GANNETT CO., INC. OVERVIEW
We are a subscription-led and digitally focused media and marketing solutions company committed to empowering communities to thrive. We aim to be the premiere source for clarity, connections and solutions within our communities. Our strategy is focused on driving audience growth and engagement by delivering deeper content experiences to our consumers, while offering the products and marketing expertise our advertisers desire. The execution of this strategy is expected to allow the Company to continue its evolution from a more traditional print media business to a digitally focused content platform. UntilNovember 19, 2019 , our corporate name wasNew Media Investment Group Inc. ("New Media") andGannett Co., Inc. was a separate publicly traded company. OnNovember 19, 2019 , New Media completed its acquisition ofGannett Co., Inc. (which was renamedGannett Media Corp. and is referred to as "Legacy Gannett"). In connection with the acquisition, New Media changed its name toGannett Co., Inc. and assumed Legacy Gannett's ticker symbol "GCI" (having previously traded under "NEWM"). As a result of the acquisition, historical results for 2019 represents legacy New Media's results up to and through the date of the acquisition plus the new consolidated company's results of operations for the approximately six-week period between the date of acquisition and the 2019 fiscal year end. Our current portfolio of media assets includesUSA TODAY , local media organizations in 46 states in theU.S. andGuam , andNewsquest , a wholly owned subsidiary operating in theUnited Kingdom ("U.K.") with more than 120 local news media brands. Gannett also owns the digital marketing services companiesReachLocal, Inc. ("ReachLocal"),UpCurve, Inc. ("UpCurve"), andWordStream, Inc. ("WordStream"), which are marketed under the LOCALiQ brand, and runs the largest media-owned events business in theU.S., USA TODAY NETWORK Ventures . ThroughUSA TODAY , our local property network, andNewsquest , Gannett delivers high-quality, trusted content where and when consumers want to engage with it on virtually any device or platform. Additionally, the Company has strong relationships with hundreds of thousands of local and national businesses in both ourU.S. andU.K. markets due to our large local and national sales forces and a robust advertising and digital marketing solutions product suite. The Company reports in two operating segments, Publishing and Digital Marketing Solutions ("DMS"). We also have a corporate and other category that includes activities not directly attributable to a specific operating segment and includes broad corporate functions such as legal, human resources, accounting, analytics, finance, and marketing. A full description of our operating segments is included in Note 14 - Segment reporting of the notes to the Consolidated financial statements. A discussion regarding our results of operations and changes in financial condition for 2019 as compared to 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "2019 Form 10-K"), filed with theSecurities and Exchange Commission (the "SEC") onMarch 2, 2020 , and is incorporated by reference herein.
Business Trends
We have considered several industry trends when assessing our business strategy:
•Print advertising continues to decline as the audience increasingly moves to
digital platforms. We look to optimize our print operations to efficiently
manage for this declining print audience. We are focused on converting the
growing digital audience into digital-only subscribers to our publications.
•Small and medium-sized businesses ("SMBs") are facing an increasingly complex
marketing environment and need to create digital presence to capture audience
online. We offer a broad suite of DMS products that offer a single, unified
solution to meet their digital marketing needs.
•Consumers are looking for experience-based, emotional connections and
communities. USA TODAY NETWORK Ventures was designed to celebrate local
communities and create opportunities for meaningful in-person and virtual
experiences.
When evaluating public company publishing peers for revenue trends, we include
Legacy Gannett (and legacy New Media for the period when they were separate
companies), Lee Enterprises, Inc., A. H. Belo Corporation, and Tribune
Publishing Company. We have tracked average revenue trends for this peer group
for 2018 - 2020 across the print advertising, digital
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advertising, and circulation categories, which is available through the third
quarter of 2020. The COVID-19 pandemic had a significant impact on revenue
trends across the industry during 2020, which we have described below:
•Print advertising revenues were down 13%-19% annually prior to the pandemic,
worsening to down 26%-47% during the second and third quarters of 2020;
•Digital advertising revenues (which often includes digital marketing services
products) performed between down 5% to up 5% annually prior to the pandemic. The
majority of companies did not provide digital advertising breakouts during the
second and third quarters of 2020; and
•Circulation revenues were down 3%-10% annually prior to the pandemic,
performing at the lower end of that range, down 9%, during the second and third
quarters of 2020.
Certain matters affecting comparability
Reclassifications
Certain amounts in prior period consolidated financial statements have been reclassified to conform to the current year presentation. Pursuant to our acquisition of Legacy Gannett, in the fourth quarter of 2019 we realigned the presentation of marketing services revenues generated by ourUpCurve subsidiary from Other revenues to Advertising and marketing services revenues on the Consolidated statements of operations and comprehensive income (loss). As a result of this updated presentation, Advertising and marketing services revenues increased and Other revenues decreased$58.2 million for the year endedDecember 30, 2018 . Operating revenues, net income, retained earnings, and earnings per share remained unchanged.
Acquisitions
•InNovember 2019 , we acquired substantially all of the assets, properties, and business of Legacy Gannett for an aggregate purchase price of$1.315 billion . The acquisition was funded by a five-year, senior-secured term loan facility withApollo Capital Management, L.P. ("Apollo") in an aggregate principal amount of approximately$1.792 billion (the "Acquisition Term Loan") and available cash on hand. •During 2019 prior to the acquisition of Legacy Gannett, we acquired substantially all the assets, properties, and business of certain publications and businesses (the "2019 Acquisitions"), including 11 daily newspapers, 11 weekly publications, nine shoppers, a remnant advertising agency, five events production businesses, and a business community and networking platform for an aggregate purchase price of$53.4 million , including estimated working capital. As part of one of the 2019 Acquisitions, we also acquired a 58% equity interest in the acquiree, and the minority equity owners retained a 42% interest, which has been classified as a redeemable non-controlling interest on the Consolidated statements of operations and comprehensive income (loss). The 2019 Acquisitions were financed from available cash on hand.
Dispositions
•OnOctober 30, 2020 , we completed the sale ofBridgeTower Media, LLC . As a result of the sale, we recognized a pre-tax gain of approximately$8.2 million , net of selling expenses which is included in Net (gain) loss on sale or disposal of assets on the Consolidated statements of operations and comprehensive income (loss) for the year endedDecember 31, 2020 .
Integration and reorganization costs
•For the year endedDecember 31, 2020 , we incurred Integration and reorganization costs of$145.7 million . Of the total costs incurred,$86.3 million were related to severance activities and$59.4 million were related to other costs incurred to consolidate and streamline our operations in connection with the acquisition of Legacy Gannett and ongoing implementation of our plans to reduce costs and preserve cash flow, including a$30.4 million expense related to the early termination of the Amended and Restated Management and Advisory Agreement (the "Amended Management Agreement") withFIG LLC (the "Manager"). •For the year endedDecember 31, 2020 , we ceased operations of 40 printing facilities as part of the synergy and ongoing cost reduction programs. As a result, we recognized accelerated depreciation of$49.6 million during the year endedDecember 31, 2020 .
•For the year ended
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•For the year ended December 31, 2019 , we ceased operations of three printing
publications and 12 printing operations as part of the ongoing cost reduction
programs. As a result, we recognized accelerated depreciation of $7.9 million
during the year ended December 31, 2019 .
Asset impairments
•For the year endedDecember 31, 2020 , we recognized Asset impairments of$11.0 million , primarily related to the Publishing segment as a result of the annual impairment analysis as well as fixed asset disposals related to the continued consolidation of operations and as a result of our recoverability test for long-lived asset groups performed as ofJune 30, 2020 .
•For the year ended
•For the year endedDecember 31, 2020 , we recognized$393.4 million ofGoodwill and intangible impairments primarily due to the impact of the COVID-19 pandemic on the Company's operations. •For the year endedDecember 31, 2019 , we recognized$100.7 million inGoodwill and intangible impairments, as a result of softening business conditions which led to the decline in revenue projections that negatively impacted the fair value of our reporting units and newspaper mastheads.
Foreign currency
The Company'sU.K. publishing operations are conducted through itsNewsquest subsidiary. In addition, the Company'sReachLocal subsidiary has foreign operations in regions such asCanada ,Australia /New Zealand andIndia . Earnings from operations in foreign regions are translated intoU.S. dollars at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Translation fluctuations impact revenue, expense, and operating income results for international operations. Outlook for 2021 Strategy
Our areas of strategic focus for 2021 include:
Accelerating digital subscriber growth
The broad reach of our newsroom network, linking leading national journalism atUSA TODAY , our local property network in 46 states in theU.S. andNewsquest in theU.K. with more than 120 local media brands, gives us the ability to deepen our relationships with consumers at both the national and local levels. We bring consumers local news and information that impacts their day-to-day lives while keeping them informed of the national events that impact their country. We believe this local content is not readily obtainable elsewhere, and we are able to deliver that content to our customers across multiple print and digital platforms. As such, a key element of our consumer strategy is growing our paid digital-only subscriber base. We also expect to launch new digital subscription offerings tailored to specific users.
Driving digital marketing services growth by engaging more clients in a subscriber relationship
We are now of significant digital scale, with unique reach at both the national and local community levels. We expect to leverage our integrated sales structure and lead generation strategy to continue to aggressively expand our digital marketing services business into our local markets, both domestically and internationally. Given our extensive client base and volume of digital campaigns, we will also use data and insights to inform new and dynamic advertising products that we believe will deliver superior results.
