DALLASNEWS CORPORATION A. H. Belo intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect its financial statements. The following information should be read in conjunction with the Company's consolidated financial statements and related notes filed as part of this report. Unless otherwise noted, amounts in Management's Discussion and Analysis reflect continuing operations of the Company, and all dollar amounts are presented in thousands, except share and per share amounts. OVERVIEWA. H. Belo , headquartered inDallas, Texas , is the leading local news and information publishing company inTexas . The Company has commercial printing, distribution and direct mail capabilities, as well as a presence in emerging media and digital marketing. While focusing on extending the Company's media platforms,A. H. Belo delivers news and information in innovative ways to a broad range of audiences with diverse interests and lifestyles. The Company's Publishing segment includes the operations ofThe Dallas Morning News (www.dallasnews.com),Texas' leading newspaper and winner of nine Pulitzer Prizes, and various niche publications targeting specific audiences. Its newspaper operations also provide commercial printing and distribution services to large national and regional newspapers and other businesses inTexas . The segment includes sales of online automotive classifieds on thecars.com platform. In addition, the Publishing segment includes all corporate expenses. All other operations are reported within the Company's Marketing Services segment. These operations primarily includeDMV Digital Holdings Company ("DMV Holdings ") and its subsidiariesDistribion, Inc. ("Distribion"),Vertical Nerve, Inc. ("Vertical Nerve") andCDFX, LLC ("MarketingFX"). The segment also includes targeted display advertising generated by Connect (programmatic advertising). In addition, onApril 1, 2019 , the Company completed an asset acquisition. The new entityCubic Creative, Inc. ("Cubic Creative") is located inTulsa, Oklahoma and has approximately 25 employees. This acquisition adds creative strategy services, which will be complementary to service offerings currently available toA. H. Belo clients. OnMay 17, 2019 , the Company completed the sale of the real estate assets in downtownDallas, Texas , previously used as the Company's headquarters for a sale price of$28,000 , and recorded a pretax gain of$25,908 , which for tax purposes is fully offset by net operating loss carryforwards. A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A 22
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RESULTS OF OPERATIONS
Consolidated Results of Operations (unaudited)
This section contains discussion and analysis of net operating revenue, expense and other information relevant to an understanding of results of operations for the three and six months endedJune 30, 2019 and 2018. In the first quarter of 2019, the Company determined one of the Company's business units, previously reported in the Publishing segment, is now providing services and products more closely aligned with the Marketing Services segment. BeginningJanuary 1, 2019 , this business unit will be reported in the Marketing Services segment. The 2018 financial information by segment was recast for comparative purposes. This Form 10-Q/A amends the Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission onJuly 29, 2019 , (the "original Form 10-Q") to reflect the restatement of the Company's financial statements for the quarter endedJune 30, 2019 . In connection with the restatement, the Company re-calculated the income tax provision for the three and six months endedJune 30, 2019 , and the Company determined using an estimated annual effective tax rate to calculate the income tax provision was appropriate, compared to the discrete year-to-date calculation of income tax expense or benefit used in prior interim periods and in the original Form 10-Q. The Consolidated Statements of Operations for the three and six months endedJune 30, 2019 , were restated to reflect the re-calculated income tax provision primarily resulting from using an estimated annual effective tax rate, a reduction in other income, net for additional interest expense related to uncertain tax positions, and the reversal of amortization expense related to the Marketing Services long-lived assets impairment disclosed in theDecember 31, 2018 Form 10-K/A. In addition, the Company determined that a new line of business associated with its