Gannett(GCI) - 2021 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This note cautions that forward-looking statements are subject to risks and uncertainties, where actual results may differ materially - Forward-looking statements reflect current views on future growth, operations, performance, and business prospects, but are not historical facts[5] - Actual results, liquidity, and financial condition may differ materially due to known and unknown risks, uncertainties, and other factors[6] - Key risk factors include general economic and market conditions, competitive environment, COVID-19 pandemic impacts, shift from print to digital media, risks in the Digital Marketing Solutions segment, declining print advertising and circulation, debt restrictions, and ability to retain key personnel[8] Part I. Financial Information Part I details Gannett's unaudited Q3 2021 financial statements, management's discussion, market risk, and internal controls Item 1. Financial Statements This section provides unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and equity, with detailed notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show the company's financial position as of September 30, 2021, compared to December 31, 2020, highlighting changes in assets, liabilities, and equity Key Balance Sheet Metrics (in thousands) | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Total Assets | $2,910,003 | $3,108,914 | $(198,911) | -6.40% | | Total Liabilities | $2,367,369 | $2,745,955 | $(378,586) | -13.79% | | Total Equity | $544,843 | $364,109 | $180,734 | 49.64% | | Cash and cash equivalents | $141,302 | $170,725 | $(29,423) | -17.23% | | Current portion of long-term debt | $104,948 | $128,445 | $(23,497) | -18.29% | | Long-term debt | $741,636 | $890,323 | $(148,687) | -16.70% | | Convertible debt | $399,875 | $581,405 | $(181,530) | -31.22% | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This statement summarizes the company's revenues, expenses, and net income (loss) for the three and nine months ended September 30, 2021, compared to the same periods in 2020 Operating Results for Three Months Ended Sep 30 (in thousands, except per share) | Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total operating revenues | $800,185 | $814,539 | $(14,354) | -1.76% | | Total operating expenses | $769,083 | $813,059 | $(43,976) | -5.41% | | Operating income (loss) | $31,102 | $1,480 | $29,622 | 1999.99% | | Net income (loss) attributable to Gannett | $14,687 | $(31,260) | $45,947 | -147.00% | | Basic EPS | $0.11 | $(0.24) | $0.35 | -145.83% | | Diluted EPS | $0.09 | $(0.24) | $0.33 | -137.50% | Operating Results for Nine Months Ended Sep 30 (in thousands, except per share) | Metric (in thousands, except per share) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total operating revenues | $2,381,544 | $2,530,223 | $(148,679) | -5.88% | | Total operating expenses | $2,297,056 | $2,996,189 | $(699,133) | -23.33% | | Operating income (loss) | $84,488 | $(465,966) | $550,454 | -118.14% | | Net income (loss) attributable to Gannett | $(112,514) | $(548,305) | $435,791 | -79.48% | | Basic EPS | $(0.84) | $(4.17) | $3.33 | -79.86% | | Diluted EPS | $(0.84) | $(4.17) | $3.33 | -79.86% | Condensed Consolidated Statements of Cash Flows This statement details cash flows from operating, investing, and financing activities for the nine months ended September 30, 2021, compared to the same period in 2020 Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net cash provided by operating activities | $133,347 | $74,280 | $59,067 | 79.52% | | Net cash provided by (used for) investing activities | $39,236 | $(1,979) | $41,215 | -2082.62% | | Net cash used for financing activities | $(212,284) | $(37,471) | $(174,813) | 466.52% | | (Decrease) increase in cash, cash equivalents and restricted cash | $(39,312) | $35,269 | $(74,581) | -211.46% | Condensed Consolidated Statements of Equity This section presents changes in the company's equity for the three and nine months ended September 30, 2021 and 2020, detailing movements across components Equity Components (in thousands) | Equity Component (in thousands) | Balance at Dec 31, 2020 | Net Loss Attributable to Gannett | Equity Component of 2027 Notes | Other Comprehensive Loss, net of tax | Share-based Compensation Expense | Treasury Stock | Other Activity | Balance at Sep 30, 2021 | | :------------------------------ | :---------------------- | :------------------------------- | :----------------------------- | :----------------------------------- | :------------------------------- | :------------- | :------------- | :---------------------- | | Common stock | $1,395 | — | — | — | — | — | $51 | $1,446 | | Additional paid-in capital | $1,103,881 | — | $283,718 | — | $13,804 | $(2,034) | $(1,708) | $1,399,693 | | Accumulated other comprehensive income (loss) | $50,173 | — | — | $(578) | — | — | — | $49,595 | | Accumulated deficit | $(786,437) | $(112,514) | — | — | — | — | — | $(898,951) | | Treasury stock | $(4,903) | — | — | — | — | $(2,034) | — | $(6,940) | | Total Equity | $364,109 | $(112,514) | $283,718 | $(578) | $13,804 | $(2,034) | $(1,657) | $544,843 | Note 1 — Description of Business and Basis of Presentation Gannett is a subscription-led, digitally-focused media and marketing solutions company, with its strategy aiming to grow audience and engagement - Gannett is a subscription-led and digitally-focused media