Optimizing our traditional businesses across print and advertising
We will continue to drive the profitability of our traditional print operations through economies of scale, process improvements, and optimizations. We are focused on optimizing our pricing and improving customer service for our print
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subscribers. Print advertising continues to offer a compelling branding
opportunity across our network due to our scale and unique reach at both the
national and local community levels.
Prioritizing investments into growth businesses that have significant potential and support our vision
By leveraging our unique footprint, trusted brands, and media reach, we
identify, experiment, and invest in potential growth businesses.
Building on our inclusive and diverse culture to center around meaningful purpose, individual growth and customer focus
Inclusion, Diversity and Equity are core pillars of our organization and influence all that we do, from recruiting, development and retention, to day-to-day operations including hiring, onboarding, education, leadership training and professional development. We have published our inclusion goals for 2025 and our efforts underway to progress toward those goals and expect to publish our first workforce diversity report in the first quarter of 2021. We believe aligning our culture around empowering our communities to thrive and putting our customers at the center of everything we do will provide the foundation for our broader strategic efforts.
Impacts of COVID-19
The ongoing COVID-19 pandemic and related measures to contain its spread have resulted in significant volatility and economic uncertainty, which is expected to continue in the near term. While we have generally been exempt from mandates requiring closures of non-essential business and have been able to continue operations, these circumstances are expected to continue to create volatility and unfavorable trends in our financial results as individuals and businesses rationalize expenditures during this time of uncertainty. During the year endedDecember 31, 2020 , the Company experienced decreased demand for its advertising and digital marketing services, commercial print and distribution services, as well as reductions in events and the single copy and commercial distribution of its newspapers. The Company currently expects that the COVID-19 pandemic will continue to have a negative impact on the Company's business and results of operations in the near-term. Longer term, the ultimate impact of the COVID-19 pandemic on the Company's business and results of operations will depend on the severity and length of the pandemic, the duration and extent of the mitigation measures and governmental actions designed to combat the pandemic, as well as the changes in customer behavior as a result of the pandemic, all of which remain highly uncertain. As a result, the Company has implemented, and continues to implement, measures to reduce costs and preserve cash flow. These measures include suspension of the quarterly dividend and refinancing of our debt, as well as reductions in discretionary spending. In addition, the Company has deferred certain payroll tax remittance as permitted under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and negotiated the deferral of pension contributions, as well as continuing with its previously disclosed plan to monetize non-core assets. Seasonality Our revenues are subject to moderate seasonality, due primarily to fluctuations in advertising volumes. Advertising and marketing services revenues for our Publishing segment are typically highest in the Company's fourth quarter, due to holiday and seasonal advertising, and lowest in the first quarter, following the holiday season. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.
Recent Developments
Senior Secured Convertible Notes due 2027
OnNovember 17, 2020 , the Company entered into an Exchange Agreement (the "Exchange Agreement") with certain of the lenders (the "Exchanging Lenders") under the Acquisition Term Loan pursuant to which the Company and the Exchanging Lenders agreed to exchange$497.1 million in aggregate principal amount of the Company's newly issued 6.0% Senior Secured Convertible Notes due 2027 (the "2027 Notes") for the retirement of an equal amount of term loans under the Acquisition Term Loan (the "Exchange"). Following the Exchange, the outstanding balance under the Acquisition Term Loan as ofDecember 31 , 39 -------------------------------------------------------------------------------- T able of Contents 2020 was$1.019 billion (the "Remaining Term Loan"). The 2027 Notes were issued pursuant to an Indenture (the "Indenture") dated as ofNovember 17, 2020 , between the Company andU.S. Bank National Association , as trustee. The Indenture, as supplemented by the Second Supplemental Indenture (the "Second Supplemental Indenture") dated as ofFebruary 9, 2021 , between the Company andU.S. Bank National Association as trustee, includes affirmative and negative covenants that are substantially consistent with the 5-Year Term Loan, as well as customary events of default. Please see the disclosure below under "Liquidity and Capital Resources - Senior Secured Convertible Notes due 2027" and Note 8 - Debt for additional information regarding the 2027 Notes.
Termination of the Amended and Restated Management Agreement
For the year endedDecember 31, 2020 , we were externally managed and advised by the Manager. OnAugust 5, 2019 , in connection with the entry into the agreement to acquire Legacy Gannett, the Company and the Manager entered into the Amended Management Agreement, which became effective upon the closing of the acquisition onNovember 19, 2019 . OnDecember 21, 2020 , we entered into a Termination Agreement (the "Termination Agreement") with the Manager providing for the early termination of the Amended Management Agreement, effective at11:59 p.m. Eastern Time onDecember 31, 2020 . Upon termination of the Amended Management Agreement, the Manager ceased providing external management services to the Company, and the Manager no longer is the employer of the person serving in the role of Chief Executive Officer of the Company. In connection with the Termination Agreement, the Company made a one-time cash payment of$30.4 million to the Manager. In addition, all transfer restrictions contained in the Amended Management Agreement on shares of our Common Stock owned by the Manager, or acquired by the Manager upon the exercise of stock options to acquire Common Stock, lapsed. In connection with the termination of our relationship with the Manager, we extended offers of employment to certain employees of the Manager or its affiliates who provided services to the Company, including to our Chief Executive Officer. Certain indemnification and other obligations in the Amended Management Agreement survived the termination of our relationship with the Manager.
Term Loan Refinancing
OnFebruary 9, 2021 , the Company entered into a five-year, senior-secured term loan facility withCitibank, N.A . in an aggregate principal amount of$1.045 billion (the "5-Year Term Loan"). The 5-Year Term Loan matures onFebruary 9, 2026 and, at the Company's option, bears interest at the rate of theLondon Interbank Offered Rate plus a margin equal to 7.00% per annum or an alternate base rate plus a margin equal to 6.00% per annum. Accordingly, we are required to dedicate a substantial portion of cash flow from operations to fund interest payments. Please see the disclosure below under "Liquidity and Capital Resources - Term Loan Refinancing" and Note 16 - Subsequent events for additional information regarding the 5-Year Term Loan.
Special Meeting of Stockholders
At the special meeting of stockholders of the Company, held onFebruary 26, 2021 (the "Special Meeting"), our stockholders approved, for purposes of Rule 312.03(c) of theNew York Stock Exchange , of the issuance of the maximum number of shares of Common Stock issuable upon conversion of the 2027 Notes. Following receipt of the stockholder approval, the Company has the flexibility to settle conversion of the 2027 Notes with shares of Common Stock in full (rather than cash of an equivalent value). 40 --------------------------------------------------------------------------------
T able of Contents RESULTS OF OPERATIONS Consolidated summary
The following table summarizes results of operations for the Company by segment
for the years ended
Year ended December 31,
In thousands, except per share amounts 2020 2019 Change % Change
Operating revenues:
Publishing $ 3,080,447 $ 1,792,652 $ 1,287,795 72 %
Digital Marketing Solutions 428,605 149,242 279,363 ***
Corporate and other 10,960 4,554 6,406 ***
Intersegment eliminations (114,342) (78,539) (35,803) 46 %
Total operating revenues 3,405,670 1,867,909 1,537,761 82 %
Operating expenses:
Publishing 3,268,911 1,772,323 1,496,588 84 %
Digital Marketing Solutions 481,177 164,023 317,154 ***
Corporate and other 217,812 157,079 60,733 39 %
Intersegment eliminations (114,342) (78,539) (35,803) 46 %
Total operating expenses 3,853,558 2,014,886 1,838,672 91 %
Operating income (loss) (447,888) (146,977) (300,911) ***
Non-operating (income) expense 257,959 60,207 197,752 ***
Income (loss) before income taxes (705,847) (207,184) (498,663) ***
Provision (benefit) for income taxes (33,450) (85,994) 52,544 (61 %)
Net income (loss) $ (672,397) $ (121,190) $ (551,207) ***
Net loss attributable to redeemable
noncontrolling interests (1,918) (1,348) (570) 42 %
Net income (loss) attributable to Gannett
***
Earnings (loss) per share attributable to
Gannett - basic $ (5.09) $ (1.77) $ (3.32) ***
Earnings (loss) per share attributable to
Gannett - diluted $ (5.09) $ (1.77) $ (3.32) ***
*** Indicates an absolute value percentage change greater than 100.
Intersegment eliminations in the preceding table represent digital marketing services revenues and expenses associated with products sold by ourU.S. local publishing sales teams but which are fulfilled by our DMS segment. When discussing segment results, these revenues and expenses are presented gross and are eliminated in consolidation.
