Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Gannett Co., Inc. and Subsidiaries
Unaudited; in thousands, except share data
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
68,558
|
|
|
$
|
93,559
|
|
Accounts receivable, net of allowance for doubtful accounts of $9,730 and $11,088
|
289,128
|
|
|
343,617
|
|
Other current assets
|
134,763
|
|
|
143,385
|
|
Total current assets
|
492,449
|
|
|
580,561
|
|
Property, plant and equipment, at cost net of accumulated depreciation of $1,263,203 and $1,412,531
|
745,939
|
|
|
796,009
|
|
Operating lease assets
|
256,324
|
|
|
—
|
|
Goodwill
|
779,626
|
|
|
779,597
|
|
Intangible assets, net
|
149,512
|
|
|
170,344
|
|
Deferred income taxes
|
31,623
|
|
|
51,039
|
|
Other assets
|
121,423
|
|
|
100,861
|
|
Total assets
|
$
|
2,576,896
|
|
|
$
|
2,478,411
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
300,715
|
|
|
$
|
387,003
|
|
Deferred revenue
|
117,786
|
|
|
117,083
|
|
Short-term portion of revolving credit facility
|
135,000
|
|
|
—
|
|
Other current liabilities
|
47,122
|
|
|
47,482
|
|
Total current liabilities
|
600,623
|
|
|
551,568
|
|
Postretirement medical and life insurance liabilities
|
58,702
|
|
|
69,938
|
|
Pension liabilities
|
273,330
|
|
|
319,084
|
|
Long-term portion of revolving credit facility
|
—
|
|
|
135,000
|
|
Convertible debt
|
171,832
|
|
|
169,264
|
|
Long-term operating lease liabilities
|
264,655
|
|
|
—
|
|
Other noncurrent liabilities
|
141,427
|
|
|
198,451
|
|
Total liabilities
|
1,510,569
|
|
|
1,443,305
|
|
Equity
|
|
|
|
Preferred stock of $0.01 par value per share, 5,000,000 shares authorized, none issued
|
—
|
|
|
—
|
|
Common stock of $0.01 par value per share, 500,000,000 shares authorized, 120,333,121 and 118,875,977 shares issued
|
1,203
|
|
|
1,189
|
|
Treasury stock at cost, 5,750,000 shares
|
(50,046
|
)
|
|
(50,046
|
)
|
Additional paid-in capital
|
1,827,963
|
|
|
1,822,094
|
|
Accumulated deficit
|
(129,834
|
)
|
|
(121,435
|
)
|
Accumulated other comprehensive loss
|
(582,959
|
)
|
|
(616,696
|
)
|
Total equity
|
1,066,327
|
|
|
1,035,106
|
|
Total liabilities and equity
|
$
|
2,576,896
|
|
|
$
|
2,478,411
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Gannett Co., Inc. and Subsidiaries
Unaudited; in thousands, except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
Advertising and marketing services
|
$
|
368,328
|
|
|
$
|
420,163
|
|
|
$
|
733,563
|
|
|
$
|
830,475
|
|
Circulation
|
247,092
|
|
|
263,806
|
|
|
499,819
|
|
|
530,392
|
|
Other
|
44,917
|
|
|
46,799
|
|
|
90,380
|
|
|
92,852
|
|
Total operating revenues
|
660,337
|
|
|
730,768
|
|
|
1,323,762
|
|
|
1,453,719
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
403,089
|
|
|
452,053
|
|
|
814,253
|
|
|
909,037
|
|
Selling, general and administrative expenses
|
195,068
|
|
|
199,143
|
|
|
395,170
|
|
|
412,142
|
|
Depreciation and amortization
|
35,466
|
|
|
38,378
|
|
|
72,511
|
|
|
78,630
|
|
Gain on sale of property
|
(32,768
|
)
|
|
—
|
|
|
(33,650
|
)
|
|
—
|
|
Restructuring costs
|
6,771
|
|
|
12,611
|
|
|
27,730
|
|
|
21,910
|
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
803
|
|
|
14,239
|
|
Total operating expenses
|
607,900
|
|
|
712,668
|
|
|
1,276,817
|
|
|
1,435,958
|
|
Operating income
|
52,437
|
|
|
18,100
|
|
|
46,945
|
|
|
17,761
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
(6,879
|
)
|
|
(5,935
|
)
|
|
(13,844
|
)
|
|
(10,413
|
)
|
Other non-operating items, net
|
(6,104
|
)
|
|
4,042
|
|
|
(9,134
|
)
|
|
8,353
|
|
Non-operating expense
|
(12,983
|
)
|
|
(1,893
|
)
|
|
(22,978
|
)
|
|
(2,060
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
39,454
|
|
|
16,207
|
|
|
23,967
|
|
|
15,701
|
|
Provision (benefit) for income taxes
|
12,729
|
|
|
(99
|
)
|
|
9,147
|
|
|
(228
|
)
|
Net income
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
Earnings per share - diluted
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Gannett Co., Inc. and Subsidiaries
Unaudited; in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Net income
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
Other comprehensive income, before tax:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(8,490
|
)
|
|
(33,310
|
)
|
|
4,567
|
|
|
(13,936
|
)
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
Change in prior service costs
|
—
|
|
|
103,416
|
|
|
—
|
|
|
103,416
|
|
Amortization of prior service credit, net
|
(1,328
|
)
|
|
(401
|
)
|
|
(2,664
|
)
|
|
(805
|
)
|
Actuarial gain (loss) arising during the period
|
10,055
|
|
|
13,240
|
|
|
10,236
|
|
|
13,240
|
|
Amortization of actuarial loss
|
15,332
|
|
|
16,877
|
|
|
31,129
|
|
|
32,353
|
|
Other
|
5,605
|
|
|
20,196
|
|
|
141
|
|
|
6,779
|
|
Pension and other postretirement benefit items
|
29,664
|
|
|
153,328
|
|
|
38,842
|
|
|
154,983
|
|
Other comprehensive income, before tax
|
21,174
|
|
|
120,018
|
|
|
43,409
|
|
|
141,047
|
|
Income tax effect related to components of other comprehensive income
|
(6,957
|
)
|
|
(28,295
|
)
|
|
(9,672
|
)
|
|
(29,449
|
)
|
Other comprehensive income, net of tax
|
14,217
|
|
|
91,723
|
|
|
33,737
|
|
|
111,598
|
|
Comprehensive income
|
$
|
40,942
|
|
|
$
|
108,029
|
|
|
$
|
48,557
|
|
|
$
|
127,527
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Gannett Co., Inc. and Subsidiaries
Unaudited; in thousands
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
|
|
|
Operating activities:
|
|
|
|
Net income
|
$
|
14,820
|
|
|
$
|
15,929
|
|
Adjustments to reconcile net income (loss) to net cash flow from operating activities:
|
|
|
|
Depreciation and amortization
|
72,511
|
|
|
78,630
|
|
Gain on sale of property
|
(33,650
|
)
|
|
—
|
|
Restructuring costs
|
11,926
|
|
|
6,881
|
|
Asset impairment charges
|
803
|
|
|
14,239
|
|
Pension and other postretirement expenses, net of contributions
|
(40,715
|
)
|
|
(50,244
|
)
|
Stock-based compensation
|
10,175
|
|
|
9,221
|
|
Change in other assets and liabilities, net
|
(224
|
)
|
|
5,874
|
|
Net cash provided by operating activities
|
35,646
|
|
|
80,530
|
|
Investing activities:
|
|
|
|
Capital expenditures
|
(25,918
|
)
|
|
(27,522
|
)
|
Payments for investments
|
(493
|
)
|
|
(2,558
|
)
|
Proceeds from sale of certain assets
|
6,047
|
|
|
23,390
|
|
Proceeds from insurance claim on property
|
3,500
|
|
|
—
|
|
Changes in other investing activities
|
—
|
|
|
1,401
|
|
Net cash used for investing activities
|
(16,864
|
)
|
|
(5,289
|
)
|
Financing activities:
|
|
|
|
Dividends paid
|
(36,661
|
)
|
|
(36,131
|
)
|
Payments for employee taxes withheld from stock awards
|
(1,587
|
)
|
|
(2,806
|
)
|
Proceeds from borrowings under revolving credit agreement
|
40,000
|
|
|
140,000
|
|
Repayments of borrowings under revolving credit agreement
|
(40,000
|
)
|
|
(325,000
|
)
|
Proceeds from convertible debt
|
—
|
|
|
195,167
|
|
Proceeds from sale and leaseback transaction
|
—
|
|
|
41,791
|
|
Deferred payments for acquisitions
|
(4,853
|
)
|
|
—
|
|
Changes in other financing activities
|
138
|
|
|
(17
|
)
|
Net cash (used for) provided by financing activities
|
(42,963
|
)
|
|
13,004
|
|
Effect of currency exchange rate change on cash
|
53
|
|
|
1,126
|
|
Increase (decrease) in cash and cash equivalents and restricted cash
|
(24,128
|
)
|
|
89,371
|
|
Balance of cash, cash equivalents, and restricted cash at beginning of period
|
116,861
|
|
|
144,032
|
|
Balance of cash, cash equivalents, and restricted cash at end of period
|
$
|
92,733
|
|
|
$
|
233,403
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
Cash paid for taxes, net of refunds
|
$
|
(327
|
)
|
|
$
|
5,179
|
|
Cash paid for interest
|
$
|
8,137
|
|
|
$
|
4,086
|
|
Non-cash investing and financing activities:
|
|
|
|
Accrued capital expenditures
|
$
|
1,819
|
|
|
$
|
1,252
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — Basis of presentation and summary of significant accounting policies
Description of business:
Gannett Co., Inc. is an innovative, digitally focused media and marketing solutions company committed to defining, strengthening, and growing our communities through digital engagement while also serving as a trusted, comprehensive digital marketing partner to local and national businesses. Gannett owns ReachLocal, Inc., 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 with more than
150
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. Additionally, the company has strong relationships with thousands of marketers in both our U.S. and U.K. markets due to our large local and national sales forces and robust advertising and marketing solutions product suite. The company reports in
two
operating segments: publishing and ReachLocal.
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, 2018
.
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 postretirement 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.
Cash and cash equivalents, including restricted cash:
Cash equivalents consist of investments with original maturities of three months or less. 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:
|
|
|
|
|
|
|
|
|
|
June 30,
|
In thousands
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
68,558
|
|
|
$
|
209,678
|
|
Restricted cash included in other current assets
|
2,607
|
|
|
4,419
|
|
Restricted cash included in investments and other assets
|
21,568
|
|
|
19,306
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
92,733
|
|
|
$
|
233,403
|
|
Leases:
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease assets, other current liabilities, and long-term operating lease liabilities on our
Condensed consolidated balance sheets
.
Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The rates implicit within the company's leases are generally not determinable; therefore, the company uses judgment to determine the incremental borrowing rate used to calculate the present value of lease payments. The incremental borrowing rate for each lease is primarily based on publicly-available information for companies within the same industry and with similar credit profiles and adjusted for the impact of collateralization, the lease term, and other specific terms included in the company’s lease arrangements. ROU assets are assessed for impairment in accordance with the company’s accounting policy for long-lived assets.
Our lease terms include options to extend or terminate. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to
terminate the lease is included if it is reasonably certain that the option will not be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
For certain equipment leases, we apply a portfolio approach to account for the operating lease ROU assets and liabilities.
New accounting pronouncements adopted:
The following are new accounting pronouncements that we adopted in the
first six months
of
2019
:
Leases:
On January 1, 2019, the company adopted ASU 2016-02 utilizing the modified retrospective transition method by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. We elected the package of practical expedients permitted under the transition guidance within the new standard, which allows us to carry forward 1) our historical lease classification, 2) our assessment on whether a contract is or contains a lease, and 3) our treatment of initial direct costs for any leases that exist prior to adoption of the new standard. We have also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. We did not elect to apply the hindsight practical expedient when determining the lease term and assessing impairment of right-of-use assets.
As a result of adopting the new standard, we recorded a one-time adjustment to beginning retained earnings of
$13.4 million
, consisting primarily of the recognition of deferred gains on sale-leaseback transactions, which are no longer deferred under the new guidance, net of the deferred tax impact. Based on the present value of the lease payments for the remaining lease term of the company's existing leases, we recognized net right-of-use assets of approximately
$268.9 million
and lease liabilities for operating leases of approximately
$317.4 million
on January 1, 2019. The standard did not materially impact our
Condensed consolidated statements of income
or
Condensed consolidated statements of cash flows
. Refer to
Note 3 — Leases
for further details on the company's leases.
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. Adopting this guidance did not have a material impact on our consolidated financial statements.
New accounting pronouncements not yet adopted:
The following are new accounting pronouncements that we are evaluating for future impacts on our 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 permitted, including adoption in any interim period. 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.
Financial Instruments—Credit Losses:
In June 2016, the FASB issued new guidance which amends the principles around the recognition of credit losses by mandating entities incorporate an estimate of current expected credit losses when determining the value of certain assets. The guidance also amends reporting around allowances for credit losses on available-for-sale marketable securities. 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.
NOTE 2 — Revenues
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.
