NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — Basis of presentation and summary of significant accounting policies
Description of business:
Gannett Co., Inc. (Gannett, we, us, our, or the company) is an innovative, digitally focused media and marketing solutions company committed to strengthening communities across our network. Gannett owns ReachLocal, Inc. (ReachLocal), a digital marketing solutions company, the USA TODAY NETWORK (made up of USA TODAY and
109
local media organizations in
34
states in the U.S. and Guam, including digital sites and affiliates), and Newsquest (a wholly owned subsidiary operating in the United Kingdom (U.K.) with
160
local media brands). Through the USA TODAY NETWORK and Newsquest, Gannett delivers high-quality, trusted content where and when consumers want to engage with it on virtually any device or platform.
Basis of presentation:
Our condensed consolidated financial statements are unaudited; however, in the opinion of management, they contain all of the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP) applicable to interim periods. All intercompany accounts have been eliminated in consolidation. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Beginning in the
second quarter
of
2018
, we have realigned the presentation of web presence and software-as-a-service revenues from other revenues to advertising and marketing services revenues on the
Condensed consolidated statements of income
. As a result of this updated presentation, advertising and marketing services revenues increased and other revenues decreased
$11.3 million
and
$35.0 million
for the
three
and
nine months ended September 30, 2018
, respectively. Additionally, advertising and marketing services revenues increased and other revenues decreased
$9.1 million
and
$25.0 million
for the
three
and
nine months ended September 24, 2017
, respectively. Operating revenues, net income, retained earnings, and earnings per share remained unchanged.
Use of estimates:
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and footnotes thereto. Actual results could differ from those estimates. Significant estimates and judgments inherent in the preparation of financial statements include accounting for income taxes, pension and other post-employment benefits, allowances for doubtful accounts, stock-based compensation, depreciation and amortization, business combinations, litigation matters, contingencies, and the valuation of long-lived and intangible assets.
New accounting pronouncements adopted:
The following are new accounting pronouncements that we adopted in the
first nine months
of
2018
:
Revenue from Contracts with Customers
: We adopted Financial Accounting Standards Board (FASB) guidance which prescribes a single comprehensive model for entities to use in the accounting of revenue arising from contracts with customers. The new guidance is centered around the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new revenue recognition standard using the modified retrospective approach; however, we did not record any one-time adjustments to beginning retained earnings as a result of adopting the new guidance. Refer to
Note 2 — Revenues
for further details regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with our customers.
Cash and Cash Equivalents, including Statement of Cash Flows and Restricted Cash:
We adopted FASB guidance requiring entities to disclose, in their statements of cash flows, the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, restricted cash and restricted cash equivalents must now be included within the total of cash and cash equivalents when reconciling the beginning and end of period totals shown on the statement of cash flows. The guidance was adopted retrospectively, and the impact was not material to our consolidated financial results.
Restricted cash primarily consists of cash held in an irrevocable grantor trust for our deferred compensation plans and cash held with banking institutions for insurance plans. The restrictions will lapse when benefits are paid to plan participants and their beneficiaries as specified in the plans. The following table presents a reconciliation of cash, cash equivalents, and restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
September 30, 2018
|
|
December 31, 2017
|
|
September 24, 2017
|
|
Cash and cash equivalents
|
$
|
108,563
|
|
|
$
|
120,589
|
|
|
$
|
109,961
|
|
|
Restricted cash included in other current assets
|
4,615
|
|
|
2,942
|
|
|
3,726
|
|
|
Restricted cash included in investments and other assets
|
19,205
|
|
|
20,501
|
|
|
20,566
|
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
132,383
|
|
|
$
|
144,032
|
|
|
$
|
134,253
|
|
Financial Assets and Financial Liabilities:
We adopted FASB guidance revising the classification and measurement of investments in equity securities and the presentation of certain fair value changes in financial liabilities measured at fair value. The impact of adopting this guidance was not material to our consolidated financial results.
Business Combinations—Definition of a Business:
We adopted FASB guidance which amends the definition of a business. This new guidance now requires an entity to evaluate if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The impact of adopting this guidance was not material to our consolidated financial results.
New accounting pronouncements not yet adopted:
The following are new accounting pronouncements that we are evaluating for future impacts on our financial position:
Leases:
In February 2016, the FASB issued updated guidance modifying lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We currently anticipate adopting the new leasing standard on January 1, 2019 using the modified retrospective approach and expect to elect certain available transitional practical expedients.
To date, we have made progress in our assessment of the impact of adopting this new guidance, and steps towards implementation have been taken. Specifically, we have selected a software solution to be compatible with our enterprise software system. While development of our selected solution is ongoing, it is not yet fully compliant with the requirements of the standard. If the solution is not remediated in the near term, in order to implement the new standard in a timely manner, we may be required to take alternative actions, which might not be as efficient as an integrated software solution.
Based on our progress to date, we anticipate adopting the standard will have a material impact on our consolidated balance sheets in the form of the recognition of additional right of use assets and lease liabilities for existing operating leases with a lease term greater than twelve months. However, we do not believe adoption will have a material impact on our consolidated statements of income or cash flows. Our preliminary evaluation and conclusions are subject to change as our assessment continues to progress or in the event additional updates to the standard are approved. Our full evaluation is expected to be completed and finalized during the fourth quarter of
2018
.
Intangibles—Goodwill and Other:
In January 2017, the FASB issued new guidance which simplifies the subsequent measurement of goodwill. The guidance permits an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with such losses not exceeding the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income:
In February 2018, the FASB issued new guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income, generally described as stranded tax effects, resulting from the Tax Cuts and Jobs Act. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are evaluating the provisions of the updated guidance, assessing the impact on our consolidated financial statements, and currently plan to implement this guidance during the fourth quarter of
2018
.