and marketing solutions company, aiming to be a premier source for clarity, connections, and solutions within communities[21] - The company's portfolio includes USA TODAY, local media organizations in 46 U.S. states, Newsquest (U.K. subsidiary with over 120 local media brands), and digital marketing services (ReachLocal, UpCurve, WordStream) marketed under the LOCALiQ brand[22][23] - The COVID-19 pandemic caused a significant decline in Advertising and marketing services revenues and constraints on single-copy newspaper sales, leading to cost reduction measures, including PPP funding and debt refinancing[24][25] PPP Loan Forgiveness (Q3 2021) | Item | Amount (in millions) | | :--- | :------------------- | | Total PPP funding received (9 months ended Sep 30, 2021) | $16.4 | | PPP loans forgiven (Q3 2021) | $15.1 | | Recognized as offset to Operating costs | $11.1 | | Recognized as offset to Selling, general, and administrative expenses | $4.0 | | Remaining PPP loans as of Sep 30, 2021 | $1.3 | Note 2 — Revenues This note disaggregates total operating revenues by source, including print advertising, digital advertising, circulation, and other revenues, and details deferred revenues Operating Revenues by Source for Three Months Ended Sep 30 (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Print advertising | $190,044 | $208,047 | $(17,993) | -8.65% | | Digital advertising and marketing services | $221,976 | $197,180 | $24,796 | 12.57% | | Total advertising and marketing services | $412,020 | $405,227 | $6,793 | 1.68% | | Circulation | $306,702 | $336,158 | $(29,456) | -8.76% | | Other | $81,463 | $73,154 | $8,309 | 11.36% | | Total revenues | $800,185 | $814,539 | $(14,354) | -1.76% | Operating Revenues by Source for Nine Months Ended Sep 30 (in thousands) | Revenue Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Print advertising | $584,165 | $664,047 | $(79,882) | -12.03% | | Digital advertising and marketing services | $636,322 | $585,109 | $51,213 | 8.75% | | Total advertising and marketing services | $1,220,487 | $1,249,156 | $(28,669) | -2.29% | | Circulation | $942,398 | $1,053,528 | $(111,130) | -10.55% | | Other | $218,659 | $227,539 | $(8,880) | -3.90% | | Total revenues | $2,381,544 | $2,530,223 | $(148,679) | -5.88% | - Deferred revenues primarily stem from circulation subscriptions paid in advance, with recognition expected over the next 1-12 months[36] Note 3 — Leases This note outlines the company's lease obligations for real estate, vehicles, and equipment, including operating lease assets, liabilities, and lease expense components Lease Liabilities (in thousands) | Item | Sep 30, 2021 | | :-------------------------------- | :----------- | | Operating lease right-to-use assets | $279,400 | | Short-term operating lease liabilities | $48,300 | | Long-term operating lease liabilities | $261,400 | Net Lease Cost (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | $23,073 | $24,649 | | Nine months ended Sep 30 | $70,009 | $77,457 | Future Minimum Lease Payments (in thousands) | Year Ended Dec 31, | Amount | | :----------------- | :----- | | 2021 (remaining) | $18,625 | | 2022 | $81,364 | | 2023 | $68,607 | | 2024 | $60,380 | | 2025 | $51,315 | | Thereafter | $213,647 | | Total | $493,938 | | Less: Imputed interest | $(184,245) | | Total (net) | $309,693 | Note 4 — Accounts Receivable, Net This note details the allowance for doubtful accounts, calculated using specific formulas, which decreased significantly due to lower write-offs compared to the prior year - Allowance for doubtful accounts is calculated using a 'black motor formula' for advertising receivables and a 90-day aging reserve for circulation receivables[43] Allowance for Doubtful Accounts (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Beginning balance | $20,843 | $19,923 | $920 | 4.62% | | Current period provision | $3,478 | $23,075 | $(19,597) | -84.93% | | Write-offs charged against the allowance | $(10,998) | $(21,139) | $10,141 | -47.98% | | Ending balance | $16,411 | $23,749 | $(7,338) | -30.90% | - Bad debt expense decreased significantly for both the three and nine months ended September 30, 2021, compared to the prior year, which reflected higher impacts from the COVID-19 pandemic[45] Note 5 — Goodwill and Intangible Assets This note breaks down goodwill and intangible assets, net of amortization, and discusses the annual impairment assessment, with no impairment indicators as of September 30, 2021 Goodwill and Intangible Assets (in thousands) | Asset Type | Sep 30, 2021 (Net Carrying Amount) | Dec 31, 2020 (Net Carrying Amount) | Change ($) | Change (%) | | :-------------------------- | :--------------------------------- | :--------------------------------- | :--------- | :--------- | | Finite-lived intangible assets | $571,649 | $653,242 | $(81,593) | -12.49% | | Indefinite-lived intangible assets (Mastheads) | $169,942 | $171,408 | $(1,466) | -0.86% | | Total intangible assets | $741,591 | $824,650 | $(83,059) | -10.07% | | Goodwill | $533,797 | $534,088 | $(291) | -0.05% | - The company performed its annual goodwill and indefinite-lived intangible impairment assessment in Q2 2021, concluding that the fair value of all reporting units and indefinite-lived assets exceeded their carrying values[47][48][49] - No indicators of impairment were present as of September 30, 2021[50] - In Q2 2020, the company recorded significant goodwill and intangible asset