reportable business segment.
Acquisitions
During the
three
months ended
April 1, 2018
, we completed six acquisitions. We acquired substantially all the assets, properties, and business of certain publications/businesses, which included
two
daily newspapers,
six
weekly newspapers, and cloud services and digital platforms for an aggregate purchase price of
$25.8 million
, including estimated working capital.
During 2017, we acquired substantially all the assets, properties, and business of certain publications/businesses, which included
four
business publications,
22
daily newspapers,
34
weekly publications,
24
shoppers, two customer relationship management solutions providers, a social media app and an event production business for an aggregate purchase price of
$165.1 million
, including working capital.
Management Agreement
On November 26, 2013, New Media entered into the management agreement (as amended and restated, the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC ("Fortress"), pursuant to which the Manager manages the operations of New Media. We pay the Manager a management fee equal to 1.5% of New Media’s Total Equity (as defined in the Management Agreement) and the Manager is eligible to receive incentive compensation.
On December 27, 2017, SoftBank Group Corp. (“SoftBank”) announced that it completed its previously announced acquisition of Fortress (the “SoftBank Merger”).
Long-Lived Asset Impairment
As part of the ongoing cost reduction programs, the Company is consolidating print facilities, and during the three months ended
March 26, 2017
, the Company ceased printing operations at
four
facilities. As a result, the Company recognized an impairment charge related to retired equipment of
$6.5 million
during that period. There were no such facility consolidations during the three months ended April 1, 2018.
Dispositions
On February 27, 2018, we sold a parcel of land and building located in Framingham, Massachusetts, for
$9.3 million
, and recognized a pre-tax gain of approximately
$3.3 million
, net of selling expenses, which is included in (gain) loss on sale or disposal of assets on the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss during the three months ended April 1, 2018.
On June 2, 2017, we completed the sale of the
Mail Tribune,
located in Medford, Oregon, for approximately
$14.7 million
, including working capital. As a result, a pre-tax gain of approximately
$5.4 million
, net of selling expenses, is included in (gain) loss on sale or disposal of assets on the Consolidated Statement of Operations and Comprehensive Loss during the year ended December 31, 2017 since the disposition did not qualify for treatment as a discontinued operation.
Industry
The newspaper industry and the Company have experienced declining same store revenue and profitability over the past several years. As a result, we have implemented, and continue to implement, plans to reduce costs and preserve cash flow. We have also invested in potential growth opportunities, primarily in the digital and business services space. We believe the cost reductions and the new digital and business services initiatives will provide the appropriate capital structure and financial resources necessary to invest in the business and ensure our future success and provide sufficient cash flow to enable us to meet our commitments for the next year.
General economic conditions, including declines in consumer confidence, high unemployment levels in certain local markets, declines in real estate values in certain local markets, and other trends, have also impacted the markets in which we operate. Additionally, media companies continue to be impacted by the migration of consumers and businesses to an internet and mobile-based, digital medium. These conditions may continue to negatively impact print advertising and other revenue sources as well as increase operating costs in the future. We expect that we will have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.
We periodically perform testing for impairment of goodwill and newspaper mastheads in which the fair value of our reporting units for goodwill impairment testing and newspaper mastheads are estimated using the expected present value of future cash flows and recent industry transaction multiples, using estimates, judgments and assumptions, that we believe are appropriate in the circumstances. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, we may be required to record additional impairment charges in the future.
Critical Accounting Policy Disclosure
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
A summary of our significant accounting policies are described in Note 1, of our consolidated financial statements, "Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies", for the year ended
December 31, 2017
, included in our Annual Report on Form 10-K.