acquisition of Cubic Creative onApril 1, 2019 , where the Company acted as an agent was incorrectly accounted for in the original Form 10-Q. In the three and six months endedJune 30, 2019 , revenue and expense were immaterially overstated by the same amount, resulting in no impact to operating income (loss), net income (loss), retained earnings or earnings per share. The Company corrected this error and the restated Consolidated Statements of Operations for the three and six months endedJune 30, 2019 , reflect the associated reduction in advertising and marketing services revenue and in other production, distribution and operating costs. See the Notes to the Consolidated Financial Statements, Note 2 - Restatement of Financial Statements , for additional information. The table below sets forth the components ofA. H. Belo's operating income (loss) by segment. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2019 Change 2018 2019 Change 2018 (Restated) (Recast) (Restated) (Recast)
Publishing
Advertising and marketing services$ 19,100 (6.0) %$ 20,313 $ 37,255 (7.4) %$ 40,230 Circulation 17,013 (5.1) % 17,921 34,286 (3.9) % 35,668 Printing, distribution and other 4,802 (29.9) % 6,851 10,077 (21.4) % 12,816 Total Net Operating Revenue 40,915 (9.2) % 45,085
81,618 (8.0) % 88,714
Total Operating Costs and Expense 18,173 (61.2) % 46,884
62,916 (35.0) % 96,815
Operating Income (Loss)
Marketing Services Advertising and marketing services$ 6,200 1.9 %$ 6,084 $ 12,086 1.5 %$ 11,908 Total Net Operating Revenue 6,200 1.9 % 6,084
12,086 1.5 % 11,908
Total Operating Costs and Expense 6,087 7.7 % 5,652
11,861 4.1 % 11,391
Operating Income$ 113 (73.8) %$ 432 $
225 (56.5) %
"N/M" - not meaningful
Traditionally, the Company's primary revenues are generated from advertising
within its core newspapers, niche publications and related websites and from
subscription and single copy sales of its printed newspapers. As a result of
competitive and economic conditions, the newspaper industry has faced a
significant revenue decline over the past decade. Therefore, the Company has
sought to diversify its revenues through development and investment in new
product offerings, increased circulation rates and leveraging of its existing
assets
A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A 23
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Table of Contents to offer cost efficient commercial printing and distribution services to its local markets. The Company continually evaluates the overall performance of its core products to ensure existing assets are deployed adequately to maximize return. The Company's advertising revenue from its core newspapers continues to be adversely affected by the shift of advertiser spending to other forms of media and the increased accessibility of free online news content, as well as news content from other sources, which resulted in declines in advertising and paid print circulation volumes and revenue. Decreases in print display and classified categories are indicative of continuing trends by advertisers towards digital platforms, which are widely available from many sources. In the current environment, companies are allocating more of their advertising spending towards programmatic channels that provide digital advertising on multiple platforms with enhanced technology for targeted delivery and measurement. The display and classified categories have declined to 18.0 percent of consolidated revenue thus far in 2019, and further declines are likely in future periods. The Company has responded to these challenges by expanding programmatic channels through which it works to meet customer demand for digital advertisement opportunities in display, mobile, video and social media categories. By utilizing advertising exchanges to apply marketing insight, the Company believes it offers greater value to clients through focused targeting of advertising to potential customers. The Company has a meter on its website and continues to build a base of paid digital subscribers. The Company's expanded digital and marketing services product offerings leverage the Company's existing resources and relationships to offer additional value to existing and new advertising clients. Solutions provided byDMV Holdings include development of mobile websites, search engine marketing and optimization, video, mobile advertising, email marketing, advertising analytics, creative strategy services and online reputation management services.