Operating revenues
Total Operating Revenues were$3.406 billion for the year endedDecember 31, 2020 , an increase of$1.538 billion from 2019. Acquired revenues related to Legacy Gannett were$2.185 billion for the year endedDecember 31, 2020 compared to$299.2 million for the six-week period endedDecember 31, 2019 . For the Publishing segment, Operating revenues increased$1.288 billion , driven by higher Advertising and marketing services revenues of$511.9 million , including both print and digital, higher Circulation revenues of$687.2 million and higher Other revenues of$88.7 million . Advertising and marketing services revenues are generated by the sale of local, national, and classified print advertising products, digital advertising offerings such as digital classified advertisements, digital media such as display advertisements run on our platforms as well as third-party sites, and digital marketing services such as search advertising offered through and delivered by our DMS segment. Circulation revenues are derived principally from home delivery and single copy sales of our publications and distribution of our publications on our digital platforms. Other revenues are derived mainly from commercial printing and distribution arrangements and our events business. For the DMS segment, Operating revenues increased$279.4 million , driven by higher Advertising and marketing services revenues of$280.9 million and lower Other revenues of$1.6 million . Our DMS segment generates Advertising and marketing services revenues through multiple services, including search advertising, display advertising, search optimization, social media, website development, web presence products, customer relationship management, Google-suite offerings, and software-as-a-service solutions. Other revenues in our DMS segment are derived from systems integration services, cloud offerings, and software licensing. 41 -------------------------------------------------------------------------------- T able of Contents For the Corporate and Other category, Operating revenues increased$6.4 million , driven by higher Other revenues of$5.9 million . Other revenues at our Corporate and Other category are driven by third party newsprint sales.
Operating expenses
Total Operating expenses were
•Operating costs at the Publishing segment include labor, newsprint and delivery costs and at the DMS segment include the cost of online media acquired from third parties and costs to manage and operate our marketing solutions and technology infrastructure; •Selling, general and administrative expenses include labor, payroll, outside services, and benefits costs; •Depreciation and amortization; •Integration and reorganization costs include severance charges and facility consolidation expenses as well as integration-related costs; •Acquisition related costs; •Impairment charges, including costs incurred related to goodwill, intangible assets and property, plant and equipment; and •Gains or losses on the sale or disposal of assets. For the year endedDecember 31, 2020 , Operating expenses at our Publishing segment increased$1.497 billion , reflecting an increase in Operating costs of$797.0 million , an increase in Selling, general and administrative expenses of$294.4 million , an increase in Depreciation and amortization of$119.9 million , an increase in Integration and reorganization costs of$37.4 million , an increase in Asset impairments of$7.3 million , and an increase inGoodwill and intangible impairments of$252.2 million , partially offset by an increase in the Gain on the sale or disposal of assets of$11.6 million . For the year endedDecember 31, 2020 , Operating expenses at our DMS segment increased$317.2 million , reflecting an increase in Operating costs of$177.6 million , an increase in Selling, general and administrative expenses of$72.8 million , an increase in Depreciation and amortization of$19.3 million , an increase in Integration and reorganization costs of$4.5 million , an increase inGoodwill and intangible impairments of$40.5 million , and an increase in the Loss on the sale or disposal of assets of$1.7 million . For the year endedDecember 31, 2020 , Operating expenses at Corporate and other an increase$60.7 million , due to an increase in Operating costs of$20.4 million , an increase in Selling, general and administrative expenses of$25.9 million , an increase in Depreciation and amortization expenses of$12.7 million , and an increase in Integration and reorganization costs of$51.7 million , partially offset by a decrease in Acquisition costs of$49.5 million .
Refer to the discussion of segment results below for further information.
Non-operating (income) expense
Interest expense: For the year endedDecember 31, 2020 , Interest expense was$228.5 million compared to$63.7 million for 2019. The increase in interest expense was mainly due to a full year of interest expense on the Acquisition Term Loan in 2020 compared to 2019. Loss on early extinguishment of debt: For the year endedDecember 31, 2020 , Loss on early extinguishment of debt was$43.8 million compared to$6.1 million for 2019. The increase was mainly due to the Exchange of the Acquisition Term Loan in 2020. Non-operating pension income: For the year endedDecember 31, 2020 , Non-operating pension income was$72.1 million compared to$9.1 million for 2019. The increase in Non-operating pension income was primarily due to the increased expected return on plan assets held by the Gannett Retirement Plan (the "GR Plan") in excess of interest costs on benefit obligations compared to the prior year. Unrealized loss on Convertible notes derivative: For the year endedDecember 31, 2020 , Unrealized loss on Convertible notes derivative was$74.3 million , representing the increase in the fair value of the derivative liability as a result of the increase in the Company's stock price from the original issue date throughDecember 31, 2020 . 42 -------------------------------------------------------------------------------- T able of Contents Gain on sale of investments: For the year endedDecember 31, 2020 , Gain on sale of investments was$8.0 million , compared to none for 2019. The increase in the Gain on sale of investments was due to the disposal of a cost-method investment held by the DMS segment during 2020. Other non-operating items, net: Our non-operating items, net, are driven by certain items that fall outside of our normal business operations. For the year endedDecember 31, 2020 , Non-operating items, net, was income of$8.5 million compared to$0.4 million in for 2019.
Provision (benefit) for income taxes
The following table summarizes our Income (loss) before income taxes and income
tax accounts.
Year ended December 31,
In thousands 2020 2019
Income (loss) before income taxes
Provision (benefit) for income taxes (33,450) (85,994)
Effective tax rate 4.7 % 41.5 %
Our effective tax rate for the year ended December 31, 2020 , was 4.7%. The rate
was primarily impacted by the tax effect of non-deductible asset impairments,
non-deductible officers' compensation, disallowed loss on the Convertible notes
derivative and the increase in valuation allowances against non-deductible
interest expense and capital losses carryforwards. Without the federal and
foreign valuation allowance activity, our effective tax rate would have been
18.5%, which is lower than the statutory rate primarily due to non-deductible
asset impairments, nondeductible officers' compensation and disallowed loss on
Convertible notes derivative. Our effective tax rate for the year ended December
31, 2019 , was 41.5%. The rate was primarily impacted by the release of a
valuation allowance for $46.9 million related to legacy New Media's U.S. federal
deferred tax assets and federal net operating losses. If we do not have taxable
income in future years, we may be required to reestablish a valuation allowance
against our federal net operating loss deferred tax assets.
Net loss attributable to Gannett and diluted loss per share attributable to Gannett
For the year endedDecember 31, 2020 , Net loss attributable to Gannett and diluted loss per share attributable to Gannett were$670.5 million and$5.09 , respectively, compared to$119.8 million and$1.77 for the year endedDecember 31, 2019 , respectively. The change reflects the various items discussed above. 43 -------------------------------------------------------------------------------- T able of Contents Publishing segment
A summary of our Publishing segment results is presented below:
Year ended December 31,
In thousands 2020 2019 Change % Change
Operating revenues:
Advertising and marketing services $ 1,409,500 $ 897,585 $ 511,915 57 %
Circulation 1,391,983 704,811 687,172 97 %
Other 278,964 190,256 88,708 47 %
Total operating revenues 3,080,447 1,792,652 1,287,795 72 %
Operating expenses:
Operating costs 1,842,825 1,045,807 797,018 76 %
Selling, general and administrative
expenses 787,770 493,360 294,410 60 %
Depreciation and amortization 221,746 101,881 119,865 ***
Integration and reorganization costs 60,852 23,487 37,365 ***
Asset impairments 10,312 3,009 7,303 ***
Goodwill and intangible impairments 352,947 100,743 252,204 ***
Net (gain) loss on sale or disposal of
assets (7,541) 4,036 (11,577) ***
Total operating expenses 3,268,911 1,772,323 1,496,588 84 %
Operating income (loss) $ (188,464) $ 20,329 $ (208,793) ***
*** Indicates an absolute value percentage change greater than 100.
Operating revenues
The following table provides the breakout of Total operating revenues by
category:
Year ended December 31,
In thousands 2020 2019 Change % Change
Local and national print advertising
$ 107,222 22 % Classified print advertising 316,392 211,099 105,293 50 % Print advertising 901,321 688,806 212,515 31 % Digital media 341,259 125,756 215,503 *** Digital classified 57,990 30,717 27,273 89 % Digital marketing services 108,930 52,306 56,624 *** Digital advertising and marketing services 508,179 208,779 299,400 *** Advertising and marketing services 1,409,500 897,585 511,915 57 % Print circulation 1,316,695 683,529 633,166 93 % Digital-only circulation 75,288 21,282 54,006 *** Circulation 1,391,983 704,811 687,172 97 % Other 278,964 190,256 88,708 47 % Total operating revenues$ 3,080,447 $ 1,792,652 $ 1,287,795 72 %
