GANNETT CO., INC. The following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures should be read in conjunction with our unaudited Condensed consolidated financial statements and related notes. Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described under Cautionary Note Regarding Forward-Looking Statements and throughout this Quarterly Report, as well as the factors described in our 2019 Annual Report on Form 10-K, this report, and subsequent periodic reports filed with theSecurities and Exchange Commission , particularly under "Risk Factors."
Overview
27
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Gannett Co., Inc. ("Gannett", "we", "us", "our", or "the Company") is an
innovative, digitally focused media and marketing solutions company committed to
fostering the communities in our network and helping them build relationships
with their local businesses. Until November 19, 2019 , our corporate name was New
Media Investment Group Inc. ("New Media") and Gannett Co., Inc. was a separate
publicly traded company. On November 19, 2019 , New Media completed its
acquisition of Gannett Co., Inc. (which was renamed Gannett Media Corp. and is
referred to herein as "Legacy Gannett"). In connection with the acquisition, New
Media changed its name to Gannett Co., Inc. and assumed Legacy Gannett's ticker
symbol "GCI" (having previously traded under "NEWM").
As a result of the acquisition, historical results for fiscal years 2019 and prior are those of legacy New Media up to and through the date of the acquisition.
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 140 local media brands. Gannett also owns the digital marketing services companiesReachLocal, Inc. ("ReachLocal"),UpCurve, Inc. ("UpCurve"), andWordStream, Inc. ("WordStream") and runs the largest media-owned events business in theU.S. , GateHouse Live. 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 marketing solutions product suite. The Company reports in two operating segments, Publishing and Marketing Solutions. We also have a corporate and other category that includes activities not directly attributable to a specific segment. A full description of our segments is included in Note 14 - Segment reporting of the notes to the Condensed consolidated financial statements.
Certain matters affecting current and future operating results
The following items affect period-over-period comparisons from 2019 and will continue to affect period-over-period comparisons for future results:
Acquisitions
• In
and business of Legacy Gannett for an aggregate purchase price of $1.3
billion . The acquisition was funded by a new term loan facility with an
aggregate principal balance of $1.8 billion 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, 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
capital. As part of one of the 2019 acquisitions, the Company 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 Condensed consolidated statements of operations and
comprehensive income (loss). These acquisitions were financed from available
cash on hand.
Integration and reorganization costs
• In the three months ended
reorganization costs of
million were related to severance activities while
to other costs, including those for the purpose of consolidating operations.
In the six months ended
reorganization costs of
million were related to severance activities while
to other costs, including those for the purpose of consolidating operations.
• In the three months ended
reorganization costs of
million were related to severance activities while
to other costs, including those for the purpose of consolidating operations.
In the six months ended
reorganization costs of
million were related to severance activities while
to other costs, including those for the purpose of consolidating operations.
28
--------------------------------------------------------------------------------Facility consolidation and impairment of property, plant and equipment
• In the three months ended
printing facilities as part of the synergy and ongoing cost reduction
programs. As a result, the Company recognized accelerated depreciation of
$11.0 million during the three months ended June 30, 2020 . There were noimpairment charges recognized relating to retired equipment during the three
months ended
Company ceased operations of 24 printing facilities as part of the synergy
and ongoing cost reduction programs. As a result, the Company recognized
accelerated depreciation of
30, 2020. There were no impairment charges recognized relating to retired
equipment during the six months ended
• There were
recorded for the three and six months ended
segment as a result of the Company's recoverability test for long-lived asset
groups performed as of
• In the three months ended
of three print publications and eight printing operations as part of the
ongoing cost reduction programs. As a result, the Company recognized
impairment charges relating to retired equipment of
three months ended
Company ceased operations of three print publications and nine printing
operations as part of the ongoing cost reduction programs. As a result, the
Company recognized impairment charges relating to retired equipment of
million during the six months ended
• In the three months ended
plant and equipment impairment charges recorded by the Corporate and other
segment as a result of cost efficiency programs. For the six months ended
June 30, 2019 , there were$2.5 million property, plant and equipment impairment charges recorded by the Corporate and other segment.
• In the three and six months ended
goodwill and intangible impairment of
current and expected impact of the COVID-19 pandemic on the Company's
operations.
• There was no goodwill and intangible impairment recognized in the three and
six months ended
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. Newsprint supply Newsprint expense at our publishing segment was$6.7 million higher in the second quarter of 2020 compared to the second quarter of 2019 primarily due to acquired expenses of$16.5 million offset by declines in circulation and print advertising volumes and lower prices, in addition to page count reductions and press configuration efficiencies, when compared to the same period in 2019. Newsprint expense at our publishing segment was$22.0 million higher in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to acquired expenses of$38.6 million offset by declines in circulation and print advertising volumes, lower prices, page count reductions and press configuration efficiencies, when compared to the same period in 2019.
Outlook for the remainder of 2020
Strategy
The Company's areas of focus for 2020 continue to include (1) integrating the
Legacy Gannett and New Media organizations and achieving synergy targets, (2)
deleveraging the balance sheet via cash flow from operations and real estate
monetization, and (3) driving improved revenue trends by focusing on
complementary growth businesses. Key integration and
29
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synergy workstreams include consolidating production and distribution
facilities, integrating and centralizing back office functions, centralizing and
regionalizing our publishing sales, content, and circulation marketing
organizations, and consolidating our marketing solutions organizations. The
Company will continue to invest in our current growth businesses, such as
digital marketing services, digital subscriptions, and events, while also
experimenting with new business models, such as a marketplace model, to help
offset the revenue declines from traditional businesses to enable the Company to
return to revenue growth over the next three to five years.
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 first half of 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
global 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, employee furloughs, decreases in employee compensation, 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. The Company continues to believe these initiatives,
along with cash on hand, cash provided by operating activities, and relief from
the CARES Act will provide sufficient cash flow to enable the Company to meet
its commitments. However, these measures will not be sufficient to fully offset
the impact of the COVID-19 pandemic on the Company's business and, as such, the
Company's results of operations may be negatively impacted, and such impacts
could be material.
