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 and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , as filed with theSecurities and Exchange Commission . Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements that reflect our plans, estimates, and beliefs, all of which are based on our current expectations and could be affected by certain uncertainties, risks, and other factors described under Cautionary Note Regarding Forward-Looking Statements, Risk Factors, and elsewhere throughout this Quarterly Report, as well as the factors described in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , and subsequent periodic reports filed with theSecurities and Exchange Commission , particularly under "Risk Factors." Our actual results could differ materially from those discussed in the forward-looking statements.
OVERVIEW
We are a subscription-led and digitally-focused media and marketing solutions company committed to empowering communities to thrive. We operate a scalable, data-driven media platform that aligns with consumer and digital marketing trends. We aim to be the premier source for clarity, connections, and solutions within our communities. Our mission is to provide unbiased, unique local and national content and unrivaled marketing solutions to the communities we serve. We seek to drive audience growth and engagement by delivering valuable content experiences to our consumers, while offering the unique products and marketing expertise our advertisers desire. Our strategy prioritizes the growth of highly recurring digital businesses, while maximizing the lifetime value of our legacy print business, and we expect the execution of this strategy to enable us to continue our evolution to a digitally-focused content platform. Our current portfolio of media assets includes theUSA TODAY NETWORK, which includesUSA TODAY and local media organizations in 43 states inthe United States (the "U.S."), andNewsquest , a wholly-owned subsidiary operating in theUnited Kingdom (the "U.K."). We also own digital marketing services companies under the brandLocaliQ , which provide a cloud-based platform of products to enable small and medium-sized businesses ("SMBs") to accomplish their marketing goals. In addition, our portfolio includes what we believe is the largest media-owned events business in theU.S., USA TODAY NETWORK Ventures . ThroughUSA TODAY , our network of local properties, andNewsquest , we deliver high-quality, trusted content with a commitment to balanced, unbiased journalism, where and when consumers want to engage with it on virtually any device or platform. Additionally, we have 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. We report in two segments, Gannett Media and Digital Marketing Solutions ("DMS"). We also have a Corporate and other category that includes activities not directly attributable to a specific reportable segment and includes broad corporate functions, such as legal, human resources, accounting, analytics, finance and marketing, as well as other general business costs. A full description of our reportable segments is included in Note 12 - Segment reporting in the notes to the condensed consolidated financial statements.
Business Trends
We have considered several industry trends when assessing our business strategy:
•Print advertising and circulation revenues continue to decline as our audience
increasingly moves to digital platforms. We seek to optimize our print
operations to efficiently manage for the declining print audience. We are
focused on converting a growing digitally-focused audience into paid
digital-only subscribers to our publications.
•SMBs are facing a more complex marketing environment and need to create digital
presence to capture audience online. Advertisers are increasingly looking for
more effective ways to analyze their return on marketing investments and they
are seeking solutions that offer greater attribution. We offer a broad suite of
digital marketing services products that offer a single, unified solution to
meet their digital marketing needs.
•Inflationary prices across a number of categories such as labor, fuel, delivery
costs, newsprint, ink, and printing plates have had and are expected to continue
to have a negative impact on our overall cost structure. In the short term, we
believe the impact of inflationary pressure peaked in 2022.
22
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Table of Contents Recent Developments Debt Repurchase InFebruary 2023 , we entered into a privately negotiated agreement with a holder of our$400 million aggregate principal amount of 6.00% first lien notes dueNovember 1, 2026 (the "2026 Senior Notes") to repurchase$6.1 million in aggregate principal amount of outstanding 2026 Senior Notes at a discount to par value. As a result of this transaction, we recognized a net gain on the early extinguishment of debt of approximately$0.9 million during the three months endedMarch 31, 2023 , which included the write-off of unamortized original issue discount and deferred financing costs.
Certain Matters Affecting Comparability
The following items affect period-over-period comparisons and will continue to
affect period-over-period comparisons for future results:
(Gain) loss on sale or disposal of assets
For the three months endedMarch 31, 2023 , we recognized a gain on the sale of assets of$17.7 million , primarily related to the gain on the sale of a domestic production facility at Gannett Media of$16.3 million as part of our plan to monetize non-core assets as well as the gain on the sale of intellectual property of$1.4 million at our Corporate and other category. For the three months endedMarch 31, 2022 , we recognized a gain on the sale of assets of$2.8 million , primarily related to sales of real estate, partially offset by losses on the sales of non-core products which were divested at Gannett Media.
Integration and reorganization costs
For the three months endedMarch 31, 2023 , we incurred Integration and reorganization costs of$12.1 million , of which$10.3 million were related to severance activities and$1.9 million were related to other costs, including costs for consolidating operations, primarily related to systems implementation and the outsourcing of corporate functions, partially offset by the reversal of a withdrawal liability related to a multiemployer pension plan. For the three months endedMarch 31, 2022 , we incurred Integration and reorganization costs of$11.4 million , of which$5.4 million were related to severance activities and$6.0 million were related to other costs, including costs for consolidating operations, primarily related to systems implementation and the outsourcing of corporate functions. Foreign currency OurU.K. media operations are conducted through ourNewsquest subsidiary. In addition, we have 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. Currency translation fluctuations may impact revenue, expense, and operating income results for our international operations. Foreign currency headwinds have increased significantly as theU.S. dollar strengthened in relation to many foreign currencies, including theU.K. pound sterling. Foreign currency exchange rate fluctuations negatively impacted our revenues and profitability during the three months endedMarch 31, 2023 , and may continue to negatively impact our financial results in the future.