During the three months ended April 1, 2018, we changed several accounting policies in order to adopt recent accounting standards, including the Financial Accounting Standards Board Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”. There have been no other material changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Results of Operations
The following table summarizes our results of operations for the
three
months ended
April 1, 2018
and
March 26, 2017
:
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
April 1, 2018
|
|
March 26, 2017
|
Revenues:
|
|
|
|
Advertising
|
$
|
163,259
|
|
|
$
|
155,564
|
|
Circulation
|
129,991
|
|
|
110,806
|
|
Commercial printing and other
|
47,515
|
|
|
41,154
|
|
Total revenues
|
340,765
|
|
|
307,524
|
|
Operating costs and expenses:
|
|
|
|
Operating costs
|
196,389
|
|
|
177,790
|
|
Selling, general, and administrative
|
118,819
|
|
|
106,202
|
|
Depreciation and amortization
|
19,247
|
|
|
17,604
|
|
Integration and reorganization costs
|
2,430
|
|
|
2,370
|
|
Impairment of long-lived assets
|
—
|
|
|
6,485
|
|
(Gain) loss on sale or disposal of assets
|
(3,171
|
)
|
|
88
|
|
Operating income (loss)
|
7,051
|
|
|
(3,015
|
)
|
Interest expense
|
8,352
|
|
|
7,218
|
|
Other income
|
(520
|
)
|
|
(217
|
)
|
Loss before income taxes
|
(781
|
)
|
|
(10,016
|
)
|
Income tax benefit
|
(116
|
)
|
|
(6,331
|
)
|
Net loss
|
$
|
(665
|
)
|
|
$
|
(3,685
|
)
|
Three Months Ended
April 1, 2018
Compared To Three Months Ended
March 26, 2017
Revenue
. Total revenue for the three months ended
April 1, 2018
increased by $33.3 million, or 10.8%, to $340.8 million from $307.5 million for the three months ended
March 26, 2017
. The increase in total revenue was comprised of a $7.7 million, or 4.9%, increase in advertising revenue, a $19.2 million, or 17.3%, increase in circulation revenue, and a $6.4 million, or 15.5%, increase in commercial printing and other revenue.
Advertising revenue increased primarily due to acquisitions which were partially offset by declines driven by reductions in the local retail, classified, and preprint categories due to secular pressures and a continuing uncertain economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes, which have been offset by price increases in select locations. The majority of the increase in commercial printing and other revenue is due to digital marketing services and events revenue.
Operating Costs.
Operating costs for the three months ended
April 1, 2018
increased by $18.6 million, or 10.5%, to $196.4 million from $177.8 million for the three months ended
March 26, 2017
. The increase includes operating costs from acquisitions of $26.4 million, a $0.5 million increase in advertising and promotion, and a $0.5 million increase in professional and consulting fees, which was partially offset by an $8.8 million decrease in the costs related to the remaining operations. This decline in operating costs related to the remaining operations was primarily due to a decrease in compensation, hauling and delivery and newsprint and ink of $4.6 million, $2.7 million and $1.0 million, respectively. There were no other increases or decreases greater than $0.5 million.
Selling, General and Administrative.
Selling, general and administrative expenses for the three months ended
April 1, 2018
increased by $12.6 million, or 11.9%, to $118.8 million from $106.2 million for the three months ended
March 26, 2017
. The increase includes selling, general and administrative expenses from acquisitions of $17.6 million, which was partially offset by a $5.0 million decrease in the costs related to the remaining operations. This decline in selling, general and administrative expenses related to the remaining operations was primarily due to a decrease in compensation and professional and consulting fees of $3.2 million and $1.2 million, respectively. There were no other increases or decreases greater than $0.5 million.
Integration and Reorganization Costs.
During each of the three month periods ended
April 1, 2018
and
March 26, 2017
, we recorded integration and reorganization costs of $2.4 million, primarily resulting from severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from ongoing implementation of our plans to reduce costs and preserve cash flow.
Impairment of Long-lived Assets.
During the three months ended March 26, 2017, we recorded a $6.5 million impairment of long-lived assets due to four printing facilities ceasing operations during the first quarter of 2017, and additional shut downs expected in the second and third quarters of 2017. No such charge was recorded during the three months ended April 1, 2018.
Income Tax Benefit.
During the three months ended
April 1, 2018
and
March 26, 2017
, we recorded an income tax benefit of approximately $0.1 million and $6.3 million, respectively. The reduced income tax benefit is primarily attributable to the nominal loss reflected for the three months ended April 1, 2018.