Compensation—Stock Compensation:
In June
2018
, the FASB issued new guidance which expands the scope of share-based compensation accounting by applying, with limited exceptions, the specific requirements of employee stock compensation to the accounting for non-employee awards granted in exchange for goods and services. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
Incremental Codification Improvements:
In July 2018, the FASB issued new guidance intended to clarify, correct errors in, and improve several unrelated sections of the overall Accounting Standard Codification. Portions of this guidance are effective immediately, with other portions effective for fiscal years beginning after December 15, 2018. Our adoption of the portions of the guidance which were effective immediately did not have a material impact on our consolidated financial results. We are evaluating the provisions of the remaining guidance and assessing the impact on our consolidated financial statements.
Intangibles—Internal-Use Software:
In August
2018
, the FASB issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. This guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is not permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
Fair Value Measurement—Disclosure Framework:
In August
2018
, the FASB issued new guidance that changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
Compensation—Retirement Plans:
In August
2018
, the FASB issued new guidance that changes disclosures related to defined benefit pension and other postretirement benefit plans as part of the disclosure framework project. This guidance is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
NOTE 2 — Revenues
In
January 2018
, we adopted the new revenue recognition accounting pronouncement, Accounting Standards Codification (ASC) 606 – Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning after
January 1, 2018
are presented under ASC 606 while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting under ASC 605 – Revenue recognition. We did not record any one-time adjustments to beginning retained earnings as a result of adopting the new guidance.
The following table presents our revenues disaggregated by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
(1)
|
|
September 30, 2018
|
|
September 24, 2017
(1)
|
|
Print advertising
|
$
|
204,023
|
|
|
$
|
244,843
|
|
|
$
|
657,744
|
|
|
$
|
788,745
|
|
|
Digital advertising and marketing services
|
199,351
|
|
|
185,068
|
|
|
576,105
|
|
|
537,754
|
|
|
Total advertising and marketing services
|
403,374
|
|
|
429,911
|
|
|
1,233,849
|
|
|
1,326,499
|
|
|
Circulation
|
258,873
|
|
|
264,413
|
|
|
789,265
|
|
|
821,375
|
|
|
Other
|
49,467
|
|
|
49,950
|
|
|
142,319
|
|
|
144,364
|
|
|
Total revenues
|
$
|
711,714
|
|
|
$
|
744,274
|
|
|
$
|
2,165,433
|
|
|
$
|
2,292,238
|
|
(1)
Prior period amounts have not been adjusted under the modified retrospective method.
Additionally, approximately
13%
of our
third quarter
2018
revenues and
14%
of our year to date
2018
revenues are generated from international locations.
Recognition principles:
Our revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Additionally, sales and usage-based taxes are excluded from revenues.
Advertising and marketing services revenues:
Our advertising and marketing services revenues include amounts charged to advertisers for space purchased in our newspapers, ads placed on our digital platforms, other advertising products and services such as preprints and direct mail, the provision and sale of online marketing, web presence, and software-as-a-service products through our ReachLocal segment, and revenues from other miscellaneous products and services. Print advertising is recognized in the period when advertising is printed. Digital advertising is recognized when placed on digital platforms either by cost per impression or cost per day. Web presence and software-as-a-service solutions are recognized when the products or services are delivered to the customer. Other advertising product and service revenues are recognized when advertisements or services are delivered.
For online marketing products provided by our ReachLocal segment, we enter into agreements for products in which our clients typically pay in advance and on a monthly basis. These prepayments include all charges for the included technology and any media services, management, third-party content, and other costs and fees. Revenue is then recognized as we purchase media on behalf of the customer and perform other marketing-related services.
For our advertising and marketing services revenues, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) by performing analyses regarding whether we control the provision of specified goods or services before they are transferred to our customers. We report advertising and marketing services revenues gross when we control advertising inventory before it is transferred to the customer. Our control is evidenced by us being primarily responsible or sharing responsibility for the fulfillment of services and maintaining control over transaction pricing.
Certain customers may receive credits, which are accounted for as a separate performance obligation. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We recognize revenue when the performance obligation is satisfied.
Circulation revenues:
Our circulation revenues include revenues for content delivered to consumers via print and digital products purchased by readers or distributors. Single copy circulation revenues are recognized on a daily basis as purchased newspapers are distributed, net of provisions for related returns. Circulation revenues from digital and home delivery subscriptions are recognized over the subscription period as the performance obligations are delivered.
Other revenues:
Our other revenues consist primarily of amounts received from commercial printing and distribution arrangements. Commercial printing and distribution revenues are recognized when the product is delivered to the customer.
Arrangements with multiple performance obligations:
We have various advertising and circulation agreements which have both print and digital performance obligations. Revenues from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus a margin that is appropriate for that good or service.
Deferred revenue:
Amounts received from customers in advance of revenue recognition are deferred as liabilities. The following table presents changes in the deferred revenue balance for the
nine months ended
September 30, 2018
by type of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Nine months ended September 30, 2018
|
|
|
Advertising, Marketing Services, and Other
|
|
Circulation
|
|
Total
|
|
Beginning balance
|
$
|
33,986
|
|
|
$
|
88,805
|
|
|
$
|
122,791
|
|
|
Acquired deferred revenue
|
2,676
|
|
|
—
|
|
|
2,676
|
|
|
Cash receipts
|
218,602
|
|
|
620,965
|
|
|
839,567
|
|
|
Revenue recognized
|
(216,782
|
)
|
|
(622,748
|
)
|
|
(839,530
|
)
|
|
Ending balance
|
$
|
38,482
|
|
|
$
|
87,022
|
|
|
$
|
125,504
|
|
The Company’s primary source of deferred revenue is from circulation subscriptions paid in advance of the service provided. The majority of our subscription customers are billed and pay on monthly terms, but subscription periods range between
one
and
twelve
months. The remaining deferred revenue balance relates to advertising and other revenue. The
$2.7 million
increase in deferred revenue as compared to the year ended
December 31, 2017
is the result of the acquisition of WordStream as the difference between collections of cash and revenue recognized were negligible.
Practical expedients and exemptions:
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within cost of sales. Additionally, we do not disclose the value of unsatisfied performance obligations because the vast majority of our contracts have original expected lengths of one year or less and our payment terms are generally short-term in nature unless a customer is in bankruptcy.
