Gannett(GCI) - 2023 Q1 - Quarterly Report

Part I. Financial Information This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the company ITEM 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Gannett Co., Inc., including the balance sheets, statements of operations, cash flows, and equity, along with detailed notes explaining the company's business, revenue recognition, asset valuations, debt, pension plans, income taxes, equity information, commitments, and segment reporting Condensed Consolidated Balance Sheets This section provides a summary of the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Balance Sheet Summary | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Total Assets | $2,328,434 | $2,393,555 | $(65,121) | -2.72% | | Total Liabilities | $2,007,791 | $2,098,182 | $(90,391) | -4.31% | | Total Equity | $320,643 | $295,373 | $25,270 | 8.56% | | Cash and cash equivalents | $83,074 | $94,255 | $(11,181) | -11.86% | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This statement outlines the company's revenues, expenses, and net income or loss over specific periods, including comprehensive income adjustments Statements of Operations Summary | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total operating revenues | $668,917 | $748,077 | $(79,160) | -10.58% | | Operating income (loss) | $19,961 | $(1,978) | $21,939 | >100% | | Net income (loss) attributable to Gannett | $10,344 | $(2,967) | $13,311 | >100% | | Income (loss) per share attributable to Gannett - diluted | $0.07 | $(0.02) | $0.09 | >100% | Condensed Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities for the reported periods Cash Flow Summary | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Cash provided by operating activities | $6,718 | $32,429 | $(25,711) | -79.29% | | Cash provided by (used for) investing activities | $20,704 | $(6,220) | $26,924 | >100% | | Cash used for financing activities | $(38,640) | $(3,818) | $(34,822) | >100% | | Increase (decrease) in cash, cash equivalents and restricted cash | $(11,180) | $21,399 | $(32,579) | >100% | Condensed Consolidated Statements of Equity This statement presents changes in the company's equity, including net income, other comprehensive income, and share transactions Equity Summary | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Total Equity | $320,643 | $295,373 | $25,270 | 8.56% | | Net income attributable to Gannett (Q1 2023) | $10,344 | N/A | N/A | N/A | | Other comprehensive income, net (Q1 2023) | $13,290 | N/A | N/A | N/A | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 — Description of business and basis of presentation Gannett is a subscription-led and digitally-focused media and marketing solutions company, operating the USA TODAY NETWORK, Newsquest (U.K.), and LocaliQ digital marketing services. Its strategy prioritizes digital growth while maximizing the value of its legacy print business. The financial statements are prepared in accordance with U.S. GAAP for interim information - Gannett's business model is subscription-led and digitally-focused, aiming to empower communities through content and marketing solutions[16] - Key media assets include the USA TODAY NETWORK (U.S.), Newsquest (U.K.), LocaliQ (digital marketing services), and USA TODAY NETWORK Ventures (events business)[17] - The company reports in two segments: Gannett Media and Digital Marketing Solutions (DMS), with a Corporate and other category for broad corporate functions[18] NOTE 2 — Revenues Total operating revenues decreased by 10.6% year-over-year, primarily due to declines in print advertising and circulation. Digital advertising and marketing services also saw a slight decrease, while international revenues increased as a percentage of total revenues Revenue Breakdown by Type | Revenue Type | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Print advertising | $147,954 | $173,518 | $(25,564) | -14.73% | | Digital advertising and marketing services | $192,893 | $201,596 | $(8,703) | -4.32% | | Total advertising and marketing services | $340,847 | $375,114 | $(34,267) | -9.13% | | Circulation | $241,285 | $288,602 | $(47,317) | -16.40% | | Other | $86,785 | $84,361 | $2,424 | 2.87% | | Total revenues | $668,917 | $748,077 | $(79,160) | -10.58% | - Revenues generated from international locations increased to approximately 10.2% of total revenues for Q1 2023, up from 8.9% in Q1 2022[23] NOTE 3 — Accounts receivable, net The allowance for doubtful accounts decreased from $16.7 million at December 31, 