Gannett(GCI) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Gannett Co., Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents Gannett's unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, along with detailed notes on accounting policies, revenues, leases, and other financial disclosures Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of June 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total assets | $3,337,917 | $4,020,102 | | Total liabilities | $2,885,374 | $3,036,896 | | Total equity | $452,085 | $981,356 | - Total assets decreased by $682.185 million (16.97%) from December 31, 2019, to June 30, 2020, primarily due to a significant reduction in goodwill and intangible assets[13] - Total equity decreased by $529.271 million (53.93%) over the six-month period, largely influenced by accumulated deficit and other comprehensive loss[13] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section details Gannett's revenues, expenses, and net income or loss for the three and six months ended June 30, 2020 and 2019 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating revenues | $767,000 | $404,387 | $1,715,683 | $791,987 | | Total operating expenses | $1,204,624 | $392,214 | $2,183,131 | $781,249 | | Operating income (loss) | $(437,624) | $12,173 | $(467,448) | $10,738 | | Net income (loss) attributable to Gannett | $(436,893) | $2,815 | $(517,045) | $(6,291) | | Diluted EPS | $(3.32) | $0.05 | $(3.95) | $(0.10) | | Dividends declared per share | $0.00 | $0.38 | $0.00 | $0.76 | - Total operating revenues for the three months ended June 30, 2020, increased by 89.6% year-over-year, primarily due to the Legacy Gannett acquisition[15] - The company reported a significant net loss of $(436.893) million for the three months ended June 30, 2020, compared to a net income of $2.815 million in the prior year, largely driven by goodwill and intangible impairment charges of $393.446 million[15] - Dividends declared per share were suspended in Q2 2020 ($0.00) compared to $0.38 in Q2 2019, as a measure to preserve liquidity due to the COVID-19 pandemic[15] Condensed Consolidated Statements of Equity This section outlines changes in Gannett's total equity, accumulated deficit, and comprehensive income (loss) for the periods presented Condensed Consolidated Statements of Equity (in thousands) | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total Equity | $452,085 | $981,356 | | Accumulated Deficit | $(633,003) | $(115,958) | | Accumulated other comprehensive income (loss) | $(13,362) | $8,202 | - Total equity decreased significantly from $981.356 million at December 31, 2019, to $452.085 million at June 30, 2020, primarily due to a substantial increase in accumulated deficit from $(115.958) million to $(633.003) million[17][19] - The accumulated other comprehensive income (loss) shifted from a gain of $8.202 million to a loss of $(13.362) million, mainly due to foreign currency translation adjustments and pension benefit items[17][19] Condensed Consolidated Statements of Cash Flows This section presents Gannett's cash flows from operating, investing, and financing activities for the six months ended June 30, 2020 and 2019 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $24,640 | $57,653 | | Net cash used for investing activities | $(3,026) | $(37,180) | | Net cash used for financing activities | $(20,331) | $(50,062) | | Increase (decrease) in cash and cash equivalents and restricted cash | $503 | $(29,586) | - Net cash provided by operating activities decreased by $33.013 million (57.26%) for the six months ended June 30, 2020, compared to the same period in 2019, primarily due to higher interest payments and severance payments, partially offset by working capital increases from the Legacy Gannett merger[20][216] - Net cash used for investing activities significantly decreased from $(37.180) million in 2019 to $(3.026) million in 2020, mainly due to lower acquisition payments and higher proceeds from asset sales[20][217][218] - Net cash used for financing activities decreased from $(50.062) million in 2019 to $(20.331) million in 2020, largely due to the suspension of dividend payments in 2020[20][219][220] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements NOTE 1 — Basis of presentation and summary of significant accounting policies This note describes the company's formation, business segments, and the significant impact of the COVID-19 pandemic on its operations and financial results - Gannett Co., Inc. is a digitally focused media and marketing solutions company, formed by the acquisition of Legacy Gannett by New Media Investment Group Inc. on November 19, 2019[21] - The company operates in two segments: Publishing (including USA TODAY, local media, and Newsquest in the U.K.) and Marketing Solutions (including ReachLocal, UpCurve, and WordStream)[22][23] - The COVID-19 pandemic significantly negatively impacted Q2 2020 results, leading to decreased demand for advertising, digital marketing, commercial print, and distribution