NOTE 3 — Acquisitions
WordStream:
In
July 2018
, our ReachLocal segment completed the acquisition of WordStream, a provider of cloud-based software-as-a-service solutions for local and regional businesses and agencies, for approximately
$132.5 million
, net of cash acquired. In addition, up to
$20.0 million
of additional consideration is payable quarterly beginning in the fourth quarter of 2018 through the first quarter of 2020 based upon the achievement of certain revenue targets. Based on WordStream's revenue results, the fair value of the remaining contingent obligation as of
September 30, 2018
was estimated at
$9.5 million
. We financed the transaction through borrowings under our Credit Facility and cash on hand.
The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets and liabilities assumed, deferred income taxes, and assumed income and non-income based tax liabilities. As of the acquisition date, the purchase price was assigned to the acquired assets and assumed liabilities as follows:
|
|
|
|
|
|
|
|
In thousands
|
|
|
Cash and restricted cash acquired
|
$
|
20,954
|
|
|
Other current assets
|
9,159
|
|
|
Property, plant and equipment
|
1,072
|
|
|
Developed technology
|
63,030
|
|
|
Customer relationships
|
21,420
|
|
|
Trade names
|
1,105
|
|
|
Goodwill
|
67,483
|
|
|
Total assets acquired
|
184,223
|
|
|
Current liabilities
|
3,987
|
|
|
Noncurrent liabilities
|
17,303
|
|
|
Total liabilities assumed
|
21,290
|
|
|
Net assets acquired
|
$
|
162,933
|
|
Acquired property, plant, and equipment is depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies. Goodwill associated with the acquisition of WordStream is allocated to the ReachLocal segment. We do not expect the purchase price allocated to goodwill and intangibles to be deductible for tax purposes.
SweetIQ:
In
April 2017
, our ReachLocal segment completed the acquisition of SweetIQ, a location and customer engagement software provider, for approximately
$31.8 million
, net of cash acquired. SweetIQ's customers include businesses with multi-location brands and agencies that target local marketing.
The allocation of the purchase price was based upon estimated fair values. The determination of the fair value of assets acquired and liabilities assumed has been completed and the final allocation is as follows: goodwill of
$18.8 million
, intangible assets of
$15.2 million
(comprised of trade names, customer relationships, and developed technology), noncurrent assets of
$0.6 million
, noncurrent liabilities of
$1.8 million
, and positive net working capital of
$0.3 million
. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies. Goodwill associated with the
acquisition of SweetIQ is allocated to the ReachLocal segment. We do not expect the purchase price allocated to goodwill and intangibles to be deductible for tax purposes.
Other:
During
2018
and
2017
, we completed other immaterial acquisitions.
NOTE 4 — Restructuring activities and asset impairment charges
Over the past several years, we have engaged in a series of individual restructuring programs designed to right size our employee base, consolidate facilities, and improve operations. Facility consolidation and other cost savings plans led us to recognize restructuring expenses, which consist of severance-related expenses and facility consolidation charges, accelerated depreciation, and asset impairment charges. As part of our plans, we are selling certain assets which we have classified as held-for-sale and for which we have reduced the carrying values to equal the fair values less costs to dispose.
Severance-related expenses:
We recorded severance-related expenses of
$4.6 million
and
$5.1 million
for the
three months ended September 30, 2018
and
September 24, 2017
, respectively. Of the expenses incurred for the
three months ended September 30, 2018
,
$3.9 million
related to the publishing segment,
$0.4 million
related to the ReachLocal segment, and
$0.3 million
related to the corporate and other category. Of the expenses incurred for the
three months ended September 24, 2017
, the majority were related to the publishing segment.
We recorded severance-related expenses of
$19.6 million
and
$25.4 million
for the
nine months ended September 30, 2018
and
September 24, 2017
, respectively. Of the expenses incurred for the
nine months ended
September 30, 2018
,
$16.5 million
related to the publishing segment,
$2.2 million
related to the ReachLocal segment, and
$0.9 million
related to the corporate and other category. Of the expenses incurred for the
nine months ended
September 24, 2017
,
$21.2 million
related to the publishing segment,
$0.5 million
related to the ReachLocal segment, and
$3.7 million
related to the corporate and other category.
The activity and balance of the severance-related liabilities are as follows:
|
|
|
|
|
|
|
|
In thousands
|
Severance Activities
|
|
Balance at December 31, 2017
|
$
|
10,562
|
|
|
Expense
|
19,580
|
|
|
Payments
|
(24,055
|
)
|
|
Balance at September 30, 2018
|
$
|
6,087
|
|
Facility consolidation charges and accelerated depreciation:
We recorded facility consolidation charges of
$7.0 million
and
$0.7 million
for the
three months ended September 30, 2018
and
September 24, 2017
, respectively. Of the charges incurred for the
three months ended September 30, 2018
,
$5.2 million
related to the Corporate segment,
$1.0 million
related to the publishing segment, and the remainder related to the ReachLocal segment. For the
three months ended September 24, 2017
, all of the charges related to the publishing segment. In addition, we incurred accelerated depreciation of
$2.7 million
and
$14.1 million
for the
three months ended September 30, 2018
and
September 24, 2017
, respectively, which is included in depreciation expense. All of these charges related to the publishing segment.
We recorded facility consolidation charges of
$13.9 million
and
$2.8 million
for the
nine months ended September 30, 2018
and
September 24, 2017
, respectively. Of the charges incurred for the
nine months ended
September 30, 2018
,
$6.1 million
related to the publishing segment,
$5.3 million
related to the Corporate segment, and the remainder related to the ReachLocal segment. For the
nine months ended
September 24, 2017
, all of the charges related to the publishing segment. In addition, we incurred accelerated depreciation of
$12.1 million
and
$37.6 million
for the
nine months ended September 30, 2018
and
September 24, 2017
, respectively, which is included in depreciation expense. All of these charges related to the publishing segment.