Strategy
Gannett is committed to a subscription-led business strategy that drives audience growth and engagement by delivering valuable content experiences to our consumers, while offering the unique products and marketing expertise our advertisers desire. The execution of this strategy is expected to allow us to continue our evolution from a more traditional print media business to a digitally focused content creator and marketing solutions platform. We intend to create stockholder value through a variety of methods, including organic growth driven by our consumer and business-to-business strategies, as well as through paying down debt. The five key operating pillars of our strategy include:
Driving digital subscriptions growth
As consumers have become increasingly interested in digital consumption of news,
a key element to our consumer strategy is growing our paid digital-only
subscriber base. We are able to deliver our unique local and national content to
our customers
23
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across multiple print and digital platforms, and expect the addressable market
for our digital platforms to continue to grow. In service of that, we expect to
develop and launch additional digital subscription offerings tailored to
specific topics and audiences in the future. We are focused on growing our
digital-only subscriber base in order to maximize overall return and, as a
result, the volume of new digital-only subscriptions is expected to fluctuate
versus historical trends.
Driving Digital Marketing Solutions growth by engaging more customers in
recurring monthly revenue offerings
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 customer base and volume of digital campaigns, we plan to use data and insights to inform new and dynamic advertising products, such as our "freemium" offering to complement our sales structures, which we believe will deliver superior results.
Optimizing our traditional businesses across print and advertising
We plan to continue to drive the profitability and lifetime value of our traditional operations by focusing on product and property-level performance across our portfolio. We expect the continued evolution of the core print product, but remain committed to providing strong customer service and delivering high quality products for our print subscribers. Advertising, both print and digital, 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.
Prioritize investments in growth businesses
By leveraging our unique footprint, trusted brands, and media reach, we identify, experiment with, and invest in potential growth businesses. Some examples of our growth businesses include our community events and promotions subsidiary,USA TODAY NETWORK Ventures , our consumer product review site, Reviewed, and our sports betting presence, which we have expanded through strategic partnerships. We expect to engage in future partnerships and expanded product offerings that can further monetize our significant audience and unique footprint.
Building on our environmental, social and governance focus to foster culture and
community both internally and externally
We will continue our environmental, social and governance ("ESG") journey that
is rooted in our strategic mission to empower our communities to thrive and
putting our customers at the center of everything we do. We support that mission
with clearly defined values that aim to influence not only what we do, but how
we do it, with one of the core pillars focusing on our ongoing commitments to
inclusion, diversity and equity ("ID&E"). From our internal efforts around
recruiting, development and retention, to our external efforts to provide high
quality products and excellent customer service, we believe our strategic focus
will benefit from our continued commitment to building upon our culture and
community values.
Macroeconomic Environment
TheU.S. and global economies and markets experienced increased volatility in 2022, and are expected to continue to experience volatility, due to factors including higher inflation, increased interest rates, banking volatility, and other geopolitical events that are anticipated to continue during the remainder of 2023. Uncertain economic conditions adversely impacted our advertising revenues, and the occurrence of these factors has resulted in a reduction in demand for our print and digital advertising, reduced the rates for our advertising, and caused marketers to shift, reduce or stop spend. The impact of the uncertain macroeconomic conditions has not changed substantially since the initial volatility that began in the second quarter of 2022. These challenging conditions, especially higher inflation and interest rates, have negatively impacted the consumer and resulted in increased price sensitivity from our print and paid digital-only subscribers. Consumer purchases of discretionary items, including our products and services, generally decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Increased consumer price sensitivity, along with delivery challenges associated with labor shortages, and ongoing consumer sentiment negatively impacted print circulation volumes as compared to the same periods in the prior year.
As a result of the macroeconomic volatility, we experienced rising costs,
including costs associated with labor, newsprint, delivery, ink, printing
plates, fuel, and utilities. We are also exposed to potential increases in
interest rates associated with our five-year senior secured term loan facility
in an original aggregate principal amount of
24 -------------------------------------------------------------------------------- Table of Contents Term Loan," formerly referred to as the New Senior Secured Term Loan), which as ofMarch 31, 2023 andDecember 31, 2022 , accounted for approximately 33% and 34% of our outstanding debt, respectively, as well as fluctuations in foreign currency exchange rates, primarily related to our operations in the U.K. We expect continued uncertainty and volatility in theU.S. and global economies which will continue to impact our business.
Recent
OnAugust 16, 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act"), which includes, among other provisions, changes to theU.S. corporate income tax system, including a 15% minimum tax based on "average adjusted financial statement income" exceeding$1 billion for any three consecutive years preceding the tax year and a 1% excise tax on net repurchases of stock in excess of$1 million afterDecember 31, 2022 . We do not anticipate a material financial impact from the Inflation Reduction Act during 2023. Seasonality Our revenues are subject to moderate seasonality, due primarily to fluctuations in advertising volumes. Advertising and marketing services revenues for our Gannett Media segment are typically highest in the fourth quarter, primarily due to fluctuations in advertising volumes tied to the holidays, regional weather and levels of activity in our various markets, some of which have a high degree of seasonal residents and tourists. 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. Uncertain economic conditions continued to adversely impact our advertising revenues in the first quarter of 2023, and the occurrence of these factors has resulted in a reduction in demand for our print and digital advertising, reduced the rates for our advertising, and caused marketers to shift, reduce or stop spend. Refer to "Macroeconomic Environment" above for further discussion.