*** Indicates an absolute value percentage change greater than 100.
The increase in Local and national print advertising revenues and Classified print advertising revenues was due to acquired revenues related to Legacy Gannett of$327.5 million and$174.3 million , respectively, for the year endedDecember 31, 2020 compared to$61.7 million and$23.1 million , respectively, for the six-week period endedDecember 31, 2019 . Excluding the acquisition of Legacy Gannett, Local and national print advertising revenues and Classified print advertising revenues 44 -------------------------------------------------------------------------------- T able of Contents decreased$158.6 million and$45.9 million , respectively, for the year endedDecember 31, 2020 . The decline in Print advertising was driven by secular industry trends and the negative impact of the COVID-19 pandemic on all categories. The decline in Local and national print advertising revenues was driven by lower advertising volume and a decline in advertiser inserts. Classified print advertising revenues declined due to reduced spend in legal, automotive and real estate classified advertisements. The increase in Digital media, Digital classified and Digital marketing services revenues was due to acquired revenues related to Legacy Gannett, which were$266.0 million ,$38.2 million and$75.7 million , respectively, for the year endedDecember 31, 2020 compared to$35.1 million ,$5.7 million , and$10.4 million , respectively, for the six-week period endedDecember 31, 2019 . Excluding the acquisition of Legacy Gannett, Digital media, Digital classified and Digital marketing services revenues decreased$15.5 million ,$5.3 million and$8.6 million , respectively, for the year endedDecember 31, 2020 due to lower local digital media spend, a reduction in spend in automotive and employment classified advertisements and lower client counts for Digital marketing services, as well as the negative impact of the COVID-19 pandemic. The increase in Print circulation revenues and Digital-only circulation revenues was due to acquired revenues related to Legacy Gannett of$801.8 million and$55.3 million , respectively, for the year endedDecember 31, 2020 compared to$102.4 million and$4.9 million , respectively, for the six-week period endedDecember 31, 2019 . Excluding the acquisition of Legacy Gannett, for the year endedDecember 31, 2020 , Print circulation revenues decreased$66.3 million due to declines driven by a reduction in the volume of home delivery due to subscriber declines and single copy sales, reflecting the impact of COVID-19 on businesses that buy and sell copies of our publications and Digital-only circulation revenues increased$3.6 million due to an increase in digital only subscribers. Digital-only subscribers for the total company increased 29% to approximately 1.1 million as ofDecember 31, 2020 . The increase in Other revenues was due to acquired revenues related to Legacy Gannett which were$156.2 million for the year endedDecember 31, 2020 compared to$21.0 million for the six-week period endedDecember 31, 2019 . Excluding the acquisition of Legacy Gannett, Other revenues decreased$46.5 million due to declines in the commercial print and delivery business as a result of the overall secular trends and the COVID-19 pandemic as well as the absence of revenues related to the disposition ofBridgeTower Media LLC in the fourth quarter of 2020.
Operating expenses
For the year endedDecember 31, 2020 , Operating costs increased$797.0 million . The following table provides the breakout of the increase in Operating costs: Year ended December 31, In thousands 2020 2019 Change % Change Newsprint and ink$ 130,912 $ 100,911 $ 30,001 30 % Distribution 406,784 185,256 221,528 *** Compensation and benefits 629,643 348,744 280,899 81 % Outside services 333,435 149,020 184,415 *** Other 342,051 261,876 80,175 31 % Total operating costs$ 1,842,825 $ 1,045,807 $ 797,018 76 %
*** Indicates an absolute value percentage change greater than 100.
For the year endedDecember 31, 2020 , Newsprint and ink costs increased$30.0 million as a result of acquired newsprint and ink costs related to Legacy Gannett operations. The Company's Newsprint and ink benefited$32.7 million from declines in print circulation and print advertising volumes, lower paper prices, and page count reductions driven by efficiency initiatives in printing operations.
For the year ended
For the year endedDecember 31, 2020 , Compensation and benefits increased$280.9 million due to costs related to Legacy Gannett operations. The Company's Compensation and benefits benefited$66.3 million from cost-containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts, including employee furloughs and headcount reductions. 45 -------------------------------------------------------------------------------- T able of Contents For the year endedDecember 31, 2020 , Outside services, which includes outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees, increased$184.4 million due to acquired costs associated with the Legacy Gannett operations. Outside services benefited$8.0 million as a result of declines in activity driven by lower revenues and cost containment initiatives, as well as a decline in third-party printing activity.
For the year ended
Year ended December 31,
In thousands 2020 2019 Change % Change
Compensation and benefits $ 396,017 $ 269,825 $ 126,192 47 %
Outside services 45,972 35,780 10,192 28 %
Other 345,781 187,755 158,026 84 %
Total selling, general and administrative
expenses $ 787,770 $ 493,360 $ 294,410 60 %
For the year ended December 31, 2020 , Compensation and benefits costs increased
$126.2 million due to acquired costs associated with the acquisition of Legacy
Gannett. Overall, Compensation and benefits benefited $54.9 million from
cost-containment initiatives implemented in connection with the COVID-19
pandemic and ongoing integration efforts, including employee furloughs and
headcount reductions.
For the year ended December 31, 2020 , Outside services costs, which include
outside printing as well as professional and outside services, increased $10.2
million due to acquired costs. Outside services benefited $10.0 million from
declines in activity and cost containment initiatives.
For the year ended December 31, 2020 , Other costs increased $158.0 million due
to acquired costs and benefited $14.3 million from declines in activity and cost
containment initiatives.
For the year ended December 31, 2020 , Depreciation and amortization expense
increased $119.9 million compared to 2019, due to acquired property and
intangible assets from the Legacy Gannett acquisition, an increase in
accelerated depreciation of $41.7 million as a result of ongoing cost-reduction
programs and an increase in the number of printing facilities closed in 2020
compared to 2019.
For the year ended December 31, 2020 , Integration and reorganization costs
increased $37.4 million compared to 2019 due to an increase in severance costs
of $36.1 million driven by our voluntary severance program and our plan to
outsource certain processes to a third party, as well as the continued
consolidation of our operations as a result of the ongoing implementation of our
plans to reduce costs and preserve cash flow.
For the year ended December 31, 2020 , Asset impairments increased $7.3 million
compared to 2019, due to an increase in the number of printing facilities closed
in 2020 compared to 2019.
For the year ended December 31, 2020 , Goodwill and intangible impairments
increased $252.2 million compared to 2019, due to the write-off of Goodwill and
Indefinite-lived intangible assets during 2020 as a result of the impact of the
COVID-19 pandemic on our operations.
For the year ended December 31, 2020 , the increase in the Gain on the sale or
disposal of assets of $11.6 million was driven by gains related to the sale of
assets in 2020, including BridgeTower Media, LLC , compared to losses incurred in
2019 related to various asset sales.
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Publishing segment Adjusted EBITDA
Year ended December 31,
In thousands 2020 2019 Change % Change
Net income (loss) attributable to Gannett
$ (131,129) *** Interest expense 142 123 19 15 % Non-operating pension income (71,858) (2,486) (69,372) *** Gain on sale of investments (195) - (195) *** Other non-operating (income) expense, net (6,029) 1,517 (7,546) *** Depreciation and amortization 221,746 101,881 119,865 *** Integration and reorganization costs 60,852 23,487 37,365 *** Asset impairments 10,312 3,009 7,303 *** Goodwill and intangible impairments 352,947 100,743 252,204 *** Net (gain) loss on sale or disposal of assets (7,541) 4,036 (11,577) *** Other items 7,425 14,083 (6,658) (47 %) Adjusted EBITDA (non-GAAP basis)$ 459,195 $ 268,916 $ 190,279 71 %
*** Indicates an absolute value percentage change greater than 100.
For the year endedDecember 31, 2020 , Adjusted EBITDA for our Publishing segment increased 71% compared to 2019 primarily attributable to acquired Adjusted EBITDA for Legacy Gannett and ongoing operating efficiencies, offset by lower demand beginning near the end of the first quarter of 2020, which was impacted by the ongoing economic effects of COVID-19.
Digital Marketing Solutions segment
A summary of our Digital Marketing Solutions segment results is presented below:
Year ended December 31,
In thousands 2020 2019 Change % Change
Operating revenues:
Advertising and marketing services $ 411,940 $ 131,003 $ 280,937 ***
Other 16,665 18,239 (1,574) (9 %)
Total operating revenues 428,605 149,242 279,363 ***
Operating expenses:
Operating costs 276,859 99,272 177,587 ***
Selling, general and administrative
expenses 128,834 56,058 72,776 ***
Depreciation and amortization 25,878 6,534 19,344 ***
Integration and reorganization costs 6,663 2,202 4,461 ***
Acquisition costs - (38) 38 (100 %)
Asset impairments 717 - 717 ***
Goodwill and intangible impairments 40,499 - 40,499 ***
Net (gain) loss on sale or disposal of
assets 1,727 (5) 1,732 ***
Total operating expenses 481,177 164,023 317,154 ***
Operating loss $ (52,572) $ (14,781) $ (37,791) ***
*** Indicates an absolute value percentage change greater than 100.
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Operating revenues
For the year ended December 31, 2020 , Advertising and marketing services
revenues increased $280.9 million . The increase was due to acquired revenues
related to Legacy Gannett of $358.2 million for the year ended December 31,
2020 , compared to $42.6 million for the six-week period ended December 31, 2019 .
Excluding the acquisition of Legacy Gannett, Advertising and marketing services
revenues decreased $34.7 million for the year ended December 31, 2020 , primarily
due to lower digital advertising across our small and medium-sized business
marketing customers driven by the negative impact of the COVID-19 pandemic.
Operating expenses
For the year endedDecember 31, 2020 , Operating costs increased$177.6 million . The following table provides the breakout of the increase in Operating costs: Year ended December 31, In thousands 2020 2019 Change % Change Compensation and benefits$ 44,441 $ 27,162 $ 17,279 64 % Outside services 216,847 66,753 150,094 *** Other 15,571 5,357 10,214 *** Total operating costs$ 276,859 $ 99,272 $ 177,587 ***
*** Indicates an absolute value percentage change greater than 100.
For the year endedDecember 31, 2020 , Compensation and benefits increased$17.3 million due to acquired costs associated with the acquisition of Legacy Gannett. Our Compensation and benefits benefited$8.0 million from cost-containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts, including employee furloughs and headcount reductions. For the year endedDecember 31, 2020 , Outside services, which includes professional and outside services, paid search and ad serving and feature services, increased$150.1 million due to acquired costs associated with the Legacy Gannett operations. Outside services benefited$13.0 million as a result of declines in activity driven by lower revenues and cost containment initiatives.