Asset impairment charges:
We recorded charges for asset impairments of
$1.7 million
and
$1.5 million
for the
three months ended September 30, 2018
and
September 24, 2017
, respectively, which consisted entirely of impairment charges for property, plant, and equipment. Of the charges incurred for the
three months ended September 30, 2018
,
$1.4 million
related to the publishing segment, and the remainder related to the ReachLocal segment. The charges incurred for the
three months ended September 24, 2017
all related to the publishing segment.
We recorded charges for asset impairments of
$15.9 million
and
$20.0 million
for the
nine months ended September 30, 2018
and
September 24, 2017
, respectively, which consisted entirely of impairment charges for property, plant, and equipment.
Of the charges incurred for the
nine months ended
September 30, 2018
,
$15.7 million
related to the publishing segment, and the remainder related to the ReachLocal segment. The charges incurred for the
nine months ended
September 24, 2017
all related to the publishing segment.
Sale of property:
In
February 2018
, we sold property in Nashville, Tennessee and entered into a
15
-month rent-free leaseback agreement. The sale generated proceeds of approximately
$41.8 million
and is accounted for under the financing method. The property, which has a net book value of approximately
$11.8 million
as of
September 30, 2018
, remains on the balance sheet and will continue to be depreciated until the lease terminates. We recorded the financing liability within Other current liabilities in the
Condensed consolidated balance sheets
. The sale, along with any related gain, will be recognized when the lease terminates.
NOTE 5 — Debt
Revolving credit facility:
We maintain a secured revolving credit facility pursuant to which we may borrow from time to time up to an aggregate principal amount of
$500.0 million
(Credit Facility). Under the Credit Facility, we may borrow at an applicable margin above the Eurodollar base rate (LIBOR loan) or the higher of the Prime Rate, the Federal Funds Effective Rate plus
0.50%
, or the one month LIBOR rate plus
1.00%
(ABR loan). The applicable margin is determined based on our total leverage ratio but differs between LIBOR loans and ABR loans. For LIBOR-based borrowing, the margin varies from
2.00%
to
2.50%
. For ABR-based borrowing, the margin varies from
1.00%
to
1.50%
. Up to
$50.0 million
of the Credit Facility is available for issuance of letters of credit. The Credit Facility matures on June 29, 2020.
Customary fees are payable related to the Credit Facility, including commitment fees on the undrawn commitments of between
0.30%
and
0.40%
per annum, payable quarterly in arrears, based on our total leverage ratio. Borrowings under the Credit Facility are guaranteed by our wholly-owned material domestic subsidiaries. All obligations of Gannett and each subsidiary guarantor under the Credit Facility are or will be secured by first priority security interests in our equipment, inventory, accounts receivable, fixtures, general intangibles and other personal property, mortgages on certain material real property, and pledges of the capital stock of each subsidiary guarantor.
Under the Credit Facility, our consolidated interest coverage ratio cannot be less than
3
:1, and our total leverage ratio cannot exceed
3
:1, in each case as of the last day of the test period consisting of the last four consecutive fiscal quarters. We were in compliance with all financial covenants under the Credit Facility as of
September 30, 2018
.
The Credit Facility also contains a number of covenants that, among other things, limit or restrict our ability, subject to certain exceptions, to: (i) permit certain liens on current or future assets, (ii) enter into certain corporate transactions, (iii) incur additional indebtedness, (iv) make certain payments or declare certain dividends or distributions, (v) dispose of certain property, (vi) make certain investments, (vii) prepay or amend the terms of other indebtedness, or (viii) enter into certain transactions with our affiliates. We were in compliance with these covenants as of
September 30, 2018
.
As of
September 30, 2018
, we had
$170.0 million
in outstanding borrowings under the Credit Facility and
$16.6 million
of letters of credit outstanding, leaving
$313.4 million
of availability remaining.
Convertible debt:
On
April 9, 2018
, we completed an offering of
4.75%
convertible senior notes, with an initial offering size of
$175.0 million
aggregate principal amount. As part of the offering, the initial purchaser of the notes exercised its option to purchase an additional
$26.3 million
aggregate principal amount of notes, resulting in total aggregate principal of
$201.3 million
and net proceeds of approximately
$195.3 million
. Interest on the notes is payable semi-annually in arrears. The notes mature on
April 15, 2024
with our earliest redemption date being
April 15, 2022
. The stated conversion rate of the notes is
82.4572
shares per
$1,000
in principal or approximately
$12.13
per share.
Upon conversion, we have the option to settle in cash, shares of our common stock, or a combination of the two. Additionally, holders may convert the notes at their option prior to
January 15, 2024
only if one or more of the following conditions are present: (1) if, during any
20
of the
30
trading days immediately preceding a quarter end, our common stock trading price is
130%
of the stated conversion price, (2) if, during the five business day period after any
ten
consecutive trading day period, the trading price per
$1,000
principal amount of notes is less than
98%
of the product of (a) the last reported sale price of the Company's common stock and (b) the conversion rate on each such trading day, or (3) a qualified change in control event occurs. Depending on the nature of the triggering event, the conversion rate may also be subject to adjustment.
The
$201.3 million
principal value of the notes was bifurcated into debt and equity components. The
$171.1 million
liability component is measured at fair value using the present value of its cash flows at a discount rate of
7.91%
and is reported
as convertible debt in the
Condensed consolidated balance sheets
. The residual amount of
$30.2 million
is recorded within additional paid-in capital in the equity section of the
Condensed consolidated balance sheets
.
$6.3 million
of debt issuance costs were allocated between liabilities and equity in proportion to the allocation of the principal value of the notes, with
$5.4 million
allocated to liabilities and
$0.9 million
allocated to equity. These debt issuance costs will be amortized over the
6
-year contractual life of the notes. The unamortized discount totaled
$28.3 million
as of
September 30, 2018
, which will be amortized over the remaining contractual life of the notes. For the
three
and
nine months ended September 30, 2018
, interest expense on the notes totaled
$2.4 million
and
$4.5 million
, respectively. Amortization of debt issuance costs was
$0.2 million
and
$0.4 million
for the
three
and
nine months ended September 30, 2018
, respectively. Amortization of the discount was
$1.0 million
and
$1.9 million
for the
three
and
nine months ended September 30, 2018
, respectively. The effective interest rate on the liability component of the notes was
7.91%
as of
September 30, 2018
.