Environmental, Social and Governance Initiatives
As a leading media organization, our longstanding corporate social responsibility position is driven by our deep commitment to our communities. We are dedicated to ensuring that we have mindful and ethical business practices that positively impact our world. In early 2023, we published our 2023 ESG Report detailing the progress we made on our U.N.Sustainable Development Goals ("U.N. SDGs") that include Reduced Inequalities, Climate Action, and Peace, Justice & Strong Institutions. The 2023 ESG Report included noteworthy highlights such as our efforts to improve our workplace diversity, expand our systems infrastructure to provide Scope 1 and 2 emissions for our entire global carbon footprint and reduce our number of manufacturing facilities. Also, we recently published the inaugural edition of our network-wide 2022 Impact Report, which highlighted what we believe are the most influential articles we produced in 2022 and includes topics such as coverage on inclusion, diversity, and equity, as well as climate change. 25 --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS Consolidated Summary
A summary of our consolidated results is presented below:
Three months ended
Change
In thousands, except per share amounts 2023 2022 $ %
Operating revenues:
Local and national print $ 82,149 $ 102,744 (20,595) (20) %
Classified print 65,805 70,774 (4,969) (7) %
Print advertising 147,954 173,518 (25,564) (15) %
Digital media 66,133 78,771 (12,638) (16) %
Digital marketing services (a) 112,683 108,991 3,692 3 %
Digital classified 14,077 13,834 243 2 %
Digital advertising and marketing services 192,893 201,596 (8,703) (4) %
Advertising and marketing services 340,847 375,114 (34,267) (9) %
Print circulation 205,454 258,476 (53,022) (21) %
Digital-only circulation 35,831 30,126 5,705 19 %
Circulation 241,285 288,602 (47,317) (16) %
Other 86,785 84,361 2,424 3 %
Total operating revenues 668,917 748,077 (79,160) (11) %
Total operating expenses (a) 648,956 750,055 (101,099) (13) %
Operating income (loss) 19,961 (1,978) 21,939 ***
Non-operating expenses 27,030 8,731 18,299 ***
Loss before income taxes (7,069) (10,709) 3,640 (34) %
Benefit for income taxes (17,329) (7,607) (9,722) ***
Net income (loss) 10,260 (3,102) 13,362 ***
Net loss attributable to noncontrolling
interests (84) (135) 51 (38) %
Net income (loss) attributable to Gannett $ 10,344 $ (2,967) $ 13,311 ***
Income (loss) per share attributable to
Gannett - basic $ 0.07 $ (0.02) $ 0.09 ***
Income (loss) per share attributable to
Gannett - diluted $ 0.07 $ (0.02) $ 0.09 ***
(a) Amounts are net of intersegment eliminations of $34.4 million and $33.4
million for the three months ended March 31, 2023 and 2022, respectively, which
represent digital advertising marketing services revenues and expenses
associated with products sold by our U.S. local Gannett Media sales teams but
fulfilled by our DMS segment. When discussing segment results, these revenues
and expenses are presented gross but are eliminated in consolidation.
*** Indicates an absolute value percentage change greater than 100.
Operating revenues
Advertising and marketing services revenues are generated by both the Gannett Media and DMS segments. At the Gannett Media segment, 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 delivered by our DMS segment. At the DMS segment, Advertising and marketing services revenues are generated through multiple services, including search advertising, display advertising, search optimization, social media, website development, web presence products, customer relationship management, and software-as-a-service solutions.
Circulation revenues, which are generated at the Gannett Media segment, are
derived from home delivery, digital distribution and single copy sales of our
publications.
26 -------------------------------------------------------------------------------- Table of Contents Other revenues, which are primarily generated at the Gannett Media segment, are derived mainly from commercial printing, distribution arrangements, revenues from our events business, digital content syndication and affiliate revenues and third-party newsprint sales, and to a lesser extent generated at our Corporate and other category, mainly driven by sales of cloud-based products with expert guidance and support. Operating expenses Operating expenses consist primarily of the following: •Operating costs at the Gannett Media 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, benefits costs and bad debt expense; •Depreciation and amortization; •Integration and reorganization costs include severance charges and other costs, including those for the purpose of consolidating our operations (i.e., facility consolidation expenses and integration-related costs); •Impairment charges, including costs incurred related to goodwill, intangible assets and property, plant and equipment; •Gains or losses on the sale or disposal of assets; and •Other operating expenses, including third-party debt expenses as well as acquisition-related costs.
Refer to Segment results below for a discussion of the results of operations by
segment.
Non-operating (income) expense
Interest expense: For the three months endedMarch 31, 2023 , Interest expense was$28.3 million compared to$26.0 million for the three months endedMarch 31, 2022 . The increase in interest expense for the three months endedMarch 31, 2023 compared to the same period in 2022 was mainly due to the impact of the increase in interest rates on our Senior Secured Term Loan, partially offset by a lower debt balance, mainly driven by quarterly amortization payments and required prepayments on the Senior Secured Term Loan and repurchases of our 2026 Senior Notes. (Gain) loss on early extinguishment of debt: For the three months endedMarch 31, 2023 , the gain on early extinguishment of debt was$0.5 million compared to a loss of$2.7 million for the three months endedMarch 31, 2022 . For the three months endedMarch 31, 2023 , the change in the (Gain) loss on the early extinguishment of debt compared to the same period in 2022 was mainly due to refinancing activities related to our 2026 Senior Notes and the Senior Secured Term Loan. Non-operating pension income: For the three months endedMarch 31, 2023 , Non-operating pension income was$1.8 million compared to$18.2 million for the three months endedMarch 31, 2022 . The decrease in non-operating pension income for the three months endedMarch 31, 2023 compared to the same period in 2022 was primarily due to a decrease in the expected return on plan assets mainly driven by a decrease in assets following the annuity contract entered into during the three months endedSeptember 30, 2022 related to the Gannett Retirement Plan (the "GR Plan").