The following table presents our revenues disaggregated by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Print advertising
|
$
|
184,252
|
|
|
$
|
227,894
|
|
|
$
|
370,438
|
|
|
$
|
453,720
|
|
Digital advertising and marketing services
|
184,076
|
|
|
192,269
|
|
|
363,125
|
|
|
376,755
|
|
Total advertising and marketing services
|
368,328
|
|
|
420,163
|
|
|
733,563
|
|
|
830,475
|
|
Circulation
|
247,092
|
|
|
263,806
|
|
|
499,819
|
|
|
530,392
|
|
Other
|
44,917
|
|
|
46,799
|
|
|
90,380
|
|
|
92,852
|
|
Total revenues
|
$
|
660,337
|
|
|
$
|
730,768
|
|
|
$
|
1,323,762
|
|
|
$
|
1,453,719
|
|
Additionally, approximately
11%
of our quarter to date and
12%
of our year to date revenues are generated from international locations.
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
six months ended June 30, 2019
by type of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Advertising and Other
|
|
Circulation
|
|
Total
|
Beginning balance
|
$
|
35,742
|
|
|
$
|
81,341
|
|
|
$
|
117,083
|
|
Cash receipts
|
136,553
|
|
|
407,271
|
|
|
543,824
|
|
Revenue recognized
|
(134,630
|
)
|
|
(408,491
|
)
|
|
(543,121
|
)
|
Ending balance
|
$
|
37,665
|
|
|
$
|
80,121
|
|
|
$
|
117,786
|
|
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 can last between
one
and
twelve
months. The remaining deferred revenue balance relates to advertising and other revenue. The
$0.7 million
increase
in deferred revenue as compared to the year ended
December 31, 2018
is primarily the result of increases in the recognition of revenue credits at our ReachLocal segment partially offset by declines in our circulation deferred revenue balance due to a decline in the number of prepaid subscribers and seasonality in our subscription activity.
NOTE 3 — Leases
We lease certain real estate, vehicles, and equipment. Our leases have remaining lease terms of
1
to
16
years, some of which may include options to extend the leases, and some of which may include options to terminate the leases. The exercise of lease renewal options is at our sole discretion. The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
As of
June 30, 2019
, our
Condensed consolidated balance sheets
include
$256.3 million
of operating lease right-to use assets,
$36.9 million
of short-term operating lease liabilities included in
Other current liabilities
, and
$264.7 million
of long-term operating lease liabilities.
The components of lease expense for the
three
and
six months ended June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended June 30, 2019
|
|
Six months ended June 30, 2019
|
Operating lease cost
(a)
|
$
|
15,831
|
|
|
$
|
32,813
|
|
Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less
|
600
|
|
|
1,079
|
|
Net lease cost
|
$
|
16,431
|
|
|
$
|
33,892
|
|
(a)
Net of sublease income, which is immaterial.
Future minimum lease payments under non-cancellable leases as of
June 30, 2019
are as follows:
|
|
|
|
|
In thousands
|
Year Ending December 31,
(a)
|
2019 (excluding the six months ended June 30, 2019)
|
$
|
25,409
|
|
2020
|
55,506
|
|
2021
|
50,431
|
|
2022
|
46,212
|
|
2023
|
38,572
|
|
Thereafter
|
192,006
|
|
Total future minimum lease payments
|
408,136
|
|
Less: Imputed interest
|
106,586
|
|
Total
|
$
|
301,550
|
|
(a)
Operating lease payments exclude
$4.4 million
of legally binding minimum lease payments for leases signed but not yet commenced.
Other information related to leases, all of which are operating leases, were as follows:
|
|
|
|
|
In thousands, except lease term and discount rate
|
Six months ended June 30, 2019
|
Supplemental cash flow information
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
33,460
|
|
Right-of-use assets obtained in exchange for lease obligations
|
$
|
17,892
|
|
|
|
|
As of June 30, 2019
|
Weighted-average remaining lease term (in years)
|
8.9
|
|
Weighted-average discount rate
|
6.7
|
%
|
NOTE 4 — 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 fourth quarter of
2019
based upon the achievement of certain revenue targets. The fair value of the contingent consideration at the acquisition date was
$9.5 million
. Based on WordStream's revenue results, the fair value of the remaining contingent consideration as of
June 30, 2019
was estimated at
$2.7 million
and is included within
Other current liabilities
on the
Condensed consolidated balance sheets
. We financed the transaction through borrowings under our Credit Facility and cash on hand.
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 of the purchase price is 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
|
66,742
|
|
Total assets acquired
|
183,482
|
|
Current liabilities
|
3,987
|
|
Noncurrent liabilities
|
16,562
|
|
Total liabilities assumed
|
20,549
|
|
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.
NOTE 5 — Restructuring activities and asset impairment charges
In response to the transition of our business from a legacy print publishing business into a digitally focused media and marketing solutions company, we have engaged in a series of individual restructuring programs. These programs are designed to transform and right size our employee base, consolidate facilities, and eliminate costs that are no longer necessary to run the ongoing business as a result of the evolution of the media industry from print to digital and changes in our business model. As a result of executing these restructuring programs, we have incurred severance charges for positions we do not expect to rehire in the future, facility consolidation costs, accelerated depreciation expenses, and certain asset impairment charges. As part of our plans, we are also 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 by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Publishing
|
$
|
5,150
|
|
|
$
|
7,033
|
|
|
$
|
12,310
|
|
|
$
|
12,661
|
|
ReachLocal
|
100
|
|
|
1,233
|
|
|
120
|
|
|
1,772
|
|
Corporate and Other
|
681
|
|
|
198
|
|
|
3,374
|
|
|
596
|
|
Total
|
$
|
5,931
|
|
|
$
|
8,464
|
|
|
$
|
15,804
|
|
|
$
|
15,029
|
|
The activity and balance of the severance-related liabilities for the
six months ended June 30, 2019
are as follows:
|
|
|
|
|
In thousands
|
|
Beginning balance
|
$
|
32,974
|
|
Expense
|
15,804
|
|
Payments
|
(44,499
|
)
|
Ending balance
|
$
|
4,279
|
|
Facility consolidation charges and accelerated depreciation:
We recorded facility consolidation charges by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Publishing
|
$
|
840
|
|
|
$
|
2,414
|
|
|
$
|
2,486
|
|
|
$
|
5,148
|
|
ReachLocal
|
—
|
|
|
1,733
|
|
|
120
|
|
|
1,733
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
37
|
|
|
—
|
|
Total
|
$
|
840
|
|
|
$
|
4,147
|
|
|
$
|
2,643
|
|
|
$
|
6,881
|
|
We incurred accelerated depreciation of
$0.6 million
and
$4.2 million
for the
three months ended June 30, 2019
and
2018
, respectively, which is included in depreciation expense. These expenses were related to the publishing segment. We incurred accelerated depreciation of
$2.3 million
and
$9.4 million
for the
six months ended June 30, 2019
and
2018
, respectively, which is included in depreciation expense. These expenses were related to the publishing segment.
Asset impairment charges:
We recorded charges for asset impairments of
$0.3 million
and
$10.5 million
for the
three months ended June 30, 2019
and
2018
, respectively, which consisted entirely of impairment charges for property, plant, and equipment related to the publishing segment. We recorded charges for asset impairments of
$0.8 million
and
$14.2 million
for the
six months ended June 30, 2019
and
2018
, respectively, which consisted of impairment charges for property, plant, and equipment 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 was accounted for under the financing method. In
May 2019
, the lease was terminated, and we recognized a gain of
$30.6 million
on our
Condensed consolidated statements of income
.
In
December 2018
, we sold property in Phoenix, Arizona and entered into a
7
-year leaseback agreement. The sale generated proceeds of approximately
$33.9 million
. We recorded a total deferred gain of
$13.2 million
at
December 31, 2018
,
$1.9 million
of which was within
Other current liabilities
and
$11.3 million
of which was within
Other noncurrent liabilities
on the
Condensed consolidated balance sheets
. This deferred gain was recognized in retained earnings as of January 1, 2019 upon adoption of the new leasing standard. Refer to
Note 1 — Basis of presentation and summary of significant accounting policies
for further details.
NOTE 6 — 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). The Credit Facility, which matures on
June 29, 2020
, allows us to 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). Up to
$50.0 million
of the Credit Facility is available for issuance of letters of credit. The Credit Facility includes several covenants, all of which we complied with as of
June 30, 2019
.
On June 29, 2019, the Company’s Credit Facility became current or due to be repaid on June 29, 2020. As disclosed in
Note 14 — Subsequent events
, the Company entered into an Agreement and Plan of Merger with New Media Investment Group on August 5, 2019. Should the transaction not close by June 29, 2020, management, with Board approval, will obtain such resources for the Company by refinancing the existing Credit Facility or obtaining new term debt. Management has the ability and intent to proceed with its plan to refinance the existing Credit Facility or obtain new term debt if necessary.
As of
June 30, 2019
, we had
$135.0 million
in outstanding borrowings under the Credit Facility and
$23.1 million
of letters of credit outstanding, leaving
$341.9 million
of availability remaining.
Convertible debt:
On
April 9, 2018
, we completed an offering of
4.75%
convertible senior notes, resulting in total aggregate principal of
$201.3 million
and net proceeds of approximately
$195.3 million
. 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.
The
$201.3 million
principal value of the notes was bifurcated into debt and equity components. The liability component is reported as convertible debt in the
Condensed consolidated balance sheets
was initially measured at fair value using the present value of its cash flows at a discount rate of
7.91%
. The carrying value, which approximates fair value, of the liability component was
$171.8 million
and
$169.3 million
at
June 30, 2019
and
December 31, 2018
, respectively. The residual amount is recorded within additional paid-in capital in the equity section of the
Condensed consolidated balance sheets
and totaled
$30.2 million
at both
June 30, 2019
and
December 31, 2018
.
$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 are amortized over the
6
-year contractual life of the notes. The unamortized discount totaled
$25.1 million
as of
June 30, 2019
, which will be amortized over the remaining contractual life of the notes. For the
three
and
six months ended June 30, 2019
, interest expense was
$2.4 million
and
$4.8 million
, respectively, amortization of debt issuance costs was
$0.2 million
and
$0.5 million
, respectively, and amortization of the discount was
$1.1 million
and
$2.1 million
, respectively. For the
three
and
six months ended June 30, 2018
, interest expense on the notes totaled
$2.2 million
, amortization of debt issuance costs was
$0.2 million
, and amortization of the discount was
$0.9 million
. The effective interest rate on the liability component of the notes was
7.91%
as of
June 30, 2019
and
June 30, 2018
.
For the
three
and
six months ended June 30, 2019
,
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 12 — Earnings per share
for details on the convertible debt's impact to diluted earnings per share under the treasury stock method.
NOTE 7 — 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), Newsquest and Romanes Pension Schemes in the U.K. (U.K. Pension Plans), and other defined benefit and defined contribution 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2019
|
|
2018
|
In thousands
|
Pension
|
|
OPEB
|
|
Pension
|
|
OPEB
|
Operating expenses:
|
|
|
|
|
|
|
|
Service cost - Benefits earned during the period
|
$
|
378
|
|
|
$
|
20
|
|
|
$
|
576
|
|
|
$
|
33
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
25,675
|
|
|
625
|
|
|
26,598
|
|
|
699
|
|
Expected return on plan assets
|
(36,543
|
)
|
|
—
|
|
|
(44,476
|
)
|
|
—
|
|
Amortization of prior service cost (benefit)
|
(513
|
)
|
|
(815
|
)
|
|
483
|
|
|
(884
|
)
|
Amortization of actuarial loss (gain)
|
16,034
|
|
|
(702
|
)
|
|
17,152
|
|
|
(275
|
)
|
Total non-operating expenses (credit)
|
$
|
4,653
|
|
|
$
|
(892
|
)
|
|
$
|
(243
|
)
|
|
$
|
(460
|
)
|
Total expense (benefit) for retirement plans
|
$
|
5,031
|
|
|
$
|
(872
|
)
|
|
$
|
333
|
|
|
$
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
In thousands
|
Pension
|
|
OPEB
|
|
Pension
|
|
OPEB
|
Operating expenses:
|
|
|
|
|
|
|
|
Service cost - Benefits earned during the period
|
$
|
807
|
|
|
$
|
52
|
|
|
$
|
1,178
|
|
|
$
|
88
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
51,371
|
|
|
1,407
|
|
|
52,019
|
|
|
1,482
|
|
Expected return on plan assets
|
(73,077
|
)
|
|
—
|
|
|
(89,025
|
)
|
|
—
|
|
Amortization of prior service cost (benefit)
|
(1,037
|
)
|
|
(1,627
|
)
|
|
962
|
|
|
(1,767
|
)
|
Amortization of actuarial loss (gain)
|
32,061
|
|
|
(932
|
)
|
|
32,533
|
|
|
(180
|
)
|
Curtailments
|
—
|
|
|
192
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
(1,018
|
)
|
|
—
|
|
|
—
|
|
Total non-operating expenses (credit)
|
$
|
9,318
|
|
|
$
|
(1,978
|
)
|
|
$
|
(3,511
|
)
|
|
$
|
(465
|
)
|
Total expense (benefit) for retirement plans
|
$
|
10,125
|
|
|
$
|
(1,926
|
)
|
|
$
|
(2,333
|
)
|
|
$
|
(377
|
)
|
During the
six months ended June 30, 2019
, we contributed
$44.0 million
and
$4.9 million
to our pension and other postretirement plans, respectively.