Net Loss.
Net loss for the three months ended
April 1, 2018
and
March 26, 2017
was $0.7 million and $3.7 million, respectively. The difference is related to the factors noted above.
Liquidity and Capital Resources
Our primary cash requirements are for working capital, debt obligations, capital expenditures and acquisitions. We have no material outstanding commitments for capital expenditures. We expect our 2018 capital expenditures to total between $14 million and $16 million. The 2018 capital expenditures will be primarily comprised of projects related to the consolidation of print operations and system upgrades. For more information on our long term debt and debt service obligations, see Note 6 to the unaudited condensed consolidated financial statements, “Indebtedness”. Our principal sources of funds have historically been, and are expected to continue to be, cash provided by operating activities.
We expect to fund our operations through cash provided by our subsidiaries’ operating activities, the incurrence of debt or the issuance of additional equity securities. We expect that we will have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.
Our leverage may adversely affect our business and financial performance and restricts our operating flexibility. The level of our indebtedness and our on-going cash flow requirements may expose us to a risk that a substantial decrease in operating cash flows due to, among other things, continued or additional adverse economic developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our credit facilities. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological and other changes in our industry and economic conditions generally.
Dividends
On
May 3, 2018
, we announced a
first
quarter
2018
cash dividend of
$0.37
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend will be paid on
May 16, 2018
, to shareholders of record as of the close of business on
May 14, 2018
.
On February 28, 2018, we announced a fourth quarter 2017 cash dividend of $0.37 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on March 22, 2018, to shareholders of record as of the close of business on March 14, 2018.
On October 26, 2017, we announced a third quarter 2017 cash dividend of $0.37 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on November 16, 2017, to shareholders of record as of the close of business on November 8, 2017.
On July 27, 2017, we announced a second quarter 2017 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on August 17, 2017, to shareholders of record as of the close of business on August 9, 2017.
On April 27, 2017, we announced a first quarter 2017 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on May 18, 2017, to shareholders of record as of the close of business on May 10, 2017.
On February 21, 2017, we announced a fourth quarter 2016 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on March 16, 2017, to shareholders of record as of the close of business on March 8, 2017.
New Media Credit Agreement
On June 4, 2014, New Media Holdings II LLC (the “New Media Borrower”), a wholly owned subsidiary of New Media, entered into a credit agreement (the “New Media Credit Agreement”) among the New Media Borrower, New Media Holdings I LLC (“Holdings I”), the lenders party thereto, RBS Citizens, N.A. and Credit Suisse Securities (USA) LLC as joint lead arrangers and joint bookrunners, Credit Suisse AG, Cayman Islands Branch as syndication agent and Citizens Bank of Pennsylvania as administration agent which provided for (i) a $200 million senior secured term facility (the “Term Loan Facility” and any loan thereunder, including as part of the Incremental Facility, “Term Loans”), (ii) a $25 million senior secured revolving credit facility, with a $5 million sub-facility for letters of credit and a $5 million sub-facility for swing loans, (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facilities”) and (iii) the ability for the New Media Borrower to request one or more new commitments for term loans or revolving loans from time to time up to an aggregate total of $75 million (the “Incremental Facility”) subject to certain conditions. On June 4, 2014, the New Media Borrower borrowed $200 million under the Term Loan Facility (the “Initial Term Loans”). As of
April 1, 2018
,
$0
was drawn under the Revolving Credit Facility. The Term Loans mature on July 14, 2022 and the maturity date for the Revolving Credit Facility is July 14, 2021. The New Media Credit Agreement was amended:
•
on September 3, 2014, to provide for additional term loans under the Incremental Facility in an aggregate principal amount of $25 million (the “2014 Incremental Term Loan”);
•
on November 20, 2014, to increase the amount of the Incremental Facility that may be requested after the date of the amendment from $75 million to $225 million;
•
on January 9, 2015, to provide for $102 million in additional term loans (the “2015 Incremental Term Loan”) and $50 million in additional revolving commitments (the “2015 Incremental Revolver”) under the Incremental Facility and to make certain amendments to the Revolving Credit Facility in connection with the purchase of the assets of Halifax Media;
•