Other non-operating expense (income), net: Other non-operating expense (income),
net consisted of certain items that fall outside of our normal business
operations. For the three months ended
non-operating expense, net of
income, net of
Benefit for income taxes
The following table outlines our pre-tax net loss before income taxes and income
tax accounts:
Three months ended March 31,
In thousands 2023 2022
Loss before income taxes $
(7,069)
Benefit for income taxes (17,329) (7,607)
Effective tax rate 245.1 % 71.0 %
The provision for income taxes is calculated by applying the projected annual
effective tax rate for the year to the current period income or loss before tax
plus the tax effect of any significant or unusual items (discrete events), and
changes in tax
27
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laws. The benefit for income taxes for the three months ended March 31, 2023 ,
was mainly driven by the tax benefit of the pre-tax book loss, the change in
valuation allowances on non-deductible U.S. interest expense carryforwards, the
global intangible low-taxed income inclusion and stock compensation. The benefit
was calculated using an estimated annual effective tax rate of 273.3%. The
estimated annual effective tax rate is principally impacted by valuation
allowances on non-deductible interest expense carryforwards, the global
intangible low-taxed income inclusion and foreign tax expense, partially offset
by the benefit of U.S. pre-tax book loss. The estimated annual effective tax
rate is based on the projected tax expense for the full year. We do not
anticipate a material financial impact from the Inflation Reduction Act during
2023. See "Recent U.S. Tax Legislation" above.
The benefit for income taxes for the three months ended March 31, 2022 , was
mainly driven by pre-tax loss and the then current year tax benefit from the
release of tax reserves, partially offset by the creation of valuation
allowances on non-deductible interest expense carryforwards. The provision was
calculated using the estimated annual effective tax rate of 41.3%.
Net income (loss) attributable to Gannett and diluted income (loss) per share
attributable to Gannett
For the three months endedMarch 31, 2023 , Net income attributable to Gannett and diluted income per share attributable to Gannett were$10.3 million and$0.07 , respectively, compared to Net loss attributable to Gannett and diluted loss per share attributable to Gannett of$3.0 million and$0.02 , respectively, for the three months endedMarch 31, 2022 . The change for the three months endedMarch 31, 2023 compared to the same periods in the prior year reflects the various items discussed above.
Segment Results
Gannett Media segment
A summary of our Gannett Media segment results is presented below:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Operating revenues:
Advertising and marketing services $ 262,423 $ 298,762 $ (36,339) (12) %
Circulation 241,285 288,602 (47,317) (16) %
Other 85,387 83,055 2,332 3 %
Total operating revenues 589,095 670,419 (81,324) (12) %
Operating expenses:
Operating costs 379,565 426,116 (46,551) (11) %
Selling, general and administrative expenses 152,648 176,932 (24,284) (14) %
Depreciation and amortization 33,509 37,431 (3,922) (10) %
Integration and reorganization costs 4,649 5,721 (1,072) (19) %
Asset impairments 5 854 (849) (99) %
Gain on sale or disposal of assets, net (16,268) (2,968) (13,300) ***
Other operating expenses - 741 (741) (100) %
Total operating expenses 554,108 644,827 (90,719) (14) %
Operating income $ 34,987 $ 25,592 $ 9,395 37 %
*** Indicates an absolute value percentage change greater than 100.
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Operating revenues
The following table provides the breakout of Operating revenues by category:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Local and national print $ 82,149 $ 102,744 $ (20,595) (20) %
Classified print 65,805 70,774 (4,969) (7) %
Print advertising 147,954 173,518 (25,564) (15) %
Digital media 66,133 78,771 (12,638) (16) %
Digital marketing services 34,259 32,639 1,620 5 %
Digital classified 14,077 13,834 243 2 %
Digital advertising and marketing services 114,469 125,244 (10,775) (9) %
Advertising and marketing services 262,423 298,762 (36,339) (12) %
Print circulation 205,454 258,476 (53,022) (21) %
Digital-only circulation 35,831 30,126 5,705 19 %
Circulation 241,285 288,602 (47,317) (16) %
Other 85,387 83,055 2,332 3 %
Total operating revenues $ 589,095 $ 670,419 $ (81,324) (12) %
For the three months ended March 31, 2023 , Local and national print advertising
revenues decreased compared to the three months ended March 31, 2022 , primarily
due to a decrease in advertiser inserts, mainly due to volume declines, and a
decrease in local and national print advertisements, mainly due to the ongoing
decline associated with secular trends and both a shift and a reduction in spend
from customers driven by macroeconomic factors, as well as the absence of
$10.3 million of Print Advertising revenues associated with both businesses
divested and non-core products which were sunset in 2023 and 2022. For the three
months ended March 31, 2023 , Classified print advertising revenues decreased
compared to the three months ended March 31, 2022 , due to lower spend on
classified advertisements, mainly driven by lower spend on obituary
notifications.
For the three months ended March 31, 2023 , Digital media revenues decreased
compared to the three months ended March 31, 2022 , driven by decreases in both
national and local revenue volumes and a reduction in digital advertising demand
as a result of a more challenging macroeconomic environment. For the three
months ended March 31, 2023 , Digital marketing services revenues increased
compared to the three months ended March 31, 2022 due to an increase in average
revenue per user ("ARPU"), which we define as monthly revenues divided by
average client count within the period, partially offset by a decrease in client
counts. For the three months ended March 31, 2023 , Digital classified revenues
increased compared to the three months ended March 31, 2022 due to higher spend
on classified advertisements, mainly driven by automotive advertisements,
partially offset by lower spend on employment and obituary notifications.
