GANNETT CO., INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
PREVIEW
We are a subscription-led and digitally-focused media and marketing solutions company committed to empowering communities to thrive. Gannett operates a scalable, data-driven media platform that aligns with our consumer and digital marketing trends. We aim to be the premier source for clarity, connections, and solutions within our communities. Our strategy is focused on driving audience growth and engagement by delivering deeper content experiences to our consumers, while offering the products and marketing expertise our advertisers desire. The execution of this strategy is expected to enable us to continue our evolution from a more traditional print media business to a digitally-focused content platform. Our current portfolio of media assets includesUSA TODAY , local media organizations in 45 states in theU.S. , andNewsquest , a wholly-owned subsidiary operating in theUnited Kingdom ("U.K.") with more than 120 local media brands. We also operate a digital marketing solutions company brandedLOCALiQ , that provides a cloud-based platform of products to enable small and medium businesses ("SMBs") to accomplish their marketing goals. In addition, we run what we believe is the largest media-owned events business in theU.S., USA TODAY NETWORK Ventures . ThroughUSA TODAY , our local property network, 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, Publishing 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. A full description of our reportable segments is included in Note 15 - Segment reporting of the notes to the Consolidated financial statements. UntilNovember 19, 2019 , our corporate name wasNew Media Investment Group Inc. ("Legacy New Media") andGannett Co., Inc. was a separate publicly traded company. OnNovember 19, 2019 , New Media completed its acquisition ofGannett Co., Inc. (which was renamedGannett Media Corp. and is referred to as "Legacy Gannett"). In connection with the acquisition, New Media changed its name toGannett Co., Inc. and assumed Legacy Gannett's ticker symbol "GCI" (having previously traded under "NEWM"). In addition, effective at11:59 p.m. Eastern Time onDecember 31, 2020 , our former management agreement (the "Former Management Agreement") withFIG LLC (the "Former Manager") was terminated. A discussion of our results of operations and changes in financial condition for 2020 as compared to 2019 is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 Form 10-K"), filed with theSecurities and Exchange Commission (the "SEC") onFebruary 26, 2021 , and is incorporated by reference herein.
Business trends
We considered several industry trends when evaluating our business strategy:
•Print advertising continues to decline as the audience increasingly moves to digital platforms. We seek to optimize our print operations to efficiently manage for this declining print audience. We are focused on converting the growing digital audience into digital-only subscribers to our publications. •SMBs are facing an increasingly complex marketing environment and need to create digital presence to capture audience online. We offer a broad suite of DMS products that offer a single, unified solution to meet their digital marketing needs. •Consumers are looking for experience-based, emotional connections and communities.USA TODAY NETWORK Ventures was designed to celebrate local communities and create opportunities for meaningful in-person and virtual experiences. However, the COVID-19 pandemic continues to negatively impact our ability to secure necessary permitting for in-person events and consumers' desire to attend or participate in live events. •Digital consumer engagement has declined in comparison to such engagement at the height of the COVID-19 pandemic in the second quarter of 2020, as consumers have resumed certain pre-pandemic activities. In addition, the overall news cycle, specifically political coverage, has slowed, driving less consumer engagement to our sites. 37 -------------------------------------------------------------------------------- Table of Contents •Newsprint availability is constrained due to manufacturing facility closures and on-going capacity shifts between newsprint and specialty paper grades. Further, transportation and other issues have challenged and continue to challenge supplier deliveries, including delays that worsened during the fourth quarter of 2021 with increased seasonal demand associated with the holidays. Additionally, inflationary pressures are impacting the overall cost of newsprint and delivery services. Recent Developments
Modification of the new senior secured term loan
OnJanuary 31, 2022 ,Gannett Holdings LLC ("Gannett Holdings "), our wholly-owned subsidiary, entered into an amendment (the "Term Loan Amendment") to its New Senior Secured Term Loan to provide for new incremental senior secured term loans (the "Incremental Term Loans") in an aggregate principal amount of$50 million . The Incremental Term Loans have substantially identical terms as the New Senior Secured Term Loan and are treated as a single tranche with the New Senior Secured Term Loan. The Term Loan Amendment also amended the New Senior Secured Term Loan to transition the interest rate base from LIBOR to the Adjusted Term SOFR and to permit the repurchase of up to$50 million of Common Stock under the Stock Repurchase Program (defined below) consummated on or prior toDecember 31, 2022 , in addition to capacity forGannett Holdings to make restricted payments, including stock repurchases, currently permitted under other provisions of the New Senior Secured Term Loan and our other debt facilities, including the 2026 Senior Secured Notes Indenture and the 2027 Notes Indenture. Stock Repurchase Program OnFebruary 1, 2022 , the Board of Directors authorized the repurchase of up to$100 million of our Common Stock (the "Stock Repurchase Program"). 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 Exchange Act 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 will depend on a number of factors including, but not limited to, the price and availability of the Company's shares, trading volume, capital availability, Company performance and general economic and market conditions. The Stock Repurchase Program may be suspended or discontinued at any time.