For the
three
and
nine months ended
September 30, 2018
,
no
shares were issued upon conversion, exercise, or satisfaction of the required conditions because no conversion triggers were met during the period. Refer to
Note 11 — Earnings per share
for details on the convertible debt's impact to diluted earnings per share under the treasury stock method.
NOTE 6 — Pensions and other postretirement benefit plans
We, along with our subsidiaries, have various defined benefit retirement plans, including plans established under collective bargaining agreements. Our retirement plans include the Gannett Retirement Plan (GRP), the Newsquest and Romanes Pension Schemes in the U.K. (U.K. Pension Plans), and other defined benefit retirement plans. We also provide health care and life insurance benefits to certain retired employees who meet age and service requirements.
Retirement plan costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Service cost - benefits earned during the period
|
$
|
589
|
|
|
$
|
42
|
|
|
$
|
610
|
|
|
$
|
83
|
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
24,669
|
|
|
742
|
|
|
27,935
|
|
|
902
|
|
|
Expected return on plan assets
|
(42,073
|
)
|
|
—
|
|
|
(42,657
|
)
|
|
—
|
|
|
Amortization of prior service cost
|
(424
|
)
|
|
(884
|
)
|
|
1,668
|
|
|
(912
|
)
|
|
Amortization of actuarial loss (gain)
|
15,846
|
|
|
(90
|
)
|
|
18,197
|
|
|
25
|
|
|
Total non-operating expenses (credit)
|
(1,982
|
)
|
|
(232
|
)
|
|
5,143
|
|
|
15
|
|
|
Total expense (benefit) for retirement plans
|
$
|
(1,393
|
)
|
|
$
|
(190
|
)
|
|
$
|
5,753
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Service cost - benefits earned during the period
|
$
|
1,767
|
|
|
$
|
130
|
|
|
$
|
1,830
|
|
|
$
|
161
|
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
76,688
|
|
|
2,224
|
|
|
83,309
|
|
|
2,706
|
|
|
Expected return on plan assets
|
(131,098
|
)
|
|
—
|
|
|
(127,035
|
)
|
|
—
|
|
|
Amortization of prior service cost
|
538
|
|
|
(2,651
|
)
|
|
5,003
|
|
|
(2,736
|
)
|
|
Amortization of actuarial loss (gain)
|
48,379
|
|
|
(270
|
)
|
|
54,368
|
|
|
77
|
|
|
Total non-operating expenses (credit)
|
(5,493
|
)
|
|
(697
|
)
|
|
15,645
|
|
|
47
|
|
|
Total expense (benefit) for retirement plans
|
$
|
(3,726
|
)
|
|
$
|
(567
|
)
|
|
$
|
17,475
|
|
|
$
|
208
|
|
During the
nine months ended September 30, 2018
, we contributed
$55.5 million
and
$6.7 million
to our pension and other postretirement plans, respectively. We expect to contribute approximately
$25.0 million
to the GRP in
2019
and
2020
as well as
$15.0 million
in
2021
. We also expect to contribute
£10.1 million
to the U.K. Pension Plans during the remainder of
2018
,
£24.0 million
in
2019
,
£19.8 million
in
2020
, and
£18.0 million
in
2021
.
In June 2018, the inflation index used to determine payments to beneficiaries of the Newsquest pension plan was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). As a result of this change, we remeasured the plan at June 30, 2018 and recognized actuarial gains of
$33.1 million
during the
nine months ended September 30, 2018
and a net prior service credit of
$103.4 million
within Accumulated other comprehensive loss in the
Condensed consolidated balance sheets
. The fair value of the funded status at
September 30, 2018
was
$54.4 million
and is presented within Pension assets in the
Condensed consolidated balance sheets
. This value represents the fair value of the plan assets of
$785.2 million
net of benefit obligations of
$730.8 million
.
Pursuant to the aforementioned change in index, we also reassessed the Newsquest plan's actuarial assumptions. As a result of this review, we lowered the rate of return on plan assets from
5.7%
to
4.6%
and raised the discount rate for the plan from
2.65%
to
2.8%
.
Retirement plan assets as of
September 30, 2018
do not include any shares of our common stock. Retirement plan assets as of
December 31, 2017
included approximately
0.6 million
shares of our common stock valued at approximately
$7.2 million
.
NOTE 7 — Income taxes
The following table outlines our pre-tax net income and income tax expense amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
September 30, 2018
|
|
September 24, 2017
|
|
Pre-tax net income
|
16,200
|
|
|
6,243
|
|
|
31,901
|
|
|
883
|
|
|
Income tax expense (benefit)
|
2,848
|
|
|
(16,801
|
)
|
|
2,620
|
|
|
(19,595
|
)
|
|
Effective tax rate
|
17.6
|
%
|
|
***
|
|
|
8.2
|
%
|
|
***
|
|
*** Indicates a percentage that is not meaningful
The Company benefited from favorable permanent differences such as a tax rate change adjustment due to tax reform of
$0.5 million
and the release of certain valuation allowances of
$1.3 million
during the
three months ended September 30, 2018
, resulting in an effective tax rate that is lower than the statutory rate. Tax expense for the
three months ended September 24, 2017
is negative because the Company recorded a tax benefit of
$20.1 million
relating to worthless stock and debt deductions. Tax expense for the
nine months ended September 30, 2018
was higher than the comparable period in
2017
due to the one-time permanent benefit of worthless stock and debt deductions recorded in the
third quarter
of
2017
.