Advertising and marketing services revenue
Advertising and marketing services revenue was 53.7 percent and 52.7percent of total revenue for the three and six months endedJune 30, 2019 , respectively, and 51.6 percent and 51.8 percent for the three and six months endedJune 30, 2018 , respectively. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2019 Change 2018 2019 Change 2018 (Restated) (Recast) (Restated) (Recast) Publishing Advertising revenue$ 19,100 (6.0) %$ 20,313 $ 37,255 (7.4) %$ 40,230 Marketing Services Digital services 5,005 2.2 % 4,899 9,314 (0.6) % 9,367 Other services 1,195 0.8 % 1,185 2,772 9.1 % 2,541 Advertising and Marketing Services$ 25,300 (4.2) %$ 26,397 $ 49,341 (5.4) %$ 52,138 Publishing Advertising Revenue - The Company has a comprehensive portfolio of print and digital advertising products, which include display, classified, preprint and digital advertising. Display and classified print revenue primarily represents sales of advertising space within the Company's core and niche newspapers. As advertisers continue to diversify marketing budgets to incorporate more and varied avenues of reaching consumers, traditional display and classified advertising continues to decline. Display and classified print revenue decreased$420 and$931 in the three and six months endedJune 30, 2019 , respectively, primarily due to lower classified advertising in all categories. Preprint revenue primarily reflects preprinted advertisements inserted into the Company's core newspapers and niche publications, or distributed to non-subscribers through the mail. Revenue decreased$652 and$1,675 for the three and six months endedJune 30, 2019 , respectively, due to a volume decline in preprint newspaper inserts, consistent with the decline in circulation volumes discussed below.Digital Publishing revenue is primarily comprised of banner and real estate classified advertising onThe Dallas Morning News' website dallasnews.com, online employment and obituary classified advertising on third-party websites sold under a print/digital bundle package and sales of online automotive classifieds on thecars.com platform. Revenue decreased$141 and$369 for the three and six months endedJune 30, 2019 , respectively, primarily due to a lower volume of online automotive classifieds oncars.com . The Company's agreement to sell on thecars.com platform was not renewed and will endSeptember 30, 2019 . A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A 24
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Table of Contents Marketing Services Digital services - Digital marketing revenue includes targeted and multi-channel advertising placed on third-party websites, content development, social media management, search optimization, and other consulting. Revenue increased
Other services - Other services revenue increased$10 and$231 for the three and six months endedJune 30, 2019 , respectively, due to an increase in the sale of promotional merchandise by MarketingFX. Circulation revenue Circulation revenue was 36.1 percent and 36.6 percent of total revenue for the three and six months endedJune 30, 2019 , respectively, and 35.0 percent and 35.5 percent for the three and six months endedJune 30, 2018 , respectively. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2019 Change 2018 2019 Change 2018 Publishing Circulation$ 17,013 (5.1) %$ 17,921 $ 34,286 (3.9) %$ 35,668 Revenue decreased primarily due to home delivery revenue, driven by a volume decline of 35.7 percent and 23.9 percent, for the three and six months endedJune 30, 2019 , respectively. Single copy revenue also decreased compared to prior year, due to single copy paid print circulation volume declines of 22.4 percent and 21.3 percent for the three and six months endedJune 30, 2019 , respectively. The volume declines were partially offset by rate increases.
Printing, distribution and other revenue
Printing, distribution and other revenue was 10.2 percent and 10.7 percent of total revenue for the three and six months endedJune 30, 2019 , respectively, and 13.4 percent and 12.7 percent for the three and six months endedJune 30, 2018 , respectively. Three Months Ended June 30, Six Months Ended June 30, Percentage Percentage 2019 Change 2018 2019 Change 2018 Publishing Printing, Distribution and Other$ 4,802 (29.9) %$ 6,851 $ 10,077 (21.4) %$ 12,816 Revenue decreased in the three and six months endedJune 30, 2019 , primarily due to the Company eliminating its brokered printing business in which it provided services direct to small business clients. Additionally, the Company reduced the number of local and national commercial print customers it serves from more than 30 to five. This strategic decision to streamline operations was implemented to improve the segment's operating income. A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A
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Operating Costs and Expense
The table below sets forth the components of the Company's operating costs and
expense.