services. The company implemented cost reduction measures including dividend suspension, furloughs, and deferred pension contributions[24] NOTE 2 — Revenues This note details the breakdown of Gannett's total operating revenues by type, including print advertising, digital advertising, and circulation Revenue by Type (in thousands) | Revenue Type (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Print advertising | $188,158 | $158,205 | $456,000 | $309,105 | | Digital advertising and marketing services | $168,760 | $46,492 | $387,929 | $89,137 | | Circulation | $342,646 | $150,850 | $717,369 | $303,015 | | Other | $67,436 | $48,840 | $154,385 | $90,730 | | Total revenues | $767,000 | $404,387 | $1,715,683 | $791,987 | - Digital advertising and marketing services revenue saw a substantial increase of 263% for the three months ended June 30, 2020, compared to the prior year, largely due to the Legacy Gannett acquisition[38] - Circulation revenue more than doubled for both the three and six months ended June 30, 2020, compared to 2019, also primarily driven by the acquisition[38] NOTE 3 — Leases This note provides information on Gannett's operating lease right-to-use assets, liabilities, and associated lease costs Lease Metrics (in thousands) | Lease Metric (in thousands) | June 30, 2020 | | :-------------------------- | :------------ | | Operating lease right-to-use assets | $296,100 | | Short-term operating lease liabilities | $44,700 | | Long-term operating lease liabilities | $282,900 | Lease Expense (in thousands) | Lease Expense (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $24,437 | $7,864 | $48,321 | $15,969 | | Short-term lease cost | $1,345 | $866 | $4,487 | $1,632 | | Net lease cost | $25,782 | $8,730 | $52,808 | $17,601 | - The weighted-average remaining lease term as of June 30, 2020, was 7.9 years, with a weighted-average discount rate of 12.78%[47] NOTE 4 — Accounts receivable, net This note details the allowance for doubtful accounts and the impact of COVID-19 on estimated future credit losses for trade receivables Allowance for Doubtful Accounts (in thousands) | Allowance for Doubtful Accounts (in thousands) | Six months ended June 30, 2020 | | :--------------------------------------------- | :----------------------------- | | Beginning balance | $19,923 | | Current period provision | $17,345 | | Write-offs charged against the allowance | $(12,019) | | Recoveries of amounts previously written-off | $1,467 | | Foreign currency | $(156) | | Ending balance | $26,560 | - The allowance for doubtful accounts increased to $26.560 million as of June 30, 2020, from $19.923 million at the beginning of the period, reflecting a current period provision of $17.345 million[49] - The Company estimated $7.7 million in future credit losses for trade receivables due to the potential impacts of the COVID-19 pandemic, based on analysis of higher-risk accounts[50] - Bad debt expense for the six months ended June 30, 2020, was $17.3 million, a significant increase from $4.0 million in the same period of 2019[51] NOTE 5 — Acquisitions This note describes the acquisition of Legacy Gannett and other publications, including purchase price and measurement period adjustments - On November 19, 2019, New Media Investment Group Inc. completed the acquisition of Legacy Gannett for an aggregate purchase price of $1.3 billion, financed by a term loan and common stock issuance[52] - Measurement period adjustments for the Legacy Gannett acquisition during the six months ended June 30, 2020, primarily related to intangible assets and multi-employer pension liabilities, offset against Goodwill[55] - In 2019, the Company also acquired other publications and businesses for $53.4 million, including 11 daily newspapers and digital platforms, with $7.0 million of consideration payable as of June 30, 2020[56] NOTE 6 — Goodwill & Intangible Assets This note details changes in goodwill and intangible assets, including significant impairment charges recognized due to market conditions Goodwill & Intangible Assets (in thousands) | Asset Type (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------ | :------------ | :---------------- | | Goodwill | $559,623 | $914,331 | | Mastheads | $176,217 | $178,559 | | Amortized intangible assets, net | $744,308 | $834,005 | - Goodwill decreased by $354.708 million during the six months ended June 30, 2020, primarily due to impairment charges of $362.350 million across Publishing and Marketing Solutions segments[63] - The company recorded goodwill impairment charges of $256.5 million for Domestic Publishing, $65.4 million for Newsquest, and $40.5 million for Marketing Solutions in Q2 2020, driven by the COVID-19 pandemic's impact on operations[68] - Masthead impairment of $4.0 million was recorded in both Domestic Publishing and Newsquest reporting units[66] NOTE 7 — Integration and reorganization costs and impairments of property, plant and equipment This note outlines expenses related to severance, facility consolidation, and impairment charges for