For the year ended
Year ended December 31,
In thousands 2020 2019 Change % Change
Compensation and benefits $ 113,314 $ 42,880 $ 70,434 ***
Outside services 11,629 5,929 5,700 96 %
Other 3,891 7,249 (3,358) (46 %)
Total selling, general and administrative
expenses $ 128,834 $ 56,058 $ 72,776 ***
*** Indicates an absolute value percentage change greater than 100.
For the year endedDecember 31, 2020 , Compensation and benefits costs increased$70.4 million due to acquired costs associated with the acquisition of Legacy Gannett. Our Compensation and benefits benefited$11.2 million from cost-containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts, including employee furloughs and headcount reductions.
For the year ended
For the year ended
For the year endedDecember 31, 2020 , Integration and reorganization costs increased$4.5 million compared to 2019 due to higher severance costs of$4.4 million driven by the continued consolidation of our operations as a result of the ongoing implementation of our plans to reduce costs and preserve cash flow. 48
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For the year endedDecember 31, 2020 ,Goodwill and intangible asset impairments increased$40.5 million compared to 2019 due to the write-off ofGoodwill and Indefinite-lived intangible assets during 2020 as a result of the impact of the COVID-19 pandemic on our operations. For the year endedDecember 31, 2020 , the increase in the Loss on the sale or disposal of assets of$1.7 million was driven by the sale of a business during the fourth quarter of 2020 compared to no significant sales or disposals of assets during 2019.
Digital Marketing Solutions segment Adjusted EBITDA
Year ended December 31,
In thousands 2020 2019 Change % Change
Net income (loss) attributable to Gannett
$ (28,488) *** Gain on sale of investments (7,800) - (7,800) *** Other non-operating (income) expense, net (2,278) (775) (1,503) *** Depreciation and amortization 25,878 6,534 19,344 *** Integration and reorganization costs 6,663 2,202 4,461 *** Acquisition costs - (38) 38 (100 %) Asset impairments 717 - 717 *** Goodwill and intangible impairments 40,499 - 40,499 *** Net (gain) loss on sale or disposal of assets 1,727 (5) 1,732 *** Other items 1,449 2,809 (1,360) (48 %) Adjusted EBITDA (non-GAAP basis)$ 24,361 $ (3,279) $ 27,640 ***
*** Indicates an absolute value percentage change greater than 100.
Adjusted EBITDA for our DMS segment was$24.4 million for the year endedDecember 31, 2020 , compared to negative$3.3 million in 2019, primarily due to additional Adjusted EBITDA from Legacy Gannett and ongoing operating efficiencies, offset by lower demand beginning near the end of the first quarter of 2020, which was impacted by the ongoing economic effects of COVID-19.
Corporate and other category
For the year endedDecember 31, 2020 , Corporate and other operating revenues were$11.0 million compared to$4.6 million in 2019. The increase was due to acquired revenues related to Legacy Gannett of$7.1 million for the year endedDecember 31, 2020 , compared to$0.9 million for the six-week period endedDecember 31, 2019 . Excluding the acquisition of Legacy Gannet, operating revenues increased slightly, driven by an increase in sales of newsprint to third parties. For the year endedDecember 31, 2020 , Corporate and other Operating expenses were$217.8 million , an increase of$60.7 million compared to 2019, due to an increase in Operating costs of$20.4 million , an increase in Selling, general and administrative expenses of$25.9 million and an increase in Depreciation and amortization expense of$12.7 million driven by acquired costs associated with the acquisition of Legacy Gannett. In addition, Integration and reorganization costs increased$51.7 million due to the continued consolidation of our operations resulting from the ongoing implementation of our plans to reduce costs and preserve cash flow, including a$30.4 million expense in the fourth quarter related to the early termination of the Amended Management Agreement with the Manager, partially offset by a decrease in Acquisition costs of$49.5 million due to lower costs associated with the acquisition of Legacy Gannett in 2020 compared to 2019.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements are for working capital, debt obligations, and capital expenditures.
We expect to fund our operations through cash provided by operating activities. We expect we will have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations, and all required capital expenditures for at least the next twelve months.
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Table of Con tents
Details of our cash flows are included in the table below:
Year Ended
December 31, December 31,
In thousands 2020 2019
Net cash provided by operating activities $ 57,770 $ 25,535
Net cash provided by (used for) investing activities 160,136 (785,060)
Net cash provided by (used for) financing activities (201,342) 898,913
Effect of currency exchange rate change 1,498 (3,494)
Net increase in cash $ 18,062 $ 135,894
Cash flows provided by operating activities: Our largest source of cash provided
by our operations is advertising revenues primarily generated from local and
national advertising and marketing services revenues (retail, classified, and
online). Additionally, we generate cash through circulation subscribers,
commercial printing and delivery services to third parties, and events. Our
primary uses of cash from our operating activities include compensation,
newsprint, delivery, and outside services.
Net cash provided by operating activities was $57.8 million for the year ended
December 31, 2020 , compared to $25.5 million for 2019. This increase in net cash
provided by operating activities was primarily due to a decrease in pension and
postretirement payments of $44.2 million and an increase in tax refunds of $5.2
million , offset by an increase in interest paid of $177.9 million and an
increase in severance payments of $73.1 million . The remainder of the change is
due to the acquisition of Legacy Gannett, as well as overall timing of receipts
and payments.
Cash flows provided by (used for) investing activities: Net cash provided by
investing activities was $160.1 million for the year ended December 31, 2020
compared to $785.1 million used for investing activities for 2019. This increase
was primarily due to a year-over-year decrease of $796.5 million in cash used to
fund acquisitions and an increase of $168.9 million in funds received from the
sale of businesses and other assets, partially offset by a year over year
decrease of $23.0 million for capital expenditures.
Cash flows provided by (used for) financing activities: Net cash used for
financing activities was $201.3 million for the year ended December 31, 2020 ,
compared to $898.9 million provided by financing activities for 2019. This
decrease was primarily due to decreased borrowings under term loans of $1.792
billion and an increase in repayments for term loans of $200.0 million . Cash
used for term loans was partially offset by proceeds from the 2027 Notes of
$497.1 million as well as a decrease in the repayments of the convertible debt
of $198.0 million . In addition, payments of debt issuance costs decreased $118.9
million and the payment of dividends decreased $91.9 million as there were no
dividend payments in 2020.
Debt
Senior Secured Convertible Notes due 2027
OnNovember 17, 2020 , the Company entered into the Exchange Agreement with the Exchanging Lenders under the Acquisition Term Loan pursuant to which the Company and the Exchanging Lenders agreed to exchange$497.1 million in aggregate principal amount of the Company's newly issued 2027 Notes for the retirement of an equal amount of term loans under the Acquisition Term Loan (the "Exchange"). Following the Exchange, the outstanding balance under the Acquisition Term Loan was$1.019 billion (the "Remaining Term Loan") as ofDecember 31, 2020 . The 2027 Notes were issued pursuant to an Indenture (the "Indenture") dated as ofNovember 17, 2020 , between the Company andU.S. Bank National Association , as 50 -------------------------------------------------------------------------------- Table of Con tents trustee. The Indenture, as supplemented by the Second Supplemental Indenture, includes affirmative and negative covenants that are substantially consistent with the 5-Year Term Loan, as well as customary events of default. In connection with the Exchange, the Company entered into an Investor Agreement (the "Investor Agreement") with the holders of the 2027 Notes (the "Holders") establishing certain terms and conditions concerning the rights and restrictions on the Holders with respect to the Holders' ownership of the 2027 Notes. The Company also entered into an amendment to the Registration Rights Agreement datedNovember 19, 2019 , between the Company andFIG LLC . In addition, the Remaining Term Loan was amended as described below (the "Amendment"). Interest on the 2027 Notes is payable semi-annually in arrears. The 2027 Notes mature onDecember 1, 2027 , unless earlier repurchased or converted. The 2027 Notes may be converted at any time by the holders into cash, shares of the Company's Common Stock or any combination of cash and Common Stock, at the Company's election. The initial conversion rate is 200 shares of Common Stock per$1,000 principal amount of the 2027 Notes, which is equal to a conversion price of$5.00 per share of Common Stock (the "Conversion Price"). The conversion rate is subject to customary adjustment provisions as provided in the Indenture. In addition, the conversion rate will be subject to adjustment in the event of any issuance or sale of Common Stock (or securities convertible into Common Stock) at a price equal to or less than the Conversion Price in order to ensure that following such issuance or sale, the 2027 Notes would be convertible into approximately 42% of the Common Stock after giving effect to such issuance or sale (assuming the initial principal amount of the 2027 Notes remains outstanding). Upon the occurrence of a "Make-Whole Fundamental Change" (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time. If a "Fundamental Change" (as defined in the Indenture) occurs, the Company will be required to offer to repurchase the 2027 Notes at a repurchase price of 110% of the principal amount thereof. Holders of the 2027 Notes will have the right to put up to approximately$100 million of the 2027 Notes at par on or after the date that is 91 days after the maturity date of the 5-Year Term Loan. Under the Indenture, the Company can only pay cash dividends up to an agreed-upon amount, provided the ratio of consolidated debt to EBITDA (as such terms are defined in the Indenture) does not exceed a specified ratio. In addition, the Indenture provides that, at any time that the Company's Total Gross Leverage Ratio (as defined in the Indenture) exceeds 1.5 and the Company approves the declaration of a dividend, the Company must offer to purchase a principal amount of 2027 Notes equal to the proposed amount of the dividend. Until the four-year anniversary of the issuance date, the Company will have the right to redeem for cash up to approximately$99.4 million of the 2027 Notes at a redemption price of 130% of the principal amount thereof, with such amount reduced ratably by any principal amount of 2027 Notes that has been converted by the holders or redeemed or purchased by the Company. The 2027 Notes are guaranteed byGannett Holdings LLC and any subsidiaries of the Company (collectively, the "Guarantors") that guarantee the 5-Year Term Loan. The Notes are secured by the same collateral securing the 5-Year Term Loan. The 2027 Notes rank as senior secured debt of the Company and are secured by a second priority lien on the same collateral package securing the indebtedness incurred in connection with the 5-Year Term Loan. For the year endedDecember 31, 2020 , no shares were issued upon conversion, exercise, or satisfaction of the required conditions. Refer to additional discussion regarding fair value of the 2027 Notes, including debt and embedded derivative components in Note 8 - Debt and refer to Note 12 - Supplemental equity information for details on the convertible debt's impact to diluted earnings per share under the if-converted method. 51
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Table of Con tents
Permitted Financing Under the 2027 Notes
The Company may refinance the Remaining Term Loan with new first lien debt, as long as the new first lien debt satisfies the requirements of a Permitted Refinancing. New first lien debt will constitute a "Permitted Refinancing" so long as, among other things, (i) the principal amount of the new debt does not exceed the balance of the Remaining Term Loan (plus interest and fees), (ii) the all-in-yield of the new debt does not exceed 9.5% per annum and (iii) the other terms of the new debt are no less favorable to the Company. Refer to "Term Loan Refinancing" below and Note 16 - Subsequent events for discussion of the refinancing of the Remaining Term Loan onFebruary 9, 2021 , as permitted by the Indenture. Holders of the 2027 Notes had the option to require the Company to repurchase their 2027 Notes at a price equal to 101.5% of par, which amount would increase by 1.5% on each three-month anniversary of the issuance date of the 2027 Notes. The Indenture permits the Company to raise additional first lien or second lien debt to finance any such repurchases, subject to certain conditions set forth therein. No holders of the 2027 Notes exercised their option to require the Company to repurchase their 2027 Notes in connection with the refinancing of the Remaining Term Loan.