impairment charges totaling $393.4 million due to the COVID-19 pandemic's impact[51] Note 6 — Integration and Reorganization Costs and Asset Impairments This note details costs associated with restructuring programs, including severance, facility consolidation, asset impairment charges, and accelerated depreciation Severance-Related Expenses for Three Months Ended Sep 30 (in thousands) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing | $1,941 | $3,983 | $(2,042) | -51.27% | | Digital Marketing Solutions | $402 | $1,196 | $(794) | -66.39% | | Corporate and other | $317 | $2,103 | $(1,786) | -84.93% | | Total | $2,660 | $7,282 | $(4,622) | -63.47% | Severance-Related Expenses for Nine Months Ended Sep 30 (in thousands) | Segment | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing | $10,125 | $35,401 | $(25,276) | -71.40% | | Digital Marketing Solutions | $321 | $5,333 | $(5,012) | -94.00% | | Corporate and other | $440 | $14,069 | $(13,629) | -96.87% | | Total | $10,886 | $54,803 | $(43,917) | -80.14% | - Asset impairment charges for the three and nine months ended September 30, 2021, were $2.3 million and $3.1 million, respectively, primarily due to the impairment of real estate held for sale in the Publishing segment[56] - Accelerated depreciation decreased significantly for both the three and nine months ended September 30, 2021, compared to 2020, due to fewer print facility shutdowns[57] Note 7 — Debt This note details the company's debt structure, including the 5-Year Term Loan, 2027 Notes, and 2024 Notes, covering refinancing, reclassification, and interest expenses - On February 9, 2021, the company entered into a new $1.045 billion 5-Year Term Loan to repay the previous Acquisition Term Loan, resulting in a $17.2 million loss on early extinguishment of debt in Q1 2021[58][59][61] - As of September 30, 2021, $899.4 million was outstanding under the 5-Year Term Loan with an effective interest rate of 9.5%. The loan was fully repaid on October 15, 2021, through a subsequent debt refinancing[63][64] - The $497.1 million 6.0% Senior Secured Convertible Notes due 2027 (2027 Notes) initially had a derivative liability component for the conversion option. Following stockholder approval on February 26, 2021, the conversion option was reclassified to equity, resulting in a $126.6 million non-cash loss due to fair value increase[65][76][79][80] Debt Interest Expense (in thousands) | Debt Type | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :---------------- | :-------------------------- | :-------------------------- | | 5-Year Term Loan | $19,200 | $50,500 | | 2027 Notes | $7,500 | $22,400 | - The 2027 Notes have an initial conversion rate of 200 shares per $1,000 principal amount (conversion price of $5.00 per share) and are subject to various covenants, including minimum liquidity and dividend restrictions[68][72][75] Note 8 — Pensions and Other Postretirement Benefit Plans This note details defined benefit retirement plans and postretirement benefits, highlighting an increase in non-operating pension income due to higher expected returns and lower interest costs Total Expense (Benefit) for Retirement Plans for Three Months Ended Sep 30 (in thousands) | Plan Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Pension Benefits | $(23,785) | $(18,236) | $(5,549) | 30.43% | | Postretirement Benefits | $438 | $622 | $(184) | -29.58% | Total Expense (Benefit) for Retirement Plans for Nine Months Ended Sep 30 (in thousands) | Plan Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Pension Benefits | $(71,429) | $(54,139) | $(17,290) | 31.94% | | Postretirement Benefits | $1,322 | $1,863 | $(541) | -29.04% | - The increase in non-operating pension income for both periods was primarily due to higher expected returns on plan assets and lower interest costs on benefit obligations[162] - The company contributed $40.2 million to pension plans and $4.4 million to other postretirement plans during the nine months ended September 30, 2021, including deferred contributions for the GR Plan[83] Note 9 — Income Taxes This note summarizes pre-tax income (loss) and income tax provision (benefit), with the Q3 provision driven by pre-tax income and PPP loan forgiveness, and the nine-month provision by net loss and derivative revaluation Income Taxes (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income (loss) before income taxes | $17,529 | $(28,350) | $(101,880) | $(572,085) | | Provision (benefit) for income taxes | $2,984 | $3,098 | $11,567 | $(22,200) | | Effective tax rate | 17.0% | *** | (11.4)% | 3.9% | - The Q3 2021 tax provision was mainly driven by pre-tax income and impacted by PPP loan forgiveness, partially offset by valuation allowances on non-deductible interest expense carryforwards[85] - The nine-month 2021 tax provision was primarily due to a pre-tax net loss in Q1 2021, the non-deductible derivative revaluation, valuation allowances, and state/foreign tax expenses[86] - A $32.5 million deferred tax asset related to the 2027 Notes' embedded conversion feature was reclassified to Equity in Q1 2021[87] Note 10 — Supplemental Equity Information This note details income (loss) per share calculations, including dilutive securities, share-based compensation, and the company's Rights Agreement to protect NOLs Income (Loss) Per Share Attributable to Gannett (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to Gannett | $14,687 | $(31,260) | $(112,514) | $(548,305) | | Basic weighted average shares outstanding (in thousands) | 135,002 | 132,223 | 134,610 | 131,425 | | Diluted weighted average shares outstanding (in thousands) | 239,453 | 132,223 | 134,610 | 131,425 | | Basic EPS | $0.11 | $(0.24) | $(0.84) | $(4.17) | | Diluted EPS | $0.09 | $(0.24) | $(0.84) | $(4.17) | - Dilutive securities for Q3 2021 included 5.032 million restricted stock grants and 99.419 million shares from the 2027 Notes[92] Share-Based Compensation Expense (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | 3 Months Ended Sep 30 | $4,600 | $3,800 | | 9 Months Ended Sep 30 | $13,800 | $22,800 | - The company adopted a Section 382 Rights Agreement to protect its $543.5 million net operating loss carryforwards (NOLs), which will continue until April 5, 2023[96][98] Note 11 — Fair Value Measurement This note describes fair value measurements, categorizing assets and liabilities into a three-tiered hierarchy, with pension plan assets measured recurringly and assets held for sale nonrecurringly - Fair value measurements are disclosed using a three-tiered hierarchy: Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[101] - Pension plan assets are measured at fair value on a recurring basis, and the 5-Year Term Loan was classified as Level 2[102][103] - Assets held for sale, totaling $21.7 million as of September 30, 2021, are measured on a nonrecurring basis and classified as Level 3[104] Note 12 — Commitments, Contingencies and Other Matters This note addresses the company's legal proceedings and contingent matters, with management believing current proceedings will not materially adversely affect financial position or results - The company is involved in various legal proceedings in the ordinary course of business, including libel, intellectual property, employment, and regulatory matters[105] - Management does not expect current and threatened legal proceedings to have a material adverse effect on the company's business, financial position, or consolidated results of operations[106] - Equity purchase arrangements exercisable by counterparties are classified as Redeemable noncontrolling interests[107] Note 13 — Segment Reporting This note defines the company's Publishing and Digital Marketing Solutions segments, outlining revenue types and the use of non-GAAP measures like Adjusted EBITDA for performance evaluation - Gannett reports in two segments: Publishing (local, regional, national, and international newspaper publishers) and Digital Marketing Solutions (DMS) (digital marketing services through ReachLocal)[23][112] - The Chief Operating Decision Maker (CEO) uses Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted Net income (loss) attributable to Gannett (non-GAAP measures) to evaluate segment performance and allocate resources[110][111] Adjusted EBITDA for Three Months Ended Sep 30 (non-GAAP basis, in thousands) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing | $101,001 | $108,752 | $(7,751) | -7.13% | | Digital Marketing Solutions | $15,024 | $4,177 | $10,847 | 259.70% | | Corporate and other | $(13,958) | $(24,949) | $10,991 | -44.05% | | Consolidated | $102,067 | $87,980 | $14,087 | 16.01% | Adjusted EBITDA for Nine Months Ended Sep 30 (non-GAAP basis, in thousands) | Segment | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing | $317,398 | $311,767 | $5,631 | 1.81% | | Digital Marketing Solutions | $36,725 | $14,847 | $21,878 | 147.35% | | Corporate and other | $(35,822) | $(61,548) | $25,726 | -41.80% | | Consolidated | $318,301 | $265,066 | $53,235 | 20.08% | Note 14 — Other Supplemental Information This note provides additional financial details, including a reconciliation of cash, cash equivalents, and restricted cash, supplemental cash flow information, and a breakout of accounts payable and accrued liabilities Cash, Cash Equivalents and Restricted Cash (in thousands) | Item | Sep 30, 2021 | Sep 30, 2020 | | :-------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $141,302 | $188,960 | | Restricted cash included in other current assets | $4,845 | $10,796 | | Restricted cash included in investments and other assets | $21,267 | $24,177 | | Total cash, cash equivalents and restricted cash | $167,414 | $223,933 | Supplemental Cash Flow Information for Nine Months Ended Sep 30 (in thousands) | Item | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Net cash refund for taxes | $(9,031) | $(4,510) | | Cash paid for interest | $80,280 | $176,402 | | Accrued capital expenditures | $2,836 | $758 | Accounts Payable and Accrued Liabilities (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Accounts payable | $134,805 | $131,797 | | Compensation | $108,444 | $115,061 | | Taxes (primarily property and sales taxes) | $29,104 | $30,834 | | Benefits | $23,031 | $22,821 | | Interest | $10,012 | $3,676 | | Other | $51,928 | $74,057 | | Total | $357,324 | $378,246 | Note 15 — Subsequent Events This note discloses a major debt refinancing completed on October 15, 2021, where the company secured new loans to repay existing debt, resulting in an estimated loss on early extinguishment - On October 15, 2021, Gannett Holdings completed a debt refinancing, including a $516 million New Senior Secured Term Loan and $400 million of 6.00% first lien notes due 2026 (2026 Senior Notes)[119][120] - Proceeds from the new debt were used to fully repay the $899.4 million 5-Year Term Loan[120][124] - Total