Certain issues affecting comparability
The following items affect period-to-period comparisons and will continue to affect period-to-period comparisons for future results:
Integration and reorganization costs
For the year endedDecember 31, 2021 , we incurred Integration and reorganization costs of$49.3 million . Of the total costs incurred,$16.5 million were related to severance activities and$32.8 million were related to other costs, including those for the purpose of consolidating operations, including costs associated with systems integrations. For the year endedDecember 31, 2020 , we incurred Integration and reorganization costs of$145.7 million . Of the total costs incurred,$86.3 million were related to severance activities and$59.4 million were related to other costs, including those for the purpose of consolidating operations and ongoing implementation of our plans to reduce costs and preserve cash flow, including a$30.4 million expense related to the early termination of the Former Management Agreement with the Former Manager. For the years endedDecember 31, 2021 and 2020, we ceased operations of 21 and 40 printing operations, respectively, as part of the synergy and ongoing cost reduction programs. As a result, we recognized accelerated depreciation of$15.3 million and$49.6 million during the years endedDecember 31, 2021 and 2020, respectively. Asset impairments For the year endedDecember 31, 2021 , we recognized Asset impairments of$4.0 million related to the Publishing segment due primarily to the impairment of real estate held for sale. 38 -------------------------------------------------------------------------------- Table of Contents For the year endedDecember 31, 2020 , we recognized Asset impairments of$11.0 million , primarily related to the Publishing segment as a result of the annual impairment analysis as well as fixed asset disposals related to the continued consolidation of operations and as a result of our recoverability test for long-lived asset groups performed as ofJune 30, 2020 .
There was none
For the year endedDecember 31, 2020 , we recognized$393.4 million inGoodwill and intangible impairments primarily due to the impact of the COVID-19 pandemic on our operations. Foreign currency OurU.K. publishing 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.
Outlook for 2022
Strategy
Our areas of strategic focus for 2022 include:
Accelerating digital subscriber growth
The broad reach of our newsroom network, linking leading national journalism atUSA TODAY , our local property network in 45 states in theU.S. andNewsquest in theU.K. with more than 120 local media brands, gives us the ability to deepen our relationships with consumers at both the national and local levels. We bring consumers local news and information that impacts their day-to-day lives while keeping them informed of the national events that impact their country. We believe this local content is not readily obtainable elsewhere, and we are able to deliver that content to our customers across multiple print and digital platforms. As such, a key element of our consumer strategy is growing our paid digital-only subscriber base. As part of our digital subscriber growth strategy, we expect to continue to develop and launch new digital subscription offerings tailored to specific topics and audiences.
Drive growth in digital marketing services by engaging more customers in a subscriber relationship
We are now of significant digital scale, with unique reach at both the national and local community levels. We expect to leverage our integrated sales structure and lead generation strategy to continue to aggressively expand our digital marketing services business into our local markets, both domestically and internationally. Given our extensive client base and volume of digital campaigns, we plan to use data and insights to inform new and dynamic advertising products, such as our "freemium" offering to complement our sales structures, that we believe will deliver superior results.
Optimize our traditional activities in printing and advertising
We plan to continue to drive the profitability of our traditional print operations through the continued evolution of the core print product, economies of scale, process improvements, and operational focus. We are committed to improving customer service and delivering high quality products for our print subscribers. Print advertising continues to offer a compelling branding opportunity across our network due to our scale and unique reach at both the national and local community levels.
Prioritize investments in growing businesses that have significant potential and support our vision
Leveraging our unique footprint, trusted brands and media reach, we identify, experiment with and invest in companies with growth potential.
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Inclusion, Diversity and Equity are core pillars of our organization and influence all that we do, from recruiting, development and retention, to day-to-day operations including hiring, onboarding, education, leadership training and professional development. We have published our inclusion goals for 2025 and our ongoing efforts to progress toward them, including an annual workforce diversity report, which was released for the first time in the first quarter of 2021. We believe aligning our culture around empowering our communities to thrive and putting our customers at the center of everything we do will provide the foundation for our broader strategic efforts.