property, plant, and equipment Integration and Reorganization Costs and Impairments (in thousands) | Expense Type (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Severance-related expenses | $25,742 | $2,880 | $47,521 | $6,293 | | Facility consolidation and other restructuring-related expenses | $6,564 | $1,398 | $13,039 | $3,784 | | Impairment of property, plant and equipment | $6,859 | $1,262 | $6,859 | $2,469 | | Accelerated depreciation | $11,000 | $2,600 | $35,800 | $2,600 | - Severance-related expenses increased significantly to $47.521 million for the six months ended June 30, 2020, from $6.293 million in the prior year, reflecting ongoing restructuring programs and acquisition integration[72] - Property, plant, and equipment impairment charges were $6.9 million for the six months ended June 30, 2020, primarily in the Publishing segment, and accelerated depreciation increased to $35.8 million due to ceased print operations[73][74] NOTE 8 — Debt This note details the company's debt structure, including the Apollo term loan facility and convertible senior notes, and associated interest expenses - In November 2019, the Company entered into a five-year, $1.8 billion senior-secured term loan facility with Apollo Capital Management, L.P., bearing an interest rate of 11.5% per annum[75] - As of June 30, 2020, $1.7 billion in aggregate principal was outstanding under the term loan facility, with an effective interest rate of 12.9%[80] - Interest expense for the six months ended June 30, 2020, was $115.827 million, a substantial increase from $20.346 million in the prior year, due to the larger debt balance and higher effective interest rate[15][80] - The Company redeemed $198.0 million of convertible senior notes in December 2019, with $3.3 million principal value remaining outstanding as of June 30, 2020, at an effective interest rate of 6.05%[82][83] NOTE 9 — Pensions and other postretirement benefit plans This note provides information on the company's pension plans, including service costs, non-operating expenses, and deferred contributions Retirement Plan Expense (in thousands) | Retirement Plan Expense (in thousands) | Six months ended June 30, 2020 (Pension) | Six months ended June 30, 2019 (Pension) | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Service cost | $1,385 | $317 | | Non-operating expenses (benefit) | $(37,288) | $(480) | | Total expense (benefit) | $(35,903) | $(163) | - The Company reported a total pension benefit of $(35.903) million for the six months ended June 30, 2020, compared to a benefit of $(163) thousand in the prior year, driven by increased expected return on plan assets[85] - Pension contributions of $12 million for U.K. plans in 2020 were deferred to 2021, and $11 million in minimum required contributions for the U.S. GRP for 2019 were deferred until January 1, 2021[85] NOTE 10 — Income taxes This note details the company's income tax expense or benefit, effective tax rate, and the impact of the CARES Act and unrecognized tax benefits Income Tax Metrics (in thousands) | Tax Metric (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pre-tax net income (loss) | $(472,107) | $2,272 | $(543,734) | $(9,037) | | Benefit for income taxes | $(34,276) | $(343) | $(25,297) | $(2,297) | | Effective tax rate | 7.3% | *** | 4.7% | 25.4% | - The Company recognized a benefit for income taxes of $(34.276) million for Q2 2020, primarily due to the pre-tax net loss, but reduced by non-deductible asset impairments and a valuation allowance against deferred tax assets[87] - The CARES Act, enacted March 27, 2020, allows the Company to defer certain employer payroll tax payments and may provide Employee Retention Tax Credits[88] - Unrecognized tax benefits totaled $33.8 million as of June 30, 2020, with accrued interest and penalties of $2.3 million[90] NOTE 11 — Supplemental equity information This note provides details on net income (loss) attributable to Gannett, diluted EPS, share repurchase programs, and the Section 382 Rights Agreement EPS Metrics (in thousands, except share data) | EPS Metric (in thousands, except share data) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to Gannett | $(436,893) | $2,815 | $(517,045) | $(6,291) | | Basic weighted average shares outstanding | 131,471 | 60,031 | 130,999 | 59,998 | | Diluted weighted average shares outstanding | 131,471 | 60,031 | 130,999 | 59,998 | - Diluted loss per share was $(3.32) for Q2 2020 and $(3.95) for the six months ended June 30, 2020, compared to income of $0.05 and loss of $(0.10) respectively in the prior year, reflecting the significant net losses[92] - The Company's share repurchase program expired on May 19, 2020, with no shares repurchased during the first six months of 2020[94] - The Board adopted a Section 382 Rights Agreement on April 6, 2020, to protect the Company's $435 million net operating loss carryforwards (NOLs) from ownership changes[102] NOTE 12 — Fair value measurement This note describes assets and liabilities measured at fair value, primarily pension