Three Months Ended June 30, Six Months Ended June 30,
Percentage Percentage
2019 Change 2018 2019 Change 2018
(Restated) (Recast) (Restated) (Recast)
Publishing
Employee compensation and
benefits $ 16,379 (10.9) % $ 18,376 $ 34,441 (13.2) % $ 39,691
Other production,
distribution and operating
costs 21,718 4.1 % 20,862 41,764 (0.3) % 41,901
Newsprint, ink and other
supplies 3,721 (28.0) % 5,170 8,039 (22.0) % 10,311
Depreciation 2,263 (9.4) % 2,498 4,580 (7.2) % 4,934Gain on sale of assets, net (25,908) N/A - (25,908) N/A - Asset impairments - 100.0 % (22) - 100.0 % (22) Marketing Services Employee compensation and benefits 3,449 9.4 % 3,153 6,511 0.0 % 6,510 Other production, distribution and operating costs 2,127 7.9 % 1,971 4,265 8.1 % 3,946 Newsprint, ink and other supplies 301 3.4 % 291 730 58.4 % 461 Depreciation 70 89.2 % 37 139 87.8 % 74 Amortization 140 (30.0) % 200 216 (46) % 400 Total Operating Costs and Expense$ 24,260 (53.8) %$ 52,536 $ 74,777 (30.9) %$ 108,206 Publishing Employee compensation and benefits - The Company continues to implement measures to optimize its workforce and reduce risk associated with future obligations for employee benefit plans. Employee compensation and benefits decreased$1,997 and$5,250 in the three and six months endedJune 30, 2019 , respectively, primarily due to headcount reductions of 151 sinceJune 30, 2018 . Other production, distribution and operating costs - Expense increased$856 and decreased$137 in the three and six months endedJune 30, 2019 , respectively, due to$1,920 of expense related to a strategy review with an outside consulting firm in the second quarter of 2019. Newsprint, ink and other supplies - Expense decreased due to reduced newsprint costs associated with lower circulation volumes and the elimination of brokered printing for small business clients. Newsprint consumption for the three and six months endedJune 30, 2019 , approximated 3,043 and 6,849 metric tons, respectively, and for the three and six months endedJune 30, 2018 , approximated 5,014 and 10,013 metric tons, respectively.
Depreciation - Expense decreased in the three and six months ended
Gain on sale of assets - In the second quarter of 2019, the Company completed
the sale of real estate previously used as the Company's headquarters for
Marketing Services Employee compensation and benefits - Expense increased$296 in the three months endedJune 30, 2019 , and remained flat in the six months endedJune 30, 2019 , due to additional expense generated from the 25 new employees of Cubic Creative, which was acquired in the second quarter of 2019.
Other production, distribution and operating costs - Expense increased
Newsprint, ink and other supplies - Expense increased$10 and$269 in the three and six months endedJune 30, 2019 , respectively, primarily due to an increase in promotional material printing costs associated with MarketingFX. A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A 26
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Depreciation - Expense increased
Amortization - Expense is related to developed technology associated with
Other
The table below sets forth the other components of the Company's results of
operations.
Three Months Ended June 30, Six Months Ended June 30,
Percentage Percentage
2019 Change 2018 2019 Change 2018
(Restated) (Restated)
Other income, net $ 1,133 27.2 % $ 891 $ 1,962 10.3 % $ 1,779 Income tax provision (benefit)
"N/M" - not meaningful Other income, net - Other income, net is primarily comprised of net periodic pension and other post-employment benefit of$818 and$1,636 for the three and six months endedJune 30, 2019 , respectively, and$931 and$1,861 for the three and six months endedJune 30, 2018 , respectively. Gain (loss) from investments and interest income (expense) are also included in other income, net. Income tax provision (benefit) - The Company recognized income tax provision (benefit) of$7,460 and$58 for the three months endedJune 30, 2019 and 2018, respectively, and$6,496 and$(1,257) for the six months endedJune 30, 2019 and 2018, respectively. Effective income tax rates were 31.1 percent and 21.7 percent for the six months endedJune 30, 2019 and 2018, respectively. The income tax provision for the three and six months endedJune 30, 2019 , was due to applying the estimated annual effective tax rate to year-to-date income, which included effects of the income generated from the sale of the Company's former headquarters (see Note 14 - Sales of Assets ), a decrease in the deferred tax asset, and the effect of theTexas margin tax. Legal proceedings - From time to time, the Company is involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. Management routinely assesses the likelihood of adverse judgments or outcomes in these matters, as well as the ranges of probable losses to the extent losses are reasonably estimable. Accruals for contingencies are recorded when, in the judgment of management, adverse judgments or outcomes are probable and the financial impact, should an adverse outcome occur, is reasonably estimable. The determination of likely outcomes of litigation matters relates to factors that include, but are not limited to, past experience and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. Predicting the outcome of claims and litigation and estimating related costs and financial exposure involves substantial uncertainties that could cause actual results to vary materially from estimates and accruals. In the opinion of management, liabilities, if any, arising from other currently existing claims against the Company would not have a material adverse effect onA. H. Belo's results of operations, liquidity or financial condition. A. H. Belo Corporation Second Quarter 2019 on Form 10-Q/A
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Liquidity and Capital Resources
The Company's cash balances as of
The Company intends to hold existing cash for purposes of future investment opportunities, potential return of capital to shareholders and for contingency purposes. Although revenue from Publishing operations is expected to continue to decline in future periods, operating contributions expected from the Company's Marketing Services businesses and other cost cutting measures, are expected to be sufficient to fund operating activities and capital spending of approximately$1,500 over the remainder of the year.