30--------------------------------------------------------------------------------
Results of Operations Consolidated Summary
A summary of our segment results is presented below:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change 2020 2019 Change
Operating revenues:
Publishing $ 695,893 $ 394,435 $ 301,458 $ 1,554,043 $ 772,516 $ 781,527
Marketing Solutions 94,563 27,345 67,218 215,844 53,232 162,612
Corporate and other 2,398 895 1,503 5,407 1,567 3,840
Intersegment eliminations (25,854 ) (18,288 ) (7,566 )
(59,611 ) (35,328 ) (24,283 )
Total operating revenues 767,000 404,387 362,613 1,715,683 791,987 923,696
Operating expenses:
Publishing $ 1,045,492 $ 370,152 $ 675,340 $ 1,876,021 $ 729,981 $ 1,146,040
Marketing Solutions 140,403 31,152 109,251 263,135 62,667 200,468
Corporate and other 44,583 9,198 35,385 103,586 23,929 79,657
Intersegment eliminations (25,854 ) (18,288 ) (7,566 ) (59,611 ) (35,328 ) (24,283 )
Total operating expenses 1,204,624 392,214 812,410 2,183,131 781,249 1,401,882
Operating income (loss) (437,624 ) 12,173 (449,797 ) (467,448 ) 10,738 (478,186 )
Non-operating expense 34,483 9,901 24,582 76,286 19,775 56,511
Income (loss) before income
taxes (472,107 ) 2,272 (474,379 ) (543,734 ) (9,037 ) (534,697 )
Benefit for income taxes (34,276 ) (343 ) (33,933 ) (25,297 ) (2,297 ) (23,000 )
Net income (loss) $ (437,831 ) $ 2,615 $ (440,446 )
Loss per share attributable
to Gannett - diluted
Intersegment eliminations in the preceding table represent digital advertising marketing services revenues and expenses associated with products sold by ourU.S. local publishing sales teams but which are fulfilled by our Marketing Solutions segment. When discussing segment results, these revenues and expenses are presented gross but are eliminated in consolidation.
Operating revenues:
Our Publishing segment generates revenue primarily through advertising and subscriptions for our print and digital publications. Our advertising teams sell local, national, and classified advertising across multiple platforms, including print, online, mobile, and tablet as well as niche publications. In addition, our Publishing segment advertising teams sell digital marketing services which are primarily fulfilled by teams within our Marketing Solutions segment. Circulation revenues are derived principally from home delivery and single copy sales of our publications and distributing our publications on our digital platforms. Other revenues are derived mainly from commercial printing, events, and distribution arrangements. Our Marketing Solutions 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 Marketing Solutions segment are derived from system integration services, cloud offerings, and software licensing.
Quarter ended
Total operating revenues were$767.0 million for the second quarter of 2020. The increase in total revenue was comprised of a$152.2 million increase in advertising and marketing services revenues, a$191.8 million increase in circulation revenues, and an$18.6 million increase in other revenues. Revenue at the Publishing and Marketing Solutions segments increased by$301.5 million and$67.2 million , respectively, primarily due to acquisition-related revenues, including revenue contributed by Legacy Gannett, partially offset by the impacts of COVID-19. 31
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Six months ended
Total operating revenues were$1.7 billion for the six months endedJune 30, 2020 . The increase in total revenue was comprised of a$445.7 million increase in advertising and marketing services revenues, a$414.4 million increase in circulation revenues, and a$63.7 million increase in other revenues. Revenue at the Publishing and Marketing Solutions segments increased by$781.5 million and$162.6 million , respectively, primarily due to acquisition-related revenues, including revenue contributed by Legacy Gannett, partially offset by the impacts of COVID-19. Operating expenses:
Operating expenses consist primarily of the following:
• Operating costs such as labor, newsprint, and delivery costs in our
Publishing segment or the cost of online media acquired from third
parties, such as Google, and costs to manage and operate our marketing
solutions and technology infrastructure in our Marketing Solutions
segment;
• Selling, general, and administrative expenses such as labor, payroll,
outside services, and benefits costs;
• Depreciation and amortization;
• Integration and reorganization costs such as severance charges, facility
consolidation charges, and acquisition or integration-related costs;
• Costs incurred pursuant to acquisitions or mergers;
• Impairment charges such as those for property, plant and equipment,
goodwill, or other intangible assets; and
• Net gains or losses on the sale or disposal of assets such as property,
plant, and equipment.
Quarter ended
Total operating expenses were$1.2 billion for the second quarter of 2020, an increase from the same period in 2019. Total operating expenses across all segments increased primarily due to acquired operating expenses contributed by Legacy Gannett, impairment recognized for property, plant and equipment and goodwill and intangibles during the second quarter of 2020, and increased integration and reorganization costs incurred related to the Legacy Gannett acquisition. These increases in operating expenses were offset by measures implemented to reduce costs and preserve cash flow as a result of the COVID-19 pandemic which began impacting the Company toward the end of the first quarter of 2020. Operating costs were$476.7 million in the second quarter of 2020. Publishing segment operating costs increased$203.4 million , while Marketing Solutions segment operating costs increased$43.9 million , primarily due to the contributions of Legacy Gannett, partially offset by costs associated with declines in revenue from continuing operations, in part, as a result of the pandemic and continued cost efficiency efforts resulting from the consolidation and centralization of operations. Selling, general, and administrative expenses were$226.5 million in the second quarter of 2020, an increase compared to 2019. Publishing segment selling, general, and administrative expenses increased$65.9 million , while Marketing Solutions segment selling, general, and administrative expenses increased$18.3 million , primarily due to the contributions of Legacy Gannett, partially offset by continued cost efficiency efforts as well as cost containment initiatives implemented as a result of the COVID-19 pandemic. Integration and reorganization costs were$32.3 million in the second quarter of 2020, an increase of$28.0 million compared to the same period in 2019. Integration and reorganization costs at the Publishing, Corporate and other, and Marketing Solutions segments increased$16.5 million ,$8.7 million , and$2.8 million , respectively, primarily due to additional severance costs stemming from acquisition-related synergies and the continued consolidation of our operations resulting from the ongoing implementation of our plans to reduce costs and preserve cash flow and the integration of acquired businesses. Acquisitions costs were$2.4 million in the second quarter of 2020, flat compared to the same period in 2019. The acquisition costs, the vast majority of which were incurred at the Corporate and other segment, was primarily due to costs of$2.3 million incurred in conjunction with the acquisition of Legacy Gannett. There was impairment of property, plant and equipment of$6.9 million in the second quarter of 2020, an increase of$5.6 million compared to the same period in 2019. The Company incurred a goodwill and intangible impairment of$393.4 million in the second quarter of 2020 compared to no goodwill and mastheads impairment recognized in the same period in 2019. 32 --------------------------------------------------------------------------------