2022, to $14.5 million at March 31, 2023. The company recorded a bad debt expense of $1.4 million in Q1 2023, a shift from a $2.4 million benefit in Q1 2022 Accounts Receivable and Bad Debt Expense | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Allowance for doubtful accounts (Ending balance) | $14,499 | $16,697 | $(2,198) | -13.16% | | Current period provision (Q1 2023 vs Q1 2022) | $1,383 | $(2,403) | $3,786 | >100% | NOTE 4 — Goodwill and intangible assets Total intangible assets decreased to $591.7 million at March 31, 2023, from $613.4 million at December 31, 2022, primarily due to amortization. Goodwill remained stable at approximately $533.5 million, and no impairment indicators were identified during the quarter Goodwill and Intangible Assets Summary | Asset Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Total intangible assets | $591,688 | $613,358 | $(21,670) | -3.53% | | Goodwill | $533,469 | $533,166 | $303 | 0.06% | - The company performed a review of potential impairment indicators for goodwill and indefinite-lived intangible assets as of March 31, 2023, and determined that no indicators of impairment were present[29] NOTE 5 — Integration and reorganization costs Total integration and reorganization costs increased to $12.1 million in Q1 2023 from $11.4 million in Q1 2022. This was driven by a significant increase in severance-related expenses, partially offset by a decrease in other restructuring-related expenses due to the reversal of a multiemployer pension plan withdrawal liability Integration and Reorganization Costs | Cost Type | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total Integration and reorganization costs | $12,127 | $11,398 | $729 | 6.40% | | Severance-related expenses | $10,253 | $5,360 | $4,893 | 91.29% | | Other restructuring-related expenses | $1,874 | $6,038 | $(4,164) | -68.96% | - The decrease in other restructuring-related costs was primarily due to the reversal of a withdrawal liability related to a multiemployer pension plan[32] NOTE 6 — Debt Total debt decreased to $1.13 billion at March 31, 2023, from $1.16 billion at December 31, 2022, primarily due to prepayments on the Senior Secured Term Loan and repurchases of 2026 Senior Notes. The company was in compliance with all debt covenants as of March 31, 2023 Debt Summary | Debt Type | Carrying Value (March 31, 2023, in millions) | Carrying Value (December 31, 2022, in millions) | Change (in millions) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------- | :--------- | | Total debt | $1,130.3 | $1,161.8 | $(31.5) | -2.71% | | Senior Secured Term Loan | $397.6 | $427.6 | $(30.0) | -7.02% | | 2026 Senior Notes | $323.8 | $328.5 | $(4.7) | -1.43% | | 2027 Notes (Convertible debt) | $405.6 | $402.4 | $3.2 | 0.79% | | 2024 Notes | $3.3 | $3.3 | $0.0 | 0.00% | - The Senior Secured Term Loan had an effective interest rate of 10.6% as of March 31, 2023, and the company made $31.3 million in prepayments during Q1 2023[39] - The company repurchased $6.1 million of 2026 Senior Notes in Q1 2023, resulting in a net gain of approximately $0.9 million on early extinguishment of debt[42] - As of March 31, 2023, the company was in compliance with all covenants and obligations under its debt instruments[36] NOTE 7 — Pensions and other postretirement benefit plans Total retirement plan expense shifted from a significant benefit of $18.1 million in Q1 2022 to a smaller benefit of $1.6 million in Q1 2023, primarily due to a decrease in non-operating pension income. The Gannett Retirement Plan (GR Plan) was more than 100% funded as of March 31, 2023 Retirement Plan Benefit/Expense | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total (benefit) expense for retirement plans | $(1,587) | $(18,137) | $16,550 | -91.25% | | Non-operating pension income | $(1,911) | $(18,612) | $16,701 | -89.73% | - The decrease in non-operating pension income was mainly driven by a decrease in the expected return on plan assets following an annuity contract in Q3 2022[131] - As of March 31, 2023, the GR Plan was more than 100% funded[66] NOTE 8 — Fair value measurement The company applies a three-tiered fair value hierarchy for its measurements. Pension plan assets are the primary assets measured at fair value on a recurring basis. Debt instruments are recorded at carrying value, with fair values disclosed, and assets held for sale are measured on a nonrecurring basis - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[67] - Assets and liabilities recorded at fair value