debt outstanding after the refinancing was $1.416 billion, comprising the New Senior Secured Term Loan, 2026 Senior Notes, 2027 Notes, and 2024 Notes[123] - The company estimates a loss on early extinguishment of the 5-Year Term Loan and other fees of approximately $31.2 million in Q4 2021 due to the refinancing[124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Gannett's financial performance, condition, and operational results, covering strategy, trends, COVID-19 impact, and non-GAAP measures Overview Gannett is a subscription-led and digitally-focused media and marketing solutions company, aiming to drive audience growth and engagement through content and marketing expertise - Gannett's strategy focuses on driving audience growth and engagement by delivering deeper content experiences and offering marketing expertise to advertisers, transitioning from traditional print to a digitally-focused content platform[126] - The company's assets include USA TODAY, local media in 46 U.S. states, Newsquest in the U.K., and digital marketing services (ReachLocal, UpCurve, WordStream) marketed under the LOCALiQ brand[127] Business Trends Gannett navigates industry trends including declining print advertising, SMBs' need for digital presence, consumer demand for experience-based connections, and newsprint availability challenges - Print advertising continues to decline, prompting a focus on optimizing print operations and converting digital audiences into digital-only subscribers[131] - Small and medium-sized businesses (SMBs) require digital presence, which Gannett addresses with its broad suite of Digital Marketing Solutions (DMS) products[131] - Digital consumer engagement has declined from its peak during the COVID-19 pandemic, as consumers resume pre-pandemic activities and the news cycle slows[131] - Newsprint availability is constrained, and inflationary pressures are impacting newsprint and delivery costs[131] Recent Developments Recent developments include a significant debt refinancing on October 15, 2021, and reclassifications in prior period financial statements for consistency - On October 15, 2021, Gannett Holdings completed a debt refinancing, securing a $516 million New Senior Secured Term Loan and issuing $400 million of 6.00% first lien notes due 2026, used to repay the 5-Year Term Loan[129] - Certain prior period condensed consolidated financial statements were reclassified to conform to the current year presentation, including a re-alignment of Publishing segment's Circulation revenues related to Digital-only circulation[130] Certain Matters Affecting Comparability This section highlights factors impacting financial comparisons, including reclassifications, the 2027 Notes' conversion option reclassification, integration costs, accelerated depreciation, and foreign currency fluctuations - Stockholder approval on February 26, 2021, allowed the 2027 Notes' conversion option to be share-settled, leading to its reclassification to equity and a $126.6 million non-cash loss due to fair value increase[131][132] Integration and Reorganization Costs (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | 3 Months Ended Sep 30 | $13,600 | $13,400 | | 9 Months Ended Sep 30 | $35,500 | $74,000 | - The company ceased operations of 4 and 14 printing facilities for the three and nine months ended September 30, 2021, respectively, resulting in accelerated depreciation of $1.1 million and $11.4 million[134] - No goodwill and intangible impairments were incurred for the three and nine months ended September 30, 2021, compared to $393.4 million in the nine months ended September 30, 2020, primarily due to COVID-19 impacts[137] Outlook for 2021 Gannett's 2021 strategic focus includes accelerating digital subscriber growth, driving digital marketing services growth, optimizing print businesses, and investing in growth areas like USA TODAY NETWORK Ventures - Strategic focus areas for 2021 include accelerating digital subscriber growth to 10 million over the next five years, driving digital marketing services growth, optimizing traditional print and advertising businesses, and investing in growth businesses like USA TODAY NETWORK Ventures[140][141][142][143] - The company entered an exclusive agreement with Tipico USA Technology, Inc. in July 2021 to explore online gaming[143] Impacts of the COVID-19 Pandemic The COVID-19 pandemic continued to negatively impact Gannett's Advertising and marketing services and single-copy newspaper sales, accelerating secular declines, leading to cost reduction measures - The COVID-19 pandemic continued to negatively impact Advertising and marketing services revenues and single-copy newspaper sales, accelerating secular declines[144] - Measures to reduce costs and preserve cash flow included applying for governmental relief programs (like PPP), suspending quarterly dividends, and debt refinancing[145] - The company received $16.4 million in PPP funding and had $15.1 million of these loans forgiven in Q3 2021, recognized as an offset to operating costs and SG&A expenses[147] Seasonality Gannett's revenues experience moderate seasonality, with Advertising and marketing services revenues typically highest in the fourth quarter and lowest in the first quarter, influenced by external factors - Revenues are subject to moderate seasonality, with Advertising and marketing services revenues typically highest in Q4 (holiday