Acquisition Term Loan
OnNovember 19, 2019 , pursuant to the acquisition of Legacy Gannett, the Company entered into the Acquisition Term Loan, which matures onNovember 19, 2024 . Origination fees totaled 6.5% of the total principal amount of the financing at closing. In connection with the Exchange, the Company, the Guarantors,Alter Domus Products Corp. , as administrative agent and collateral agent, and the lenders under the Acquisition Term Loan executed the Amendment which, among other things, (i) requires quarterly amortization payments in an amount equal to the interest rate savings resulting from the Exchange for the applicable quarter, (ii) increases the threshold under the requirement for prepayment of the Acquisition Term Loan with unrestricted cash and cash equivalents in excess of$40 million from$40 million to$70 million for the 2020 fiscal year and (iii) replaces Apollo's right to appoint directors to the Board in the event the gross leverage ratio exceeds certain thresholds with the right to increase the size of the Board of Directors and to nominate directors for election to the Board in the event the gross leverage ratio exceeds such thresholds. As ofDecember 31, 2020 , the total gross leverage ratio exceeded certain thresholds, whereby Apollo had the right to nominate one voting director. As ofDecember 31, 2020 , the Company is in compliance with all of the covenants and obligations under the Acquisition Term Loan. Upon the occurrence and during the continuance of an Event of Default (as defined in the Acquisition Term Loan), the interest rate increases by 2.0%. The proceeds from the 5-Year Term Loan were used to repay the Acquisition Term Loan (the "Payoff"), and we are no longer subject to the terms of the Acquisition Term Loan. In connection with the Acquisition Term Loan, the Company incurred approximately$4.9 million of fees and expenses and$116.6 million of lender fees which were capitalized and will be amortized over the term of the Acquisition Term Loan using the effective interest method. The Company used the proceeds of the Acquisition Term Loan to (i) partially fund the acquisition of Legacy Gannett, (ii) repay, prepay, repurchase, redeem, or otherwise discharge in full each of the existing financing facilities (as defined in the agreement and discussed in part below), and (iii) pay fees and expenses incurred to obtain the Acquisition Term Loan. The Company is permitted to prepay the principal of the Acquisition Term Loan, in whole or in part, at par plus accrued and unpaid interest, without any prepayment premium or penalty. The Acquisition Term Loan is guaranteed by the material wholly-owned subsidiaries of the Company, and all obligations of the Company and its subsidiary guarantors are or will be secured by first priority liens on certain material real property, equity interests, land, buildings, and fixtures. The Acquisition Term Loan contains customary representations and warranties, affirmative covenants, and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, dividends and other distributions, capital expenditures, and events of default. During the year endedDecember 31, 2020 , the Company recorded$194.0 million in interest expense,$24.0 million in amortization of deferred financing costs, and$43.8 million for the loss on early extinguishment of debt. During the year endedDecember 31, 2020 , the Company paid interest of$217.5 million . 52 -------------------------------------------------------------------------------- Table of Con tents Senior Convertible Notes due 2024 OnApril 9, 2018 , Legacy Gannett completed an offering of 4.75% convertible senior notes (the "2024 Notes"), with an initial offering size of$175.0 million aggregate principal amount. As part of the offering, the initial purchaser of the 2024 Notes exercised its option to purchase an additional$26.3 million aggregate principal amount of notes, resulting in total aggregate principal of$201.3 million and net proceeds of approximately$195.3 million . Interest on the 2024 Notes is payable semi-annually in arrears. The 2024 Notes mature onApril 15, 2024 , with the earliest redemption date beingApril 15, 2022 . The stated conversion rate of the notes is 82.4572 shares per$1,000 in principal or approximately$12.13 per share. Upon conversion, we have the option to settle in cash, shares of our common stock, or a combination of the two. Additionally, holders may convert the 2024 Notes at their option prior toJanuary 15, 2024 , only if one or more of the following conditions are present: (i) if, during any 20 of the 30 trading days immediately preceding a quarter end, our common stock trading price is 130% of the stated conversion price, (ii) if, during the 5 business day period after any 10 consecutive trading day period, the trading price per$1,000 principal amount of notes is less than 98% of the product of (a) the last reported sale price of the Company's common stock and (b) the conversion rate on each such trading day, or (iii) a qualified change in control event occurs. Depending on the nature of the triggering event, the conversion rate may also be subject to adjustment. The Company's acquisition of Legacy Gannett constituted a Fundamental Change and Make-Whole Fundamental Change under the terms of the indenture governing the 2024 Notes. At the acquisition date, the Company delivered to the holders of the 2024 Notes a notice offering the right to surrender all or a portion of their notes for cash onDecember 31, 2019 . Holders were required to surrender their notes byDecember 30, 2019 , and in return, the Company redeemed the 2024 Notes for either (i) cash at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest fromOctober 15, 2019 , toDecember 29, 2019 , or (ii) converted equity plus cash at the stated conversion rate of 82.4572 shares per$1,000 in principal, comprised of 0.5427 shares of Parent common stock, plus$6.25 of cash. OnDecember 31, 2019 , the Company completed the redemption of$198.0 million in aggregate principal in exchange for cash. As ofDecember 31, 2020 and 2019, the$3.3 million principal value of the 2024 Notes is reported as Convertible debt in the Consolidated balance sheets. The effective interest rate on the notes was 6.05% as ofDecember 31, 2020 . During the year endedDecember 31, 2020 , the Company recorded$0.2 million in interest expense, of which$0.1 million is cash interest paid on aforementioned redemption.
Term Loan Refinancing
OnFebruary 9, 2021 , the Company entered into the 5-Year Term Loan, a five-year, senior secured term loan facility withCitibank N.A . in an aggregate principal amount of$1.045 billion . The 5-Year Term Loan matures onFebruary 9, 2026 and, at the Company's option, bears interest at the rate of the London Interbank Offered Rate plus a margin equal to 7.00% per annum or an alternate base rate plus a margin equal to 6.00% per annum. Accordingly, we are required to dedicate a substantial portion of cash flow from operations to fund interest payments.
The proceeds from the 5-Year Term Loan were used for the Payoff, and to pay fees and expenses incurred to obtain the 5-Year Term Loan and consummate the Payoff.