In
December 2017
, the Tax Cuts and Jobs Act (the Tax Act) was signed into law. The Tax Act contains significant changes to corporate taxation, including a reduction of the corporate tax rate from
35%
to
21%
, limitation of the tax deduction for interest expense to
30%
of earnings, limitation of the deduction for net operating losses (generated after
2017
) to
80%
of current year taxable income, elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates (Transition Tax) regardless of whether offshore earnings are repatriated, a new U.S. tax regime on foreign earnings known as Global Intangible Low-Taxed Income (GILTI), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. The Tax Act also includes certain provisions that will offset the benefits of the rate reduction such as repeal of the domestic production deduction and disallowance of the deduction of performance-based officers’ compensation in excess of
$1 million
.
In
December 2017
, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of
September 30, 2018
, we have finalized our calculation of historical foreign earnings and have concluded that we are not subject to the Transition Tax, resulting in no adjustment to provisional amounts recorded in
2017
. In
2017
, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%
for U.S. federal tax purposes. During the
nine months ended September 30, 2018
, upon further analysis and refinement of our calculation, we have recognized a favorable adjustment of
$2.6 million
to the provisional amounts recorded at
December 31, 2017
, which is included as a component of income tax expense from continuing operations. We consider the enactment date remeasurement of deferred tax assets and liabilities with respect to the rate change as it pertains to the federal effective tax rate to be complete. We will continue to analyze and refine our enactment date changes with respect to state effective tax rates. The Company has elected to account for the tax liability from GILTI tax in the year the tax is incurred.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately
$23.9 million
as of
September 30, 2018
and
$30.1 million
as of
December 31, 2017
. The amount of accrued interest and penalties payable related to unrecognized tax benefits was
$1.3 million
as of
September 30, 2018
and
$0.9 million
as of
December 31, 2017
.
It is reasonably possible that the amount of unrecognized benefits with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations, or other regulatory developments. At this time, we estimate the amount of gross unrecognized tax positions may be reduced by up to
$2.2 million
within the next 12 months primarily due to lapses of statutes of limitations and settlements of ongoing audits in various jurisdictions.
NOTE 8 — Supplemental equity information
The following tables summarize equity activity for the
nine months ended September 30, 2018
and
September 24, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
Balance at beginning of period
|
$
|
1,017,395
|
|
|
$
|
856,761
|
|
|
Comprehensive income:
|
|
|
|
|
Net income
|
29,281
|
|
|
20,478
|
|
|
Other comprehensive income
|
119,904
|
|
|
46,186
|
|
|
Total comprehensive income
|
149,185
|
|
|
66,664
|
|
|
Dividends declared
|
(54,217
|
)
|
|
(54,427
|
)
|
|
Convertible debt conversion feature
|
21,534
|
|
|
—
|
|
|
Stock-based compensation
|
13,498
|
|
|
14,897
|
|
|
Other activity
|
(5,606
|
)
|
|
(20,226
|
)
|
|
Balance at end of period
|
$
|
1,141,789
|
|
|
$
|
863,669
|
|
Changes in our common stock balance consist entirely of new shares issued for the settlement of employee stock awards. Approximately
1.2 million
and
0.9 million
new shares were issued for the
nine months ended September 30, 2018
and
September 24, 2017
, respectively.
The following table summarizes the components of, and the changes in, Accumulated other comprehensive loss (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Retirement Plans
|
|
Foreign Currency Translation
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
(1,000,790
|
)
|
|
$
|
344,273
|
|
|
$
|
(656,517
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
103,227
|
|
|
(17,952
|
)
|
|
85,275
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
34,629
|
|
|
—
|
|
|
34,629
|
|
|
Other comprehensive income
|
137,856
|
|
|
(17,952
|
)
|
|
119,904
|
|
|
Balance at September 30, 2018
|
$
|
(862,934
|
)
|
|
$
|
326,321
|
|
|
$
|
(536,613
|
)
|
|
|
|
|
|
|
|
|
Balance at December 25, 2016
|
$
|
(1,183,196
|
)
|
|
$
|
300,284
|
|
|
$
|
(882,912
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(34,980
|
)
|
|
44,675
|
|
|
9,695
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
36,491
|
|
|
—
|
|
|
36,491
|
|
|
Other comprehensive income
|
1,511
|
|
|
44,675
|
|
|
46,186
|
|
|
Balance at September 24, 2017
|
$
|
(1,181,685
|
)
|
|
$
|
344,959
|
|
|
$
|
(836,726
|
)
|
Accumulated other comprehensive loss components are included in computing net periodic postretirement costs as outlined in
Note 6 — Pensions and other postretirement benefit plans
. Reclassifications out of accumulated other comprehensive loss related to these postretirement plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
September 30, 2018
|
|
September 24, 2017
|
|
Amortization of prior service credit, net
|
$
|
(1,308
|
)
|
|
$
|
756
|
|
|
$
|
(2,113
|
)
|
|
$
|
2,267
|
|
|
Amortization of actuarial loss
|
15,756
|
|
|
18,222
|
|
|
48,109
|
|
|
54,445
|
|
|
Total reclassifications, before tax
|
14,448
|
|
|
18,978
|
|
|
45,996
|
|
|
56,712
|
|
|
Income tax effect
|
(3,600
|
)
|
|
(6,755
|
)
|
|
(11,367
|
)
|
|
(20,221
|
)
|
|
Total reclassifications, net of tax
|
$
|
10,848
|
|
|
$
|
12,223
|
|
|
$
|
34,629
|
|
|
$
|
36,491
|
|
NOTE 9 — Fair value measurement
We measure and record certain assets and liabilities at fair value. A fair value measurement is determined based on market assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require use of our own estimates and assumptions through present value and other valuation techniques in determination of fair value (Level 3).
As of
September 30, 2018
and
December 31, 2017
, assets and liabilities recorded at fair value and measured on a recurring basis primarily consist of pension plan assets. As permitted by U.S. GAAP, we use net asset values as a practical expedient to determine the fair value of certain investments. These investments measured at net asset value have not been classified in the fair value hierarchy.