season) and lowest in Q1[148] - Advertising sales volumes are influenced by competitors' pricing, advertiser spending decisions, and general economic conditions[148] Results of Operations This section provides a high-level overview of the company's consolidated financial results, including total operating revenues, expenses, and income (loss) for the three and nine months ended September 30, 2021 Consolidated Operating Results for Three Months Ended Sep 30 (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total operating revenues | $800,185 | $814,539 | $(14,354) | -1.76% | | Total operating expenses | $769,083 | $813,059 | $(43,976) | -5.41% | | Operating income (loss) | $31,102 | $1,480 | $29,622 | 1999.99% | Consolidated Operating Results for Nine Months Ended Sep 30 (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total operating revenues | $2,381,544 | $2,530,223 | $(148,679) | -5.88% | | Total operating expenses | $2,297,056 | $2,996,189 | $(699,133) | -23.33% | | Operating income (loss) | $84,488 | $(465,966) | $550,454 | -118.14% | Consolidated Summary This section provides a consolidated summary of the company's segment results, including operating revenues, expenses, and income (loss) for the three and nine months ended September 30, 2021 and 2020 Consolidated Summary for Three Months Ended Sep 30 (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing Operating revenues | $715,807 | $732,226 | $(16,419) | -2% | | Digital Marketing Solutions Operating revenues | $116,771 | $105,443 | $11,328 | 11% | | Total operating revenues | $800,185 | $814,539 | $(14,354) | -2% | | Total operating expenses | $769,083 | $813,059 | $(43,976) | -5% | | Operating income (loss) | $31,102 | $1,480 | $29,622 | *** | | Net income (loss) attributable to Gannett | $14,687 | $(31,260) | $45,947 | *** | | Diluted EPS | $0.09 | $(0.24) | $0.33 | *** | Consolidated Summary for Nine Months Ended Sep 30 (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Publishing Operating revenues | $2,139,937 | $2,286,268 | $(146,331) | -6% | | Digital Marketing Solutions Operating revenues | $329,089 | $321,287 | $7,802 | 2% | | Total operating revenues | $2,381,544 | $2,530,223 | $(148,679) | -6% | | Total operating expenses | $2,297,056 | $2,996,189 | $(699,133) | -23% | | Operating income (loss) | $84,488 | $(465,966) | $550,454 | *** | | Net income (loss) attributable to Gannett | $(112,514) | $(548,305) | $435,791 | -79% | | Diluted EPS | $(0.84) | $(4.17) | $3.33 | -80% | Operating Revenues Total operating revenues decreased for both the three and nine months ended September 30, 2021, with Publishing declines offset by DMS growth in digital advertising and marketing services - Total Operating revenues decreased by $14.4 million (2%) for the three months and $148.7 million (6%) for the nine months ended September 30, 2021[152] - Publishing segment revenues decreased due to lower Circulation revenues ($29.5 million for 3 months, $111.1 million for 9 months) and Advertising and marketing services revenues ($40.8 million for 9 months), partially offset by higher Other revenues[153] - DMS segment revenues increased by $11.3 million (11%) for the three months and $7.8 million (2%) for the nine months, driven by higher Advertising and marketing services revenues[155] Operating Expenses Total operating expenses decreased for both the three and nine months ended September 30, 2021, with significant reductions in Publishing and Corporate, partially offset by DMS operating cost increases - Total Operating expenses decreased by $44.0 million (5%) for the three months and $699.1 million (23%) for the nine months ended September 30, 2021[156] - Publishing segment operating expenses decreased by $27.2 million (4%) for the three months and $591.8 million (23%) for the nine months, driven by lower operating costs, depreciation, integration costs, and the absence of goodwill impairments seen in 2020[156] - DMS segment operating expenses increased by $1.4 million (1%) for the three months but decreased by $55.6 million (15%) for the nine months, reflecting increased operating costs offset by lower SG&A and the absence of 2020 goodwill impairments[157] - Corporate and other operating expenses decreased by $9.9 million (22%) for the three months and $43.3 million (29%) for the nine months, primarily due to reduced SG&A and integration costs[158] Non-Operating (Income) Expense This section details changes in non-operating items, including decreased interest expense, increased loss on early debt extinguishment, higher non-operating pension income, and a significant loss on convertible notes derivative - Interest expense decreased for both periods due to a lower effective interest rate from debt refinancing and a reduced debt balance[160] - Loss on early extinguishment of debt increased significantly, primarily due to early prepayments on the 5-Year Term Loan and the payoff of the Acquisition Term Loan[161] - Non-operating pension income increased due to higher expected returns on plan assets and lower interest costs on benefit obligations[162] - A $126.6 million loss on convertible notes derivative was recorded for the nine months ended September 30, 2021, driven by an increase in the fair value of the derivative liability due to the company's stock price increase[163] Provision (Benefit) for Income Taxes The income tax provision for Q3 2021 was influenced by pre-tax income and PPP loan