Six months ended
Total operating expenses were$2.2 billion for the six months endedJune 30, 2020 , an increase from the same period in 2019. Total operating expenses across all segments increased primarily due to acquired operating expenses contributed by Legacy Gannett, impairment recognized for property, plant and equipment and goodwill and intangibles during the second quarter of 2020, and increased integration and reorganization costs incurred related to the Legacy Gannett acquisition. These increases were offset by measures implemented to reduce costs and preserve cash flow as a result of the COVID-19 pandemic, which began impacting the Company toward the end of the first quarter of 2020. Operating costs were$1.0 billion in the six months endedJune 30, 2020 . Publishing segment operating costs increased$496.5 million , while Marketing Solutions segment operating costs increased$98.9 million , primarily due to the contributions of Legacy Gannett, partially offset by costs associated with declines in revenue from continuing operations, in part, as a result of the pandemic and continued cost efficiency efforts resulting from the consolidation and centralization of operations. Selling, general, and administrative expenses were$525.6 million in the six months endedJune 30, 2020 , an increase compared to 2019. Publishing segment selling, general, and administrative expenses increased$183.8 million , while Marketing Solutions segment selling, general, and administrative expenses increased$47.7 million , primarily due to the contributions of Legacy Gannett, partially offset by continued cost efficiency efforts as well as cost containment initiatives implemented as a result of the COVID-19 pandemic. Integration and reorganization costs were$60.6 million in the six months endedJune 30, 2020 , an increase of$50.5 million compared to the same period in 2019. Integration and reorganization costs at the Publishing, Corporate and other, and Marketing Solutions segments increased$27.5 million ,$3.6 million , and$19.4 million , respectively, primarily due to additional severance costs stemming from acquisition-related synergies and the continued consolidation of our operations resulting from the ongoing implementation of our plans to reduce costs and preserve cash flow and the integration of acquired businesses. Acquisitions costs were$8.3 million in the six months endedJune 30, 2020 , an increase of$5.2 million compared to the same period in 2019. The increase in acquisition costs, the vast majority of which were incurred at the Corporate and other segment, was primarily due to costs of$6.9 million incurred in conjunction with the acquisition of Legacy Gannett. There was impairment of property, plant and equipment of$6.9 million in the six months endedJune 30, 2020 , an increase of$4.4 million compared to the same period in 2019. The Company incurred a goodwill and intangible impairment of$393.4 million in the second quarter of 2020 compared to no goodwill and intangible impairment recognized in the same period in 2019. 33 --------------------------------------------------------------------------------
Publishing segment
A summary of our Publishing segment results is presented below:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change ($) 2020 2019 Change ($)
Operating revenues:
Advertising and marketing
services $ 292,252 $ 199,178 $ 93,074 $ 695,888 $ 388,036 $ 307,852
Circulation 342,645 150,827 191,818 717,365 302,991 414,374
Other 60,996 44,430 16,566 140,790 81,489 59,301
Total operating revenues 695,893 394,435 301,458 1,554,043 772,516 781,527
Operating expenses:
Operating costs 432,920 229,568 203,352 951,779 455,270 496,509
Selling, general and
administrative expenses 176,043 110,113 65,930 406,856 223,007 183,849
Depreciation and
amortization 56,553 21,769 34,784 123,510 40,599 82,911
Integration and
reorganization costs 20,619 4,074 16,545 33,927 6,458 27,469
Impairment of property,
plant and equipment 6,859 2,469 4,390 6,859 2,469 4,390
Goodwill and intangible
impairment 352,947 - 352,947 352,947 - 352,947
Net loss on sale or disposal
of assets (449 ) 2,159 (2,608 ) 143 2,178 (2,035 )
Total operating expenses 1,045,492 370,152 675,340 1,876,021 729,981 1,146,040
Operating income $ (349,599 ) $ 24,283 (373,882 ) $ (321,978 ) $ 42,535 (364,513 )
Operating revenues:
Quarter ended
Advertising and marketing services revenues were$292.3 million for the second quarter of 2020, which included revenues from international operations of$20.1 million for the second quarter of 2020. This increase compared to the same period in 2019 was primarily attributable to$178.0 million in acquired advertising and marketing services revenues, including$177.4 million related to Legacy Gannett. Print advertising revenues were$187.9 million for the second quarter of 2020, an increase of$29.9 million compared to the same period in 2019. Local and national print advertising revenues were$92.0 million and$25.7 million , respectively, for the second quarter of 2020, a decrease of$10.1 million and an increase of$19.0 million , respectively, compared to the same period in 2019. The increases in local and national print advertising revenues were attributable to$63.7 million in acquired revenues, including$63.2 million in acquired revenues related to Legacy Gannett. Classified print advertising revenues of$70.2 million for 2020 increased$21.0 million compared to 2019, primarily attributable to acquired revenues of$38.9 million , including$38.8 million in acquired revenues related to Legacy Gannett. The increases across all categories of print advertising revenues were partially offset by reduced demand consistent with general trends adversely impacting the publishing industry and unfavorable impacts resulting from the COVID-19 pandemic, which began in the latter part of the first quarter of 2020. Digital advertising and marketing services revenues were$104.4 million for the second quarter of 2020, an increase of$63.1 million compared to the same period in 2019. Digital media revenues were$65.3 million for the second quarter of 2020, an increase of$41.9 million compared to the same period in 2019, primarily due to$48.2 million in acquired revenues, including$48.2 million in acquired revenues related to Legacy Gannett. Digital marketing services revenues were$23.6 million for the second quarter of 2020, an increase of$12.4 million compared to the same period in 2019. This increase was attributable to$16.4 million in acquired revenues related to Legacy Gannett. Digital classified revenues were$15.4 million for the second quarter of 2020, an increase of$8.8 million compared to the same period in 2019 due to$10.9 million in acquired revenues, including$10.9 million in acquired revenues related to Legacy Gannett. The impacts from the COVID-19 pandemic which began in the latter part of the first quarter of 2020 negatively affected digital revenues across each category. Circulation revenues were$342.6 million for the second quarter of 2020. Print circulation revenues were$321.8 million for the second quarter of 2020, an increase of$176.1 million from the same period in 2019 due to$193.4 million in acquired revenues, including$193.0 million in acquired revenues related to Legacy Gannett, partially offset by declines stemming from a reduction in volume of our single copy and home delivery sales, reflecting the impact of COVID-19 on businesses that buy and sell copies 34 -------------------------------------------------------------------------------- of our publications as well as general industry trends. Digital circulation revenues were$20.8 million for the second quarter of 2020, an increase of$15.7 million from the same period in 2019 primarily due to$14.7 million in acquired revenues and a 31.3% increase in digital only subscribers.