on a recurring basis primarily consist of pension plan assets[68] - Assets held for sale, totaling $2.3 million as of March 31, 2023, are measured at fair value on a nonrecurring basis (Level 3)[70] NOTE 9 — Income taxes The company reported a benefit for income taxes of $17.3 million in Q1 2023, significantly higher than $7.6 million in Q1 2022, resulting in an effective tax rate of 245.1%. This was mainly driven by the tax benefit of the pre-tax book loss and changes in valuation allowances. The Inflation Reduction Act is not expected to have a material financial impact in 2023 Income Tax Summary | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Loss before income taxes | $(7,069) | $(10,709) | $3,640 | -34.00% | | Benefit for income taxes | $(17,329) | $(7,607) | $(9,722) | >100% | | Effective tax rate | 245.1% | 71.0% | 174.1% | >100% | - The Q1 2023 benefit for income taxes was mainly driven by the tax benefit of the pre-tax book loss, changes in valuation allowances on non-deductible U.S. interest expense carryforwards, global intangible low-taxed income inclusion, and stock compensation[71] - The Inflation Reduction Act of 2022 is not anticipated to have a material financial impact on the company during 2023[75] NOTE 10 — Supplemental equity information Net income attributable to Gannett was $10.3 million, or $0.07 diluted EPS, for Q1 2023, a significant improvement from a net loss of $3.0 million, or $0.02 diluted loss per share, in Q1 2022. Share-based compensation expense increased slightly, and no shares were repurchased under the Stock Repurchase Program during the quarter Supplemental Equity and EPS Information | Metric | Three months ended March 31, 2023 (in thousands, except per share) | Three months ended March 31, 2022 (in thousands, except per share) | Change (in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------------------------- | :------------------------------------------------------------- | :-------------------- | :--------- | | Net income (loss) attributable to Gannett | $10,344 | $(2,967) | $13,311 | >100% | | Diluted weighted average shares outstanding | 138,175 | 136,425 | 1,750 | 1.28% | | Income (loss) per share attributable to Gannett - diluted | $0.07 | $(0.02) | $0.09 | >100% | | Share-based compensation expense | $3,736 | $3,393 | $343 | 10.11% | - Approximately 97.1 million shares convertible from the 2027 Notes were excluded from diluted EPS calculation as their effect would have been antidilutive[77] - No shares were repurchased under the Stock Repurchase Program during Q1 2023, with approximately $96.9 million remaining authorized. No repurchases are anticipated for the remainder of 2023[82] NOTE 11 — Commitments, contingencies and other matters The company is involved in various legal proceedings in the ordinary course of business, including libel, privacy, intellectual property, and employment matters. Management believes these current and threatened proceedings will not have a material adverse effect on the company's financial position or results of operations - The company is involved in legal proceedings such as libel, invasion of privacy, intellectual property infringement, wrongful termination, and regulatory investigations[84] - Management does not believe it is reasonably possible that current and threatened legal proceedings will have a material adverse effect on the company's business, financial position, or consolidated results of operations[85] NOTE 12 — Segment reporting Gannett operates through two reportable segments: Gannett Media (local, regional, national, and international newspaper publishers) and Digital Marketing Solutions (LocaliQ digital marketing services). The Chief Operating Decision Maker uses Adjusted EBITDA and Adjusted EBITDA margin to evaluate segment performance and allocate resources - Reportable segments are Gannett Media (USA TODAY NETWORK, Newsquest) and Digital Marketing Solutions (LocaliQ)[86][87] - Adjusted EBITDA and Adjusted EBITDA margin are key non-GAAP financial performance measures used to evaluate segment performance and allocate resources[89] Adjusted EBITDA by Segment | Segment | Adjusted EBITDA (Q1 2023, in thousands) | Adjusted EBITDA (Q1 2022, in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------- | :--------- | | Gannett Media | $57,263 | $68,648 | $(11,385) | -16.58% | | Digital Marketing Solutions | $11,683 | $11,180 | $503 | 4.50% | | Corporate and other | $(6,044) | $(15,657) | $9,613 | -61.40% | | Consolidated Adjusted EBITDA | $62,902 | $64,171 | $(1,269) | -1.98% | NOTE 13 — Other supplemental information Total cash, cash equivalents, and restricted cash decreased to $93.6 million at March 31, 2023, from $165.0 million at March 31, 2022. Cash paid for interest increased, while cash paid for taxes remained relatively stable. Accounts payable and accrued liabilities also decreased Cash and Cash Equivalents, and Cash Paid for Taxes and Interest | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Total cash, cash equivalents and restricted cash | $93,624 | $165,018 | $(71,394) | -43.26% | | Cash paid for taxes, net of refunds (Q1) | $953 | $846 | $107 | 12.65% | | Cash paid for interest (Q1) | $10,499 | $7,531 | $2,968 | 39.41% | Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Accounts payable | $154,859 | $189,094 | $(34,235) | -18.11% | | Compensation | $60,241 | $87,937 | $(27,696) | -31.49% | | Total Accounts payable and accrued liabilities | $304,912 | $351,848 | $(46,936) | -13.34% | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion of Gannett's financial condition and results of operations for the three months ended March 31, 2023. It covers the company's business overview, recent developments, strategic pillars, macroeconomic environment, and a comprehensive analysis of consolidated and segment-level financial performance, liquidity, capital resources, and non-GAAP financial measures OVERVIEW Gannett is executing a subscription-led, digitally-focused strategy to drive audience growth and engagement, while optimizing its legacy print business. Key business trends include declining print revenues, increasing demand for digital marketing solutions for SMBs, and inflationary cost pressures. The company also highlights its ESG initiatives and the impact of the macroeconomic environment - Gannett's strategy prioritizes the growth of highly recurring digital businesses while maximizing the lifetime value of its legacy print business[100] - Print advertising and circulation revenues continue to decline as audiences shift to digital platforms - SMBs are increasingly seeking digital marketing solutions that offer greater attribution - Inflationary prices across categories like labor, fuel, and newsprint have negatively impacted costs, with the impact believed to have peaked in 2022[103] - The company repurchased $6.1 million of 2026 Senior Notes in February 2023, recognizing a net gain of approximately $0.9 million on early extinguishment of debt[104] - Driving digital subscriptions growth, aiming for additional digital subscription offerings - Driving Digital Marketing Solutions growth by engaging more customers in recurring monthly revenue offerings - Optimizing traditional businesses across print and advertising for profitability and lifetime value - Prioritizing investments in growth businesses like USA TODAY NETWORK Ventures, Reviewed, and sports betting partnerships - Building on environmental, social, and governance (ESG) focus, including workplace diversity and emissions reduction[109][110][111][112][113][114] - Uncertain economic conditions, including higher inflation and interest rates, adversely impacted advertising revenues and consumer price sensitivity, leading to reduced print circulation volumes[115][116] RESULTS OF OPERATIONS Gannett reported a significant turnaround in Q1 2023, achieving net income and operating income despite an 11% decline in total operating revenues. This improvement was driven by substantial reductions in operating expenses and a gain on asset sales, partially offset by increased non-operating expenses due to higher interest and lower pension income. Segment results show varying performance, with Gannett Media's operating income increasing due to cost controls, and DMS showing revenue and operating income growth Consolidated Summary This section provides a high-level overview of the company's consolidated financial performance, including revenues, expenses, and net income Consolidated Financial Performance Summary | Metric | Three months ended March 31, 2023 (in thousands, except per share) | Three months ended March 31, 2022 (in thousands, except per share) | Change (in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------------------------- | :------------------------------------------------------------- | :-------------------- | :--------- | | Total operating revenues | $668,917 | $748,077 | $(79,160) | -10.58% | | Total operating expenses | $648,956 | $750,055 | $(101,099) | -13.48% | | Operating income (loss) | $19,961 | $(1,978) | $21,939 | >100% | | Net income (loss) attributable to Gannett | $10,344 | $(2,967) | $13,311 | >100% | | Income (loss) per share attributable to Gannett - diluted | $0.07 | $(0.02) | $0.09 | >100% | Operating revenues Total operating revenues decreased by 11% year-over-year. Print advertising and circulation revenues experienced significant declines, while digital marketing services revenues showed growth. Other revenues also increased slightly Operating Revenues Breakdown | Revenue Category | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Print advertising | $147,954 | $173,518 | $(25,564) | -14.73% | | Digital advertising and marketing services | $192,893 | $201,596 | $(8,703) | -4.32% | | Total advertising and marketing services | $340,847 | $375,114 | $(34,267) | -9.13% | | Print circulation | $205,454 | $258,476 | $(53,022) | -20.51% | | Digital-only circulation | $35,831 | $30,126 | $5,705 | 18.94% | | Total circulation | $241,285 | $288,602 | $(47,317) | -16.40% | | Other | $86,785 | $84,361 | $2,424 | 2.87% | | Total operating revenues | $668,917 | $748,077 | $(79,160) | -10.58% | - Digital marketing services revenues increased by 3% due to an increase in average revenue per user (ARPU), partially offset by a decrease in client counts[123][139] - Digital-only circulation revenues increased by 19%, driven by a 15.4% increase in paid digital-only subscriptions to approximately 2.02 million as of March 31, 2023[123][140] Operating expenses Total operating expenses decreased by 13% year-over-year, contributing to the improved operating income. This reduction was primarily driven by lower operating costs and selling, general and administrative expenses, reflecting ongoing cost control initiatives and fewer print facilities Operating Expenses Breakdown | Expense Category | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total operating expenses | $648,956 | $750,055 | $(101,099) | -13.48% | | Operating costs | $430,188 | $469,885 | $(39,697) | -8.45% | | Selling, general and administrative expenses | $180,390 | $221,837 | $(41,447) | -18.68% | | Depreciation and amortization | $43,698 | $47,783 | $(4,085) | -8.55% | | Integration and reorganization costs | $12,127 | $11,398 | $729 | 6.40% | | Gain on sale or disposal of assets, net | $(17,681) | $(2,804) | $(14,877) | >100% | - Operating costs decreased due to lower labor, newsprint, and delivery costs[128] - Selling, general and administrative expenses decreased due to lower labor, payroll, outside services, and benefits costs[128] Non-operating (income) expense Non-operating expenses increased significantly to $27.0 million in Q1 2023 from $8.7 million in Q1 2022. This was primarily driven by higher interest expense due to increased interest rates and a substantial decrease in non-operating pension income, partially offset by a gain on early extinguishment of debt Non-Operating Income and Expense | Expense Category | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Non-operating expenses | $27,030 | $8,731 | $18,299 | >100% | | Interest expense | $28,330 | $26,006 | $2,324 | 8.94% | | (Gain) loss on early extinguishment of debt | $(496) | $2,743 | $(3,239) | >100% | | Non-operating pension income | $(1,815) | $(18,213) | $16,398 | -90.00% | | Other non-operating expense (income), net | $1,011 | $(1,805) | $2,816 | >100% | - The increase in interest expense was mainly due to the impact of higher interest rates on the Senior Secured Term Loan, partially offset by a lower debt balance[129] - The decrease in non-operating pension income was primarily due to a decrease in the expected return on plan assets following an annuity contract in Q3 2022[131] Benefit for income taxes The benefit for income taxes increased to $17.3 million in Q1 2023 from $7.6 million in Q1 2022, resulting in an effective tax rate of 245.1%. This was primarily driven by the tax benefit of the pre-tax book loss and changes in valuation allowances on non-deductible U.S. interest expense carryforwards Income Tax Benefit and Effective Rate | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Loss before income taxes | $(7,069) | $(10,709) | $3,640 | -34.00% | | Benefit for income taxes | $(17,329) | $(7,607) | $(9,722) | >100% | | Effective tax rate | 245.1% | 71.0% | 174.1% | >100% | - The benefit for income taxes in Q1 2023 was mainly driven by the tax benefit of the pre-tax book loss, the change in valuation allowances on non-deductible U.S. interest expense carryforwards, global intangible low-taxed income