forgiveness, while the nine-month provision was impacted by a pre-tax net loss and the non-deductible derivative revaluation Income Taxes (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income (loss) before income taxes | $17,529 | $(28,350) | $(101,880) | $(572,085) | | Provision (benefit) for income taxes | $2,984 | $3,098 | $11,567 | $(22,200) | | Effective tax rate | 17.0% | *** | (11.4)% | 3.9% | - The Q3 2021 tax provision was mainly driven by pre-tax income and PPP loan forgiveness, partially offset by valuation allowances on non-deductible interest expense carryforwards[166] - The nine-month 2021 tax provision was primarily due to a pre-tax net loss in Q1 2021, the non-deductible derivative revaluation, valuation allowances, and state/foreign tax expenses[167][168] - A $32.5 million deferred tax asset related to the 2027 Notes' embedded conversion feature was reclassified to Equity in Q1 2021[169] Net Income (Loss) Attributable to Gannett and Diluted Income (Loss) Per Share Attributable to Gannett Gannett reported net income of $14.7 million and diluted EPS of $0.09 for Q3 2021, a significant improvement, while the nine-month net loss decreased substantially to $112.5 million Net Income (Loss) Attributable to Gannett and Diluted EPS (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to Gannett | $14,687 | $(31,260) | $(112,514) | $(548,305) | | Diluted EPS | $0.09 | $(0.24) | $(0.84) | $(4.17) | - The change in net income (loss) and diluted EPS for both periods reflects the combined impact of improved operating income, reduced interest expense, increased non-operating pension income, and the loss on convertible notes derivative[171] Publishing Segment The Publishing segment experienced declining total operating revenues due to decreases in print circulation and advertising, but showed growth in digital advertising and marketing services, with significantly reduced operating expenses Publishing Segment Operating Revenues for Three Months Ended Sep 30 (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Advertising and marketing services | $328,784 | $329,508 | $(724) | 0% | | Circulation | $306,698 | $336,152 | $(29,454) | -9% | | Other | $80,325 | $66,566 | $13,759 | 21% | | Total operating revenues | $715,807 | $732,226 | $(16,419) | -2% | Publishing Segment Operating Revenues for Nine Months Ended Sep 30 (in thousands) | Revenue Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Advertising and marketing services | $984,575 | $1,025,396 | $(40,821) | -4% | | Circulation | $942,392 | $1,053,517 | $(111,125) | -11% | | Other | $212,970 | $207,355 | $5,615 | 3% | | Total operating revenues | $2,139,937 | $2,286,268 | $(146,331) | -6% | - Print advertising revenues declined due to secular trends and divestitures, while Digital advertising and marketing services revenues increased due to higher digital media spend and marketing services, and improved operating trends post-COVID-19[173][174] - Print circulation revenues decreased due to reduced home delivery and single-copy sales, but Digital-only circulation revenues increased by 27% (Q3) and 37% (9 months) driven by a 46% increase in paid digital-only subscribers to approximately 1.543 million[175] - Operating costs decreased due to lower newsprint and ink costs, and reduced compensation and benefits from headcount reductions and PPP loan forgiveness, partially offset by increased distribution costs[177][178][179] - Depreciation and amortization expenses decreased due to fewer print facility shutdowns and strategic real estate dispositions[185] - Adjusted EBITDA for the Publishing segment decreased by $7.8 million (7%) for the three months but increased by $5.6 million (2%) for the nine months ended September 30, 2021[192] Digital Marketing Solutions Segment The Digital Marketing Solutions (DMS) segment reported increased operating revenues driven by advertising and marketing services growth, with operating expenses reflecting higher outside services costs offset by reduced compensation Digital Marketing Solutions Segment Operating Revenues for Three Months Ended Sep 30 (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Advertising and marketing services | $116,771 | $100,807 | $15,964 | 16% | | Other | — | $4,636 | $(4,636) | -100% | | Total operating revenues | $116,771 | $105,443 | $11,328 | 11% | Digital Marketing Solutions Segment Operating Revenues for Nine Months Ended Sep 30 (in thousands) | Revenue Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :----------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Advertising and marketing services | $328,184 | $306,899 | $21,285 | 7% | | Other | $905 | $14,388 | $(13,483) | -94% | | Total operating revenues | $329,089 | $321,287 | $7,802 | 2% | - Advertising and marketing services revenues increased due to growth in the core ReachLocal business and improved operating trends post-COVID-19[194] - Operating costs increased due to higher outside services costs (third-party media fees) driven by increased revenues, while compensation and benefits decreased due to integration efforts and cost containment[196][197][198] - Selling, general and administrative expenses decreased due to reduced compensation and benefits from integration efforts and cost containment initiatives[199][200] - Adjusted EBITDA for the DMS segment increased significantly by $10.8 million (Q3) and $21.9 million (9 months) compared to the prior year[207] Corporate