plan assets and assets held for sale - Assets and liabilities recorded at fair value on a recurring basis primarily consist of pension plan assets[109] - Assets held for sale, classified as Level 3 assets, totaled $21.6 million as of June 30, 2020, down from $25.5 million at December 31, 2019[111] NOTE 13 — Commitments, contingencies and other matters This note addresses the company's involvement in legal proceedings and environmental contingencies, noting no material adverse effects are expected - The Company is involved in various legal proceedings, including environmental contingencies related to groundwater contamination assumed from the Legacy Gannett acquisition, but does not expect them to have a material adverse effect[112][114][115] NOTE 14 — Segment reporting This note provides financial information for Gannett's Publishing and Marketing Solutions segments, including Adjusted EBITDA - Gannett reports in two segments: Publishing (local, regional, national, and international newspaper publishers) and Marketing Solutions (digital marketing services like ReachLocal and UpCurve)[120] - Adjusted EBITDA is the primary metric used by the Chief Operating Decision Maker (CODM) to evaluate segment performance and allocate resources[119] Segment Adjusted EBITDA (in thousands) | Segment Adjusted EBITDA (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Publishing | $91,991 | $55,493 | $203,014 | $97,188 | | Marketing Solutions | $2,784 | $(2,459) | $10,668 | $(5,689) | | Corporate and other | $(16,757) | $(5,739) | $(36,598) | $(11,354) | | Consolidated Adjusted EBITDA | $78,018 | $47,295 | $177,084 | $80,145 | NOTE 15 — Related party transactions This note details transactions with related parties, including the Manager's ownership, management fees, and incentive fee arrangements - The Manager (an affiliate of Fortress Investment Group LLC) and its affiliates owned approximately 4% of outstanding stock and 40% of outstanding warrants as of June 30, 2020[123] - The Amended Management Agreement, effective November 19, 2019, reduced the incentive fee from 25% to 17.5% and set a termination date of December 31, 2021, for the Manager's services[126] Related Party Fees (in thousands) | Fee Type (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Management fee expense | $4,674 | $2,456 | $8,433 | $4,912 | | Incentive fee expense | $0 | $1,413 | $0 | $1,413 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Gannett's financial condition and results of operations, highlighting the impact of the Legacy Gannett acquisition, COVID-19, strategic outlook, liquidity, and non-GAAP measures Overview This section provides an overview of Gannett's business as a digitally focused media and marketing solutions company, including its formation and operating segments - Gannett Co., Inc. is an innovative, digitally focused media and marketing solutions company, formed by the acquisition of Legacy Gannett by New Media Investment Group Inc. on November 19, 2019[133] - The company's portfolio includes USA TODAY, local media in 46 U.S. states and Guam, Newsquest in the U.K., and digital marketing services companies ReachLocal, UpCurve, and WordStream[135] - Gannett reports in two operating segments: Publishing and Marketing Solutions, with a corporate and other category for non-segment-specific activities[136] Certain matters affecting current and future operating results This section discusses the financial impact of the Legacy Gannett acquisition, integration costs, goodwill impairments, and newsprint expenses - The Legacy Gannett acquisition in November 2019 for $1.3 billion significantly impacted financial results, funded by a new $1.8 billion term loan facility[139] - Integration and reorganization costs for the six months ended June 30, 2020, totaled $60.6 million, primarily from severance activities ($47.5 million) and facility consolidation[139] - Goodwill and intangible impairment charges of $393.4 million were recognized in Q2 2020, mainly due to the current and expected impact of the COVID-19 pandemic[143] - Newsprint expense increased by $22.0 million for the six months ended June 30, 2020, due to acquired expenses from Legacy Gannett, partially offset by volume declines and efficiency efforts[142] Outlook for the remainder of 2020 This section outlines Gannett's strategic priorities for 2020, including integration, deleveraging, revenue growth, and the anticipated impact of the COVID-19 pandemic - Key strategic focuses for 2020 include integrating Legacy Gannett, deleveraging the balance sheet through cash flow and real estate monetization, and driving revenue growth in digital marketing services, digital subscriptions, and events[143][144] - The COVID-19 pandemic is expected to continue negatively impacting business and results of operations in the near term, with long-term impacts dependent on the pandemic's severity and duration[146] - Cost reduction measures include suspending quarterly dividends, employee furloughs, compensation decreases, deferred payroll tax remittances (CARES Act), and deferred pension contributions[147] Results of Operations This section provides a detailed analysis of Gannett's consolidated and segment-specific financial performance, including revenues, expenses, and profitability Consolidated Summary This section summarizes Gannett's overall operating revenues, expenses, and net income or loss for the reported periods Consolidated Summary (in thousands) | Metric (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating revenues | $767,000 | $404,387 | $1,715,683 | $791,987 | | Total operating expenses | $1,204,624 | $392,214 | $2,183,131 | $781,249 | | Operating income (loss) | $(437,624) | $12,173 | $(467,448) | $10,738 | | Net income (loss) | $(437,831) | $2,615 | $(518,437) | $(6,740) | - Total operating revenues increased by $362.613 million (89.67%) for Q2 2020 and $923.696 million (116.63%) for the six months ended June 30, 2020, primarily due to acquisition-related revenues from Legacy Gannett[148][151][152] - Operating expenses increased significantly due to acquired expenses, goodwill and intangible impairments, and increased integration costs, partially offset by COVID-19 related cost reductions[153][159] Publishing segment This section analyzes the financial performance of the Publishing segment, including revenue trends, digital circulation growth, and operating costs Publishing Segment (in thousands) | Publishing Segment (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating revenues | $695,893 | $394,435 | $1,554,043 | $772,516 | | Operating income (loss) | $(349,599) | $24,283 | $(321,978) | $42,535 | | Adjusted EBITDA | $91,991 | $55,493 | $203,014 | $97,188 | - Publishing segment revenues increased by $301.458 million (76.43%) for Q2 2020 and $781.527 million (101.17%) for the six months ended June 30, 2020, primarily due to acquired revenues from Legacy Gannett[166][167][173] - Digital circulation revenues increased by $15.7 million (300%) in Q2 2020, driven by $14.7 million in acquired revenues and a 31.3% increase in digital-only subscribers[171] - Operating costs increased by $203.352 million (88.6%) in Q2 2020, mainly due to acquired costs from Legacy Gannett, partially offset by cost containment initiatives and synergy savings[178][179] Marketing Solutions segment This section reviews the financial performance of the Marketing Solutions segment, focusing on revenue growth and Adjusted EBITDA improvement Marketing Solutions Segment (in thousands) | Marketing Solutions Segment (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating revenues | $94,563 | $27,345 | $215,844 | $53,232 | | Operating loss | $(45,840) | $(3,807) | $(47,291) | $(9,435) | | Adjusted EBITDA | $2,784 | $(2,459) | $10,668 | $(5,689) | - Marketing Solutions revenues increased by $67.218 million (245.8%) for Q2 2020 and $162.612 million (305.4%) for the six months ended June 30, 2020, primarily due to acquired revenues from Legacy Gannett[190][191][192] - The segment's Adjusted EBITDA improved to $2.784 million in Q2 2020 from a loss of $(2.459) million in Q2 2019, driven by the Legacy Gannett acquisition[201] - Operating costs increased due to acquired costs from Legacy Gannett and higher costs of online media, partially offset by COVID-19 related cost containment[193][196] Corporate and other segment This section discusses the operating expenses and financial impact of corporate and other non-segment-specific activities - Corporate and other operating expenses increased by $35.4 million for Q2 2020 and $79.7 million for the six months ended June 30, 2020, primarily due to acquired operating expenses from Legacy Gannett and increased acquisition costs[203][204] Non-operating expense This section details non-operating expenses, including interest expense from the Apollo term loan and pension income - Interest expense for Q2 2020 was $57.9 million, up from $10.2 million in Q2 2019, due to a higher effective interest rate and larger debt balance from the Apollo term loan[205] - Non-operating pension income significantly increased to $17.6 million in Q2 2020 from $0.2 million in Q2 2019, due to increased expected return on plan assets exceeding interest costs[206] Income tax expense (benefit) This section analyzes the company's income tax expense or benefit, effective tax rate, and the impact of the CARES Act Income Tax Metrics (in thousands) | Tax Metric (in thousands) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pre-tax net income (loss) | $(472,107) | $2,272 | $(543,734) | $(9,037) | | Benefit for income taxes | $(34,276) | $(343) | $(25,297) | $(2,297) | | Effective tax rate | 7.3% | *** | 4.7% | 25.4% | - The benefit for income taxes in Q2 2020 was primarily due to the pre-tax net loss, but the effective tax rate was reduced by non-deductible asset impairments and a valuation allowance against deferred tax assets[209] - The CARES Act allows for a refund of tax benefits from earlier years and deferral of certain employer payroll tax payments[210] Net income (loss) attributable to Gannett and diluted