Contingent earn-out liabilities resulting from business combinations are also recorded at fair value on a recurring basis. The Company's fair value estimate of the earn-out liability related to the Company’s acquisition of WordStream in
July 2018
was
$9.5 million
as of the date of acquisition. The WordStream earnout liability is affected by the expected amount and timing of future revenues, which are Level 3 inputs as they have no observable market. The fair value of the remaining contingent obligation for WordStream as of
September 30, 2018
was estimated at
$9.5 million
.
The Credit Facility is recorded at carrying value, which approximates fair value, in the
Condensed consolidated balance sheets
and is classified as Level 3. The liability component of the convertible debt is classified as Level 2 because it is measured at fair value using commonly accepted valuation methodologies and indirectly observable, market-based risk measurements.
We also have certain assets requiring fair value measurement on a non-recurring basis. Our assets measured on a nonrecurring basis are assets held for sale, which are classified as Level 3 assets and evaluated using executed purchase agreements, letters of intent, or third-party valuation analyses when certain circumstances arise. Assets held for sale totaled
$24.1 million
as of
September 30, 2018
and
$18.9 million
as of
December 31, 2017
.
NOTE 10 — Commitments, contingencies and other matters
Telephone Consumer Protection Act (TCPA) litigation:
In
January 2014
, a class action lawsuit was filed against Gannett in the U.S. District Court for the District of New Jersey (Casagrand et al v. Gannett Co., Inc., et al). The suit claims various violations of the Telephone Consumer Protection Act (TCPA) arising from allegedly improper telemarketing calls made to consumers by one of our vendors. The plaintiffs sought to certify a class that would include all recipients of telemarketing calls made by the vendor or us. The TCPA provides for statutory damages of
$500
per violation (
$1,500
for willful violations). In
April 2016
, we agreed to settle all claims raised. The estimated settlements are reflected in our financial statements as of
September 30, 2018
and were not material to our results of operations, financial position, or cash flows.
Environmental contingency:
In
March 2011
, the Advertiser Company (Advertiser), a subsidiary that publishes the
Montgomery Advertiser
, was notified by the U.S. Environmental Protection Agency (EPA) that it had been identified as a potentially responsible party (PRP) for the investigation and remediation of groundwater contamination in downtown Montgomery, Alabama. The Advertiser is a member of the Downtown Environmental Alliance, which has agreed to jointly fund and conduct all required investigation and remediation. In
2015
, the Advertiser and other members of the Downtown Environmental Alliance reached a settlement with the U.S. EPA regarding the costs the U.S. EPA spent to investigate the site. The U.S. EPA has transferred responsibility for oversight of the site to the Alabama Department of Environmental Management, which has approved the work plan for the additional site investigation that is currently underway. The Advertiser's final costs cannot be determined until the investigation is complete, a determination is made on whether any remediation is necessary, and contributions from other PRPs are finalized.
Other litigation:
We are defendants in judicial and administrative proceedings involving matters incidental to our business. While the ultimate results of these proceedings cannot be predicted with certainty, we expect the ultimate resolution of all pending or threatened claims and litigation will not have a material effect on our consolidated results of operations, financial position, or cash flows.
NOTE 11 — Earnings per share
The following table is a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
September 30, 2018
|
|
September 24, 2017
|
|
Net income
|
$
|
13,352
|
|
|
$
|
23,044
|
|
|
$
|
29,281
|
|
|
$
|
20,478
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
113,047
|
|
|
113,253
|
|
|
112,916
|
|
|
113,467
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Restricted stock units
|
2,354
|
|
|
1,657
|
|
|
2,282
|
|
|
1,418
|
|
|
Performance share units
|
802
|
|
|
757
|
|
|
837
|
|
|
643
|
|
|
Stock options
|
68
|
|
|
107
|
|
|
78
|
|
|
127
|
|
|
Weighted average number of shares outstanding - diluted
|
116,271
|
|
|
115,774
|
|
|
116,113
|
|
|
115,655
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
$
|
0.12
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.18
|
|
|
Earnings per share - diluted
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
$
|
0.18
|
|
For the
three
and
nine months ended
September 30, 2018
, approximately
180,000
and
900,000
outstanding common stock equivalents, respectively, were excluded from the computation of diluted EPS because their effect would have been anti-dilutive. For the
three
and
nine months ended September 24, 2017
, approximately
428,000
and
862,000
outstanding common stock equivalents, respectively, were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.
In accordance with accounting for dilutive securities under the treasury stock method, no shares related to our convertible notes were included in our calculation of diluted EPS for the
three
and
nine months ended September 30, 2018
because no conversion triggers were met during the period.
On
July 25, 2018
, we declared a dividend of
$0.16
per share of common stock, which was paid on
September 24, 2018
, to shareholders of record as of the close of business on
September 10, 2018
. Furthermore, on
October 17, 2018
, we declared a dividend of
$0.16
per share of common stock, payable on
December 24, 2018
, to shareholders of record as of the close of business on
December 10, 2018
.
NOTE 12 — Segment reporting
We define our reportable segments based on the way the chief operating decision maker (CODM), currently the Chief Executive Officer, manages the operations for purposes of allocating resources and assessing performance. Our reportable segments include the following:
|
|
|
|
•
|
Publishing, which consists of our portfolio of local, regional, national, and international newspaper publishers. The results of this segment include local, classified, and national advertising revenues consisting of both print and digital advertising, circulation revenues from the distribution of our publications on our digital platforms, home delivery of our publications, single copy sales, and other revenues from commercial printing and distribution arrangements. The publishing reportable segment is an aggregation of
two
operating segments: domestic publishing and the U.K.
|
|
|
|
|
•
|
ReachLocal, which consists of our digital marketing solutions subsidiaries ReachLocal, SweetIQ, and WordStream. The results of this segment include advertising and marketing services revenues from our search and display services and web presence and software solutions provided by ReachLocal.
|
In addition to the above operating segments, we have a corporate and other category that includes activities not directly attributable to a specific segment. This category primarily consists of broad corporate functions and includes legal, human resources, accounting, finance, and marketing as well as activities such as tax settlements and other general business costs.
In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.