Impacts of the COVID-19 pandemic
As a result of the COVID-19 pandemic, we experienced a significant decline in
Advertising and marketing services revenues, which accelerated the secular
declines that we continue to experience. In addition, we continue to experience
constraints on the sales of single copy newspapers, largely tied to business
travel, and in-person events. While we have seen operating trends improve since
the second quarter of 2020, which represents the quarter that was most
significantly impacted by the pandemic, we expect that the COVID-19 pandemic
will continue to have a negative impact on our business and results of
operations in the near-term, including lower revenues associated with events and
lower sales of single copy newspapers, largely as a result of reduced business
travel. If the COVID-19 pandemic were to revert to conditions that existed
during 2020, including measures to help mitigate and control the spread of the
virus, we would expect to experience further negative impacts in Advertising and
marketing services revenues and Circulation revenues.
In connection with the Coronavirus Aid, Relief and Economic Security Act (the
"CARES Act"), we received Paycheck Protection Program ("PPP") funding in support
of certain of our locations that were meaningfully affected by the COVID-19
pandemic totaling $16.4 million , which was included in Operating activities in
the Consolidated statements of cash flows for the year ended December 31, 2021 .
As permitted under the CARES Act, during 2021, we received forgiveness for all
of such loans, which was recognized in earnings in the Consolidated statements
of operations and comprehensive income (loss) as an offset to Operating costs of
$12.1 million and Selling, general, and administrative expenses of $4.3 million .
Seasonality
Our revenues are subject to moderate seasonality, due primarily to fluctuations
in advertising volumes. Advertising and marketing services revenues for our
Publishing segment are typically highest in the fourth quarter, primarily due to
fluctuations in advertising volumes tied to holidays and regional weather and
activity in our various markets, some of which have a high degree of seasonal
residents and tourists.
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Table of Contents RESULTS OF OPERATIONS Consolidated Summary
The following table summarizes our operating results by segment for the years ended
Year ended December 31,
In thousands, except per share amounts 2021 2020 Change % Change
Operating revenues:
Publishing $ 2,886,735 $ 3,080,447 $ (193,712) (6 %)
Digital Marketing Solutions 442,299 428,605 13,694 3 %
Corporate and other 8,371 10,960 (2,589) (24 %)
Intersegment eliminations (129,322) (114,342) (14,980) 13 %
Total operating revenues 3,208,083 3,405,670 (197,587) (6 %)
Operating expenses:
Publishing 2,653,855 3,268,911 (615,056) (19 %)
Digital Marketing Solutions 422,506 481,177 (58,671) (12 %)
Corporate and other 151,967 217,812 (65,845) (30 %)
Intersegment eliminations (129,322) (114,342) (14,980) 13 %
Total operating expenses 3,099,006 3,853,558 (754,552) (20 %)
Operating income (loss) 109,077 (447,888) 556,965 ***
Non-operating expense 196,998 257,959 (60,961) (24 %)
Loss before income taxes (87,921) (705,847) 617,926 (88 %)
Provision (benefit) for income taxes 48,250 (33,450) 81,700 ***
Net loss $ (136,171) $ (672,397) $ 536,226 (80 %)
Net loss attributable to noncontrolling
interests (1,209) (1,918) 709 (37 %)
Net loss attributable to Gannett $ (134,962) $ (670,479) $ 535,517 (80 %)
Loss per share attributable to Gannett -
basic $ (1.00) $ (5.09) $ 4.09 (80 %)
Loss per share attributable to Gannett -
diluted $ (1.00) $ (5.09) $ 4.09 (80 %)
*** Indicates a percent change in absolute value greater than 100.
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 fulfilled by our DMS segment. When discussing segment results, these revenues and expenses are presented gross but are eliminated in consolidation.
operating income
Our Publishing segment generates revenues mainly through Advertising and marketing and Circulation. 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. Circulation revenues are derived from home delivery, digital distribution and single copy sales of our publications. Other revenues are derived mainly from commercial printing, distribution arrangements, revenues from our events business, digital content syndication and affiliate revenues and third-party newsprint sales.
Our DMS segment primarily generates revenue through advertising and marketing services through several services, including search advertising, display advertising, search optimization, social media, website development, product web presence management, customer relationship management and software-as-a-service solutions.