Other revenues of
Six months ended
Advertising and marketing services revenues were
Print advertising revenues were$455.5 million for the six months endedJune 30, 2020 , an increase of$146.7 million compared to the same period in 2019. Local and national print advertising revenues were$228.8 million and$62.0 million , respectively, for the six months endedJune 30, 2020 , an increase of$31.2 million and$49.1 million , respectively, compared to the same period in 2019. The increases in local and national print advertising revenues were attributable to$161.2 million in acquired revenues, including$158.3 million in acquired revenues related to Legacy Gannett. Classified print advertising revenues of$164.7 million for 2020 increased$66.4 million compared to 2019, primarily attributable to acquired revenues of$91.1 million , including$90.3 million in acquired revenues related to Legacy Gannett. The increases across all categories of print advertising revenues were partially offset by reduced demand consistent with general trends adversely impacting the publishing industry and unfavorable impacts resulting from the COVID-19 pandemic, which began in the latter part of the first quarter of 2020. Digital advertising and marketing services revenues were$240.4 million for the six months endedJune 30, 2020 , an increase of$161.2 million compared to the same period in 2019. Digital media revenues were$151.8 million for the six months endedJune 30, 2020 , an increase of$107.7 million compared to the same period in 2019, primarily due to$113.5 million in acquired revenues, including$113.3 million in acquired revenues related to Legacy Gannett. Digital marketing services revenues were$54.2 million for the six months endedJune 30, 2020 , an increase of$32.4 million compared to the same period in 2019. This increase was attributable to$37.4 million in acquired revenues related to Legacy Gannett. Digital classified revenues were$34.4 million for the six months endedJune 30, 2020 , an increase of$21.1 million compared to the same period in 2019 due to$24.1 million in acquired revenues, including$24.0 million in acquired revenues related to Legacy Gannett. The impacts from the COVID-19 pandemic, which began in the latter part of the first quarter 2020 negatively affected digital revenues across each category. Circulation revenues were$717.4 million for the six months endedJune 30, 2020 . Print circulation revenues were$676.8 million for the six months endedJune 30, 2020 , an increase of$384.1 million from the same period in 2019 due to$412.3 million in acquired revenues, including$409.7 million in acquired revenues related to Legacy Gannett and increases from our strategic pricing programs, partially offset by declines stemming from a reduction in volume of our single copy and home delivery sales, reflecting the impact of COVID-19 on businesses that buy and sell copies of our publications as well as general industry trends. Digital circulation revenues were$40.5 million for the six months endedJune 30, 2020 , an increase of$30.3 million from the same period in 2019 primarily due to$28.7 million in acquired revenues. Other revenues of$140.8 million in the six months endedJune 30, 2020 increased$59.3 million compared to the same period in 2019. Other revenues accounted for approximately 9% of total Publishing segment revenues for the quarter.
Operating expenses:
Quarter ended
Operating costs were$432.9 million for the second quarter of 2020, an increase of$203.4 million from the same period in 2019. Newsprint and ink costs were$29.5 million in the second quarter, an increase of$6.1 million compared to 2019, primarily as a result of acquired newsprint and ink costs related to Legacy Gannett, partially offset by declines in circulation and print advertising volumes, lower prices, page count reductions and press configuration efficiencies when compared to the same period in 2019. News and editorial expenses were$9.7 million in the second quarter of 2020, an increase of$2.4 million compared to 2019, primarily as a result of acquired news and editorial expenses related to Legacy Gannett, partially offset by synergy savings. Distribution costs were$100.6 million in the second quarter of 2020, an increase of$62.8 million , primarily due to acquired hauling and delivery costs related to Legacy Gannett partially offset by synergy savings and lower production volumes. Other material 35 -------------------------------------------------------------------------------- categories of costs contributing to the overall increase in operating costs include$76.7 million increase in compensation and benefit costs and$29.1 million increase in outside services, which include portions of outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees. Increases in compensation costs during the period primarily resulting from the Legacy Gannett acquisition were offset by decreases from cost containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts. Similarly, increases in outside service costs were offset by declines in activity as a result of the COVID-19 pandemic and cost containment initiatives. Total selling, general, and administrative expenses were$176.0 million for the second quarter of 2020, an increase of$65.9 million from the same period in 2019. Outside services costs, which include portions of outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees, were$10.0 million in the second quarter, an increase of$0.9 million compared to 2019, primarily as a result of outside services costs related to Legacy Gannett offset by reductions resulting from reduced activity as a result of the COVID-19 pandemic as well as cost containment initiatives. Other material categories of costs contributing to the overall increase in selling, general, and administrative expenses include$19.9 million in compensation and benefit costs and$36.8 million in other general and administrative costs. Increases in compensation costs during the period primarily resulting from the Legacy Gannett acquisition were offset by decreases from cost containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts. Depreciation and amortization expenses were$56.6 million for the second quarter of 2020, a$34.8 million increase from the same period in 2019, primarily attributable to the acquired property and intangibles from the Legacy Gannett acquisition and an increase in accelerated depreciation of$8.5 million as a result of ongoing cost reduction programs compared to the same period in 2019. Integration and reorganization costs were$20.6 million in the second quarter of 2020, an increase of$16.5 million compared to the same period in 2019, primarily attributable to integration and reorganization costs related to Legacy Gannett driven by severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from the ongoing implementation of our plans to reduce costs and preserve cash flow.