Multi-employer plans that provide pension benefits:
During the
six months ended June 30, 2019
, we incurred
$9.3 million
in restructuring costs on the
Condensed consolidated statements of income
associated with the assessment by the CWA/ITU Negotiated Pension Plan of the company's share of unfunded benefits due to the company's partial withdrawal as a result of restructuring activities. As of
June 30, 2019
, we had pension withdrawal liabilities of
$3.6 million
included in
Current liabilities
and
$39.4 million
included in
Other noncurrent liabilities
on the
Condensed consolidated balance sheets
.
NOTE 8 — Income taxes
The following table outlines our
pre-tax net income
and income tax amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pre-tax net income
|
$
|
39,454
|
|
|
$
|
16,207
|
|
|
$
|
23,967
|
|
|
$
|
15,701
|
|
Income tax expense (benefit)
|
12,729
|
|
|
(99
|
)
|
|
9,147
|
|
|
(228
|
)
|
Effective tax rate
|
32.3
|
%
|
|
***
|
|
|
38.2
|
%
|
|
***
|
|
*** Indicates a percentage that is not meaningful.
Our reported effective tax rate for the
three
and
six months ended June 30, 2019
was higher than the comparable periods ended
June 30, 2018
, primarily due to certain favorable adjustments recorded during the three months ended
June 30, 2018
such as rate change impacts stemming from tax reform of
$2.1 million
and the release of a deferred tax asset valuation allowance of
$1.7 million
. In addition, tax expense for the
three months ended June 30, 2019
was adversely impacted by
$1.9 million
from the sale of our Brazil subsidiary.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately
$23.7 million
as of
June 30, 2019
and
$22.5 million
as of
December 31, 2018
. The amount of accrued interest and penalties payable related to unrecognized tax benefits was
$1.6 million
as of
June 30, 2019
and
$1.2 million
as of
December 31, 2018
.
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 approximately
$0.7 million
within the next 12 months primarily due to lapses of statutes of limitations and settlements of ongoing audits in various jurisdictions.
NOTE 9 — Supplemental equity information
The following tables summarize equity activity for the
three
and
six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
In thousands, except per share data
|
Common Stock, $0.01 Par Value
|
|
Treasury Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
Beginning balance
|
$
|
1,202
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,822,967
|
|
|
$
|
(138,225
|
)
|
|
$
|
(597,176
|
)
|
|
$
|
1,038,722
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
26,725
|
|
|
—
|
|
|
26,725
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,217
|
|
|
14,217
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
40,942
|
|
Dividends declared: $0.16 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,334
|
)
|
|
—
|
|
|
(18,334
|
)
|
Restricted stock awards settled
|
1
|
|
|
—
|
|
|
(88
|
)
|
|
—
|
|
|
—
|
|
|
(87
|
)
|
Performance share units settled
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
5,091
|
|
|
—
|
|
|
—
|
|
|
5,091
|
|
Other activity
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Ending balance
|
$
|
1,203
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,827,963
|
|
|
$
|
(129,834
|
)
|
|
$
|
(582,959
|
)
|
|
$
|
1,066,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
In thousands, except per share data
|
Common Stock, $0.01 Par Value
|
|
Treasury Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
Beginning balance
|
$
|
1,186
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,786,424
|
|
|
$
|
(82,470
|
)
|
|
$
|
(636,642
|
)
|
|
$
|
1,018,452
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
16,306
|
|
|
—
|
|
|
16,306
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
91,723
|
|
|
91,723
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
108,029
|
|
Dividends declared: $0.16 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,195
|
)
|
|
—
|
|
|
(18,195
|
)
|
Convertible debt conversion feature
|
—
|
|
|
—
|
|
|
21,561
|
|
|
—
|
|
|
—
|
|
|
21,561
|
|
Restricted stock awards settled
|
1
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
103
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
4,569
|
|
|
—
|
|
|
—
|
|
|
4,569
|
|
Other activity
|
—
|
|
|
—
|
|
|
(119
|
)
|
|
—
|
|
|
—
|
|
|
(119
|
)
|
Ending balance
|
$
|
1,187
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,812,537
|
|
|
$
|
(84,359
|
)
|
|
$
|
(544,919
|
)
|
|
$
|
1,134,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
In thousands, except per share data
|
Common Stock, $0.01 Par Value
|
|
Treasury Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
Beginning balance
|
$
|
1,189
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,822,094
|
|
|
$
|
(121,435
|
)
|
|
$
|
(616,696
|
)
|
|
$
|
1,035,106
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
14,820
|
|
|
—
|
|
|
14,820
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,737
|
|
|
33,737
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
48,557
|
|
Dividends declared: $0.16 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(36,661
|
)
|
|
—
|
|
|
(36,661
|
)
|
Adoption of new lease guidance
(a)
|
—
|
|
|
—
|
|
|
—
|
|
|
13,442
|
|
|
—
|
|
|
13,442
|
|
Restricted stock awards settled
|
14
|
|
|
—
|
|
|
(4,498
|
)
|
|
—
|
|
|
—
|
|
|
(4,484
|
)
|
Performance share units settled
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
10,175
|
|
|
—
|
|
|
—
|
|
|
10,175
|
|
Other activity
|
—
|
|
|
—
|
|
|
192
|
|
|
—
|
|
|
—
|
|
|
192
|
|
Ending balance
|
$
|
1,203
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,827,963
|
|
|
$
|
(129,834
|
)
|
|
$
|
(582,959
|
)
|
|
$
|
1,066,327
|
|
(a)
This amount represents the lease transition adjustment, which is primarily related to the recognition of previously deferred gains on sale leaseback transactions totaling
$13.6 million
, net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
In thousands, except per share data
|
Common Stock, $0.01 Par Value
|
|
Treasury Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
Beginning balance
|
$
|
1,175
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,786,941
|
|
|
$
|
(64,158
|
)
|
|
$
|
(656,517
|
)
|
|
$
|
1,017,395
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
15,929
|
|
|
—
|
|
|
15,929
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
111,598
|
|
|
111,598
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
127,527
|
|
Dividends declared: $0.16 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(36,130
|
)
|
|
—
|
|
|
(36,130
|
)
|
Convertible debt conversion feature
|
—
|
|
|
—
|
|
|
21,561
|
|
|
—
|
|
|
—
|
|
|
21,561
|
|
Restricted stock awards settled
|
8
|
|
|
—
|
|
|
(3,100
|
)
|
|
—
|
|
|
—
|
|
|
(3,092
|
)
|
Performance share units settled
|
4
|
|
|
—
|
|
|
(2,437
|
)
|
|
—
|
|
|
—
|
|
|
(2,433
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,221
|
|
|
—
|
|
|
—
|
|
|
9,221
|
|
Other activity
|
—
|
|
|
—
|
|
|
351
|
|
|
—
|
|
|
—
|
|
|
351
|
|
Ending balance
|
$
|
1,187
|
|
|
$
|
(50,046
|
)
|
|
$
|
1,812,537
|
|
|
$
|
(84,359
|
)
|
|
$
|
(544,919
|
)
|
|
$
|
1,134,400
|
|
Approximately
1.5 million
and
1.2 million
new shares were issued for the
six months ended June 30, 2019
and
2018
, respectively.
The following tables summarize the components of, and the changes in, Accumulated other comprehensive loss (net of tax) for the
six months ended June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
In thousands
|
Retirement Plans
|
|
Foreign Currency Translation
|
|
Total
|
Beginning balance
|
$
|
(929,170
|
)
|
|
$
|
312,474
|
|
|
$
|
(616,696
|
)
|
Other comprehensive income (loss) before reclassifications
|
7,700
|
|
|
4,567
|
|
|
12,267
|
|
Amounts reclassified from accumulated other comprehensive loss
|
21,470
|
|
|
—
|
|
|
21,470
|
|
Other comprehensive income
|
29,170
|
|
|
4,567
|
|
|
33,737
|
|
Ending balance
|
$
|
(900,000
|
)
|
|
$
|
317,041
|
|
|
$
|
(582,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
In thousands
|
Retirement Plans
|
|
Foreign Currency Translation
|
|
Total
|
Beginning balance
|
$
|
(1,000,790
|
)
|
|
$
|
344,273
|
|
|
$
|
(656,517
|
)
|
Other comprehensive income (loss) before reclassifications
|
101,753
|
|
|
(13,936
|
)
|
|
87,817
|
|
Amounts reclassified from accumulated other comprehensive loss
|
23,781
|
|
|
—
|
|
|
23,781
|
|
Other comprehensive income
|
125,534
|
|
|
(13,936
|
)
|
|
111,598
|
|
Ending balance
|
$
|
(875,256
|
)
|
|
$
|
330,337
|
|
|
$
|
(544,919
|
)
|
Accumulated other comprehensive loss components are included in computing net periodic postretirement costs as outlined in
Note 7 — Pensions and other postretirement benefit plans
. Reclassifications out of accumulated other comprehensive loss related to these postretirement plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amortization of prior service credit, net
|
$
|
(1,328
|
)
|
|
$
|
(401
|
)
|
|
$
|
(2,664
|
)
|
|
$
|
(805
|
)
|
Amortization of actuarial loss
|
15,332
|
|
|
16,877
|
|
|
31,129
|
|
|
32,353
|
|
Total reclassifications, before tax
|
14,004
|
|
|
16,476
|
|
|
28,465
|
|
|
31,548
|
|
Income tax effect
|
(3,440
|
)
|
|
(4,064
|
)
|
|
(6,995
|
)
|
|
(7,767
|
)
|
Total reclassifications, net of tax
|
$
|
10,564
|
|
|
$
|
12,412
|
|
|
$
|
21,470
|
|
|
$
|
23,781
|
|
NOTE 10 — 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
June 30, 2019
and
December 31, 2018
, 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 fair value estimate of the earn-out liability related to the company’s acquisition of WordStream in
July 2018
was
$2.7 million
as of
June 30, 2019
. 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 Credit Facility is recorded at carrying value, which approximates fair value, in the
Condensed consolidated balance sheets
and is classified as Level 3.
We also have certain assets requiring fair value measurement on a non-recurring basis. Our assets measured on a non-recurring 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
$31.1 million
as of
June 30, 2019
and
$23.3 million
as of
December 31, 2018
.
NOTE 11 — Commitments, contingencies and other matters
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
2016
, 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 12 — Earnings per share
The following table is a reconciliation of 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 June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
114,521
|
|
|
112,946
|
|
|
114,485
|
|
|
112,852
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
Restricted stock units
|
821
|
|
|
2,243
|
|
|
1,087
|
|
|
2,245
|
|
Performance share units
|
1,346
|
|
|
954
|
|
|
1,787
|
|
|
855
|
|
Stock options
|
4
|
|
|
76
|
|
|
16
|
|
|
83
|
|
Weighted average number of shares outstanding - diluted
|
116,692
|
|
|
116,219
|
|
|
117,375
|
|
|
116,035
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
Earnings per share - diluted
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
For the
three
and
six months ended June 30, 2019
, approximately
327,000
and
374,000
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
six months ended June 30, 2018
, approximately
209,000
and
719,000
outstanding common stock equivalents, respectively, were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.
On
May 6, 2019
, we declared a dividend of
$0.16
per share of common stock, which was paid on
June 24, 2019
, to shareholders of record as of the close of business on
June 10, 2019
. Furthermore, on
July 23, 2019
, we declared a dividend of
$0.16
per share of common stock, payable on
September 30, 2019
, to shareholders of record as of the close of business on
September 16, 2019
.
NOTE 13 — Segment reporting
We define our reportable segments based on the way the Chief Operating Decision Maker (CODM) function, currently the Interim Chief Operating Officer, manages our 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 exclusively of our ReachLocal digital marketing solutions subsidiaries including SweetIQ and WordStream. The results of this segment include advertising revenues from our search and display services and revenues related to 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 function uses adjusted EBITDA to evaluate the performance of the segments and allocate resources. Adjusted EBITDA is a non-GAAP financial performance measure that the company believes offers a useful view of the overall operation of our business. The company defines adjusted EBITDA as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) restructuring costs, (6) asset impairment charges, (7) other items (including acquisition-related expenses, certain business transformation costs, litigation expenses, and gains or losses on certain investments), and (8) depreciation and amortization. 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 and do not represent ongoing expenses necessary to conduct our day-to-day operations.