The future payment of dividends is dependent upon available cash after considering future operating and investing requirements and cannot be guaranteed. The Company continued stock repurchases under its prior board-authorized repurchase authority and in the first quarter of 2019, the board authorized an additional 1,500,000 shares for repurchase. Current holdings of treasury stock can be sold on the open market.
The following discusses the changes in cash flows by operating, investing and financing activities.
Operating Cash Flows Net cash provided by (used for) operating activities for the six months endedJune 30, 2019 and 2018, was$(1,037) and$7,165 , respectively. Cash flows from operating activities decreased by$8,202 during the six months endedJune 30, 2019 , when compared to the prior year period, primarily due to changes in working capital and other operating assets and liabilities. Investing Cash Flows Net cash provided by (used for) investing activities was$1,715 and$(3,697) for the six months endedJune 30, 2019 and 2018, respectively. Cash flows from investing activities improved due to cash proceeds of$4,597 received during the second quarter of 2019 related to the sale of real estate previously used as the Company's headquarters in downtownDallas, Texas , partially offset by the acquisition ofCubic, Inc. for$2,425 . Cash flows from investing activities also included$457 and$3,697 of capital spending in 2019 and 2018, respectively. Financing Cash Flows Net cash used for financing activities was$3,974 and$4,377 for the six months endedJune 30, 2019 and 2018, respectively. Cash used for financing activities included dividend payments of$3,447 and$3,552 in 2019 and 2018, respectively. Additionally, in 2019, the Company purchased 131,613 shares of its Series A common stock at a cost of$527 under its share repurchase program. Financing Arrangements None. Contractual Obligations
Under the applicable tax and labor laws governing pension plan funding, no contributions to the A. H. Belo Pension Plans are required in 2019.
OnMay 9, 2019 , the Company's board of directors declared an$0.08 per share dividend to shareholders of record as of the close of business onAugust 16, 2019 , which is payable onSeptember 6, 2019 .
Additional information related to the Company's contractual obligations is
available in Company's Annual Report on Form 10K/A for the year ended
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Critical Accounting Policies and Estimates
BeginningJanuary 1, 2019 , the Company adopted Accounting Standards Update ("ASU") 2016-02 - Leases (Topic 842). As a result, the Company implemented changes to the Company's polices related to processes around evaluating and accounting for leases or arrangements that contain a lease. Under the new standard, for substantially all leases an operating lease right-of-use asset and liability is recognized at commencement date based on the present value of lease payments over the lease term. Except for adoption of the new lease guidance (Topic 842), no material changes were made to the Company's critical accounting policies as set forth in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", included in the Company's Annual Report on Form 10-K/A filed with theSEC for the year endedDecember 31, 2018 . Forward-Looking Statements Statements in this communication concerningA. H. Belo Corporation's business outlook or future economic performance, revenues, expenses, and other financial and non-financial items that are not historical facts, including statements of the Company's expectations relating to the outcome of its ongoing review of asset impairment and related items and the timing of its late third quarter 2019 report and its 2019 Form 10-K with theSecurities and Exchange Commission and filing future reports, are "forward-looking statements" as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Such risks, trends and uncertainties are, in most instances, beyond the Company's control, and include unanticipated challenges in completing the 2019 audit process or filing the Company's late reports, the impact of the COVID-19 virus outbreak on the Company's financial reporting capabilities and its operations generally and the potential impact of such virus on the Company's customers, distribution partners, advertisers and production facilities and third parties, as well as changes in advertising demand and other economic conditions; consumers' tastes; newsprint prices; program costs; labor relations; technology obsolescence; as well as other risks described in the Company's Annual Report on Form 10-K and in the Company's other public disclosures and filings with theSecurities and Exchange Commission . Forward-looking statements, which are as of the date of this filing, are not updated to reflect events or circumstances after the date of the statement.
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