For the three months ended March 31, 2023 , Print circulation revenues decreased
compared to the three months ended March 31, 2022 , due to a decline in home
delivery sales, mainly driven by a reduction in the volume of subscribers,
partially offset by an increase in rates, as well as a decline in single copy
sales reflecting a reduction in volume related to increasing sensitivity from
customers due to price increases and product changes. For the three months ended
March 31, 2023 , Digital-only circulation revenues increased compared to the
three months ended March 31, 2022 , driven by an increase of 15.4% in paid
digital-only subscriptions, including those subscribers on introductory
subscription offers, to approximately 2.02 million as of March 31, 2023 . For the
three months ended March 31, 2023 , the increase in Digital-only circulation
revenues was offset by a slight decrease in ARPU compared to the same period in
the prior year, mainly driven by product mix.
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For the three months ended March 31, 2023 , Other revenues increased compared to
the three months ended March 31, 2022 , primarily due to commercial print and
delivery growth in local markets, and to a lesser extent, an increase in event
revenues (though not to pre-pandemic levels), primarily driven by an increase in
sponsorship revenues, registration fees and merchandising revenues, partially
offset by fewer events due to a shift in the timing of events driving lower
attendance as compared to the same period in the prior year, partially offset by
a decrease in digital content syndication volume and other digital revenues.
Operating expenses
For the three months ended
million
provides the breakout of Operating costs:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Newsprint and ink $ 33,493 $ 34,632 $ (1,139) (3) %
Distribution 87,372 102,398 (15,026) (15) %
Compensation and benefits 112,892 140,129 (27,237) (19) %
Outside services 82,894 82,784 110 - %
Other 62,914 66,173 (3,259) (5) %
Total operating costs $ 379,565 $ 426,116 $ (46,551) (11) %
For the three months ended March 31, 2023 , Newsprint and ink costs decreased
compared to the three months ended March 31, 2022 , primarily due to a decline in
the volume of home delivery and single copy sales, as well as reduction of print
offerings, partially offset by higher newsprint prices driven by inflationary
pressures experienced during 2022, as well as growth in our commercial print
business.
For the three months ended March 31, 2023 , Distribution costs decreased compared
to the three months ended March 31, 2022 , primarily due to the reduced volume of
home delivery and single copy sales, cost savings driven by the reduction of
print offerings, a decrease in third-party distribution costs, as well as the
absence of expenses associated with both businesses divested and non-core
products which were sunset in 2023 and 2022, partially offset by higher postage
costs.
For the three months ended March 31, 2023 , Compensation and benefits costs
decreased compared to the three months ended March 31, 2022 , primarily due to
lower domestic payroll expense driven by a decrease in headcount tied to ongoing
cost control initiatives.
For the three months ended March 31, 2023 , Other costs decreased compared to the
three months ended March 31, 2022 , due primarily to the absence of expenses
associated with both businesses divested and non-core products which were sunset
in 2023 and 2022, and a decrease in facility related expenses, including lower
lease, supplies and utilities costs, as well as a decline in property taxes,
mainly due to real estate sales, partially offset by an increase in technology
costs.
For the three months ended March 31, 2023 , Selling, general and administrative
expenses decreased $24.3 million compared to the three months ended March 31,
2022 . The following table provides the breakout of Selling, general and
administrative expenses:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Compensation and benefits $ 73,685 $ 86,866 $ (13,181) (15) %
Outside services and other 78,963 90,066 (11,103) (12) %
Total selling, general and administrative
expenses $ 152,648 $ 176,932 $ (24,284) (14) %
For the three months ended March 31, 2023 , Compensation and benefits costs
decreased compared to the three months ended March 31, 2022 , primarily due to
lower payroll expense driven by a decrease in headcount tied to ongoing cost
control initiatives.
For the three months ended
which include services fulfilled by third
30 -------------------------------------------------------------------------------- Table of Contents parties, decreased compared to the three months endedMarch 31, 2022 , due to a decrease in various expenses, including costs related to technology, promotions and professional services. For the three months endedMarch 31, 2023 , Depreciation and amortization expense decreased compared to the three months endedMarch 31, 2022 , reflecting the impact of fewer print facilities in the first quarter of 2023 compared to the first quarter of 2022. For the three months endedMarch 31, 2023 , Integration and reorganization costs decreased compared to the three months endedMarch 31, 2022 , mainly due to a decrease in other costs of$2.0 million , primarily due to the reversal of a withdrawal liability related to a multiemployer pension plan, partially offset by an increase in severance costs of$0.9 million . For the three months endedMarch 31, 2023 , we recognized a net gain on the sale of assets of$16.3 million , primarily related to the sale of a domestic production facility as part of our plan to monetize non-core assets. For the three months endedMarch 31, 2022 , we recognized a net gain on the sale of assets of$3.0 million , primarily related to sales of real estate, partially offset by losses on the sales of non-core products which were divested.
Gannett Media segment Adjusted EBITDA
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Net income attributable to Gannett $ 35,027 $ 42,814 $ (7,787) (18) %
Non-operating pension income (1,815) (18,213) 16,398 (90) %
Depreciation and amortization 33,509 37,431 (3,922) (10) %
Integration and reorganization costs 4,649 5,721 (1,072) (19) %
Other operating expenses - 741 (741) (100) %
Asset impairments 5 854 (849) (99) %
Gain on sale or disposal of assets, net (16,268) (2,968) (13,300) ***
Other items 2,156 2,268 (112) (5) %
Adjusted EBITDA (non-GAAP basis)(a) $ 57,263 $ 68,648 $ (11,385) (17) %
Net income attributable to Gannett margin 5.9 % 6.4 %
Adjusted EBITDA margin (non-GAAP basis)(a)(b) 9.7 % 10.2 %
*** Indicates an absolute value percentage change greater than 100.
(a)See “Non-GAAP Financial Measures” below for additional information about
non-GAAP measures.