The following tables present our segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment eliminations
|
|
Consolidated
|
Advertising and marketing services - external sales
|
$
|
269,762
|
|
|
$
|
98,566
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
368,328
|
|
Advertising and marketing services - intersegment sales
|
16,092
|
|
|
—
|
|
|
—
|
|
|
(16,092
|
)
|
|
—
|
|
Circulation
|
247,092
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
247,092
|
|
Other
|
43,227
|
|
|
—
|
|
|
1,690
|
|
|
—
|
|
|
44,917
|
|
Total revenues
|
$
|
576,173
|
|
|
$
|
98,566
|
|
|
$
|
1,690
|
|
|
$
|
(16,092
|
)
|
|
$
|
660,337
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
90,664
|
|
|
$
|
12,200
|
|
|
$
|
(26,642
|
)
|
|
$
|
—
|
|
|
$
|
76,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment Eliminations
|
|
Consolidated
|
Advertising and marketing services - external sales
|
$
|
319,728
|
|
|
$
|
100,435
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
420,163
|
|
Advertising and marketing services - intersegment sales
|
16,027
|
|
|
—
|
|
|
—
|
|
|
(16,027
|
)
|
|
—
|
|
Circulation
|
263,806
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
263,806
|
|
Other
|
44,990
|
|
|
—
|
|
|
1,809
|
|
|
—
|
|
|
46,799
|
|
Total revenues
|
$
|
644,551
|
|
|
$
|
100,435
|
|
|
$
|
1,809
|
|
|
$
|
(16,027
|
)
|
|
$
|
730,768
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
94,358
|
|
|
$
|
10,271
|
|
|
$
|
(19,030
|
)
|
|
$
|
—
|
|
|
$
|
85,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment eliminations
|
|
Consolidated
|
Advertising and marketing services - external sales
|
$
|
537,816
|
|
|
$
|
195,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
733,563
|
|
Advertising and marketing services - intersegment sales
|
30,618
|
|
|
—
|
|
|
—
|
|
|
(30,618
|
)
|
|
—
|
|
Circulation
|
499,819
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
499,819
|
|
Other
|
87,087
|
|
|
—
|
|
|
3,293
|
|
|
—
|
|
|
90,380
|
|
Total revenues
|
$
|
1,155,340
|
|
|
$
|
195,747
|
|
|
$
|
3,293
|
|
|
$
|
(30,618
|
)
|
|
$
|
1,323,762
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
172,047
|
|
|
$
|
19,831
|
|
|
$
|
(52,330
|
)
|
|
$
|
—
|
|
|
$
|
139,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Intersegment eliminations
|
|
Consolidated
|
Advertising and marketing services - external sales
|
$
|
633,552
|
|
|
$
|
196,923
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
830,475
|
|
Advertising and marketing services - intersegment sales
|
30,200
|
|
|
—
|
|
|
—
|
|
|
(30,200
|
)
|
|
—
|
|
Circulation
|
530,392
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
530,392
|
|
Other
|
89,067
|
|
|
—
|
|
|
3,785
|
|
|
—
|
|
|
92,852
|
|
Total revenues
|
$
|
1,283,211
|
|
|
$
|
196,923
|
|
|
$
|
3,785
|
|
|
$
|
(30,200
|
)
|
|
$
|
1,453,719
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
172,116
|
|
|
$
|
16,480
|
|
|
$
|
(47,929
|
)
|
|
$
|
—
|
|
|
$
|
140,667
|
|
The following table presents our reconciliation of adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (GAAP basis)
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
Provision (benefit) for income taxes
|
12,729
|
|
|
(99
|
)
|
|
9,147
|
|
|
(228
|
)
|
Interest expense
|
6,879
|
|
|
5,935
|
|
|
13,844
|
|
|
10,413
|
|
Other non-operating items, net
|
6,104
|
|
|
(4,042
|
)
|
|
9,134
|
|
|
(8,353
|
)
|
Operating income (GAAP basis)
|
52,437
|
|
|
18,100
|
|
|
46,945
|
|
|
17,761
|
|
Depreciation and amortization
|
35,466
|
|
|
38,378
|
|
|
72,511
|
|
|
78,630
|
|
Gain on sale of property
|
(32,768
|
)
|
|
—
|
|
|
(33,650
|
)
|
|
—
|
|
Restructuring costs
|
6,771
|
|
|
12,611
|
|
|
27,730
|
|
|
21,910
|
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
803
|
|
|
14,239
|
|
Other items
|
14,042
|
|
|
6,027
|
|
|
25,209
|
|
|
8,127
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
76,222
|
|
|
$
|
85,599
|
|
|
$
|
139,548
|
|
|
$
|
140,667
|
|
Asset information by segment is not a key measure of performance used by the CODM function. 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 14 — Subsequent events
On August 5, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with New Media Investment Group Inc., a Delaware corporation (“New Media”), Arctic Holdings LLC, a Delaware limited liability company and wholly owned subsidiary of New Media (“Intermediate HoldCo”), and Arctic Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Intermediate Holdco (“Merger Sub”), pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a direct wholly owned subsidiary of Intermediate Holdco and indirect wholly owned subsidiary of New Media.
Under the terms of the Merger Agreement, at the time the Merger becomes effective (the "Effective Time") each Company common share issued and outstanding immediately prior to the Effective Time will be automatically converted into (i)
0.5427
shares of common stock of New Media and (ii) the right to receive
$6.25
in cash, without interest, plus cash in lieu of any fractional shares of New Media common stock that otherwise would have been issued.
The Company and New Media have made customary representations, warranties and covenants in the Merger Agreement. The closing of the Merger is subject to the adoption of the Merger Agreement by the Company’s and New Media's respective shareholders and other customary closing conditions.
Gannett also announced that Paul Bascobert has been appointed President and Chief Executive Officer and a member of the Gannett Board of Directors, effective immediately. Mr. Bascobert will become Chief Executive Officer of the new combined operating company to be formed in connection with the transaction.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures should be read in conjunction with our unaudited condensed consolidated financial statements and related notes. Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described under Cautionary Statement Regarding Forward-Looking Statements and throughout this Quarterly Report, as well as the factors described in our
2018
Annual Report on Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission, particularly under "Risk Factors."
Overview
Gannett Co., Inc. is an innovative, digitally focused media and marketing solutions company committed to defining, strengthening, and growing our communities through digital engagement while also serving as a trusted, comprehensive digital marketing partner to local and national businesses. Gannett owns ReachLocal, Inc., 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 with more than
150
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. Additionally, the company has strong relationships with thousands of marketers in both our U.S. and U.K. markets due to our large local and national sales forces and robust advertising and marketing solutions product suite. The company reports in two operating segments: publishing and ReachLocal.
Certain matters affecting current and future operating results
The following items affect period-over-period comparisons from
2018
and will continue to affect period-over-period comparisons for future results:
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 business and agencies, for approximately
$132.5 million
, net of cash acquired. In addition, up to
$20.0 million
of additional consideration is payable in
2019
and
2020
based upon the achievement of certain revenue targets.
Restructuring and asset impairment costs
In response to the transition of our business from a legacy print publishing business into a digitally focused media and marketing solutions company, we have engaged in a series of individual restructuring programs. These programs are designed to transform and right size our employee base, consolidate facilities, and eliminate costs that are no longer necessary to run the
ongoing business as a result of the evolution of the media industry from print to digital and changes in our business model. Facility consolidation initiatives include the disposition or consolidation of older buildings, production and distribution facilities, relocations to more efficient, flexible, digitally-oriented facilities. These restructuring programs have led us to recognize severance charges for positions that we do not expect to re-hire in the future, facility consolidation charges, accelerated depreciation expenses for plant and equipment assets related to operations that will be shut down as part of a restructuring program and that cannot be relocated or repurposed, charges related to the partial withdrawal from a multi-employer pension plan, and certain asset impairment charges. As part of our plans, we are also selling certain assets which we have classified as held-for-sale and for which we have reduced carrying values to equal fair value less costs to dispose.
In conjunction with these programs, we incurred restructuring costs of
$6.8 million
and
$12.6 million
in the
second quarter
of
2019
and
2018
, respectively, and
$27.7 million
and
$21.9 million
in the
first six months
of
2019
and
2018
, respectively. Included in these restructuring costs are severance costs of
$5.9 million
and
$8.5 million
for the
second quarter
of
2019
and
2018
, respectively, and
$15.8 million
and
$15.0 million
for the
first six months
of
2019
and
2018
, respectively. Also included in restructuring costs in the
first six months
of
2019
were
$9.3 million
of charges related to a withdrawal assessment from a multi-employer plan associated with a facility closure.
We recorded accelerated depreciation of
$0.6 million
and
$4.2 million
in the
second quarter
of
2019
and
2018
, respectively, and
$2.3 million
and
$9.4 million
in the
first six months
of
2019
and
2018
, respectively.
We recorded asset impairment charges of
$0.3 million
and
$10.5 million
in the
second quarter
of
2019
and
2018
, respectively, and
$0.8 million
and
$14.2 million
in the
first six months
of
2019
and
2018
, respectively.
Foreign currency
Our U.K. publishing operations are conducted through our Newsquest subsidiary, and ReachLocal has foreign operations in Canada and the Asia-Pacific region. Earnings from operations in foreign regions are translated into U.S. dollars at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date.
With respect to Newsquest, the average exchange rate used to translate U.K. results for the
second quarter
of
2019
was
1.29
compared to
1.36
for the comparable period last year. This
5%
decrease
in the exchange rate
unfavorably
impacted
second quarter
of
2019
revenue comparisons by approximately
$3.8 million
. Newsquest results for the
first six months
of
2019
were translated at an average rate of
1.29
compared to
1.37
for the comparable period last year. This
6%
decrease
in the exchange rate
unfavorably
impacted revenue comparisons for the
first six months
of
2019
by approximately
$8.2 million
.
Impacts stemming from foreign currency translation gains and losses at our ReachLocal subsidiary
unfavorably
impacted revenues by
$0.7 million
for the
second quarter
of
2019
and
unfavorably
impacted revenues by
$2.2 million
for the
first six months
of
2019
.
Newsprint supply
The newsprint supply available to U.S. publishers is volatile. In the
first six months
of
2018
, many Canadian producers were subjected to significant anti-dumping and countervailing duties upon importation of newsprint into the U.S. Those duties were ultimately eliminated by the International Trade Commission in September
2018
, but their imposition in the first half of
2018
disrupted the newsprint market by driving prices higher and incentivizing Canadian producers to reduce their shipments of newsprint into the United States.
Newsprint expense at our publishing segment was
22%
lower
in the
second quarter
of
2019
compared to the
second quarter
of
2018
due primarily to declines in circulation volumes. Newsprint expense was
13%
lower
for the
first six months
of
2019
compared to the
first six months
of
2018
due to declines in circulation volumes which were partially offset by the utilization of higher priced newsprint in the first quarter of
2019
.
Outlook for the remainder of
2019
In
2019
, we remain focused on executing our strategic vision of being essential to consumers and marketers seeking meaningful community connections across print, digital, and other channels. In
2018
, we completed our organizational realignment that reorganized our business into two functions - Marketing Solutions and Consumer. In our Marketing Solutions business, we are focused on developing a more comprehensive suite of marketing products and services, including the
integration of the WordStream acquisition. Although print advertising will remain challenged due to market pressures, we are aggressively focused on driving a deeper penetration of our digital advertising and marketing service products within our local client base as well as acquiring new clients. Our Consumer organization is focused on growing our audiences and deepening engagement, in part by expanding our spectrum of content beyond traditional news into new verticals and platforms. We will continue to focus on operational excellence by working to maximize the efficiency of our print, sales, administrative, and distribution functions to reduce costs. We also will continue to pursue our strategy of growing our business through selective acquisitions and investments.
Results of Operations
Consolidated Summary
A summary of our segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
$
|
576,173
|
|
|
$
|
644,551
|
|
|
(11
|
%)
|
|
$
|
1,155,340
|
|
|
$
|
1,283,211
|
|
|
(10
|
%)
|
ReachLocal
|
98,566
|
|
|
100,435
|
|
|
(2
|
%)
|
|
195,747
|
|
|
196,923
|
|
|
(1
|
%)
|
Corporate and other
|
1,690
|
|
|
1,809
|
|
|
(7
|
%)
|
|
3,293
|
|
|
3,785
|
|
|
(13
|
%)
|
Intersegment eliminations
|
(16,092
|
)
|
|
(16,027
|
)
|
|
—
|
%
|
|
(30,618
|
)
|
|
(30,200
|
)
|
|
1
|
%
|
Total operating revenues
|
660,337
|
|
|
730,768
|
|
|
(10
|
%)
|
|
1,323,762
|
|
|
1,453,719
|
|
|
(9
|
%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
$
|
476,920
|
|
|
$
|
595,553
|
|
|
(20
|
%)
|
|
$
|
1,013,927
|
|
|
$
|
1,195,048
|
|
|
(15
|
%)
|
ReachLocal
|
100,516
|
|
|
102,131
|
|
|
(2
|
%)
|
|
205,920
|
|
|
201,545
|
|
|
2
|
%
|
Corporate and other
|
46,556
|
|
|
31,011
|
|
|
50
|
%
|
|
87,588
|
|
|
69,565
|
|
|
26
|
%
|
Intersegment eliminations
|
(16,092
|
)
|
|
(16,027
|
)
|
|
—
|
%
|
|
(30,618
|
)
|
|
(30,200
|
)
|
|
1
|
%
|
Total operating expenses
|
607,900
|
|
|
712,668
|
|
|
(15
|
%)
|
|
1,276,817
|
|
|
1,435,958
|
|
|
(11
|
%)
|
Operating income
|
52,437
|
|
|
18,100
|
|
|
***
|
|
|
46,945
|
|
|
17,761
|
|
|
***
|
|
Non-operating expense
|
(12,983
|
)
|
|
(1,893
|
)
|
|
***
|
|
|
(22,978
|
)
|
|
(2,060
|
)
|
|
***
|
|
Income before income taxes
|
39,454
|
|
|
16,207
|
|
|
***
|
|
|
23,967
|
|
|
15,701
|
|
|
53
|
%
|
Provision (benefit) for income taxes
|
12,729
|
|
|
(99
|
)
|
|
***
|
|
|
9,147
|
|
|
(228
|
)
|
|
***
|
|
Net income
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
64
|
%
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
64
|
%
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
(7
|
%)
|
*** Indicates an absolute value percentage change greater than 100.
Intersegment eliminations in the preceding table represent digital advertising marketing services revenues and expenses associated with products sold by our U.S. local publishing sales teams but which are fulfilled by our ReachLocal segment. When discussing segment results, these revenues and expenses are presented gross but are eliminated in consolidation.