income (loss) per share attributable to Gannett This section presents the net income or loss attributable to Gannett and the corresponding diluted earnings per share Net Income (Loss) and Diluted EPS (in thousands, except share data) | Metric (in thousands, except share data) | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to Gannett | $(436,893) | $2,815 | $(517,045) | $(6,291) | | Diluted income (loss) per share | $(3.32) | $0.05 | $(3.95) | $(0.10) | - The company reported a net loss attributable to Gannett of $(436.9) million and diluted loss per share of $(3.32) for Q2 2020, a significant decline from net income of $2.8 million and EPS of $0.05 in Q2 2019[212] Liquidity and capital resources This section discusses Gannett's cash flows from operating, investing, and financing activities, along with its debt obligations and capital management strategies Operating cash flows This section details the net cash provided by or used in operating activities and the factors influencing these flows - Net cash flow from operating activities decreased by $33.0 million to $24.6 million for the first six months of 2020, primarily due to higher interest payments on the term loan and severance payments, partially offset by working capital increases from the Legacy Gannett merger[216] Investing cash flows This section outlines cash flows related to investing activities, including capital expenditures and asset sales - Cash flows used for investing activities totaled $3.0 million for the first six months of 2020, mainly consisting of $22.2 million in capital expenditures, partially offset by $17.8 million from asset sales[217] Financing cash flows This section describes cash flows from financing activities, primarily debt repayments and dividend suspensions - Cash flows used for financing activities totaled $20.3 million for the first six months of 2020, primarily due to $19.0 million in repayments under the Apollo term loan and $1.9 million for employee taxes withheld from stock awards[219] Apollo Term Loan This section provides details on the $1.8 billion Apollo term loan facility, its interest rate, outstanding balance, and covenants - The $1.8 billion Apollo term loan facility, maturing November 19, 2024, bears an interest rate of 11.5% per annum and requires prepayments from excess cash flow and asset sales[221][222] - As of June 30, 2020, $1.7 billion was outstanding under the term loan, with an effective interest rate of 12.9%. The company was in compliance with all covenants[222][225] Convertible debt This section discusses the redemption of convertible senior notes and the remaining outstanding principal - The Company redeemed $198.0 million of 4.75% convertible senior notes in December 2019, with $3.3 million remaining outstanding as of June 30, 2020, at an effective interest rate of 6.05%[228][229] Additional information This section covers the suspension of quarterly dividends, cost containment initiatives, and deferred pension contributions - The Company suspended its quarterly dividend to preserve liquidity due to the COVID-19 pandemic and implemented cost containment initiatives including strategic reductions in force, furloughs, and pay reductions[230][231] - Pension contributions for U.K. plans ($12 million) and the U.S. Gannett Retirement Plan ($11 million for 2019) have been deferred[233] Non-GAAP Financial Measures This section defines and explains the use and limitations of non-GAAP financial measures, specifically Adjusted EBITDA Adjusted EBITDA This section provides the detailed definition of Adjusted EBITDA, outlining its components and adjustments - Adjusted EBITDA is defined as net income (loss) from continuing operations before income tax expense (benefit), interest expense, gains/losses on early extinguishment of debt, non-operating items (primarily pension costs), depreciation and amortization, integration and reorganization costs, impairment charges, net loss/gain on asset disposal, equity-based compensation, acquisition costs, and certain other non-recurring charges[236] Management's Use of Adjusted EBITDA This section explains how management utilizes Adjusted EBITDA to assess performance, control expenses, and achieve financial objectives - Management uses Adjusted EBITDA to identify trends in day-to-day performance, assess controllable expenses, and make decisions to achieve financial goals, as it excludes items not indicative of core operating performance[237][238] Limitations of Adjusted EBITDA This section highlights the inherent limitations of Adjusted EBITDA as an analytical tool and its non-substitutability for GAAP measures - Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for GAAP measures, as it excludes significant items like cash interest/financing expense, income tax, and impairment charges[239][241] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Gannett's exposure to market risks, primarily foreign exchange rate fluctuations from international operations, and provides a sensitivity analysis for the British pound sterling - Gannett is exposed to foreign exchange rate risk from operations in the U.K. (British pound sterling) and other regions (Australian dollar, Canadian dollar, Indian rupee, New Zealand dollar)[245] - A 10% fluctuation in the British pound sterling against the U.S. dollar would have increased or decreased operating income by approximately $10.8 million for the first six months of 2020[248] - Cumulative foreign currency translation adjustment reported as part of equity totaled $9.3 million at June 30, 2020[246] Item 4. Controls and Procedures This section addresses the effectiveness of Gannett's disclosure controls and procedures, acknowledging a material weakness in internal control over financial reporting and ongoing remediation efforts Remediation of Material Weakness This section details the ongoing remediation efforts to address the material weakness in internal control over financial reporting related to revenue recognition - The principal executive and financial officers concluded that disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting, as reported in the 2019 Form 10-K[249] - Remediation efforts are ongoing, focusing on dedicated personnel, improved reporting processes, and enhanced supporting technology to address control deficiencies related to revenue recognition[250] Changes in Internal Control over Financial Reporting This section confirms no material changes in internal control over financial reporting and monitors the impact of the work-from-home environment - No material changes in internal control over financial reporting occurred during the fiscal quarter[252] - The shift to a primarily work-from-home environment due to COVID-19 has not materially impacted internal control over financial reporting, but the company is continuously monitoring its effects[253] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section states that there have been no material developments in legal and environmental matters beyond what was previously reported in the 2019 Form 10-K, as detailed in Note 13 of the financial statements - No material developments in legal and environmental matters have occurred beyond those disclosed in Note 13 and the 2019 Form 10-K[254] Item 1A. Risk Factors This section outlines various risks, including acquisition integration challenges, intense digital competition, macroeconomic sensitivity, international operation complexities, and potential asset impairments Risks Related to Our Acquisition and Integration of Legacy Gannett This section details risks associated with the Legacy Gannett acquisition, including integration challenges, substantial indebtedness, and potential conflicts of interest with lenders - The Company may not achieve the intended benefits or realize anticipated synergies from the Legacy Gannett acquisition due to integration challenges, including cultural differences, personnel coordination, and retaining key employees[257][258] - The substantial indebtedness incurred for the acquisition ($1.8 billion term loan) requires a significant portion of cash flow for interest payments and imposes operating and financial restrictions, including minimum liquidity and dividend limitations[263][265] - Apollo, a lender, has the right to appoint board observers or voting directors, whose interests may conflict with those of stockholders[267][268] Risks Related to Competition from Digital Media This section highlights risks from declining print revenue, intense competition from digital media providers, and dependence on platforms like Google - Revenue relies heavily on print advertising (25% of Q2 2020 total revenue) and paid circulation, both negatively affected by the shift to digital media and commerce, leading to persistent revenue declines[270][271][275] - The company may be unsuccessful in stabilizing revenue trends by diversifying into complementary businesses like digital marketing services and events, which face intense competition from major digital providers like Google and Yahoo[277][278] - The ReachLocal and WordStream businesses are highly dependent on media purchases and rebates from Google, making them vulnerable to Google's actions or changes in business practices[279] Risks Related to Macroeconomic Factors This section discusses the sensitivity of revenue to economic conditions, the negative impact of COVID-19, and increased risks of bad debts - Revenue generation is highly sensitive to economic conditions and local demographics, with advertising revenues particularly susceptible to downturns and competition from online retailers[281] - The COVID-19 pandemic is expected to have a material negative impact on business and results of operations in the near term, leading to decreased demand for advertising and distribution services[282][283] - Adverse economic conditions may increase losses from bad debts, as the collectability of accounts receivable could deteriorate beyond current provisions[288] Risks Related to International Operations This section outlines challenges in managing international operations, including