on February 13, 2015, to provide for the replacement of the existing term loans under the Term Loan Facility (including the 2014 Incremental Term Loan and the 2015 Incremental Term Loan) with a new class of replacement term loans;
•
on March 6, 2015, to provide for $15 million in additional revolving commitments under the Incremental Facility;
•
on May 29, 2015, to provide for $25 million in additional term loans under the Incremental Facility;
•
on July 14, 2017, to (i) extend the maturity date of the outstanding term loans under the Term Loan Facility to July 14, 2022, (ii) provide for a 1.00% prepayment premium for any prepayments made in connection with certain repricing transactions effected within six months of the date of the amendment, (iii) extend the maturity date of the
Revolving Credit Facility to July 14, 2021, (iv) provide for $20 million in additional term loans (the “2017 Incremental Term Loan”) under the Incremental Facility and (v) increase the amount of the Incremental Facility that may be requested on or after the date of the amendment (inclusive of the 2017 Incremental Term Loan) to $100 million; and
•
on February 16, 2018, to provide for (i) $50 million in additional term loans under the Term Loan Facility and (ii) a 1.00% prepayment premium for any prepayments of the Term Loans made in connection with certain repricing transactions effected within six months of the date of the amendment.
In connection with the February 16, 2018 amendment, the Company incurred approximately
$0.6 million
of fees and expenses, of which
$0.5 million
were capitalized in deferred financing costs and will be amortized over the term of the Term Loan Facility. The related third party fees of $0.1 million were expensed during the quarter as this amendment was determined to be a debt modification for accounting purposes. In addition, the Company recognized
$0.3 million
of original issue discount, which will also be amortized over the term of the Term Loan Facility.
In connection with the July 14, 2017 amendment, we incurred approximately
$6.6 million
of fees and expenses. There was one lender who had a significant change in the terms of the Term Loan Facility; the difference between the present value of the cash flows after this amendment and the present value of the cash flows before this amendment was more than
10%
. This portion of the transaction was accounted for as an extinguishment under ASC Subtopic 470-50, “Debt Modifications and Extinguishments”. Deferred fees and expenses of
$1.0 million
previously allocated to that lender were written off to loss on early extinguishment of debt. Additionally, the current fees of
$2.4 million
attributed to this lender were expensed to loss on early extinguishment of debt. The third party expenses of
$0.1 million
apportioned to the lender were capitalized. In addition,
$1.3 million
fees and expenses allocated to lenders that exited the facility were written off to loss on early extinguishment of debt. The remainder of this amendment was treated as a debt modification for accounting purposes. The consent fees of
$3.0 million
for the lenders other than the one mentioned above were capitalized and will be amortized over the term of the Term Loan Facility. The third party fees of
$0.6 million
related to these lenders were expensed. Additionally, the fees and expenses allocated to the Revolving Credit Facility of
$0.4 million
were capitalized as this component of the amendment was accounted for as a debt modification.
The New Media Credit Agreement contains customary representations and warranties and affirmative covenants and negative covenants applicable to Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions, and events of default. The New Media Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of 3.25 to 1.00.
As of
April 1, 2018
, we are in compliance with all of the covenants and obligations under the New Media Credit Agreement.
Refer to Note 6 to the unaudited condensed consolidated financial statements, “Indebtedness,” and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, for further discussion of the New Media Credit Agreement.
Advantage Credit Agreements
In connection with the purchase of the assets of Halifax Media, which was completed on January 9, 2015, certain subsidiaries of the Company (the “Advantage Borrowers”) agreed to assume all of the obligations of Halifax Media and its affiliates in respect of each of (i) that certain Consolidated Amended and Restated Credit Agreement dated January 6, 2012 among Halifax Media Acquisition LLC, Advantage Capital Community Development Fund XXVIII, L.L.C., and Florida Community Development Fund II, L.L.C. (as amended, the “Halifax Florida Credit Agreement”) and (ii) that certain Credit Agreement dated June 18, 2013 between Halifax Alabama, LLC and Southeast Community Development Fund V, L.L.C. (the “Halifax Alabama Credit Agreement” and, together with the Halifax Florida Credit Agreement, the “Advantage Credit Agreements”), respectively (the debt under the Halifax Florida Credit Agreement, the “Advantage Florida Debt”; the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”). The $10 million outstanding balance under the Halifax Florida Credit Agreement was fully repaid on December 31, 2016.