Operating revenues
:
Our publishing segment generates revenue primarily through advertising and subscriptions for our print and digital publications. Our advertising teams sell local, national, and classified advertising across multiple platforms including print, online, mobile, and tablet as well as niche publications. In addition, our publishing segment advertising teams sell digital marketing services which are primarily delivered by teams within our ReachLocal segment. Circulation revenues are derived principally from home delivery and single copy sales of our publications and distributing our publications on our digital platforms. Other revenues are derived mainly from commercial printing and distribution arrangements.
Our ReachLocal segment generates advertising and marketing services revenues through multiple services including search advertising, display advertising, search optimization, social media, website development, web presence products, and software-as-a-service solutions.
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Total operating revenues were
$660.3 million
for the
second quarter
of
2019
, a
decrease
of
10%
from the same period in
2018
. This
decrease
was primarily attributable to continued softness in publishing segment advertising revenues of
$49.9 million
, reflecting decreased demand for print advertising, as well as declining trends in circulation revenues of
$16.7 million
due to lower single copy and home delivery circulation volumes, partially offset by modest increases from our strategic pricing programs and an increase in digital-only subscription revenues. In addition, there was a
decrease
in revenues of
$1.9 million
from ReachLocal. Foreign currency rate fluctuations
negatively
affected operating revenues by
$4.5 million
.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Total operating revenues were
$1.3 billion
for the
first six months
of
2019
, a
decrease
of
9%
from the same period in
2018
. This
decrease
was primarily attributable to continued softness in publishing segment advertising revenues of
$95.3 million
, reflecting decreased demand for print advertising, as well as declining trends in circulation revenues of
$30.6 million
due to lower single copy and home delivery circulation volumes, partially offset by modest increases from our strategic pricing programs and an increase in digital-only subscription revenues. In addition, there was a
decrease
in revenues of
$1.2 million
from ReachLocal. Foreign currency rate fluctuations
negatively
affected operating revenues by
$10.4 million
.
Operating expenses
:
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Payroll and benefits are the largest components of our operating expenses. Other significant operating expenses include production and distribution costs.
Total operating expenses were
$607.9 million
for the
second quarter
of
2019
, a
decrease
of
15%
from the same period in
2018
. Publishing segment expenses
decreased
by
$118.6 million
, primarily attributable to continued cost efficiency efforts, a reduction in cost of sales due to lower print advertising and circulation revenues, and lower expenses related to benefits. Corporate operating expenses
increased
50%
from the same period in
2018
primarily due to
$12.1 million
of costs related to the proxy contest with MNG Enterprises, Inc. and its affiliates. In addition, there was a
decrease
in operating expenses of
$1.6 million
from ReachLocal. Foreign currency rate fluctuations also
decreased
expenses by
$3.1 million
.
Impacting operating expenses for the
second quarter
of
2019
, and included in the numbers above, were gains on the sale of property of
$32.8 million
, restructuring charges of
$6.8 million
, accelerated depreciation of
$0.6 million
, and asset impairment charges of
$0.3 million
. Impacting the
second quarter
of
2018
were restructuring charges of
$12.6 million
, asset impairment charges of
$10.5 million
, accelerated depreciation of
$4.2 million
, and acquisition costs of
$3.0 million
.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Total operating expenses were
$1.3 billion
for the
first six months
of
2019
, a
decrease
of
11%
from the same period in
2018
. Publishing segment expenses
decreased
by
$181.1 million
, primarily attributable to continued cost efficiency efforts, a reduction in cost of sales due to lower print advertising and circulation revenues, and lower expenses related to benefits. This
decrease
was partially offset by a
26%
increase
in corporate segment operating expenses stemming from
$17.8 million
of costs related to the proxy contest and an
increase
in operating expenses from ReachLocal of
$4.4 million
. Foreign currency rate fluctuations also
decreased
expenses by
$8.0 million
.
Impacting operating expenses for the
first six months
of
2019
, and included in the numbers above, were gains on the sale of property of
$33.7 million
, restructuring charges of
$27.7 million
, accelerated depreciation of
$2.3 million
, and asset impairment charges of
$0.8 million
. Impacting the
first six months
of
2018
were restructuring charges of
$21.9 million
, asset impairment charges of
$14.2 million
, accelerated depreciation of
$9.4 million
, and acquisition costs of
$3.9 million
.
Publishing segment
A summary of our publishing segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
$
|
285,854
|
|
|
$
|
335,755
|
|
|
(15
|
%)
|
|
$
|
568,434
|
|
|
$
|
663,752
|
|
|
(14
|
%)
|
Circulation
|
247,092
|
|
|
263,806
|
|
|
(6
|
%)
|
|
499,819
|
|
|
530,392
|
|
|
(6
|
%)
|
Other
|
43,227
|
|
|
44,990
|
|
|
(4
|
%)
|
|
87,087
|
|
|
89,067
|
|
|
(2
|
%)
|
Total operating revenues
|
576,173
|
|
|
644,551
|
|
|
(11
|
%)
|
|
1,155,340
|
|
|
1,283,211
|
|
|
(10
|
%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
361,125
|
|
|
406,702
|
|
|
(11
|
%)
|
|
730,563
|
|
|
818,705
|
|
|
(11
|
%)
|
Selling, general and administrative expenses
|
124,541
|
|
|
144,764
|
|
|
(14
|
%)
|
|
254,634
|
|
|
293,934
|
|
|
(13
|
%)
|
Depreciation and amortization
|
17,758
|
|
|
24,157
|
|
|
(26
|
%)
|
|
37,497
|
|
|
50,446
|
|
|
(26
|
%)
|
Gain on sale of property
|
(32,768
|
)
|
|
—
|
|
|
***
|
|
|
(33,650
|
)
|
|
—
|
|
|
***
|
|
Restructuring costs
|
5,990
|
|
|
9,447
|
|
|
(37
|
%)
|
|
24,079
|
|
|
17,724
|
|
|
36
|
%
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
(97
|
%)
|
|
804
|
|
|
14,239
|
|
|
(94
|
%)
|
Total operating expenses
|
476,920
|
|
|
595,553
|
|
|
(20
|
%)
|
|
1,013,927
|
|
|
1,195,048
|
|
|
(15
|
%)
|
Operating income
|
$
|
99,253
|
|
|
$
|
48,998
|
|
|
***
|
|
|
$
|
141,413
|
|
|
$
|
88,163
|
|
|
60
|
%
|
*** Indicates an absolute value percentage change greater than 100.
Operating revenues
:
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Advertising and marketing services revenues were
$285.9 million
for the
second quarter
of
2019
, a
decrease
of
15%
compared to the same period in
2018
, which is primarily attributable to a
$43.6 million
decrease
in print advertising revenues as a result of reduced demand consistent with general trends adversely impacting the publishing industry. In addition, digital advertising and marketing revenues
decrease
d
$6.3 million
compared to the same period in
2018
due largely to weakness in local digital media and digital classified revenue streams. Foreign currency exchange rates
negatively
affected advertising revenues by
$2.3 million
.
Print advertising revenues were
$184.3 million
for the
second quarter
of
2019
, a
decrease
of
19%
compared to the same period in
2018
. Local and national print advertising revenues were
$84.2 million
and
$39.3 million
, respectively, for the
second quarter
of
2019
, a
decrease
of
19%
and
21%
, respectively, compared to the same period in
2018
. These
declines
are attributable to reduced demand consistent with general trends adversely impacting the publishing industry. Classified print advertising revenues of
$60.8 million
for the
second quarter
of
2019
decreased
19%
compared to the same period in
2018
, primarily attributable to
declines
in real estate, automotive, and employment advertising revenues of
$3.5 million
,
$3.1 million
, and
$2.3 million
, respectively. Foreign currency exchange rates
negatively
affected print advertising revenues by
$1.5 million
.
Digital advertising and marketing services revenues were
$101.6 million
for the
second quarter
of
2019
, a
decrease
of
6%
compared to the same period in
2018
. Digital media revenues were
$65.7 million
for the
second quarter
of
2019
, a
decrease
of
4%
compared to the same period in
2018
, primarily due to weakness in on and off platform revenues at our local markets, partially offset by continued strength from our national sales channel. Digital classified revenues were
$15.7 million
for the
second quarter
of
2019
, a
decrease
of
19%
compared to the same period in
2018
due to
decreases
in digital employment and automotive revenues of
$1.6 million
and
$0.6 million
, respectively, as a result of reduced demand. Digital marketing services revenues were
$20.2 million
for the
second quarter
of
2019
, an
increase
of
1%
compared to the same period in
2018
. This
increase
was attributable to growth at Newsquest and an
increase
in average spend per client in our local domestic markets partially offset by an overall decline in client counts. Foreign currency exchange rates
negatively
affected total digital advertising revenues by
$0.8 million
.
Circulation revenues were
$247.1 million
for the
second quarter
of
2019
, a
decrease
of
6%
compared to the same period in
2018
. Print circulation revenues were
$193.5 million
for the
second quarter
of
2019
, a
decrease
of
4%
from the same period in
2018
due to a reduction in volume of our single copy and home delivery sales, reflecting general industry trends, offset by increases from our strategic pricing programs. Digital circulation revenues were
$53.6 million
for the
second quarter
of
2019
, a
14%
decrease
from the same period in
2018
primarily due to
declines
in full-access subscriptions and the associated allocations to digital resulting
from pricing changes to print products, partially offset by an increase in digital-only circulation subscriptions. Foreign currency exchange rates
negatively
affected circulation revenues by
$1.1 million
.
Commercial printing and other revenues of
$43.2 million
in the
second quarter
of
2019
decreased
4%
compared to the same period in
2018
. Other revenues accounted for approximately
8%
of total revenues for the quarter.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Advertising and marketing services revenues were
$568.4 million
for the
first six months
of
2019
, a
decrease
of
14%
compared to the same period in
2018
, which is primarily attributable to a
$83.3 million
decrease
in print advertising revenues as a result of reduced demand consistent with general trends adversely impacting the publishing industry. In addition, digital advertising and marketing revenues
decrease
d
$12.0 million
compared to the same period in
2018
. Foreign currency exchange rates
negatively
affected advertising revenues by
$5.0 million
.
Print advertising revenues were
$370.4 million
for the
first six months
of
2019
, a
decrease
of
18%
compared to the same period in
2018
. Local and national print advertising revenues were
$166.2 million
and
$79.8 million
, respectively, for the
first six months
of
2019
,
decrease
s of
18%
each, compared to the same period in
2018
. These
declines
are attributable to reduced demand consistent with general trends adversely impacting the publishing industry. Classified print advertising revenues of
$124.5 million
for the
first six months
of
2019
decreased
19%
compared to the same period in
2018
, primarily attributable to
declines
in real estate, automotive, and employment advertising revenues of
$7.4 million
,
$6.4 million
, and
$4.5 million
, respectively. Foreign currency exchange rates
negatively
affected print advertising revenues by
$3.3 million
.
Digital advertising and marketing services revenues were
$198.0 million
for the
first six months
of
2019
, a
decrease
of
6%
compared to the same period in
2018
. Digital media revenues were
$126.9 million
for the
first six months
of
2019
, a
decrease
of
5%
compared to the same period in
2018
, primarily due to weakness in audience extension revenues at our local markets, partially offset by continued strength from our national sales channel. Digital classified revenues were
$32.6 million
for the
first six months
of
2019
, a
decrease
of
17%
compared to the same period in
2018
due to
decreases
in digital classified employment and automotive revenues of
$2.6 million
and
$1.2 million
, respectively, as a result of reduced demand. Digital marketing services revenues were
$38.5 million
for the
first six months
of
2019
, an
increase
of
3%
compared to the same period in
2018
. This
increase
was attributable to growth at Newsquest and an
increase
in average spend per client in our local domestic markets. Foreign currency exchange rates
negatively
affected total digital advertising revenues by
$1.7 million
.
Circulation revenues were
$499.8 million
for the
first six months
of
2019
, a
decrease
of
6%
compared to the same period in
2018
. Print circulation revenues were
$388.0 million
for the
first six months
of
2019
, a
decrease
of
4%
from the same period in
2018
due to a reduction in volume of our single copy and home delivery sales, reflecting general industry trends, offset by increases from our strategic pricing programs. Digital circulation revenues were
$111.8 million
for the
first six months
of
2019
, a
12%
decrease
from the same period in
2018
primarily due to declines in full-access subscriptions and the associated allocations to digital resulting from pricing changes to print products, partially offset by an increase in digital-only circulation subscriptions. Foreign currency exchange rates
negatively
affected circulation revenues by
$2.4 million
.