legal/political uncertainties, foreign exchange variability, and the impact of Brexit - Managing international operations (U.K., Canada, Australia/New Zealand, India) is subject to risks including legal/political uncertainties, difficulties in client network development, differing regulatory requirements, and staffing challenges[290] - Foreign exchange variability, particularly the British pound sterling against the U.S. dollar, could adversely affect consolidated operating results[292] - Brexit and the enactment of a Digital Services Tax in the U.K. could negatively impact Newsquest's markets and potentially lead to additional cash taxes for online advertising[293][294] Additional Risks Related to Our Business This section covers seasonal fluctuations, goodwill impairment, internal control weaknesses, environmental liabilities, and tax risks - The business is subject to seasonal fluctuations, with the first fiscal quarter typically weakest and the second and fourth strongest due to holiday advertising[296] - Goodwill and indefinite-lived assets (mastheads) are subject to annual impairment testing, and significant non-cash charges were recognized in Q2 2020 due to market capitalization decline and COVID-19 impacts[297][299] - Failure to maintain effective internal control over financial reporting, including a material weakness identified in 2019 related to revenue recognition, could lead to financial statement errors and adverse regulatory consequences[302][306] - The company faces environmental and employee safety laws, potential liabilities from personal information breaches, and tax risks related to a worthless stock loss deduction and realization of deferred tax assets[311][315][320][321] Risks Related to Pension Obligations and Employees This section addresses risks from underfunded pension plans, dependence on key personnel, and potential impacts of unionized labor - The company is required to make significant contributions to its underfunded pension plans ($116.9 million underfunded as of December 31, 2019), diverting cash flow from operations, with future amounts difficult to estimate[323][324][325] - Dependence on key personnel and the inability to attract or retain qualified employees could hinder business operations and growth[326][327] - A significant portion of employees are unionized (13% as of December 31, 2019), and labor negotiations or strikes could adversely affect efficiency and costs[329][330] Risks Related to Our Manager This section highlights reliance on the Manager, potential conflicts of interest, and the Board's limited oversight on investment decisions - The company is reliant on its Manager (an affiliate of Fortress Investment Group LLC) for operations, and the inability to retain key personnel or adverse changes in the Manager's financial health could hinder management[333][334][335] - Conflicts of interest exist due to the Manager's affiliates investing in similar media assets and the management compensation structure, which may incentivize high-risk investments[337][340] - The Board of Directors does not approve each investment decision, and the investment strategy can change without stockholder vote, potentially leading to riskier or less profitable investments[341][342] Risks Related to our Common Stock This section discusses risks related to stock price volatility, potential delisting, dividend suspension, and future stock issuances - The market price of Common Stock may fluctuate widely due to various factors, including COVID-19, operating results, and market volatility, potentially limiting liquidity[347] - The company's Common Stock may be delisted from the NYSE if it fails to comply with continued listing standards, negatively impacting price, liquidity, and investor confidence[348] - The quarterly dividend has been suspended, and there is no assurance of reinstatement, which could adversely affect stockholders[350] - Future sales or issuances of Common Stock, including for capital raises, acquisitions, or equity compensation plans, could dilute existing stockholders' ownership[349][354][358] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period Item 4. Mine Safety Disclosures This item is not applicable for the reporting period Item 5. Other Information This item is not applicable for the reporting period Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certificates of designation, rights agreements, amendments to credit agreements, and certifications - Exhibits include the Certificate of Designation of Series A Junior Participating Preferred Stock, Section 382 Rights Agreement, Offer Letter Agreement, Amendment No. 2 to the Credit Agreement, CEO/CFO Certifications (Rule 13a-14(a) and Section 1350), and financial information in Inline XBRL format[368] Signatures This section contains the signature of the registrant, Gannett Co., Inc., by its Chief Financial Officer, certifying the filing of the report - The report was signed by Douglas E. Horne, Chief Financial Officer of Gannett Co., Inc., on August 6, 2020[371]