The Halifax Alabama Credit Agreement is in the principal amount of $8 million and bears interest at the rate of LIBOR plus 6.25% per annum (with a minimum of 1% LIBOR) payable quarterly in arrears, maturing on March 31, 2019. The Advantage Alabama Debt is secured by a perfected second priority security interest in all the assets of the Advantage Borrowers
and certain other subsidiaries of the Company, subject to the limitation that the maximum amount of secured obligations is $15 million. The Advantage Alabama Debt is unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and is required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Alabama Debt is subordinated to the Senior Secured Credit Facilities pursuant to an intercreditor agreement.
The Halifax Alabama Credit Agreement contains covenants substantially consistent with those contained in the New Media Credit Agreement in addition to those required for compliance with the New Markets Tax Credit program. The Advantage Borrowers are permitted to make voluntary prepayments at any time without premium or penalty and are subject to customary mandatory prepayment events including from proceeds from asset sales and certain debt obligations.
The Halifax Alabama Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Advantage Borrowers and certain of the Company subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The Halifax Alabama Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of 3.75 to 1.00. The Halifax Alabama Credit Agreement contains customary events of default.
As of
April 1, 2018
, we are in compliance with all of the covenants and obligations under the Halifax Alabama Credit Agreement.
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, for further discussion of the Advantage Credit Agreements.
Cash Flows
The following table summarizes our historical cash flows.
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|
|
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Three months ended April 1, 2018
|
|
Three months ended March 26, 2017
|
Cash provided by operating activities
|
$
|
18,663
|
|
|
$
|
18,248
|
|
Cash used in investing activities
|
(22,131
|
)
|
|
(23,817
|
)
|
Cash provided by (used in) financing activities
|
27,438
|
|
|
(30,791
|
)
|
The discussion of our cash flows that follows is based on our historical cash flows for the
three
months ended
April 1, 2018
and
March 26, 2017
.
Cash Flows from Operating Activities.
Net cash provided by operating activities for the
three
months ended
April 1, 2018
was
$18.7 million
, an increase of $0.5 million when compared to $18.2 million of cash provided by operating activities for the
three
months ended
March 26, 2017
. This $0.5 million increase was the result of an improvement in operating results of $3.0 million and an increase in cash provided by working capital of $0.3 million, which was partially offset by adjustments for non-cash charges of $2.9 million.
The $0.3 million increase in cash provided by working capital for the
three
months ended
April 1, 2018
when compared to the
three
months ended
March 26, 2017
, is primarily attributable to a decrease in accounts receivable and an increase in deferred revenue, which was partially offset by a decrease accrued expenses and an increase in inventory.
The $2.9 million increase in adjustments to net income for non-cash charges, when compared to the
three
months ended
March 26, 2017
, primarily consisted of a $6.5 million impairment of long-lived assets and a $3.3 million increase in gain on sale or disposal of assets, which was partially offset by a $5.0 million decrease in deferred income tax benefit and a $1.6 million increase in depreciation and amortization.
Cash Flows from Investing Activities.
Net cash used in investing activities for the
three
months ended
April 1, 2018
was
$22.1 million
. During the
three
months ended
April 1, 2018
, we used $29.4 million, net of cash acquired, for acquisitions and $1.9 million for capital expenditures, which was partially offset by $9.2 million we received from the sale of real estate and other assets.
Net cash used in investing activities for the
three
months ended
March 26, 2017
was
$23.8 million
. During the
three
months ended
March 26, 2017
, we used $21.7 million, net of cash acquired, for acquisitions and $2.4 million for capital expenditures, which was partially offset by $0.3 million we received from the sale of real estate and other assets.