Commercial printing and other revenues of
$87.1 million
in the
first six months
of
2019
decreased
2%
compared to the same period in
2018
. Other revenues accounted for approximately
8%
of total revenues for the year.
Operating expenses
:
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Cost of sales were
$361.1 million
for the
second quarter
of
2019
, a
decrease
of
11%
from the same period in
2018
. This
decrease
was primarily driven by continued cost efficiency efforts as well as an overall decline in circulation volumes that reduced production and distribution costs by
28%
and
10%
, respectively. Foreign currency exchange rate fluctuations
decreased
cost of sales by
$1.9 million
.
Total selling, general, and administrative expenses were
$124.5 million
for the
second quarter
of
2019
, a
decrease
of
14%
from the same period in
2018
, primarily attributable to continued company-wide cost efficiency efforts resulting in reductions in information technology, marketing, and building expenses of
7%
,
20%
, and
33%
, respectively, as well as a general decrease in employee benefits costs. Foreign currency exchange rate fluctuations
decreased
selling, general, and administrative expenses by
$1.1 million
.
Depreciation and amortization expense was
$17.8 million
for the
second quarter
of
2019
, a
26%
decrease
from the same period in
2018
, primarily attributable to a
$3.7 million
decrease
in accelerated depreciation associated with our facility consolidation efforts in the
second quarter
of
2019
compared to the prior year period. Foreign currency exchange rates
decreased
depreciation expense by
$0.2 million
.
Impacting operating expenses for the
second quarter
of
2019
were gains on the sale of property of
$32.8 million
, restructuring charges of
$6.0 million
, and asset impairment charges of
$0.3 million
. Impacting operating expenses for the
second quarter
of
2018
asset impairment charges of
$10.5 million
and restructuring charges of
$9.4 million
.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Cost of sales were
$730.6 million
for the
first six months
of
2019
, a
decrease
of
11%
from the same period in
2018
. This
decrease
was primarily driven by continued cost efficiency efforts as well as an overall decline in circulation volumes that reduced production and distribution costs by
17%
and
10%
, respectively. Foreign currency exchange rate fluctuations
decreased
cost of sales by
$4.2 million
.
Total selling, general, and administrative expenses were
$254.6 million
for the
first six months
of
2019
, a
decrease
of
13%
from the same period in
2018
, primarily attributable to continued company-wide cost efficiency efforts resulting in reductions in information technology, marketing, and building expenses of
7%
,
24%
, and
21%
, respectively, as well as a general decrease in employee benefits costs. Foreign currency exchange rate fluctuations
decreased
selling, general, and administrative expenses by
$2.5 million
.
Depreciation and amortization expense was
$37.5 million
for the
first six months
of
2019
, a
26%
decrease
from the same period in
2018
, primarily attributable to a
$7.1 million
decrease
in accelerated depreciation associated with our facility consolidation efforts in the
first six months
of
2019
compared to the prior year period. Foreign currency exchange rates
decreased
depreciation expense by
$0.4 million
.
Impacting operating expenses for the
first six months
of
2019
were gains on the sale of property of
$33.7 million
, restructuring charges of
$24.1 million
, and asset impairment charges of
$0.8 million
. Impacting operating expenses for the
first six months
of
2018
were restructuring charges of
$17.7 million
and asset impairment charges of
$14.2 million
.
Publishing segment adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Operating income (GAAP basis)
|
$
|
99,253
|
|
|
$
|
48,998
|
|
|
***
|
|
|
$
|
141,413
|
|
|
$
|
88,163
|
|
|
60
|
%
|
Depreciation and amortization
|
17,758
|
|
|
24,157
|
|
|
(26
|
%)
|
|
37,497
|
|
|
50,446
|
|
|
(26
|
%)
|
Gain on sale of property
|
(32,768
|
)
|
|
—
|
|
|
***
|
|
|
(33,650
|
)
|
|
—
|
|
|
***
|
|
Restructuring costs
|
5,990
|
|
|
9,447
|
|
|
(37
|
%)
|
|
24,079
|
|
|
17,724
|
|
|
36
|
%
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
(97
|
%)
|
|
804
|
|
|
14,239
|
|
|
(94
|
%)
|
Other items
|
157
|
|
|
1,273
|
|
|
(88
|
%)
|
|
1,904
|
|
|
1,544
|
|
|
23
|
%
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
90,664
|
|
|
$
|
94,358
|
|
|
(4
|
%)
|
|
$
|
172,047
|
|
|
$
|
172,116
|
|
|
—
|
%
|
*** Indicates an absolute value percentage change greater than 100.
Adjusted EBITDA for our publishing segment was
$90.7 million
for the
second quarter
of
2019
, a
decrease
of
4%
compared to the same period in
2018
. The
decrease
was primarily attributable to declines in print advertising and circulation revenues, partially offset by ongoing operating efficiencies. Adjusted EBITDA was
unfavorably
impacted by
$0.7 million
of foreign exchange rate changes.
Adjusted EBITDA for our publishing segment was
$172.0 million
for the
first six months
of
2019
, flat compared to the same period in
2018
. This was primarily attributable to declines in print advertising and circulation revenues, partially offset by ongoing operating efficiencies. Adjusted EBITDA was
unfavorably
impacted by
$1.5 million
of foreign exchange rate changes.
ReachLocal
A summary of our ReachLocal segment results is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
$
|
98,566
|
|
|
$
|
100,435
|
|
|
(2
|
)%
|
|
$
|
195,747
|
|
|
$
|
196,923
|
|
|
(1
|
)%
|
Total operating revenues
|
98,566
|
|
|
100,435
|
|
|
(2
|
)%
|
|
195,747
|
|
|
196,923
|
|
|
(1
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
53,015
|
|
|
57,633
|
|
|
(8
|
)%
|
|
105,120
|
|
|
112,605
|
|
|
(7
|
)%
|
Selling, general and administrative expenses
|
34,249
|
|
|
32,636
|
|
|
5
|
%
|
|
74,477
|
|
|
68,026
|
|
|
9
|
%
|
Depreciation and amortization
|
13,152
|
|
|
8,896
|
|
|
48
|
%
|
|
26,084
|
|
|
17,409
|
|
|
50
|
%
|
Restructuring costs
|
100
|
|
|
2,966
|
|
|
(97
|
)%
|
|
239
|
|
|
3,505
|
|
|
(93
|
)%
|
Total operating expenses
|
100,516
|
|
|
102,131
|
|
|
(2
|
)%
|
|
205,920
|
|
|
201,545
|
|
|
2
|
%
|
Operating loss
|
$
|
(1,950
|
)
|
|
$
|
(1,696
|
)
|
|
15
|
%
|
|
$
|
(10,173
|
)
|
|
$
|
(4,622
|
)
|
|
***
|
|
*** Indicates an absolute value percentage change greater than 100.
|
|
|
|
|
|
|
As of date
|
June 30, 2019
|
|
December 31, 2018
|
Active Clients
(a)
|
17,300
|
|
|
20,800
|
|
Active Product Units
(b)
|
34,400
|
|
|
40,300
|
|
(a)
Active Clients is a number calculated to approximate the number of clients served. Active Clients is calculated by adjusting the number of Active Product Units to combine clients with more than one Active Product Unit as a single Active Client. Clients with more than one location are generally reflected as multiple Active Clients with the exception of SweetIQ and WordStream clients. SweetIQ and WordStream clients are generally reflected as single clients regardless of the number of locations served. Because this number includes clients served through ReachLocal's reseller channel, Active Clients includes entities with which ReachLocal does not have a direct contractual relationship. Numbers are rounded to the nearest hundred and do not include (1) clients at Newsquest using the ReachLocal platform (as ReachLocal does not recognize the revenues associated with these services) and (2) clients from operations which were exited or sold as of the end of the period.
(b)
Active Product Units is a number calculated to approximate the number of individual products, licenses, or services we are providing under contract for Active Clients. For example, if we were performing both SEM and display campaigns for a client that also licenses lead conversion software, we would consider each service separately, resulting in three Active Product Units. Similarly, if a client purchases SEM campaigns for two different products or purposes, we consider each product or purpose as separate Active Product Units. Numbers are rounded to the nearest hundred and do not include (1) clients at Newsquest using the ReachLocal platform (as ReachLocal does not recognize the revenues associated with these services) and (2) clients from operations which were exited or sold as of the end of the period.
Operating revenues
:
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Advertising and marketing services revenues were
$98.6 million
for the
second quarter
of
2019
, a
decrease
of
2%
compared to the same period in
2018
, which included revenues from international entities of
$10.7 million
for the
second quarter
of
2019
as compared to
$25.8 million
in
2018
. The
decrease
was primarily attributable to a
decline
of
$12.5 million
due to the disposition of certain international affiliates in the latter half of
2018
and early
2019
as well as a decrease of
$4.0 million
primarily due to a reduction in the core North American business largely reflecting general reduction in client counts, partially offset by revenues of
$17.3 million
from WordStream, which was acquired in
July 2018
.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Advertising and marketing services revenues were
$195.7 million
for the
first six months
of
2019
, a
decrease
of
1%
compared to the same period in
2018
, which included revenues from international entities of
$26.4 million
for the
first six months
of
2019
as compared to
$51.9 million
in
2018
. The
decrease
was primarily attributable to a
decrease
in revenues from international entities of
$20.5 million
due to the disposition of certain international affiliates in the latter half of
2018
and early
2019
as well as a decrease of
$8.4 million
primarily due to a general reduction in client counts, partially offset by revenues of
$32.7 million
from WordStream, which was acquired in
July 2018
.
The
decrease
in both Active Clients and Active Product Units as of
June 30, 2019
as compared to
December 31, 2018
is primarily attributable the disposition of certain international affiliates in the latter half of
2018
and the first half of
2019
.
Operating expenses
:
Quarter ended
June 30, 2019
versus quarter ended
June 30, 2018
Cost of sales, which includes online media acquired from third parties, costs to manage and operate ReachLocal's solutions and technology infrastructure, and other third-party direct costs, was
$53.0 million
for the
second quarter
of
2019
, a
decrease
of
8%
compared to the same period in
2018
. Cost of online media acquired from third-party publishers totaled
$40.5 million
compared to
$45.6 million
for the same period in
2018
. This
decrease
was attributable to reduced expenses of
$10.1 million
stemming from the disposition of certain international affiliates in the latter half of
2018
and early
2019
, partially offset by
$2.8 million
in additional expenses due to the addition of WordStream as well as lower average margins in North America. Cost of sales as a percentage of revenue declined due to scaling of the ReachLocal business and the addition of WordStream's higher margins.
Selling, general, and administrative expenses were
$34.2 million
for the
second quarter
of
2019
, an
increase
of
5%
compared to the same period in
2018
. Selling and marketing expenses were effectively flat compared to the same period in
2018
as reduced costs from the disposition of certain international affiliates of
$4.6 million
were offset by increased expenses of
$4.7 million
due to the acquisition of WordStream. Product and technology expenses
increased
$1.2 million
compared to the same period in
2018
, primarily due to the addition of WordStream expenses of
$1.5 million
. Other selling, general, and administrative costs
increased
$0.4 million
as compared to same period in
2018
due to increased expenses of
$3.7 million
from the acquisition of WordStream partially offset by reduced expenses of
$3.1 million
due to the disposition of certain international affiliates and lower costs in North America.
Depreciation and amortization were
$13.2 million
for the
second quarter
of
2019
, an
increase
of
48%
compared to the
second quarter
of
2018
. This
increase
was primarily attributable to increased depreciation of
$1.2 million
and
$2.8 million
in amortization related to the WordStream acquisition.
Six months ended June 30, 2019
versus
six months ended June 30, 2018
Cost of sales, which includes online media acquired from third parties, costs to manage and operate ReachLocal's solutions and technology infrastructure, and other third-party direct costs, was
$105.1 million
for the
first six months
of
2019
, a
decrease
of
7%
compared to the same period in
2018
. Cost of online media acquired from third-party publishers totaled
$80.0 million
compared to
$88.7 million
for the same period in
2018
. This
decrease
was attributable to reduced expenses stemming from the disposition of certain international affiliates in the latter half of
2018
of
$15.1 million
, partially offset by
$5.6 million
in additional expenses due to the addition of WordStream and lower average margins in North America. Cost of sales as a percentage of revenue declined due to scaling of the ReachLocal business and the addition of WordStream's higher margins.
Selling, general, and administrative expenses were
$74.5 million
for the
first six months
of
2019
, an
increase
of
9%
compared to the same period in
2018
. Selling and marketing expenses were effectively flat compared to the same period in
2018
as reduced costs from the disposition of certain international affiliates of
$6.7 million
and lower costs of
$2.4 million
were offset by increased expenses of
$9.2 million
due to the acquisition of WordStream. Product and technology expenses
increased
$2.6 million
compared to the same period in
2018
, primarily due to the addition of WordStream expenses of
$3.1 million
. Other selling, general, and administrative costs
increased
$4.0 million
as compared to same period in
2018
due to increased expenses of
$9.3 million
from the acquisition of WordStream partially offset by reduced expenses of
$4.2 million
due to the disposition of certain international affiliates and lower costs in North America.