Six months ended
Operating costs were$951.8 million for the six months endedJune 30, 2020 , an increase of$496.5 million from the same period in 2019. Newsprint and ink costs were$69.8 million in the six months endedJune 30, 2020 , an increase of$22.3 million compared to 2019, primarily as a result of acquired newsprint and ink costs related to Legacy Gannett, offset by declines in circulation and print advertising volumes, lower prices, page count reductions and press configuration efficiencies when compared to the same period in 2019. News and editorial expenses were$21.1 million in the six months endedJune 30, 2020 , an increase of$6.4 million compared to 2019, primarily as a result of acquired news and editorial expenses related to Legacy Gannett, partially offset by synergy savings. Distribution costs were$207.6 million in the six months endedJune 30, 2020 , an increase of$130.4 million , primarily due to acquired hauling and delivery costs related to Legacy Gannett partially offset by synergy savings and lower production volumes. Other material categories of costs contributing to the overall increase in operating costs include$188.0 million in compensation and benefit costs and$84.1 million in outside services, which include portions of outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees. Increases in compensation costs during the period primarily resulting from the Legacy Gannett acquisition were offset by decreases from cost containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts. Similarly, increases in outside service costs were offset by declines in activity as a result of the COVID-19 pandemic and cost containment initiatives. Total selling, general, and administrative expenses were$406.9 million for the six months endedJune 30, 2020 , an increase of$183.8 million from the same period in 2019. Outside services costs, which include portions of outside printing, professional and outside services, paid search and ad serving, feature services, and credit card fees, were$23.1 million in the six months endedJune 30, 2020 , an increase of$5.8 million compared to 2019, primarily as a result of acquired outside services costs related to Legacy Gannett offset by reductions resulting from reduced activity as a result of the COVID-19 pandemic as well as cost containment initiatives. Other material categories of costs contributing to the overall increase in selling, general, and administrative expenses include$62.0 million in compensation and benefit costs and$81.1 million in other general and administrative costs. Increases in compensation costs during the period primarily resulting from the Legacy Gannett acquisition were offset by decreases from cost containment initiatives implemented in connection with the COVID-19 pandemic and ongoing integration efforts. Depreciation and amortization expense were$123.5 million for the six months endedJune 30, 2020 , an$82.9 million increase from the same period in 2019, primarily attributable to the acquired property and intangibles from the Legacy Gannett acquisition and an increase in accelerated depreciation of$33.1 million as a result of ongoing cost reduction programs compared to the same period in 2019. 36 -------------------------------------------------------------------------------- Integration and reorganization costs were$33.9 million in the six months endedJune 30, 2020 , an increase of$27.5 million compared to the same period in 2019, primarily attributable to integration and reorganization costs related to Legacy Gannett driven by severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from the ongoing implementation of our plans to reduce costs and preserve cash flow.
Publishing segment adjusted EBITDA:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change ($) 2020 2019 Change ($)
Net income (loss)
attributable to Gannett
(GAAP basis) $ (328,207 ) $ 24,830 $ (353,037 ) $ (281,213 ) $ 43,586 $ (324,799 )
Interest expense 92 23 69 110 78 32
Non-operating pension income (17,480 ) (208 ) (17,272 ) (35,953 ) (417 ) (35,536 )
Other non-operating income (3,066 ) (162 ) (2,904 ) (3,530 ) (263 ) (3,267 )
Depreciation and
amortization 56,553 21,769 34,784 123,510 40,599 82,911
Integration and
reorganization costs 20,619 4,074 16,545 33,927 6,458 27,469
Impairment of property,
plant and equipment 6,859 2,469 4,390 6,859 2,469 4,390
Goodwill and intangible
impairment 352,947 - 352,947 352,947 - 352,947
Net loss on sale or disposal
of assets (449 ) 2,159 (2,608 ) 143 2,178 (2,035 )
Other items 4,123 539 3,584 6,214 2,500 3,714
Adjusted EBITDA (non-GAAP
basis) $ 91,991 $ 55,493 $ 36,498 $ 203,014 $ 97,188 $ 105,826
Adjusted EBITDA for our publishing segment was $92.0 million for the second
quarter of 2020, an increase of $36.5 million compared to the same period in
2019. The increase was primarily attributable to acquired Adjusted EBITDA for
Legacy Gannett and ongoing operating efficiencies offset by declines in print
advertising and circulation revenues in part reflecting lower demand during the
second quarter of 2020, which were impacted by the ongoing economic effects of
COVID-19, and ongoing operating efficiencies.
Adjusted EBITDA for our publishing segment was $203.0 million for the six months
ended June 30, 2020 , an increase of $105.8 million compared to the same period
in 2019. The increase was primarily attributable to acquired Adjusted EBITDA for
Legacy Gannett and ongoing operating efficiencies offset by declines in print
advertising and circulation revenues in part reflecting lower demand beginning
near the end of the first quarter of 2020, which were impacted by the ongoing
economic effects of COVID-19, and ongoing operating efficiencies.
37
--------------------------------------------------------------------------------Marketing Solutions segment
A summary of our Marketing Solutions segment results is presented below:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change 2020 2019 Change
Operating revenues:
Advertising and marketing
services $ 89,809 $ 23,157 $ 66,652 $ 206,092 $ 44,547 $ 161,545
Other 4,754 4,188 566 9,752 8,685 1,067
Total operating revenues 94,563 27,345 67,218 215,844 53,232 162,612
Operating expenses:
Operating costs 63,264 19,376 43,888 136,519 37,648 98,871
Selling, general and
administrative expenses 29,158 10,817 18,341 69,892 22,224 47,668
Depreciation and
amortization 4,004 778 3,226 11,335 2,056 9,279
Integration and
reorganization costs 2,962 180 2,782 4,351 736 3,615
Goodwill and intangible
impairment 40,499 - 40,499 40,499 - 40,499
Net loss on sale or disposal
of assets 516 1 515 539 3 536
Total operating expenses 140,403 31,152 109,251 263,135 62,667 200,468 Operating loss
$ (45,840 ) $ (3,807 ) $ (42,033 ) $
(47,291 )
Operating revenues:
Quarter ended
Advertising and marketing services revenues were$89.8 million for the second quarter of 2020, an increase compared to the same period in 2019, which included revenues from international entities of$8.6 million for the second quarter of 2020. This increase was primarily attributable to$74.8 million in acquired advertising and marketing services revenues related to Legacy Gannett. Other revenues were$4.8 million for the second quarter of 2020, an increase of 14% compared to the same period in 2019. This increase is primarily the result of increases in license revenue for cloud software products. These increases were partially offset by decreases driven by the impacts of the COVID-19 pandemic which began in the latter part of the first quarter of 2020.