The 5-Year Term Loan will amortize quarterly at a rate of 10% per annum (or, if the ratio of Total Indebtedness secured on an equal priority basis with the 5-Year Term Loan (net of Unrestricted Cash) to Consolidated EBITDA (as such terms are defined in the 5-Year Term Loan) is equal to or less than a specified ratio, 5% per annum) payable in equal quarterly installments (the "Quarterly Amortization Installment"), beginningSeptember 30, 2021 . In addition, we will be required to repay the 5-Year Term Loan from time to time with (i) the proceeds of non-ordinary course asset sales and casualty and condemnation events, (ii) the proceeds of indebtedness that is not otherwise permitted under the 5-Year Term Loan and (iii) the aggregate amount of cash and cash equivalents on hand in excess of$100 million at the end of each fiscal year. The 5-Year Term Loan is subject to a requirement to have minimum unrestricted cash of$30 million as of the last day of each fiscal quarter. Following this transaction, total debt outstanding will be$1.545 billion , which will include the$1.045 billion 5-Year Term Loan,$497.1 million 2027 Notes, and$3.3 million 2024 Notes. 53 --------------------------------------------------------------------------------
Table of Con tents Additional information At-the-Market Offering OnAugust 6, 2020 , we filed a shelf registration statement for an at-the-market ("ATM") offering, which is a type of follow-on offering of stock utilized by publicly traded companies in order to raise capital over time. Under the offering, we may offer and sell shares of Common Stock having an aggregate offering price of up to$50 million from time to time. We currently intend to use the net proceeds from sales of shares under the ATM program for general corporate purposes, including repayment of indebtedness. The timing of any sales will depend on a variety of factors, including the underlying price of our Common Stock and capital needs. We do not expect to utilize the shelf registration statement until such time that our stock rebounds to a level that management believes more fully reflects the Company's underlying value. However, we believe that the shelf registration statement provides us with additional financing flexibility to efficiently access the capital markets when desired.
Other information
We continue to evaluate the impacts of the COVID-19 pandemic on our results of operations and cash flows. As part of these measures, we have taken steps to manage cash outflow by rationalizing expenses and implementing various cost-containment initiatives. These initiatives include, but are not limited to, strategic reductions in force, furloughs, and the cancellation of certain non-essential expenditures. We continue to evaluate opportunities to manage the amount and timing of significant expenditures associated with vendors, creditors, and pension regulators. In connection with these measures, we previously announced that the Board of Directors had determined it is in the best interest of the Company to preserve liquidity by suspending the quarterly dividend. We presently have no intention to reinstate the dividend, and there can be no assurance if or when we will resume paying dividends on a regular basis. In addition, the terms of our indebtedness, including our credit facility, the 5-Year Term Loan, and the Indenture for the 2027 Notes have terms that restrict our ability to pay dividends. The CARES Act, enactedMarch 27, 2020 , provides various forms of relief to companies impacted by the COVID-19 pandemic. As part of the relief available under the Act, we deferred remittance of our 2020 Federal Insurance Contributions Act taxes as allowed by the legislation. The Company was able to defer$41.6 million of the employer portion of FICA taxes for payroll paid between fromMarch 27, 2020 andDecember 31, 2020 . The Company will have untilDecember 31, 2021 , to pay 50% of the FICA deferral with the remaining 50% to be remitted on or beforeDecember 31, 2022 . For the Gannett Retirement Plan in theU.S. , we have deferred our contractual contribution and negotiated a contribution payment plan of$5 million per quarter startingDecember 31, 2020 , through the end ofSeptember 30, 2022 . Additionally,$11 million in minimum required contributions for the 2019 plan year, as required by the Employee Retirement Income Security Act of 1974 ("ERISA"), were deferred untilJanuary 4, 2021 , and have been paid. We expect our capital expenditures during the year endedDecember 31, 2021 , to total approximately$50.0 million . These capital expenditures are anticipated to be primarily comprised of projects related to digital product development, maintenance of our print and technology systems, and system upgrades. Our leverage may adversely affect our business and financial performance and restricts our operating flexibility. The level of our indebtedness and our ongoing cash flow requirements may expose us to a risk that a substantial decrease in operating cash flows due to, among other things, continued or additional adverse economic developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our term loan. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological, and other changes in our industry and economic conditions generally. Although we currently forecast sufficient liquidity, the ultimate impact of the COVID-19 pandemic remains uncertain and could have a material negative impact on the Company's liquidity and its ability to meet its ongoing obligations, including its obligations under the 5-Year Term Loan. As the implications of the COVID-19 pandemic continue to evolve, we will continue to closely monitor and explore additional opportunities to appropriately manage liquidity. 54 -------------------------------------------------------------------------------- Table of Contents Contractual obligations and commitments The following table reflects a summary of our contractual cash obligations, including estimated interest payments, where applicable, as ofDecember 31, 2020 : In thousands Payments Due by Period Total 2021 2022-2023 2024-2025 Thereafter
Debt and interest obligations(a)
77,351 138,187 103,707 201,215
Purchase obligations(c) 548,005 224,762 213,490 109,553 200
Pension and other postretirement
benefits(d) 79,593 64,593 15,000 - -
Other noncurrent liabilities(e) 21,665 5,677 7,969 5,026 2,993
Total $ 3,315,582 $ 645,239 $ 703,969 $ 1,264,872 $ 701,502
(a) Amounts represent future debt and interest obligations related to the
Acquisition Term Loan, the 2027 Notes and the 2024 Notes as of December 31,
2020 . See Note 8 - Debt to the Consolidated financial statements for further
information..
(b) See Note 3 - Leases to the Consolidated financial statements.
(c) Purchase obligations include printing contracts, licenses and IT support
agreements, professional services, interactive marketing agreements, and other
legally binding commitments. Amounts for which we are liable under purchase
orders outstanding at December 31, 2020 are reflected in the Consolidated
balance sheets as accounts payable and accrued liabilities and are excluded from
the table above.
(d) Consists of amounts we are contractually obligated to contribute to the
Company's pension and postretirement benefit plans. Contributions beyond 2022
are excluded due to uncertainties regarding significant assumptions involved in
estimating these contributions, such as interest rate levels as well as the
amount and timing of invested asset returns. This total does not include
additional contributions which may be required to meet IRS minimum funding
standards as these contributions are subject to uncertainties regarding
significant assumptions involved in their estimation such as interest rate
levels as well as the amount and timing of invested asset returns.
(e) Other noncurrent liabilities primarily include IT leases at Newsquest , a
subsidiary in the U.K. . Under international reporting standards, IT leases are
considered leases, however they do not meet the definition of a lease or
purchase obligation under U.S. GAAP.
Due to uncertainty with respect to the timing of future cash flows associated
with unrecognized tax benefits at December 31, 2020 , we are unable to make
reasonably reliable estimates of the period of cash settlement. Therefore, $40.9
million of unrecognized tax benefits have been excluded from the contractual
obligations table above. See Note 11 - Income taxes to the consolidated
financial statements for a further discussion of income taxes.
Off-balance sheet arrangements
As of
NON-GAAP FINANCIAL MEASURES
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position, or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. We define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.
Adjusted EBITDA
We define Adjusted EBITDA as Net income (loss) attributable to Gannett before:
•Income tax expense (benefit);
•Interest expense;
•Gains or losses on early extinguishment of debt;
•Non-operating pension income (expense);
•Unrealized (gain) loss on Convertible notes derivative;
•Other Non-operating items, primarily equity income;
•Depreciation and amortization;
•Integration and reorganization costs;
•Asset impairments;
•Goodwill and intangible impairments;
•Gains or losses on the sale or disposal of assets;
•Share-based compensation expense;
•Acquisition costs;
•Gains or losses on the sale of investments; and
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•Certain other non-recurring charges.
Management's Use of Adjusted EBITDA
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP financial measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal financial performance. Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, non-cash impairments, and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics we use to review the financial performance of our business on a monthly basis. We use Adjusted EBITDA as a measure of our day-to-day operating performance, which is evidenced by the publishing and delivery of news and other media and excludes certain expenses that may not be indicative of our day-to-day business operating results.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed
in isolation or as a substitute for GAAP measures of earnings or cash flows.
Material limitations in making the adjustments to our earnings to calculate
Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP
net income (loss) include: the cash portion of interest/financing expense,
income tax (benefit) provision, and charges related to asset impairments, which
may significantly affect our financial results.
A reader of our financial statements may find this item important in evaluating
our performance, results of operations, and financial position. We use non-GAAP
financial measures to supplement our GAAP results in order to provide a more
complete understanding of the factors and trends affecting our business.
Adjusted EBITDA is not an alternative to net income as calculated and presented
in accordance with GAAP. Readers of our financial statements should not rely on
Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly
urge readers of our financial statements to review the reconciliation of Net
income (loss) attributable to Gannett to Adjusted EBITDA along with our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. We also strongly urge readers of our financial statements to not rely
on any single financial measure to evaluate our business. In addition, because
Adjusted EBITDA is not a measure of financial performance under GAAP and is
susceptible to varying calculations, the Adjusted EBITDA measure as presented in
this report may differ from and may not be comparable to similarly titled
measures used by other companies.