inclusion, and stock compensation[134] Net income (loss) attributable to Gannett and diluted income (loss) per share attributable to Gannett Net income attributable to Gannett was $10.3 million, or $0.07 diluted EPS, for Q1 2023, a significant improvement from a net loss of $3.0 million, or $0.02 diluted loss per share, in Q1 2022, reflecting the overall positive changes in operating and non-operating items Net Income and Diluted EPS | Metric | Three months ended March 31, 2023 (in thousands, except per share) | Three months ended March 31, 2022 (in thousands, except per share) | Change (in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------------------------- | :------------------------------------------------------------- | :-------------------- | :--------- | | Net income (loss) attributable to Gannett | $10,344 | $(2,967) | $13,311 | >100% | | Income (loss) per share attributable to Gannett - diluted | $0.07 | $(0.02) | $0.09 | >100% | Segment Results Segment results highlight varying performance across Gannett Media and Digital Marketing Solutions. Gannett Media saw a decrease in revenues but an increase in operating income due to significant cost reductions and asset sales. Digital Marketing Solutions achieved revenue and operating income growth, driven by its core direct business and local markets Gannett Media segment Gannett Media's total operating revenues decreased by 12% year-over-year to $589.1 million, primarily due to declines in print advertising and circulation. Despite this, operating income increased by 37% to $35.0 million, driven by a 14% reduction in operating expenses, reflecting successful cost control initiatives and a significant gain on asset sales Gannett Media Segment Performance | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total operating revenues | $589,095 | $670,419 | $(81,324) | -12.13% | | Total operating expenses | $554,108 | $644,827 | $(90,719) | -14.07% | | Operating income | $34,987 | $25,592 | $9,395 | 36.71% | | Advertising and marketing services | $262,423 | $298,762 | $(36,339) | -12.16% | | Circulation | $241,285 | $288,602 | $(47,317) | -16.40% | | Other | $85,387 | $83,055 | $2,332 | 2.81% | - Print advertising revenues decreased by 15% due to volume declines, macroeconomic factors, and the absence of revenues from divested businesses and sunset non-core products[138] - Digital-only circulation revenues increased by 19%, driven by a 15.4% increase in paid digital-only subscriptions[140] - Operating costs decreased by 11%, primarily due to lower compensation and benefits (down 19%), distribution (down 15%), and newsprint and ink costs (down 3%)[142][143][144] - A net gain of $16.3 million was recognized on the sale of assets, primarily from a domestic production facility[150] Digital Marketing Solutions segment The Digital Marketing Solutions (DMS) segment reported a 3% increase in total operating revenues to $112.8 million in Q1 2023, driven by growth in the core direct business and local markets. Operating income increased by 31% to $5.8 million, as operating expenses grew at a slower rate than revenues, and amortization expense decreased Digital Marketing Solutions Segment Performance | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Total operating revenues | $112,817 | $109,709 | $3,108 | 2.83% | | Total operating expenses | $107,049 | $105,295 | $1,754 | 1.67% | | Operating income | $5,768 | $4,414 | $1,354 | 30.68% | | Advertising and marketing services | $112,817 | $109,709 | $3,108 | 2.83% | - Operating costs increased by 3%, primarily due to higher outside services costs (up 4%) driven by third-party media fees, and increased compensation and benefits (up 7%) due to higher headcount[155][156] - Depreciation and amortization expense decreased by 9%, mainly due to intangibles becoming fully amortized in Q4 2022[160] Corporate and other category Corporate and other operating revenues remained stable at $1.4 million in Q1 2023. Operating expenses decreased significantly by 33% to $22.2 million, primarily due to a substantial reduction in selling, general, and administrative expenses and a gain on the sale of intellectual property, partially offset by increased operating and integration costs Corporate and Other Category Performance | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Operating revenues | $1,398 | $1,306 | $92 | 7.05% | | Total operating expenses | $22,192 | $33,290 | $(11,098) | -33.34% | | Selling, general and administrative expenses | $5,598 | $22,707 | $(17,109) | -75.35% | | Operating costs | $6,026 | $795 | $5,231 | >100% | | Integration and reorganization costs | $7,458 | $5,526 | $1,932 | 34.96% | | (Gain) loss on sale or disposal of assets, net | $(1,448) | $7 | $(1,455) | >100% | - The decrease in Selling, general and administrative expenses was primarily driven by lower compensation costs[165] - A $1.4 million gain was recognized on the sale of intellectual property[165] LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities decreased significantly in Q1 2023 compared to Q1 2022, primarily due to lower deferred revenue receipts and higher severance payments. Investing activities shifted to a cash-providing position, while financing activities saw increased cash usage. The company expects to have adequate liquidity for the next twelve months, supported by ongoing cost reduction initiatives and planned capital expenditures Cash Flow Activities Summary | Cash Flow Activity | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Cash provided by operating activities | $6,718 | $32,429 | $(25,711) | -79.29% | | Cash provided by (used for) investing activities | $20,704 | $(6,220) | $26,924 | >100% | | Cash used for financing activities | $(38,640) | $(3,818) | $(34,822) | >100% | - The decrease in operating cash flow was primarily due to lower cash receipts related to deferred revenues ($40.9 million decrease) and an increase in severance payments ($12.7 million increase), partially offset by a decrease in pension contributions ($7.3 million decrease)[169] - Total outstanding debt was $1.13 billion as of March 31, 2023, with the Senior Secured Term Loan accounting for approximately 33% of outstanding debt[172][118] - The company expects capital expenditures for the remainder of 2023 to total approximately $31.2 million, primarily for digital product development and technology systems[183] - Management expects adequate capital resources and liquidity for the next twelve months, supported by cost reduction initiatives to offset secular decline in legacy print business[167] CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES There have been no material changes to the company's critical accounting policies and use of estimates since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes to critical accounting policies and use of estimates have occurred since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[186] NON-GAAP FINANCIAL MEASURES Gannett utilizes Adjusted EBITDA and Adjusted EBITDA margin as non-GAAP financial measures to assess its day-to-day operating performance, excluding certain non-recurring or non-operational items. These measures are considered useful for identifying trends and making operational decisions but are not substitutes for U.S. GAAP measures - Adjusted EBITDA is defined as Net income (loss) attributable to Gannett before income tax expense (benefit), interest expense, gains/losses on early extinguishment of debt, non-operating pension income, loss on convertible notes derivative, depreciation and amortization, integration and reorganization costs, other operating expenses, asset impairments, goodwill and intangible impairments, gains/losses on sale or disposal of assets, share-based compensation, and certain other non-recurring charges[188] - Adjusted EBITDA and Adjusted EBITDA margin are used by management to evaluate ongoing operating performance, identify trends, and make decisions, as they eliminate the effect of items not indicative of core operations[89][189][190] - These non-GAAP measures have limitations and should not be considered in isolation or as an alternative to U.S. GAAP measures like net income (loss) or cash flows[191][193] Adjusted EBITDA and Margin | Metric | Three months ended March 31, 2023 (in thousands) | Three months ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :--------- | | Adjusted EBITDA (non-GAAP basis) | $62,902 | $64,171 | $(1,269) | -1.98% | | Adjusted EBITDA margin (non-GAAP basis) | 9.4% | 8.6% | 0.8% | 9.30% | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Gannett is exposed to market risks from changes in interest rates and foreign currency exchange rates. The company manages interest rate risk through a mix of variable and fixed-rate debt, with variable-rate debt comprising approximately one-third of its total debt. Foreign currency risk primarily stems from its U.K. operations and other international DMS activities - The company is exposed to market risks from changes in interest rates and foreign currency exchange rates[195] - As