Six months ended
Advertising and marketing services revenues were$206.1 million for the six months endedJune 30, 2020 , an increase compared to the same period in 2019, which included revenues from international entities of$19.1 million for the six months endedJune 30, 2020 . This increase was primarily attributable to$171.1 million in acquired advertising and marketing services revenues related to Legacy Gannett. Other revenues were$9.8 million for the six months endedJune 30, 2020 , an increase of$1.1 million compared to the same period in 2019. This increase is primarily the result of increases in license revenue for cloud software products. These increases were partially offset by decreases driven by the impacts of the COVID-19 pandemic, which began in the latter part of the first quarter of 2020.
Operating expenses:
Quarter ended
Operating costs, which include online media acquired from third parties, costs to manage and operate the segment's solutions and technology infrastructure, and other third-party direct costs, were$63.3 million for the second quarter of 2020, an increase compared to the same period in 2019. This increase was primarily attributable to acquired operating costs related to Legacy Gannett. Outside service costs, which include costs of online media acquired from third-party publishers, totaled$48.9 million for the second quarter of 2020 compared to$12.1 million for the same period in 2019. The increase is primarily the result of acquired outside service costs related to Legacy Gannett and increased costs of media associated with lower rebates and margin pressure experienced during the first half of 2020. Other material categories of costs contributing to the overall increase in operating costs include$7.0 million in compensation and benefit costs, which was offset by reductions associated with cost containment initiatives in connection with the COVID-19 pandemic. 38 -------------------------------------------------------------------------------- Selling, general, and administrative expenses were$29.2 million for the second quarter of 2020, an increase compared to the same period in 2019. This increase was primarily attributable to acquired selling, general, and administrative expenses related to Legacy Gannett. Depreciation and amortization were$4.0 million for the second quarter of 2020; an increase compared to the second quarter of 2019. This was primarily attributable to an increase in amortization expense stemming from new product and development initiatives.
Six months ended
Operating costs, which include online media acquired from third parties, costs to manage and operate the segment's solutions and technology infrastructure, and other third-party direct costs, were$136.5 million for the six months endedJune 30, 2020 , an increase compared to the same period in 2019. This increase was primarily attributable to acquired operating costs related to Legacy Gannett. Outside service costs, which include costs of online media acquired from third-party publishers, totaled$81.8 million for the six months endedJune 30, 2020 compared to$23.4 million for the same period in 2019. The increase is primarily the result of acquired outside service costs related to Legacy Gannett and increased costs of media associated with lower rebates and margin pressure experienced in the first quarter of 2020. Other material categories of costs contributing to the overall increase in operating costs include$18.0 million in compensation and benefit costs, which was offset by reductions associated with cost containment initiatives in connection with the COVID-19 pandemic. Selling, general, and administrative expenses were$69.9 million for the six months endedJune 30, 2020 , an increase compared to the same period in 2019. This increase was primarily attributable to acquired selling, general, and administrative expenses related to Legacy Gannett, partially offset by decreases related to cost containment initiatives as a result of the COVID-19 pandemic and ongoing integration activities. Depreciation and amortization were$11.3 million for the six months endedJune 30, 2020 , an increase compared to the six months endedJune 30, 2019 . This was primarily attributable to an increase in amortization expense stemming from new product and development initiatives.
Marketing Solutions segment adjusted EBITDA:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change 2020 2019 Change
Net income (loss)
attributable to Gannett
(GAAP basis) $ (43,226 ) $ (3,807 ) $ (39,419 ) $ (48,301 ) $ (9,435 ) $ (38,866 )
Other non-operating income (2,614 ) - (2,614 ) 1,010 - 1,010
Depreciation and
amortization 4,004 778 3,226 11,335 2,056 9,279
Integration and
reorganization costs 2,962 180 2,782 4,351 736 3,615
Goodwill and intangible
impairment 40,499 - 40,499 40,499 - 40,499
Net loss on sale or disposal
of assets 516 1 515 539 3 536
Other items 643 389 254 1,235 951 284
Adjusted EBITDA (non-GAAP
basis) $ 2,784 $ (2,459 ) $ 5,243 $ 10,668 $ (5,689 ) $ 16,357 Adjusted EBITDA for our Marketing Solutions segment was
Adjusted EBITDA for our Marketing Solutions segment was$10.7 million for the six months endedJune 30, 2020 , an increase compared to the same period in 2019 primarily due to additional Adjusted EBITDA from Legacy Gannett. 39 --------------------------------------------------------------------------------
Corporate and other segment
Corporate and other operating expenses were$44.6 million for the second quarter of 2020, an increase of$35.4 million compared to the same period in 2019 primarily attributable to acquired operating expenses related to Legacy Gannett. Also included in corporate operating expenses for the second quarter of 2020 were$8.7 million of integration and reorganization costs and$5.8 million of depreciation and amortization expenses. Corporate and other operating expenses were$103.6 million for the six months endedJune 30, 2020 , an increase of$79.7 million compared to the same period in 2019 primarily attributable to acquired operating expenses related to Legacy Gannett and an increase in acquisition costs of$5.2 million . Also included in corporate operating expenses for the six months endedJune 30, 2020 were$22.3 million of integration and reorganization costs and$9.5 million of depreciation and amortization expenses. Non-operating expense Interest expense: Interest expense for the second quarter of 2020 was$57.9 million compared to$10.2 million in the same period in 2019. Interest expense for the six months endedJune 30, 2020 was$115.8 million compared to$20.3 million in the same period in 2019. The increase in interest expense for 2020 is due to a higher effective interest rate and a larger debt balance compared to the prior year period. Non-operating pension income: Non-operating pension income for second quarter of 2020 was$17.6 million compared to$0.2 million in the same period in 2019. Non-operating pension income for the six months endedJune 30, 2020 was$36.1 million compared to$0.4 million in the same period in 2019. The increase during the three and six months endedJune 30, 2020 is due to increased expected return on plan assets in excess of interest costs on benefit obligations when compared to the same period in 2019. Other non-operating items, net: Our non-operating items, net, are driven by certain items that fall outside of our normal business operations. Non-operating items, net, consisted of$6.3 million in income for the second quarter of 2020 compared to$0.1 million in income for the same period in 2019. Non-operating items, net, consisted of$4.6 million in income for the six months endedJune 30, 2020 compared to$0.2 million in income for the same period in 2019.