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The table below shows the reconciliation of Net income (loss) attributable to
Gannett to Adjusted EBITDA for the periods presented:
Year ended December 31,
In thousands 2020
2019
Net income (loss) attributable to Gannett
(33,450) (85,994)
Interest expense 228,513
63,660
Loss on early extinguishment of debt 43,760
6,058
Non-operating pension income (72,149)
(9,085)
Unrealized loss on Convertible notes derivative 74,329
-
Gain on sale of investments (7,995)
-
Other non-operating (income) expense, net (8,499)
(426)
Depreciation and amortization 263,819
111,882
Integration and reorganization costs 145,731 52,212 Acquisition costs 11,152 60,618 Asset impairments 11,029 3,009 Goodwill and intangible impairments 393,446
100,743
Net (gain) loss on sale or disposal of assets (5,680)
4,723
Share-based compensation expense 26,350
11,324
Other items 14,018
24,989
Adjusted EBITDA (non-GAAP basis)$ 413,895 $
223,871
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make decisions based on estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain identifiable assets include, but are not limited to: expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.Goodwill Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed.Goodwill is not amortized and is tested for impairment annually on the last day of our second quarter or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We perform our impairment analysis on each of our reporting units. We evaluate our reporting units annually as of the end of our second fiscal quarter, as well as when changes in our operating structure occur. The Company has the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company elects to perform a qualitative assessment and concludes it is more likely than not that the fair value of the reporting unit is equal to or greater than its carrying value, no further assessment of that reporting unit's goodwill is necessary; otherwise goodwill must be tested for impairment. In the quantitative test, we are required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. Fair value of the reporting unit is defined as the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. The 57 -------------------------------------------------------------------------------- Table of Contents Company generally determines the fair value of a reporting unit using a combination of a discounted cash flow analysis and a market-based approach. Estimates of fair value include inputs that are subjective in nature, involve uncertainties, and involve matters of significant judgment that are made at a specific point in time. Changes in key assumptions from period to period could significantly affect the estimates of fair value. Significant assumptions used in the fair value estimates include projected revenues and related growth rates over time, projected operating cash flow margins, discount rates, and future economic and market conditions. If the carrying value of the reporting unit exceeds the estimate of fair value, we calculate the impairment as the excess of the carrying value of goodwill over its implied fair value. All three of our reporting units have goodwill balances. See Note 6 -Goodwill and intangible assets for a discussion of impairment charges taken onGoodwill in the second fiscal quarter of 2020. During the second quarter of 2020, we recognized goodwill impairment charges at all three of our reporting units. As such, the carrying value of each reporting unit was written down to fair value at that time. We have not subsequently identified any indicators of impairment that would indicate our reporting units are at risk of failing the goodwill impairment test, and therefore have not performed any additional impairment tests subsequent to the second quarter of 2020.
Intangible Assets (Indefinite-Lived and Amortizable)
Intangible assets consist of newspaper mastheads, advertiser, customer and subscriber relationships, as well as other intangibles, including trade names, and developed technology.
Newspaper mastheads (newspaper titles) are not subject to amortization as it has been determined that the useful life of such mastheads are indefinite. Newspaper mastheads are tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment test consists of a comparison of the fair value of each group of mastheads with their carrying amount. We used a relief from royalty approach, which utilizes a discounted cash flow model to determine the fair value of newspaper mastheads. Our judgments and estimates of future operating results in determining the reporting unit fair values are consistently applied in determining the fair value of mastheads. Intangible assets subject to amortization, primarily advertiser and subscriber relationships, are amortized over their useful lives and are tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. The evaluation is performed by asset group, which is the lowest level of identifiable cash flows independent of other assets. The assessment of recoverability is based on management's estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset groups to its carrying value of the asset groups to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by the asset group, an impairment is recognized to the extent the carrying value of such asset group exceeds its fair value.
See Note 6 -
Property, Plant, and Equipment
We account for long-lived assets in accordance with the provisions of ASC Topic
360, "Property, Plant and Equipment." We assess the recoverability of our
long-lived assets, including property, plant and equipment, whenever events or
changes in business circumstances indicate the carrying amount of the assets, or
related group of assets, may not be fully recoverable. We review our property,
plant, and equipment assets for potential impairment at the asset group level by
comparing the carrying value of such assets with the expected undiscounted cash
flows to be generated by those asset groups. In some cases the market approach
is used to estimate the fair value, particularly when there is a change in the
use of an asset. Significant assumptions used in the analysis include projected
revenues and related growth rates over time, projected operating cash flow
margins, and future economic and market conditions. The carrying value of a
long-lived asset group is considered impaired when the projected undiscounted
future cash flows are less than their carrying value. We measure impairment
based on the amount by which the carrying value exceeds the fair value.
As part of ongoing cost-efficiency programs, the Company has ceased a number of
print operations. Pursuant to these actions, certain assets and real estate to
be retired have been assessed for impairment. See Note 7 - Integration and
reorganization costs and asset impairments for a discussion of impairment
charges taken.
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Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Advertising and Marketing Services Revenues
The Company generates Print advertising revenues primarily by delivering advertising in its national publication,USA TODAY , and in its local publications including newspapers. Advertising revenues are categorized as local retail, local classified, online, and national. Print advertising revenue is recognized upon publication of the advertisement. Digital advertising and marketing revenues are generated primarily by online marketing products provided by our DMS segment. The Company enters into agreements for products in which our clients typically pay in advance and on a monthly basis. These prepayments include all charges for the included technology and any media services, management, third-party content, and other costs and fees, all of which are accounted for as a single performance obligation. Revenue is then recognized as we purchase and deliver media on behalf of the customer and perform other marketing-related services. For our Advertising and marketing services revenues, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) by performing analyses regarding whether we control the provision of specified goods or services before they are transferred to our customers. We report Advertising and marketing services revenues gross when we control advertising inventory before it is transferred to the customer. Our control is evidenced by us being primarily responsible or sharing responsibility for the fulfillment of services and maintaining control over transaction pricing. We recognize revenue when the performance obligation is satisfied.
Circulation Revenues
Circulation revenues are derived from print and digital subscriptions as well as single copy sales at retail stores, vending racks and boxes. Circulation revenues from subscribers are generally billed to customers at the beginning of the subscription period and are typically recognized over the subscription period as the performance obligations are delivered. The term of customer subscriptions normally ranges from one to twelve months. Circulation revenues from single-copy income are recognized based on the date of publication, net of provisions for related returns.
Other Revenues
The Company provides commercial printing services to third parties as a means to generate incremental revenue and utilize excess printing capacity. Customers consist primarily of other publishers that do not have their own printing presses and do not compete with other Gannett publications. The Company also prints other commercial materials, including flyers, business cards and invitations. Revenue is generally recognized upon delivery. In addition, the Company generates revenues from its events and promotions business. Revenues are generated primarily through ticket sales, endurance events and race management services. Revenue is generally recognized when the event occurs.
Practical Expedients and Exemptions
The Company expenses sales commissions or other costs to obtain contracts when incurred because the amortization period is generally one year or less. These costs are recorded within Selling, general and administrative expenses.
The Company does not disclose unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
Deferred revenues
The Company records deferred revenues when cash payments are received in advance
of the Company's performance. The Company's primary source of Deferred revenues
is from circulation subscriptions paid in advance of the service provided, which
represents future delivery of publications performance obligation to
subscription customers. The Company expects to recognize the revenue related to
unsatisfied performance obligations over the next one to twelve months in
accordance with the terms of the subscriptions.
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The Company's payment terms vary by the type and location of the customer and
the products or services offered. The period between invoicing and when payment
is due is not significant. For certain products or services and customer types,
the Company requires payment before the products or services are delivered to
the customer. The majority of our subscription customers are billed and pay on
monthly terms.
Income Taxes
We are subject to income taxes in the U.S. and various foreign jurisdictions in
which we operate and record our tax provision for the anticipated tax
consequences in our reported results of operations. Tax laws are complex and
subject to different interpretations by the taxpayer and respective government
taxing authorities. Significant judgment is required in determining our tax
expense and in evaluating our tax positions, including evaluating uncertainties
in the application of tax laws and regulations.
We account for income taxes under the provisions of ASC Topic 740, "Income
Taxes" ("ASC 740"). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using tax rates in effect for the year in which the
differences are expected to affect taxable income. The assessment of the
realizability of deferred tax assets involves a high degree of judgment and
complexity. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts that are expected to be realized. When we
determine that it is more likely than not that we will be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would be made and reflected either in
income or as an adjustment to goodwill. This determination will be made by
considering various factors, including our expected future results, that in our
judgment will make it more likely than not that these deferred tax assets will
be realized.
Our actual effective tax rate and income tax expense could vary from estimated
amounts due to the future impacts of various items, including changes in income
tax laws, tax planning and our forecasted financial condition, and results of
operations in future periods. Although we believe current estimates are
reasonable, actual results could differ from these estimates.
FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes,
an interpretation of SFAS No. 109" and now codified as ASC 740. ASC 740
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that a
company has taken or expects to take on a tax return. Under ASC 740, the
financial statements reflect expected future tax consequences of such positions
presuming the taxing authorities' full knowledge of the position and all
relevant facts, but without considering time values. Recognized income tax
positions are measured at the largest amount that has a greater than 50%
likelihood of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
Pension and Postretirement Liabilities
ASC Topic 715, "Compensation-Retirement Benefits," requires recognition of an asset or liability in the consolidated balance sheet reflecting the funded status of pension and other postretirement benefit plans, such as retiree health and life, with current-year changes in the funded status recognized in the statement of stockholders' equity. The determination of pension plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement benefit plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining other postretirement benefit obligations and expense are the discount rate and the assumed health care cost-trend rates. Our pension plans have assets valued at$3.2 billion as ofDecember 31, 2020 and the plans' benefit obligation is$3.2 billion , resulting in the plans being 102% funded. For 2020, the assumption used for the funded status discount rate was 2.60% for our principal retirement plan obligations. As an indication of the sensitivity of pension liabilities to the discount rate assumption, a 50 basis point reduction in the discount rate at the end of 2020 would have increased plan obligations by approximately$95.0 million . A 50 basis point change in the discount rate used to calculate 2020 expense would have changed total pension plan expense for 2020 by approximately$6.2 million . To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants, and long-term inflation assumptions. We used an assumption of 6.8% for our expected return on 60
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