(b)We define Adjusted EBITDA margin as Adjusted EBITDA divided by total
Operating revenues.
For the three months ended
compared to the three months ended
the changes discussed above.
31 -------------------------------------------------------------------------------- Table of Contents Digital Marketing Solutions segment
A summary of our DMS segment results is presented below:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Operating revenues:
Advertising and marketing services $ 112,817 $ 109,709 $ 3,108 3 %
Total operating revenues 112,817 109,709 3,108 3 %
Operating expenses:
Operating costs 78,990 76,331 2,659 3 %
Selling, general and administrative expenses 22,144 22,198 (54) - %
Depreciation and amortization 5,860 6,458 (598) (9) %
Integration and reorganization costs 20 151 (131) (87) %
Loss on sale or disposal of assets, net 35 157 (122) (78) %
Total operating expenses 107,049 105,295 1,754 2 %
Operating income $ 5,768 $ 4,414 $ 1,354 31 %
Operating revenues
For the three months ended March 31, 2023 , Advertising and marketing services
revenues increased compared to the three months ended March 31, 2022 , primarily
due to growth in the core direct business, as well as a growth in revenues
associated with local markets, partially offset by the impact of the sunset of
non-core products.
Operating expenses
For the three months ended
million
provides the breakout of Operating costs:
Three months ended March 31,
Change
In thousands 2023 2022 $ %
Outside services $ 69,096 $ 66,227 $ 2,869 4 %
Compensation and benefits 8,440 7,875 565 7 %
Other 1,454 2,229 (775) (35) %
Total operating costs $ 78,990 $ 76,331 $ 2,659 3 %
For the three months ended March 31, 2023 , Outside services costs, which
includes professional services fulfilled by third parties, media fees and other
digital costs, and paid search and ad serving services, increased compared to
the three months ended March 31, 2022 , due to an increase in expenses associated
with third-party media fees, driven by a corresponding increase in revenues.
For the three months ended
increased compared to the three months ended
increase in payroll expense driven by higher headcount.
For the three months ended
three months ended
expenses, mainly as a result of exiting space associated with the sunset of
non-core products.
For the three months endedMarch 31, 2023 , Selling, general and administrative expenses remained essentially flat compared to the three months endedMarch 31, 2022 . The following table provides the breakout of Selling, general and administrative expenses: 32
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Three months ended March 31,
Change
In thousands 2023 2022 $ %
Compensation and benefits $ 19,066 $ 18,598 $ 468 3 %
Outside services and other 3,078 3,600 (522) (15) %
Total selling, general and administrative
expenses $ 22,144 $ 22,198 $ (54) - %
For the three months ended March 31, 2023 , Compensation and benefits costs
increased compared to the three months ended March 31, 2022 , primarily due to an
increase in payroll expense driven by higher headcount as well as an increase in
incentive pay, driven by a corresponding increase in revenues.
For the three months ended
decreased compared to the three months ended
in various miscellaneous expenses, including lower technology and software
costs, partially offset by higher promotion and marketing expenses, mainly
driven by lead generation.
For the three months endedMarch 31, 2023 , Depreciation and amortization expense decreased compared to the three months endedMarch 31, 2022 , primarily due to a decrease in amortization expense, mainly due to the impact of intangibles becoming fully amortized in the fourth quarter of 2022, partially offset by an increase in depreciation expense related to capitalized software. DMS segment Adjusted EBITDA Three months ended March 31, Change In thousands 2023 2022 $ % Net income attributable to Gannett$ 5,623 $ 5,257 $ 366 7 % Depreciation and amortization 5,860 6,458 (598) (9) % Integration and reorganization costs 20 151 (131) (87) % Loss on sale or disposal of assets, net 35 157 (122) (78) % Other items 145 (843) 988 *** Adjusted EBITDA (non-GAAP basis)(a)$ 11,683 $ 11,180 $ 503 4 % Net income attributable to Gannett margin 5.0 % 4.8 % Adjusted EBITDA margin (non-GAAP basis)(a)(b) 10.4 % 10.2 %
*** Indicates an absolute value percentage change greater than 100.
(a)See “Non-GAAP Financial Measures” below for additional information about
non-GAAP measures.
(b)We define Adjusted EBITDA margin as Adjusted EBITDA divided by total
Operating revenues.
For the three months ended
compared to the three months ended
the changes discussed above.
Corporate and other category
For the three months ended
revenues were
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For the three months endedMarch 31, 2023 , Corporate and other operating expenses decreased$11.1 million compared to the three months endedMarch 31, 2022 . The following table provides the breakout of Corporate and other operating expenses: Three months ended March 31, Change In thousands 2023 2022 $ % Operating expenses: Operating costs$ 6,026 $ 795 $ 5,231 *** Selling, general and administrative expenses 5,598 22,707 (17,109) (75) % Depreciation and amortization 4,329 3,894 435 11 % Integration and reorganization costs 7,458 5,526 1,932 35 % (Gain) loss on sale or disposal of assets, net (1,448) 7 (1,455) *** Other operating expenses 229 361 (132) (37) % Total operating expenses$ 22,192 $ 33,290 $ (11,098) (33) %
*** Indicates an absolute value percentage change greater than 100.
For the three months endedMarch 31, 2023 , Corporate and other operating expenses decreased compared to the three months endedMarch 31, 2022 , primarily due to a decrease in Selling, general and administrative expenses, primarily driven by a decrease in compensation costs, as well as a$1.4 million gain on the sale of intellectual property, partially offset by an increase in Operating costs, mainly due to an increase in Other service costs, and an increase in Integration and reorganization costs, mainly driven by an increase in severance costs, partially offset by a decrease in other costs related to the outsourcing of corporate functions.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements are for working capital, debt obligations, and
capital expenditures.