Depreciation and amortization were
$26.1 million
for the
first six months
of
2019
, an
increase
of
50%
compared to the
first six months
of
2018
. This
increase
was primarily attributable to increased depreciation of
$2.6 million
and
$5.7 million
in amortization related to the WordStream acquisition.
ReachLocal segment adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Operating loss (GAAP basis)
|
$
|
(1,950
|
)
|
|
$
|
(1,696
|
)
|
|
15
|
%
|
|
$
|
(10,173
|
)
|
|
$
|
(4,622
|
)
|
|
***
|
|
Depreciation and amortization
|
13,152
|
|
|
8,896
|
|
|
48
|
%
|
|
26,084
|
|
|
17,409
|
|
|
50
|
%
|
Restructuring costs
|
100
|
|
|
2,966
|
|
|
(97
|
%)
|
|
239
|
|
|
3,505
|
|
|
(93
|
%)
|
Other items
|
898
|
|
|
105
|
|
|
***
|
|
|
3,681
|
|
|
188
|
|
|
***
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
12,200
|
|
|
$
|
10,271
|
|
|
19
|
%
|
|
$
|
19,831
|
|
|
$
|
16,480
|
|
|
20
|
%
|
*** Indicates an absolute value percentage change greater than 100.
Adjusted EBITDA for our ReachLocal segment was
$12.2 million
for the
second quarter
of
2019
, an
increase
of
19%
compared to the same period in
2018
. Profitability improved in
2019
primarily due to the addition of the higher margin WordStream business of
$5.5 million
, offset by the reduction in client counts and disposition of certain international affiliates.
Adjusted EBITDA for our ReachLocal segment was
$19.8 million
for the
first six months
of
2019
, an
increase
of
20%
compared to the same period in
2018
. Profitability improved in
2019
primarily due to the addition of the higher margin WordStream business of
$9.1 million
, offset by the reduction in client counts and disposition of certain international affiliates.
Corporate and other
Corporate operating expenses were
$46.6 million
for the
second quarter
of
2019
, an
increase
of
50%
compared to the same period in
2018
primarily due to
$12.1 million
of costs related to the proxy contest.
Corporate operating expenses were
$87.6 million
for the
first six months
of
2019
, an
increase
of
26%
compared to the same period in
2018
primarily due to
$17.8 million
of costs related to the proxy contest.
Non-operating expense
Interest expense:
Interest expense for the
second quarter
of
2019
was
$6.9 million
compared to
$5.9 million
in the same period in
2018
. Interest expense for the
first six months
of
2019
was
$13.8 million
compared to
$10.4 million
in the same period in
2018
. The
increase
in interest expense for both periods is due to a higher effective interest rate incurred on our larger convertible debt balance when compared to the effective interest rate and outstanding balance on our Credit Facility.
Other non-operating items, net:
Our non-operating items, net, are driven by certain items that fall outside of our normal business operations. Non-operating items, net, consisted of
$6.1 million
in
expense
for the
second quarter
of
2019
compared to
$4.0 million
in
income
for the same period in
2018
. The
decrease
was primarily attributable to
increase
in non-operating pension expense of
$4.3 million
.
Non-operating items, net, consisted of
$9.1 million
in
expense
for the
first six months
of
2019
compared to
$8.4 million
in
income
for the same period in
2018
. The
decrease
was primarily attributable to
increase
in non-operating pension expense of
$10.9 million
.
Income tax expense (benefit)
The following table outlines our
pre-tax net income
and income tax amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pre-tax net income
|
$
|
39,454
|
|
|
$
|
16,207
|
|
|
$
|
23,967
|
|
|
$
|
15,701
|
|
Income tax expense (benefit)
|
12,729
|
|
|
(99
|
)
|
|
9,147
|
|
|
(228
|
)
|
Effective tax rate
|
32.3
|
%
|
|
***
|
|
|
38.2
|
%
|
|
***
|
|
*** Indicates a percentage that is not meaningful.
Our reported effective tax rate for the
three
and
six months ended June 30, 2019
was higher than the comparable periods ended
June 30, 2018
, primarily due to certain favorable adjustments recorded during the three months ended
June 30, 2018
such as rate change impacts stemming from tax reform of
$2.1 million
and the release of a deferred tax asset valuation allowance of
$1.7 million
. In addition, tax expense for the
second quarter
of
2019
was adversely impacted by
$1.9 million
from the sale of our Brazil subsidiary.
Net income
and
diluted earnings per share
Net income
was
$26.7 million
and diluted
earnings
per share was
$0.23
for the
second quarter
of
2019
compared to
net income
of
$16.3 million
and diluted
earnings
per share of
$0.14
for the same period in
2018
.
Net income
was
$14.8 million
and diluted
earnings
per share was
$0.13
for the
first six months
of
2019
compared to
net income
of
$15.9 million
and diluted
earnings
per share of
$0.14
for the same period in
2018
. The change reflects the various items discussed above.
Liquidity and capital resources
Our operations, which have historically generated strong positive cash flow, along with our Credit Facility, are expected to provide sufficient liquidity to meet our requirements, including those for investments, expected dividends, and expected share repurchases. For strategic acquisitions, we will consider financing options as appropriate.
Details of our cash flows are included in the table below:
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
Net cash provided by operating activities
|
$
|
35,646
|
|
|
$
|
80,530
|
|
Net cash used for investing activities
|
(16,864
|
)
|
|
(5,289
|
)
|
Net cash (used for) provided by financing activities
|
(42,963
|
)
|
|
13,004
|
|
Effect of currency exchange rate change on cash
|
53
|
|
|
1,126
|
|
Net increase (decrease) in cash
|
$
|
(24,128
|
)
|
|
$
|
89,371
|
|
Operating cash flows
Our net cash flow from operating activities was
$35.6 million
for the
first six months
of
2019
, a decrease of
$44.9 million
compared to the same period in
2018
. The decrease in net cash flow from operating activities was primarily attributable to increased severance payments of
$27.7 million
driven by the
2018
early retirement opportunity program and a net
$6.1 million
settlement paid in connection with the Casagrand class action lawsuit filed in January 2014. The decrease is also attributable to the payment of costs incurred as a direct result of the proxy contest.
Investing cash flows
Cash flows used for investing activities totaled
$16.9 million
for the
first six months
of
2019
, primarily consisting of capital expenditures of
$25.9 million
, partially offset by proceeds from sale of certain assets of
$6.0 million
and proceeds from insurance claim on property of
$3.5 million
.
Cash flows used for investing activities totaled
$5.3 million
for the
first six months
of
2018
, primarily consisting of capital expenditures of
$27.5 million
and payments for investments of
$2.6 million
, partially offset by proceeds from sale of certain assets of
$23.4 million
.
Financing cash flows
Cash flows used for financing activities totaled
$43.0 million
for the
first six months
of
2019
, primarily consisting of payment of dividends to our shareholders of
$36.7 million
, additional consideration of
$4.9 million
for the acquisition of WordStream, and payments for employee taxes withheld from stock awards of
$1.6 million
.
Cash flows provided by financing activities totaled
$13.0 million
for the
first six months
of
2018
, primarily consisting of net proceeds from our convertible debt of
$195.2 million
and proceeds from the sale and leaseback of properties accounted for under the financing method of
$41.8 million
, partially offset by the net repayments of borrowings under our Credit Facility of
$185.0 million
, payment of dividends to our shareholders of
$36.1 million
, and payments for employee taxes withheld from stock awards of
$2.8 million
.
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). The Credit Facility, which matures on June 29, 2020, allows us to 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). Up to
$50.0 million
of the Credit Facility is available for issuance of letters of credit. The Credit Facility includes several covenants, all of which we complied with as of
June 30, 2019
.
On June 29, 2019, the Company’s Credit Facility became current or due to be repaid on June 29, 2020. As disclosed in
Note 14 — Subsequent events
, the Company entered into an Agreement and Plan of Merger with New Media Investment Group on August 5, 2019. Should the transaction not close by June 29, 2020, management, with Board approval, will obtain such resources for the Company by refinancing the existing Credit Facility or obtaining new term debt. Management has the ability and intent to proceed with its plan to refinance the existing Credit Facility or obtain new term debt if necessary.
As of
June 30, 2019
, we had
$135.0 million
in outstanding borrowings under the Credit Facility and
$23.1 million
of letters of credit outstanding, leaving
$341.9 million
of availability remaining.
Convertible debt
On
April 9, 2018
, we completed an offering of
4.75%
convertible senior notes, resulting in total aggregate principal of
$201.3 million
and net proceeds of approximately
$195.3 million
. 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.
For the
three
and
six months ended June 30, 2019
and
2018
, no shares were issued upon conversion, exercise, or satisfaction of the required conditions because no conversion triggers were considered met during those periods.
Additional information
On
May 6, 2019
, we declared a dividend of
$0.16
per share of common stock, which was paid on
June 24, 2019
, to shareholders of record as of the close of business on
June 10, 2019
. Furthermore, on
July 23, 2019
, we declared a dividend of
$0.16
per share of common stock, payable on
September 30, 2019
, to shareholders of record as of the close of business on
September 16, 2019
.
Results of operations - non-GAAP information
Presentation of non-GAAP information:
We use non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation from or as a substitute for the related GAAP measures and should be read together with financial information presented on a GAAP basis.
In this report, we present adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share (EPS), which are non-GAAP financial performance measures that exclude from our reported GAAP results restructuring, asset impairment, other business transformation charges, and certain gains and losses resulting from a series of individual operational changes that we have undertaken in response to the evolution of the media industry from print to digital. These transformational changes include severance charges for positions eliminated in connection with efforts to transform and right-size our employee base that we do not expect to re-hire in the future; facility consolidation charges related to disposition or consolidation of older buildings, production and distribution facilities, relocations to more efficient, flexible, digitally-oriented facilities; accelerated depreciation expenses for plant and equipment assets related to operations that will be shut down as part of a restructuring program and that cannot be relocated or repurposed, and certain asset impairment charges. As part of our plans, we have also sold assets which we have classified as held-for-sale, which may require us to recognize gains or losses upon completion of the sales. As we continue to execute on our business transformation strategy, we are likely to incur similar additional expenses, charges, and gains or losses related to our restructuring initiatives. Although each restructuring effort is unique, we expect to report the
charges incurred in a manner similar to the reporting of prior restructuring items for which the applicable GAAP financial measures have historically been adjusted and to report future non-GAAP financial measures excluding such items.
We use non-GAAP financial measures for purposes of evaluating our performance and liquidity. We believe each of the non-GAAP measures presented provides our investors and the finance community information to understand how our strategies are being executed and how our core business is performing without consideration of expenses, charges, and gains or losses that are not indicative of normal, ongoing operations. These measures also allow stakeholders to view our businesses through the eyes of our management and Board of Directors, facilitate comparison of our core operating results across historical periods, and provide a focus on the ongoing operating performance of our business. Many of our peer group companies present similar non-GAAP measures to better facilitate industry comparisons.
We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:
|
|
•
|
Adjusted EBITDA
is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our businesses. 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) asset impairment charges, (7) other items (including acquisition-related expenses, certain business transformation costs, litigation expenses, and gains or losses on certain investments), and (8) depreciation and amortization. When adjusted EBITDA is discussed in this report, the most directly comparable GAAP financial measure is net income.
|
|
|
•
|
Adjusted net income
is a non-GAAP financial performance measure we use for the purpose of calculating adjusted EPS. Adjusted net income is defined as net income before the adjustments we apply in calculating adjusted EPS as described below. We believe presenting adjusted net income is useful to enable investors to understand how we calculate adjusted EPS, which provides a useful view of the overall operation of our business. When adjusted net income is described in this report, the most directly comparable GAAP financial measure is net income.
|
|
|
•
|
Adjusted EPS
is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our business. We define adjusted EPS as EPS before tax-effected (1) restructuring costs, (2) asset impairment charges, (3) non-operating gains and losses, and (4) other items (including acquisition-related expenses, certain business transformation expenses, litigation expenses, and gains or losses on certain investments). The tax impact on these non-GAAP tax deductible adjustments is based on the estimated statutory tax rates for the U.K. of 19% and the U.S. of 25.5%. When adjusted EPS is discussed in this report, the most directly comparable GAAP financial measure is diluted EPS.
|
|
|
•
|
Free cash flow
is a non-GAAP liquidity measure that adjusts our reported GAAP results for items we believe are critical to the ongoing success of our business. We define free cash flow as cash flow from operating activities less capital expenditures, which results in a figure representing free cash flow available for use in operations, additional investments, debt obligations, and returns to shareholders. When free cash flow is discussed in this report, the most directly comparable GAAP financial measure is net cash from operating activities.
|
Discussion of non-GAAP financial results:
The following is a discussion of our as adjusted non-GAAP financial results.