of March 31, 2023, variable-rate debt totaled $407.1 million, and a hypothetical 150 basis point interest rate increase would have increased interest expense by approximately $1.5 million for Q1 2023[196] - Foreign exchange rate risk primarily arises from operations in the U.K. (British pound sterling) and the DMS segment's activities in Australia, Canada, India, and New Zealand[197] - A hypothetical 10% fluctuation in the British pound sterling and other DMS currencies against the U.S. dollar would not have materially impacted Q1 2023 operating income[198] ITEM 4. Controls and Procedures As of March 31, 2023, the company's disclosure controls and procedures were evaluated and deemed effective by management, including the Chief Executive Officer and Chief Financial Officer. There were no material changes in internal control over financial reporting during the quarter - The company's disclosure controls and procedures were effective as of March 31, 2023[199] - There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2023[200] Part II. Other Information This section provides additional disclosures on legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information ITEM 1. Legal Proceedings There have been no material developments with respect to the legal proceedings previously reported in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material developments regarding legal proceedings have occurred since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[203] ITEM 1A. Risk Factors While there have been no material changes to previously disclosed risk factors, the company highlights new risks related to actual or perceived banking volatility or limited liquidity, which could materially and adversely impact its available cash and results of operations - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022, except as noted[204] - A new risk factor highlights that actual or perceived events involving banking volatility or limited liquidity could have a material and adverse impact on the company's available cash and results of operations[206][207] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of Common Stock under its Stock Repurchase Program during the three months ended March 31, 2023. However, 66 thousand shares were withheld to cover employee tax-withholding obligations upon the vesting of restricted stock awards - No shares of Common Stock were repurchased under the Stock Repurchase Program during the three months ended March 31, 2023[208][213] Shares Purchased for Tax Withholding | Period | Total number of shares purchased | Average price paid per share | | :-------------------------------- | :----------------------------- | :--------------------------- | | March 1, 2023 - March 31, 2023 | 66,000 | $1.83 | - The 66 thousand shares purchased were withheld to cover employee tax-withholding obligations upon the vesting of restricted stock awards[213] - As of March 31, 2023, approximately $96.9 million remained authorized under the Stock Repurchase Program, with no repurchases anticipated for the remainder of 2023[213] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[210] ITEM 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[211] ITEM 5. Other Information No other information was reported under this item - No other information was reported[212] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various employee compensation agreements, certifications from principal executive and financial officers, and the Inline XBRL financial information - Form of Gannett Co., Inc. Employee Cash Performance Unit Award Agreement (2020 Omnibus Incentive Compensation Plan, as amended) - Form of Gannett Co., Inc. Employee Restricted Stock Grant Agreement (2020 Omnibus Incentive Compensation Plan, as amended) - Form of Gannett Co., Inc. Employee Long-Term Cash Award Agreement (2020 Omnibus Incentive Compensation Plan, as amended) - Gannett Co., Inc. 2023 Annual Bonus Plan - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(d) of the Securities Exchange Act of 1934 and Section 1350 - Inline XBRL financial information, including Condensed Consolidated Balance Sheets, Statements of Operations, Cash Flow, Equity, and Notes to Condensed Consolidated Financial Statements[214] Signatures The report was officially signed on May 4, 2023, by Douglas E. Horne, Chief Financial Officer and Chief Accounting Officer of GANNETT CO., INC. - The report was signed on May 4, 2023, by Douglas E. Horne, Chief Financial Officer and Chief Accounting Officer[217]