Cash Flows from Financing Activities.
Net cash provided by financing activities for the
three
months ended
April 1, 2018
was
$27.4 million
primarily comprised of borrowings under term loans of $49.8 million, which was partially offset by the payment of dividends of $20.0 million, repayments under term loans of $1.0 million, a $0.7 million purchase of treasury stock, and payment of debt issuance costs of $0.5 million.
Net cash used in financing activities for the
three
months ended
March 26, 2017
was
$30.8 million
primarily due to the payment of dividends of $18.9 million, repayments under term loans of $10.9 million, a $0.6 million purchase of treasury stock, and $0.4 million payment of offering costs.
Changes in Financial Position
The discussion that follows highlights significant changes in our financial position and working capital from
December 31, 2017
to
April 1, 2018
.
Accounts Receivable.
Accounts receivable decreased $17.8 million from
December 31, 2017
to
April 1, 2018
, which primarily relates to seasonality and the timing of cash collections as well as an increase in the allowance for doubtful accounts primarily related to certain retail customer bankruptcies, which was partially offset by $1.6 million of assets acquired in the three month period ending
April 1, 2018
.
Inventory.
Inventory increased $3.6 million from
December 31, 2017
to
April 1, 2018
, which primarily relates to the increase in newsprint inventory due to timing of shipments.
Prepaid Expenses.
Prepaid expenses increased $4.5 million from
December 31, 2017
to
April 1, 2018
, which primarily relates to the timing of payments and assets acquired in the three month period ending
April 1, 2018
.
Property, Plant, and Equipment.
Property, plant, and equipment decreased $14.6 million from
December 31, 2017
to
April 1, 2018
, of which $12.1 million relates to depreciation and $7.5 million relates to assets sold, classified as held for sale, or disposed of during the first three months of 2018, which was partially offset by $3.1 million of assets acquired in 2018 and $1.9 million of capital expenditures.
Goodwill.
Goodwill increased $7.1 million from
December 31, 2017
to
April 1, 2018
, which is primarily due to assets acquired in 2018.
Intangible Assets.
Intangible assets increased $10.3 million from
December 31, 2017
to
April 1, 2018
, of which $17.5 million relates to assets acquired in 2018, which was partially offset by $7.2 million in amortization.
Other Assets.
Other assets increased $2.0 million from
December 31, 2017
to
April 1, 2018
, which is primarily due to acquisitions during the three months ended
April 1, 2018
.
Current Portion of Long-term Debt.
Current portion of long-term debt increased $9.4 million from
December 31, 2017
to
April 1, 2018
, due to the reclassification to current portion of long-term debt of $8.0 million of debt that was assumed in the Halifax acquisition in 2015 that is due on March 31, 2019, a $0.9 million reclassification from long-term debt and an increase in the current portion of long-term debt of $0.5 million related to the February 16, 2018 amendment to the New Media Credit Agreement.
Accounts Payable.
Accounts payable increased $3.5 million from
December 31, 2017
to
April 1, 2018
, which relates primarily to the timing of vendor payments and acquisitions in 2018.
Accrued Expenses.
Accrued expenses decreased $19.3 million from
December 31, 2017
to
April 1, 2018
, which primarily relates to a decrease in the accrual for all management agreement related fees of $7.9 million, a $6.5 million decrease in accrued bonus, a $4.5 million decrease in accrued payroll, and a $1.8 million decrease due to the payment of a working capital settlement, which was partially offset by a $0.7 increase in accrued taxes and a $0.6 million increase in accrued vacation.
Long-term Debt.
Long-term debt increased $39.3 million from
December 31, 2017
to
April 1, 2018
, primarily due to borrowings under term loans of $49.2 million, net of original issue discount, and $0.5 million non-cash interest expense, which was partially offset by the reclassification of long-term debt to current portion of long-term debt of $8.9 million, and a $1.0 million repayment of term loans.
Accumulated Deficit.
Accumulated deficit increased $0.7 million from
December 31, 2017
to
April 1, 2018
, primarily due to a net loss of $0.7 million.