We expect to fund our operations and debt service requirements through cash
provided by our operating activities. We expect we will have adequate capital
resources and liquidity to meet our ongoing working capital needs, borrowing
obligations, and all required capital expenditures for at least the next twelve
months. However, a further economic downturn or an increased rate of revenue
declines would negatively impact our revenue, cash provided by operating
activities and liquidity. We continue to implement cost reduction initiatives to
reduce our ongoing level of operating expense. We believe our ability to realize
benefits from our cost reduction initiatives will be necessary to offset the
continued secular decline in our legacy print business revenue streams. We
believe that these measures are important in response to the overall challenging
macroeconomic environment that we are facing. Refer to "Overview - Macroeconomic
Environment" above for further discussion.
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Details of our cash flows are included in the table below:
Three months ended March 31,
In thousands 2023 2022
Cash provided by operating activities $ 6,718 $ 32,429
Cash provided by (used for) investing activities 20,704 (6,220)
Cash used for financing activities (38,640) (3,818)
Effect of currency exchange rate change on cash 38 (992)
Increase (decrease) in cash, cash equivalents and restricted
cash $ (11,180) $ 21,399
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.
Our cash flow provided by operating activities was $6.7 million for the three
months ended March 31, 2023 , compared to $32.4 million for the three months
ended March 31, 2022 . The decrease in cash flow provided by operating activities
was primarily due to lower cash receipts related to deferred revenues of $40.9
million and an increase in severance payments of $12.7 million , partially offset
by a decrease in contributions to our pension and other postretirement benefit
plans of $7.3 million .
Cash flows provided by (used for) investing activities: Cash flows provided by
investing activities was $20.7 million for the three months ended March 31,
2023 , compared to cash used of $6.2 million for the three months ended March 31,
2022 . The increase in cash flows provided by investing activities was primarily
due to a decrease in cash paid for acquisitions, net of cash acquired, of $15.4
million , an increase in proceeds from the sale of real estate and other assets
of $9.0 million and a decrease in purchases of property, plant and equipment of
$2.0 million .
Cash flows used for financing activities: Cash flows used for financing
activities was $38.6 million for the three months ended March 31, 2023 , compared
to $3.8 million for the three months ended March 31, 2022 . The increase in cash
flows used for financing activities was primarily due to lower borrowings, net
of long-term debt of $38.2 million , offset by a decrease in acquisition of
noncontrolling interests of $2.1 million , a decrease in payments related to
treasury stock of $1.0 million and a $0.4 million decrease in payments related
to deferred financing costs.
Debt
As of March 31, 2023 , the carrying value of our outstanding debt totaled $1.13
billion , which consisted of $397.6 million related to the Senior Secured Term
Loan, $323.8 million related to the 2026 Senior Notes, $405.6 million related to
the 2027 Notes (defined below), and $3.3 million related to the remaining 4.75%
convertible senior notes due April 15, 2024 (the "2024 Notes").
The Senior Secured Term Loan bears interest at a per annum rate equal to
Adjusted Term SOFR (which shall not be less than 0.50% per annum) plus a margin
equal to 5.00% or an alternate base rate (which shall not be less than 1.50% per
annum) plus a margin equal to 4.00%. We are required to repay the Senior Secured
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
not permitted under the Senior Secured Term Loan, and (iii) the aggregate amount
of cash and cash equivalents on hand at the Company and its restricted
subsidiaries in excess of $100 million at the end of each fiscal year.
Subsequent to the amendment effective as of April 8, 2022 , the Senior Secured
Term Loan is amortized at $15.1 million per quarter (or, if the ratio of debt
secured on an equal basis with the Senior Secured Term Loan less unrestricted
cash of the Company and its restricted subsidiaries to Consolidated EBITDA (as
such terms are defined in the Senior Secured Term Loan ) (such ratio, the "First
Lien Net Leverage Ratio"), for the most recently ended period of four
consecutive fiscal quarters is equal to or less than 1.20 to 1.00, $7.6 million
per quarter). For the three months ended March 31, 2023 , we made $31.3 million
of prepayments, including quarterly amortization payments, on the Senior Secured
Term Loan.
Interest on the 2026 Senior Notes is payable semi-annually in arrears. The 2026
Senior Notes mature on
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unless redeemed or repurchased earlier pursuant to the 2026 Senior Notes
Indenture.
Interest on the 6.0% Senior Secured Convertible Notes due 2027 (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 our common stock, par value$0.01 per share (the "Common Stock") or any combination of cash and Common Stock, at our 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"). For the three months endedMarch 31, 2023 , no shares were issued upon conversion, exercise, or satisfaction of the required conditions. Our Senior Secured Term Loan, 2024 Notes, 2026 Senior Notes and 2027 Notes all contain usual and customary covenants and events of default. As ofMarch 31, 2023 , we were in compliance with all such covenants and obligations.
Refer to Note 6 – Debt for additional discussion regarding our debt.