Income tax expense (benefit)
The following table outlines our pre-tax net income (loss) and income tax
amounts:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 2020 2019
Pre-tax net income (loss) $ (472,107 ) $ 2,272 $ (543,734 ) $ (9,037 )
Benefit for income taxes (34,276 ) (343 ) (25,297 ) (2,297 )
Effective tax rate 7.3 % *** 4.7 % 25.4 %
*** Indicates a percentage that is not meaningful.
The benefit for income taxes for the three months endedJune 30, 2020 was caused largely by the pre-tax net loss generated during the quarter. The benefit from income taxes was reduced due to non-deductible asset impairments, non-deductible officers' compensation, and the creation of a valuation allowance against deferred tax assets arising from non-deductible interest carryforwards. These non-deductible expenses resulted in an estimated annual effective tax rate lower than the statutory Federal rate of 21%. The benefit for income taxes for the three months endedJune 30, 2020 was calculated using the estimated annual effective tax rate of 6.8%. The estimated annual effective tax rate is based on a projected tax benefit for the year. The CARES Act was enacted onMarch 27, 2020 . The Company will realize a tax benefit attributable to the legislation which permits a refund of tax benefits from earlier years. The legislation also allows the Company to defer certain employer payroll tax payments in 2020 to the end of 2021 and 2022. Finally, the Company is evaluating and may pursue Employee Retention Tax Credits as provided under the CARES Act. The Company continually monitors guidance from theU.S. Department of the Treasury (the "Treasury") and the Internal Revenue Service to determine whether additional tax benefits are available from this legislation and similar stimulus efforts. 40 -------------------------------------------------------------------------------- The Tax Cuts and Jobs Act of 2007 ("TCJA") revised business interest expense limitations under I.R.C. Section 163(j) such that business interest deductions are not allowed in amounts exceeding prescribed percentages of EBITDA for tax years beginning beforeJanuary 1, 2022 . For tax years beginning afterJanuary 1, 2022 , deductible interest cannot exceed prescribed percentages of EBIT. Unused business interest deductions are carried forward and recorded as deferred tax assets. The Company has evaluated the potential utilization of such carryforward deferred tax assets and determined full valuation allowances are appropriate as future utilization is uncertain.
Net income (loss) attributable to Gannett and diluted income (loss) per share attributable to Gannett
Net loss attributable to Gannett was$436.9 million and diluted loss per share attributable to Gannett per share was$3.32 for the second quarter of 2020 compared to net income attributable to Gannett of$2.8 million and income per share attributable to Gannett per share of$0.05 for the same period in 2019. The change reflects the various items discussed above. Net loss attributable to Gannett was$517.0 million and diluted loss per share attributable to Gannett per share was$3.95 for the six months endedJune 30, 2020 compared to net loss attributable to Gannett of$6.3 million and diluted loss per share attributable to Gannett per share of$0.10 for the same period in 2019. The change reflects the various items discussed above.
Liquidity and capital resources
Our operations, which have historically generated strong positive cash flow, are expected to provide sufficient liquidity, together with cash on hand, to meet our ongoing liquidity requirements, primarily operating expenses, interest expense and capital expenditures.
Details of our cash flows are included in the table below:
Six months ended June 30,
In thousands 2020 2019
Net cash provided by operating activities
(3,026 ) (37,180 )
Net cash used for financing activities (20,331 ) (50,062 )
Effect of currency exchange rate change on cash (780 ) 3
Increase (decrease) in cash $ 503 $ (29,586 )
Operating cash flows
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.
Our net cash flow from operating activities was $24.6 million for the first six
months of 2020, a decrease of $33.0 million compared to the same period in 2019.
The decrease in net cash flow from operating activities was primarily due to
interest paid on the term loan of $124.7 million and severance payments of $41.2
million , offset by increases in working capital attributable to the merger with
Legacy Gannett in November 2019 .
Investing cash flows
Cash flows used for investing activities totaled$3.0 million for the first six months of 2020, primarily consisting of capital expenditures of$22.2 million , partially offset by proceeds from sale of certain assets of$17.8 million . Cash flows used for investing activities totaled$37.2 million for the first six months of 2019, primarily consisting of payments for acquisitions, net of cash acquired, of$39.4 million and capital expenditures of$4.9 million , offset by proceeds from sales of certain assets of$7.1 million . 41 --------------------------------------------------------------------------------
Financing cash flows
Cash flows used for financing activities totaled
Cash flows used for financing activities totaled$50.1 million for the first six months of 2019, primarily consisting of the payments of dividends of$46.1 million and repayments of borrowings under our term loan facility$11.3 million and$0.7 million in payments for employee taxes withheld from stock awards, offset by net borrowings under the revolving credit facility of$8.0 million .