Summary Disclosure About Contractual Obligations and Commercial Commitments
Other than the amendment to the New Media Credit Agreement described below, there have been no significant changes to our contractual obligations previously reported in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements reasonably likely to have a current or future effect on our financial statements.
Contractual Commitments
On February 16, 2018, the New Media Credit Agreement was amended to, among other things, provide for (i) $50 million in additional term loans under the Term Loan Facility and (ii) a 1.00% prepayment premium for any prepayments of the Term Loans made in connection with certain repricing transactions effected within six months of the date of the amendment.
There were no other material changes made to our contractual commitments during the period from
December 31, 2017
to
April 1, 2018
.
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. We define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.
Adjusted EBITDA
We define Adjusted EBITDA as follows:
Income (loss) from continuing operations
before
:
|
|
•
|
income tax expense (benefit);
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|
|
•
|
interest/financing expense;
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|
|
•
|
depreciation and amortization; and
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Management’s Use of Adjusted EBITDA
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance.
Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, non-cash impairments and interest expense
associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics we use to review the financial performance of our business on a monthly basis.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net income (loss), include: the cash portion of interest/financing expense, income tax (benefit) provision and charges related to impairment of long-lived assets, which may significantly affect our financial results.
A reader of our financial statements may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. Readers of our financial statements should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge readers of our financial statements to review the reconciliation of income (loss) from continuing operations to Adjusted EBITDA, along with our consolidated financial statements included elsewhere in this report. We also strongly urge readers of our financial statements to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.
We use Adjusted EBITDA as a measure of our day-to-day operating performance, which is evidenced by the publishing and delivery of news and other media and excludes certain expenses that may not be indicative of our day-to-day business operating results. We consider the unrealized (gain) loss on derivative instruments and the (gain) loss on early extinguishment of debt to be financing related costs associated with interest expense or amortization of financing fees. Accordingly, we exclude financing related costs such as the early extinguishment of debt because they represent the write-off of deferred financing costs and we believe these non-cash write-offs are similar to interest expense and amortization of financing fees, which by definition are excluded from Adjusted EBITDA. Additionally, the non-cash gains (losses) on derivative contracts, which are related to interest rate swap agreements to manage interest rate risk, are financing costs associated with interest expense. Such charges are incidental to, but not reflective of, our day-to-day operating performance and it is appropriate to exclude charges related to financing activities such as the early extinguishment of debt and the unrealized (gain) loss on derivative instruments which, depending on the nature of the financing arrangement, would have otherwise been amortized over the period of the related agreement and does not require a current cash settlement. Such charges are incidental to, but not reflective of our day-to-day operating performance of the business that management can impact in the short term.
The table below shows the reconciliation of net loss to Adjusted EBITDA for the periods presented:
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|
Three months ended
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|
|
April 1, 2018
|
|
March 26, 2017
|
|
|
(in thousands)
|
|
Net loss
|
$
|
(665
|
)
|
|
$
|
(3,685
|
)
|
|
Income tax benefit
|
(116
|
)
|
|
(6,331
|
)
|
|
Interest expense
|
8,352
|
|
|
7,218
|
|
|
Impairment of long-lived assets
|
—
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|
|
6,485
|
|
|
Depreciation and amortization
|
19,247
|
|
|
17,604
|
|
|
Adjusted EBITDA from continuing operations
|
$
|
26,818
|
|
(a)
|
$
|
21,291
|
|
(b)
|
|
|
(a)
|
Adjusted EBITDA for the three months ended
April 1, 2018
included net expenses of $5,709, related to transaction and project costs, non-cash compensation, and other expense of $6,450, integration and reorganization costs of $2,430 and a $3,171 gain on the sale or disposal of assets.
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|
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(b)
|
Adjusted EBITDA for the three months ended
March 26, 2017
included net expenses of $5,398, related to transaction and project costs, non-cash compensation, and other expense of $2,940, integration and reorganization costs of $2,370 and an $88 loss on the sale or disposal of assets.
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