Additional information
We continue to evaluate our results of operations, liquidity and cash flows, and as part of these measures, we have taken steps to manage cash outflow by rationalizing expenses and implementing various cost management initiatives. We do not presently pay a quarterly dividend and there can be no assurance that we will pay dividends in the future. In addition, the terms of our indebtedness, including the Senior Secured Term Loan, the 2026 Senior Notes Indenture and the 2027 Notes Indenture have terms that restrict our ability to pay dividends. OnFebruary 1, 2022 , our Board of Directors authorized the repurchase of up to$100 million (the "Stock Repurchase Program") of our Common Stock. Repurchases may be made from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or by means of one or more tender offers, in each case, as permitted by securities laws and other legal requirements. The amount and timing of the purchases, if any, will depend on a number of factors including, but not limited to, the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The Stock Repurchase Program may be suspended or discontinued at any time. Further, future repurchases under our Stock Repurchase Program may be subject to various conditions under the terms of our various debt instruments and agreements, unless an exception is available or we obtain a waiver or similar relief. During the three months endedMarch 31, 2023 , we did not repurchase any shares of Common Stock under the Stock Repurchase Program. As ofMarch 31, 2023 , the remaining authorized amount under the Stock Repurchase Program was approximately$96.9 million . We do not currently anticipate repurchasing any shares of Common Stock pursuant to the Stock Repurchase Program during the remainder of 2023. Beginning with the quarter endedDecember 31, 2022 , and ending with the quarter endingSeptember 30, 2024 , the GR Plan's appointed actuary will certify the GR Plan's funded status for each quarter (the "Quarterly Certification") in accordance withU.S. GAAP. If the GR Plan is less than 100% funded, the Company will make a$1.0 million contribution to the GR Plan no later than 60 days following the receipt of the Quarterly Certification, provided, however, that the Company's obligation to make additional contractual contributions will terminate the earlier of (a) the day following the date that a contractual contribution would be due for the quarter endingSeptember 30, 2024 , and (b) the date the Company has made a total of$5 million of contractual contributions subsequent toJune 30, 2022 . As ofMarch 31, 2023 , the GR Plan was more than 100% funded. We expect our capital expenditures for the remainder of 2023 to total approximately$31.2 million . These capital expenditures are anticipated to be primarily comprised of projects related to digital product development, costs associated with 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 conditions or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our Senior Secured Term Loan, the 2026 Senior Notes, and the 2027 Notes. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures as well as share repurchases and acquisitions and our flexibility to react to competitive, technological, and other changes in our industry and economic conditions generally. We continue to closely monitor economic 36 -------------------------------------------------------------------------------- Table of Contents factors, including but not limited to the current inflationary market and rising interest rates, and we expect to continue to take the steps necessary to appropriately manage liquidity.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
See our most recent Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 for a discussion of our critical accounting policies and use of estimates. There have been no material changes to our critical accounting policies and use of estimates discussed in such report.
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 excluded or included in the most comparableU.S. generally accepted accounting principles ("U.S. GAAP") measure. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures we believe offer a useful view of the overall operation of our businesses and may be different than similarly-titled measures used by other companies. We define Adjusted EBITDA as Net income (loss) attributable to Gannett before (1) Income tax expense (benefit), (2) Interest expense, (3) Gains or losses on the early extinguishment of debt, (4) Non-operating pension income, (5) Loss on convertible notes derivative, (6) Depreciation and amortization, (7) Integration and reorganization costs, (8) Other operating expenses, including third-party debt expenses and acquisition costs, (9) Asset impairments, (10)Goodwill and intangible impairments, (11) Gains or losses on the sale or disposal of assets, (12) Share-based compensation, and (13) certain other non-recurring charges. We define Adjusted EBITDA margin as Adjusted EBITDA divided by total Operating revenues.
Management’s use of Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA and Adjusted EBITDA margin are not measurements of financial performance underU.S. GAAP and should not be considered in isolation or as an alternative to income (loss) from operations, net income (loss), or any other measure of performance or liquidity derived in accordance withU.S. GAAP. We believe these non-GAAP financial measures, as we have defined them, are 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. These measures provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. We use Adjusted EBITDA and Adjusted EBITDA margin as measures 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 and Adjusted EBITDA margin
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools. They should not be viewed in isolation or as a substitute forU.S. GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and Adjusted EBITDA margin and using these non-GAAP financial measures as compared toU.S. 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. Management believes these items are important in evaluating our performance, results of operations, and financial position. We use non-GAAP financial measures to supplement ourU.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA and Adjusted EBITDA margin are not alternatives to Net income (loss) attributable to Gannett and margin as calculated and presented in accordance withU.S. GAAP. As such, they should not be considered or relied upon as substitutes or alternatives for any suchU.S. GAAP financial measures. We strongly urge you to review the reconciliation of Net income (loss) attributable to Gannett to Adjusted EBITDA and Adjusted EBITDA margin along with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We also strongly urge you not to rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA and Adjusted EBITDA margin are not measures of financial performance underU.S. GAAP and are susceptible to varying calculations, the Adjusted 37 -------------------------------------------------------------------------------- Table of Contents EBITDA and Adjusted EBITDA margin measures as presented in this report may differ from and may not be comparable to similarly titled measures used by other companies. The table below shows the reconciliation of Net income (loss) attributable to Gannett to Adjusted EBITDA and Net income (loss) attributable to Gannett margin to Adjusted EBITDA margin: Three months ended March 31, In thousands 2023 2022 Net income (loss) attributable to Gannett$ 10,344 $ (2,967) Benefit for income taxes (17,329) (7,607) Interest expense 28,330 26,006 (Gain) loss on early extinguishment of debt (496) 2,743 Non-operating pension income (1,815) (18,213) Depreciation and amortization 43,698 47,783 Integration and reorganization costs 12,127 11,398 Other operating expenses 229 1,102 Asset impairments 5 854 Gain on sale or disposal of assets, net (17,681) (2,804) Share-based compensation expense 3,736 3,393 Other items 1,754 2,483 Adjusted EBITDA (non-GAAP basis)$ 62,902 $ 64,171 Net income (loss) attributable to Gannett margin 1.5 % (0.4) % Adjusted EBITDA margin (non-GAAP basis) 9.4 % 8.6 % 38
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