Apollo Term Loan
InNovember 2019 , pursuant to the acquisition of Legacy Gannett, the Company entered into a five-year, senior-secured term loan facility withApollo Capital Management, L.P. ("Apollo") in an aggregate principal amount of approximately$1.8 billion . The term loan facility, which matures onNovember 19, 2024 , generally bears interest at the rate of 11.5% per annum. Origination fees totaled 6.5% of the total principal amount of the financing at closing. Pursuant to the agreement, Apollo has the right to designate two individuals to attend Board of Directors meetings as non-fiduciary and non-voting observers and participants. In addition, if the total gross leverage ratio exceeds certain thresholds, Apollo has the right to appoint up to two voting directors. Upon the occurrence and during the continuance of an Event of Default (as defined in the term loan facility), the interest rate increases by 2.0%. The term loan facility contains customary covenants and events of default, including a covenant that the Company have at least$20 million of unrestricted cash on the last day of each fiscal quarter. The term loan facility is required to be prepaid with (i) any unrestricted cash in excess of$40 million at the end of fiscal year 2020 and fiscal year 2021, (ii) 50% of excess cash flow (as such term is defined in the term loan facility) measured at the end of each fiscal quarter (beginning with the third quarter of 2020), subject to a step-up to 90% of excess cash flow for each period in fiscal year 2021 or later if the ratio of consolidated debt to EBITDA (as such terms are defined in the term loan facility) is greater than or equal to 1.00 to 1.00, and (iii) 100% of the net proceeds of any non-ordinary course asset sales. The term loan facility prohibits the payment of cash dividends prior to the thirtieth day of the second quarter of 2020, and thereafter permits payment of cash dividends up to an agreed-upon amount, provided that the ratio of consolidated debt to EBITDA (as such terms are defined therein) does not exceed a specified threshold. As ofJune 30, 2020 , the Company is in compliance with all of the covenants and obligations under the term loan facility. In connection with the Apollo term loan facility, 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 term loan facility using the effective interest method. The Company is permitted to prepay the principal of the term loan facility, in whole or in part, at par plus accrued and unpaid interest, without any prepayment premium or penalty. The term loan facility 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 term loan facility 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. The Company used the proceeds of the term loan facility 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 term loan facility. As ofJune 30, 2020 , the Company had$1.7 billion in aggregate principal outstanding under the term loan facility,$4.4 million of deferred financing costs, and$99.4 million of capitalized lender fees. During the three and six months endedJune 30, 2020 , the Company recorded$50.6 million and$101.4 million in interest expense, respectively,$5.9 million and$11.8 million in amortization of deferred financing costs, respectively, and$0.4 million and$1.2 million for loss on early extinguishment of debt, respectively. During the three months endedJune 30, 2020 , the Company paid$124.7 million in interest. The effective interest rate is 12.9%.
Convertible debt
42
--------------------------------------------------------------------------------
On April 9, 2018 , Legacy Gannett completed an offering of 4.75% convertible
senior notes, resulting in total aggregate principal of $201.3 million and net
proceeds of approximately $195.3 million . Interest on the notes is payable
semi-annually in arrears. The notes mature on April 15, 2024 with our earliest
redemption date being April 15, 2022 . The stated conversion rate of the notes is
82.4572 shares per $1,000 in principal or approximately $12.13 per share.
The Company's acquisition of Legacy Gannett constituted a Fundamental Change and
Make-Whole Fundamental Change under the terms of the indenture governing the
notes. At the acquisition date, the Company delivered to noteholders a notice
offering the right to surrender all or a portion of their notes for cash on
December 31, 2019 . On December 31, 2019 , we completed the redemption of $198.0
million in aggregate principal in exchange for cash.
The $3.3 million principal value of the remaining notes outstanding is reported
as convertible debt in the Condensed consolidated balance sheets. The effective
interest rate on the notes was 6.05% as of June 30, 2020 .
Additional 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, reductions in pay for senior management 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 until economic conditions improve. We expect to reinstate the dividend when appropriate but cannot provide assurance if or when we will resume paying dividends on a regular basis.
The CARES Act, enacted
In theU.K. we have negotiated a deferral of$12 million in pension contributions due in 2020 to now be paid in 2021. 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 of theSeptember 30, 2022 . Additionally,$11 million in minimum required contributions for the 2019 plan year, as required by ERISA, have been deferred untilJanuary 1, 2021 . Although we currently forecast sufficient near-term 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 Apollo term loan facility. 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.
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) from continuing operations before:
• Income tax expense (benefit);
• Interest expense;
• Gains or losses on early extinguishment of debt;
• Non-operating items, primarily pension costs;
• Depreciation and amortization;
• Integration and reorganization costs;
• Impairment of property, plant and equipment;
•
43
--------------------------------------------------------------------------------• Net loss (gain) on sale or disposal of assets;
• Equity-based compensation;
• Acquisition costs; and
• 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), cash flow from continuing operating activities, or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP 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 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.
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 impairment of property,
plant and equipment, 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, income from operations, or
cash flows provided by or used in operations 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 income
(loss) from continuing operations to Adjusted EBITDA along with our consolidated
financial statements included elsewhere in this report. 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.
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. We consider the (gain) loss on early extinguishment of debt
to be financing related costs associated with interest expense or amortization
of financing fees. Accordingly, we exclude financing related costs such as the
early extinguishment of debt because they represent the write-off of deferred
financing costs, and we believe these non-cash write-offs are similar to
interest expense and amortization of financing fees, which by definition are
excluded from Adjusted EBITDA. Such charges are incidental to, but not
reflective of, our day-to-day operating performance and it is appropriate to
exclude charges related to these financing activities which, depending on the
nature of the financing arrangement, would have otherwise been amortized over
the period of the related agreement and does not require a current cash
settlement. Such charges are incidental to, but not reflective of our day-to-day
operating performance of the business that management can impact in the short
term.
44--------------------------------------------------------------------------------
The table below shows the reconciliation of (loss) income from continuing operations to Adjusted EBITDA for the periods presented:
Three months ended June 30, Six months ended June 30,
In thousands 2020 2019 Change 2020 2019 Change
Net income (loss)
attributable to Gannett $ (436,893 ) $ 2,815 $ (439,708 ) $ (517,045 ) $ (6,291 ) $ (510,754 )
Benefit for income taxes (34,276 ) (343 ) (33,933 ) (25,297 ) (2,297 ) (23,000 )
Interest expense 57,928 10,212 47,716 115,827 20,346 95,481
Loss on early extinguishment
of debt 369 - 369 1,174 - 1,174
Non-operating pension income (17,553 ) (208 ) (17,345 ) (36,099 ) (417 ) (35,682 )
Other non-operating income (6,261 ) (103 ) (6,158 ) (4,616 ) (154 ) (4,462 )
Depreciation and
amortization 66,327 23,328 42,999 144,352 44,251 100,101
Integration and
reorganization costs 32,306 4,278 28,028 60,560 10,077 50,483
Acquisition costs 2,379 2,364 15 8,348 3,137 5,211
Impairment of property,
plant and equipment 6,859 1,262 5,597 6,859 2,469 4,390
Goodwill and intangible
impairment 393,446 - 393,446 393,446 - 393,446
Loss on sale or disposal of
assets 88 947 (859 ) 745 2,737 (1,992 )
Equity-based compensation
expense 7,391 707 6,684 18,968 1,843 17,125
Other items 5,908 2,036 3,872 9,862 4,444 5,418
Adjusted EBITDA (non-GAAP
basis) $ 78,018 $ 47,295 $ 30,723 $
177,084
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