The CODM uses adjusted EBITDA to evaluate the performance of the segments and allocate resources. Adjusted EBITDA is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our businesses and may be different than similarly-titled non-GAAP financial measures used by other companies. Adjusted EBITDA is defined as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) restructuring costs, (6) acquisition-related expenses (including integration expenses), (7) asset impairment charges, (8) other items (including certain business transformation costs, litigation expenses, multi-employer pension withdrawals, and gains or losses on certain investments), (9) depreciation, and (10) amortization. When adjusted EBITDA is discussed in this report, the most directly comparable GAAP financial measure is net income.
Management considers adjusted EBITDA to be the appropriate metric to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as it eliminates the effect of items which we do not believe are indicative of each segment's core operating performance.
The following tables present our segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment Eliminations
|
|
Consolidated
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
|
$
|
293,808
|
|
|
$
|
109,566
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
403,374
|
|
|
Advertising and marketing services - intersegment sales
|
|
15,967
|
|
|
—
|
|
|
—
|
|
|
(15,967
|
)
|
|
—
|
|
|
Circulation
|
|
258,873
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
258,873
|
|
|
Other
|
|
47,736
|
|
|
—
|
|
|
1,731
|
|
|
—
|
|
|
49,467
|
|
|
Total revenues
|
|
$
|
616,384
|
|
|
$
|
109,566
|
|
|
$
|
1,731
|
|
|
$
|
(15,967
|
)
|
|
$
|
711,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
72,739
|
|
|
$
|
17,340
|
|
|
$
|
(19,987
|
)
|
|
$
|
—
|
|
|
$
|
70,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 24, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
|
$
|
336,094
|
|
|
$
|
93,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
429,911
|
|
|
Advertising and marketing services - intersegment sales
|
|
11,219
|
|
|
—
|
|
|
—
|
|
|
(11,219
|
)
|
|
—
|
|
|
Circulation
|
|
264,413
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
264,413
|
|
|
Other
|
|
48,612
|
|
|
—
|
|
|
1,338
|
|
|
—
|
|
|
49,950
|
|
|
Total revenues
|
|
$
|
660,338
|
|
|
$
|
93,817
|
|
|
$
|
1,338
|
|
|
$
|
(11,219
|
)
|
|
$
|
744,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
87,451
|
|
|
$
|
5,229
|
|
|
$
|
(18,827
|
)
|
|
$
|
—
|
|
|
$
|
73,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment Eliminations
|
|
Consolidated
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
|
$
|
927,360
|
|
|
$
|
306,489
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,233,849
|
|
|
Advertising and marketing services - intersegment sales
|
|
46,167
|
|
|
—
|
|
|
—
|
|
|
(46,167
|
)
|
|
—
|
|
|
Circulation
|
|
789,265
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
789,265
|
|
|
Other
|
|
136,803
|
|
|
—
|
|
|
5,516
|
|
|
—
|
|
|
142,319
|
|
|
Total revenues
|
|
$
|
1,899,595
|
|
|
$
|
306,489
|
|
|
$
|
5,516
|
|
|
$
|
(46,167
|
)
|
|
$
|
2,165,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
244,855
|
|
|
$
|
33,820
|
|
|
$
|
(67,916
|
)
|
|
$
|
—
|
|
|
$
|
210,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 24, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
|
$
|
1,069,244
|
|
|
$
|
257,308
|
|
|
$
|
(53
|
)
|
|
$
|
—
|
|
|
$
|
1,326,499
|
|
|
Advertising and marketing services - intersegment sales
|
|
15,859
|
|
|
—
|
|
|
—
|
|
|
(15,859
|
)
|
|
—
|
|
|
Circulation
|
|
821,375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
821,375
|
|
|
Other
|
|
140,964
|
|
|
—
|
|
|
3,400
|
|
|
—
|
|
|
144,364
|
|
|
Total revenues
|
|
$
|
2,047,442
|
|
|
$
|
257,308
|
|
|
$
|
3,347
|
|
|
$
|
(15,859
|
)
|
|
$
|
2,292,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
283,235
|
|
|
$
|
9,592
|
|
|
$
|
(65,639
|
)
|
|
$
|
—
|
|
|
$
|
227,188
|
|
The following table presents our reconciliation of adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 24, 2017
|
|
September 30, 2018
|
|
September 24, 2017
|
|
Net income (GAAP basis)
|
$
|
13,352
|
|
|
$
|
23,044
|
|
|
$
|
29,281
|
|
|
$
|
20,478
|
|
|
Provision (benefit) for income taxes
|
2,848
|
|
|
(16,801
|
)
|
|
2,620
|
|
|
(19,595
|
)
|
|
Interest expense
|
7,135
|
|
|
4,613
|
|
|
17,548
|
|
|
12,322
|
|
|
Other non-operating items, net
|
(9,800
|
)
|
|
922
|
|
|
(18,153
|
)
|
|
10,110
|
|
|
Operating income (GAAP basis)
|
13,535
|
|
|
11,778
|
|
|
31,296
|
|
|
23,315
|
|
|
Depreciation and amortization
|
38,427
|
|
|
49,786
|
|
|
117,057
|
|
|
148,453
|
|
|
Restructuring costs
|
11,535
|
|
|
5,789
|
|
|
33,445
|
|
|
28,167
|
|
|
Asset impairment charges
|
1,701
|
|
|
1,517
|
|
|
15,940
|
|
|
20,014
|
|
|
Acquisition-related items
|
3,185
|
|
|
2,059
|
|
|
7,131
|
|
|
4,652
|
|
|
Other items
|
1,709
|
|
|
2,924
|
|
|
5,890
|
|
|
2,587
|
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
70,092
|
|
|
$
|
73,853
|
|
|
$
|
210,759
|
|
|
$
|
227,188
|
|
Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment. Additionally, equity income in unconsolidated investees, net, interest expense, other non-operating items, net, and provision for income taxes, as reported in the condensed consolidated financial statements, are not part of operating income and are primarily recorded at the corporate level.
NOTE 13 — Subsequent events
During October and November
2018
, we repaid an aggregate of
$35.0 million
on our revolving credit facility.