Adjusted EBITDA
Reconciliations of adjusted EBITDA from net income presented in accordance with GAAP on our unaudited
Condensed consolidated statements of income
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Net income (GAAP basis)
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
64
|
%
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
|
(7
|
%)
|
Provision (benefit) for income taxes
|
12,729
|
|
|
(99
|
)
|
|
***
|
|
|
9,147
|
|
|
(228
|
)
|
|
***
|
|
Interest expense
|
6,879
|
|
|
5,935
|
|
|
16
|
%
|
|
13,844
|
|
|
10,413
|
|
|
33
|
%
|
Other non-operating items, net
|
6,104
|
|
|
(4,042
|
)
|
|
***
|
|
|
9,134
|
|
|
(8,353
|
)
|
|
***
|
|
Operating income (GAAP basis)
|
52,437
|
|
|
18,100
|
|
|
***
|
|
|
46,945
|
|
|
17,761
|
|
|
***
|
|
Depreciation and amortization
|
35,466
|
|
|
38,378
|
|
|
(8
|
%)
|
|
72,511
|
|
|
78,630
|
|
|
(8
|
%)
|
Gain on sale of property
|
(32,768
|
)
|
|
—
|
|
|
***
|
|
|
(33,650
|
)
|
|
—
|
|
|
***
|
|
Restructuring costs
|
6,771
|
|
|
12,611
|
|
|
(46
|
%)
|
|
27,730
|
|
|
21,910
|
|
|
27
|
%
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
(97
|
%)
|
|
803
|
|
|
14,239
|
|
|
(94
|
%)
|
Other items
(a)
|
14,042
|
|
|
6,027
|
|
|
***
|
|
|
25,209
|
|
|
8,127
|
|
|
***
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
76,222
|
|
|
$
|
85,599
|
|
|
(11
|
%)
|
|
$
|
139,548
|
|
|
$
|
140,667
|
|
|
(1
|
%)
|
*** Indicates an absolute value percentage change greater than 100.
(a)
Includes costs incurred as a direct result of the proxy contest of
$12.1 million
and
$17.8 million
for the
second quarter
and
first six months
of
2019
, respectively.
Adjusted EBITDA was
$76.2 million
in the
second quarter
of
2019
, a
11%
decrease
compared to the same period in
2018
. The
decrease
was primarily attributable to declines in print advertising and circulation revenues, partially offset by ongoing operating efficiencies. Adjusted EBITDA was
unfavorably
impacted by
$0.6 million
of foreign exchange rate changes.
Adjusted EBITDA was
$139.5 million
in the
first six months
of
2019
, a
1%
decrease
compared to the same period in
2018
. The
decrease
was primarily attributable to declines in print advertising and circulation revenues, partially offset by ongoing operating efficiencies. Adjusted EBITDA was
unfavorably
impacted by
$1.3 million
of foreign exchange rate changes.
Consolidated adjusted EPS:
Reconciliations of adjusted diluted EPS from
net income
presented accordance with GAAP on our unaudited
Condensed consolidated statements of income
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands, except per share data
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Gain on sale of property
|
$
|
(32,768
|
)
|
|
$
|
—
|
|
|
***
|
|
|
$
|
(33,650
|
)
|
|
$
|
—
|
|
|
***
|
|
Restructuring costs (including accelerated depreciation)
|
7,324
|
|
|
16,833
|
|
|
(56
|
%)
|
|
29,984
|
|
|
31,293
|
|
|
(4
|
%)
|
Asset impairment charges
|
274
|
|
|
10,483
|
|
|
(97
|
%)
|
|
803
|
|
|
14,239
|
|
|
(94
|
%)
|
Loss (gain) from other non-operating activities
|
4,810
|
|
|
(2,862
|
)
|
|
***
|
|
|
4,308
|
|
|
(2,728
|
)
|
|
***
|
|
Other items
(a)
|
14,077
|
|
|
4,294
|
|
|
***
|
|
|
24,596
|
|
|
5,932
|
|
|
***
|
|
Pretax impact
|
(6,283
|
)
|
|
28,748
|
|
|
***
|
|
|
26,041
|
|
|
48,736
|
|
|
(47
|
%)
|
Income tax impact of above items
|
1,714
|
|
|
(7,173
|
)
|
|
***
|
|
|
(6,484
|
)
|
|
(12,100
|
)
|
|
(46
|
%)
|
Tax benefit
|
—
|
|
|
(2,094
|
)
|
|
(100
|
%)
|
|
—
|
|
|
(2,094
|
)
|
|
(100
|
%)
|
Other tax-related items
|
1,879
|
|
|
—
|
|
|
***
|
|
|
1,879
|
|
|
—
|
|
|
***
|
|
Impact of items affecting comparability on net income (loss)
|
$
|
(2,690
|
)
|
|
$
|
19,481
|
|
|
***
|
|
|
$
|
21,436
|
|
|
$
|
34,542
|
|
|
(38
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (GAAP basis)
|
$
|
26,725
|
|
|
$
|
16,306
|
|
|
64
|
%
|
|
$
|
14,820
|
|
|
$
|
15,929
|
|
|
(7
|
%)
|
Impact of items affecting comparability on net income (loss)
|
(2,690
|
)
|
|
19,481
|
|
|
***
|
|
|
21,436
|
|
|
34,542
|
|
|
(38
|
%)
|
Adjusted net income (non-GAAP basis)
|
$
|
24,035
|
|
|
$
|
35,787
|
|
|
(33
|
%)
|
|
$
|
36,256
|
|
|
$
|
50,471
|
|
|
(28
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted (GAAP basis)
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
64
|
%
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
(7
|
%)
|
Impact of items affecting comparability on net income (loss)
|
(0.02
|
)
|
|
0.17
|
|
|
***
|
|
|
0.18
|
|
|
0.29
|
|
|
(38
|
%)
|
Adjusted earnings per share - diluted (non-GAAP basis)
|
$
|
0.21
|
|
|
$
|
0.31
|
|
|
(32
|
%)
|
|
$
|
0.31
|
|
|
$
|
0.43
|
|
|
(28
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding (GAAP basis)
|
116,692
|
|
|
116,219
|
|
|
—
|
%
|
|
117,375
|
|
|
116,035
|
|
|
1
|
%
|
Diluted weighted average number of common shares outstanding (non-GAAP basis)
|
116,692
|
|
|
116,219
|
|
|
—
|
%
|
|
117,375
|
|
|
116,035
|
|
|
1
|
%
|
*** Indicates an absolute value percentage change greater than 100.
(a)
Includes costs incurred as a direct result of the proxy contest of
$12.1 million
and
$17.8 million
for the
three
and
six months ended June 30, 2019
, respectively.
Adjusted EPS on a fully diluted basis were
$0.21
for the
second quarter
of
2019
compared to
$0.31
for the same period in
2018
. The
decrease
in adjusted diluted EPS was attributable to same items discussed above for adjusted EBITDA in addition to the recognition of a non-operating gain on the sale of property of
$30.6 million
.
Adjusted EPS on a fully diluted basis were
$0.31
for the
first six months
of
2019
compared to
$0.43
for the same period in
2018
. The
decrease
in adjusted diluted EPS was attributable to same items discussed above for adjusted EBITDA in addition to the recognition of a non-operating gain on the sale of property of
$30.6 million
.
The following table presents a reconciliation of the weighted average number of outstanding basic shares on a GAAP basis to the adjusted, non-GAAP weighted average number of outstanding diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average number of shares outstanding - basic (GAAP basis)
|
114,521
|
|
|
112,946
|
|
|
114,485
|
|
|
112,852
|
|
Effect of dilutive securities (GAAP basis)
|
|
|
|
|
|
|
|
Restricted stock units
|
821
|
|
|
2,243
|
|
|
1,087
|
|
|
2,245
|
|
Performance share units
|
1,346
|
|
|
954
|
|
|
1,787
|
|
|
855
|
|
Stock options
|
4
|
|
|
76
|
|
|
16
|
|
|
83
|
|
Weighted average number of shares outstanding - diluted (GAAP basis)
|
116,692
|
|
|
116,219
|
|
|
117,375
|
|
|
116,035
|
|
Effect of dilutive securities (non-GAAP basis)
|
|
|
|
|
|
|
|
Restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Performance share units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average number of shares outstanding - diluted (non-GAAP basis)
|
116,692
|
|
|
116,219
|
|
|
117,375
|
|
|
116,035
|
|
Free cash flow:
Reconciliations of free cash flow from net cash flow provided by operating activities presented in accordance with GAAP on our unaudited
Condensed consolidated statements of cash flows
are presented below:
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
In thousands
|
2019
|
|
2018
|
Net cash flow provided by operating activities (GAAP basis)
|
$
|
35,646
|
|
|
$
|
80,530
|
|
Capital expenditures
|
(25,918
|
)
|
|
(27,522
|
)
|
Free cash flow (non-GAAP basis)
|
$
|
9,728
|
|
|
$
|
53,008
|
|
Free cash flow
decreased
by
$43.3 million
from
2018
to
2019
. This
decrease
was attributable to net cash flow from operating activities of
$35.6 million
in
2019
, down
$44.9 million
compared to the prior year primarily attributable to increased severance payments of
$27.7 million
driven by the 2018 early retirement opportunity program and a net
$6.1 million
settlement paid in connection with the Casagrand class action lawsuit filed in January 2014. The decrease is also attributable to the payment of costs incurred as a direct result of the proxy contest.
Off-Balance Sheet Arrangements
As of
June 30, 2019
, we had no material off-balance sheet arrangements as defined in the rules of the Securities and Exchange Commission.
Seasonality
Our revenues are subject to moderate seasonality due to fluctuation in advertising volumes. Our advertising revenues for publishing are typically highest in the fourth quarter due to holiday and seasonal advertising. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements regarding business strategies, market potential, future financial performance, and other matters. Forward-looking statements include all statements that are not historical facts. The words "believe," "expect," "estimate," "could," "should," "intend," "may," "plan," "seek," "anticipate," "project," and similar expressions, among others, generally identify "forward-looking statements" which speak only as of the date the statements were made and are not guarantees of future performance. The matters discussed in these forward-looking
statements are subject to many risks, trends, uncertainties, and other factors that could cause actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management, is expressed in good faith, and is believed to have a reasonable basis. However, there can be no assurance the expectation or belief will result, be achieved, or be accomplished. Whether or not any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect new information, events, or circumstances occurring after the date of this report. Factors, risks, trends, and uncertainties that could cause actual results or events to differ materially from those projected, anticipated, or implied include the matters described above under "Management's Discussion and Analysis of Financial Condition and Results of Operations," the statements made under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our
2018
Annual Report on Form 10-K, and the following other factors, risks, trends and uncertainties:
|
|
•
|
Our ability to achieve our strategic transformation;
|
|
|
•
|
Potential disruption due to the reorganization of our sales force;
|
|
|
•
|
An accelerated decline in general print readership and/or advertiser patterns as a result of changing consumer preferences, competitive alternative media, or other factors;
|
|
|
•
|
An inability to adapt to technological changes or grow our digital businesses;
|
|
|
•
|
Risks associated with the operation of an increasingly digital business, such as rapid technological changes, challenges associated with new delivery platforms, declines in web traffic levels, technical failures, and proliferation of ad blocking technologies;
|
|
|
•
|
Competitive pressures in the markets in which we operate;
|
|
|
•
|
Macroeconomic trends and conditions;
|
|
|
•
|
Increases in newsprint costs over the levels anticipated or declines in newsprint supply;
|
|
|
•
|
Risks and uncertainties associated with our ReachLocal segment, including its significant reliance on Google for media purchases, its international operations and its ability to develop and gain market acceptance for new products or services;
|
|
|
•
|
Our ability to protect our intellectual property or defend successfully against infringement claims;
|
|
|
•
|
Our ability to attract and retain talent;
|
|
|
•
|
Labor relations, including, but not limited to, labor disputes which may cause business interruptions, revenue declines or increased labor costs;
|
|
|
•
|
Potential disruption or interruption of our IT systems due to accidents, extraordinary weather events, civil unrest, political events, terrorism or cyber security attacks;
|
|
|
•
|
Risks and uncertainties related to strategic acquisitions, investments, or divestitures including distraction of management attention, incurrence of additional debt, integration challenges, and failure to realize expected benefits or synergies or to operate businesses effectively following acquisitions;
|
|
|
•
|
Risks and uncertainties relating to the proposed transaction between us and New Media Investment Group Inc., including the parties' ability to consummate the proposed transaction in the time period expected or at all, and risks relating to the parties' ability to achieve the anticipated benefits of the proposed transaction;
|
|
|
•
|
Risk of financial loss and reputational harm related to reduction or closure of operations in light of ongoing challenges affecting the publishing industry;
|
|
|
•
|
Variability in the exchange rate relative to the U.S. dollar of currencies in foreign jurisdictions in which we operate;
|
|
|
•
|
Risks associated with our underfunded pension plans and the plans of our affiliates and investees;
|
|
|
•
|
Adverse outcomes in litigation or proceedings with governmental authorities or administrative agencies, or changes in the regulatory environment, any of which could encumber or impede our efforts to improve operating results or the value of assets;
|
|
|
•
|
Volatility in financial and credit markets which could affect the value of retirement plan assets and our ability to raise funds through debt or equity issuances and otherwise affect our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;
|
|
|
•
|
Risks to our liquidity related to the redemption, conversion, and similar features of our convertible notes;
|
|
|
•
|
Political, economic, and market uncertainty resulting from the pending withdrawal of the U.K. from the European Union; and
|
|
|
•
|
Other uncertainties relating to general economic, political, business, industry, regulatory and market conditions.
|