and Other Category The Corporate and other category experienced decreases in both operating revenues and expenses, with expense reductions driven by cost containment and lower severance, partially offset by systems implementation and debt fees Corporate and Other Operating Expenses for Three Months Ended Sep 30 (in thousands) | Expense Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Operating costs | $6,039 | $7,424 | $(1,385) | -19% | | Selling, general and administrative expenses | $15,222 | $26,393 | $(11,171) | -42% | | Depreciation and amortization | $4,260 | $2,106 | $2,154 | *** | | Integration and reorganization costs | $9,176 | $7,060 | $2,116 | 30% | | Other operating expenses | $4 | $1,913 | $(1,909) | -100% | | Total operating expenses | $34,991 | $44,924 | $(9,933) | -22% | Corporate and Other Operating Expenses for Nine Months Ended Sep 30 (in thousands) | Expense Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Operating costs | $14,534 | $17,864 | $(3,330) | -19% | | Selling, general and administrative expenses | $43,386 | $79,339 | $(35,953) | -45% | | Depreciation and amortization | $12,123 | $11,613 | $510 | 4% | | Integration and reorganization costs | $23,525 | $29,342 | $(5,817) | -20% | | Other operating expenses | $11,354 | $10,261 | $1,093 | 11% | | Total operating expenses | $105,208 | $148,509 | $(43,301) | -29% | - The decrease in operating expenses was mainly due to cost containment initiatives in SG&A and lower severance costs, partially offset by increased costs for systems implementation and outsourcing of corporate functions[210][212] - Other operating expenses increased for the nine months due to $10.9 million in third-party fees related to the 5-Year Term Loan[213] Liquidity and Capital Resources Gannett's primary cash requirements are for working capital, debt, and capital expenditures, funded by operating activities, with net cash provided by operating activities increasing significantly and a major debt refinancing completed in October 2021 - Primary cash requirements are for working capital, debt obligations, and capital expenditures, expected to be funded by operating activities[214] Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2021 | 2020 | Change ($) | Change (%) | | :-------------------------------------- | :--------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $133,347 | $74,280 | $59,067 | 79.52% | | Net cash provided by (used for) investing activities | $39,236 | $(1,979) | $41,215 | -2082.62% | | Net cash used for financing activities | $(212,284) | $(37,471) | $(174,813) | 466.52% | - Increase in operating cash flow was due to decreased interest paid, lower severance payments, PPP funding, and increased tax refunds, partially offset by decreased working capital and increased pension contributions[216] - Investing activities shifted from cash used to cash provided, primarily due to increased proceeds from asset sales and decreased capital expenditures[217] - Financing activities used more cash due to increased net repayments under term loans and payments of debt issuance costs[218] - On October 15, 2021, the company completed a debt refinancing, repaying the 5-Year Term Loan with proceeds from a New Senior Secured Term Loan ($516 million) and 2026 Senior Notes ($400 million), bringing total debt outstanding to $1.416 billion[239][242] - The company does not currently pay a quarterly dividend and has no intention to reinstate it, with debt agreements restricting dividend payments[244] - Deferred $41.6 million in FICA taxes under the CARES Act, with 50% due by Dec 31, 2021, and the remainder by Dec 31, 2022[245] - Forecasted capital expenditures for the remainder of 2021 are approximately $13.9 million, primarily for digital product development, print/technology systems, and system upgrades[247] Critical Accounting Policies and Use of Estimates This section refers readers to the company's most recent Annual Report on Form 10-K for a discussion of its critical accounting policies and use of estimates, noting no material changes during the quarter - No material changes to critical accounting policies and use of estimates were reported for the quarter ended September 30, 2021[250] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, including Adjusted EBITDA and Adjusted Net income (loss) attributable to Gannett, used by management to evaluate operational performance and trends - Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted Net income (loss) attributable to Gannett are non-GAAP measures used to assess overall business operations, identify trends, and evaluate controllable expenses[252][253][254][255][256] - These non-GAAP measures exclude items like income tax expense (benefit), interest expense, gains/losses on early debt extinguishment, non-operating pension income, loss on convertible notes derivative, depreciation and amortization, integration and reorganization costs, asset impairments, goodwill and intangible impairments, gains/losses on asset sales, share-based compensation, and other non-recurring charges[252] - These measures have limitations and should not be considered in isolation or as alternatives to U.S. GAAP measures[257][259] Adjusted EBITDA Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to Gannett | $14,687 | $(31,260) | $(112,514) | $(548,305) | | Total Adjustments | $87,380 | $119,240 | $430,815 | $813,371 | | Adjusted EBITDA | $102,067 | $87,980