Revenue in our Enterprise and Other category is primarily generated from sales of cloud-based products with expert advice and support.
41 -------------------------------------------------------------------------------- Table of Contents Operating expenses
Operating expenses mainly consist of the following items:
•Operating costs at the Publishing segment include labor, newsprint and delivery costs and at the DMS segment include the cost of online media acquired from third parties and costs to manage and operate our marketing solutions and technology infrastructure; •Selling, general and administrative expenses include labor, payroll, outside services, 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 the Segment results section below for a discussion of operating results by segment.
Non-operating expenses (income)
Interest expense: For the year endedDecember 31, 2021 , Interest expense was$135.7 million compared to$228.5 million for 2020. The decrease in interest expense was mainly due to a lower effective interest rate driven by the refinancing of our five-year, senior-secured 11.5% term loan facility withApollo Capital Management, L.P. (the "Acquisition Term Loan") in the first quarter of 2021 and a lower debt balance compared to the same period in 2020. Loss on early extinguishment of debt: For the year endedDecember 31, 2021 , Loss on early extinguishment of debt was$48.7 million mainly due to the refinancing of our five-year, senior-secured term loan facility with the lenders from time to time party thereto andCitibank, N.A ., as collateral agent and administrative agent for the lenders, in an aggregate principal amount of$1.045 billion (the "5-Year Term Loan") in the fourth quarter of 2021 and the refinancing of the Acquisition Term Loan in the first quarter of 2021. For the year endedDecember 31, 2020 , Loss on early extinguishment of debt was$43.8 million , mainly due to the retirement of$497.1 million of the Acquisition Term Loan using the proceeds from the issuance of our 6.0% Senior Secured Convertible Notes due 2027 (the "2027 Notes") for the same amount. Non-operating pension income: For the year endedDecember 31, 2021 , Non-operating pension income was$95.4 million compared to$72.1 million for 2020. The increase in Non-operating pension income was primarily due to the increased expected return on plan assets held by the Gannett Retirement Plan (the "GR Plan") and lower interest costs on benefit obligations. Loss on convertible notes derivative: For the years endedDecember 31, 2021 and 2020, Loss on convertible notes derivative was$126.6 million and$74.3 million , respectively, reflecting the increase in the fair value of the derivative liability as a result of the increase in our stock price. Other non-operating income, net: Other non-operating income, net, consisted of certain items that fall outside of our normal business operations. For the year endedDecember 31, 2021 , Other non-operating income, net, was$18.7 million compared to$16.5 million in 2020. The increase in Other non-operating income, net was primarily due to the reversal of an accrual related to a legal matter in 2021, partially offset by the absence of a gain on disposal of a cost method investment held by the DMS segment in 2020.
Provision (benefit) for income taxes
The following table summarizes our pre-tax loss before income taxes and income
tax accounts.
Year ended December 31,
In thousands 2021 2020
Loss before income taxes $ (87,921) $
(705,847)
Provision (profit) for income taxes 48,250 (33,450)
Effective tax rate NM
4.7%
NM indicates not significant.
42 -------------------------------------------------------------------------------- Table of Contents Our effective tax rate for the year endedDecember 31, 2021 was not meaningful given the income tax provision associated with a loss before income taxes. The tax provision is principally impacted by the derivative revaluation, which is nondeductible for federal tax purposes, the creation of valuation allowances on non-deductible interest expense carryforwards, and deemed income from global intangible low-taxed income inclusion, offset by the change in the deferred tax rate from 19% to 25% in theU.K. and the income tax impact of PPP loan forgiveness. Our effective tax rate for the year endedDecember 31, 2020 was 4.7%. The rate was primarily impacted by the tax effect of non-deductible asset impairments, non-deductible officers' compensation, disallowed Loss on convertible notes derivative and the increase in valuation allowances against non-deductible interest expense and capital loss carryforwards. Without the federal and foreign valuation allowance activity, our effective tax rate would have been 18.5%, which is lower than the statutory rate primarily due to the reasons above. Several economic relief bills have been enacted into law in response to the COVID-19 pandemic. We continue to monitor the applicability of federal and state legislation to the Company, as well as regulatory interpretations of enacted legislation that provide economic relief in response to the pandemic, and expect to utilize these provisions as we determine necessary or desirable.
Net loss attributable to Gannett and diluted loss per share attributable to Gannett
For the year endedDecember 31, 2021 , Net loss attributable to Gannett and diluted loss per share attributable to Gannett were$135.0 million and$1.00 , respectively, compared to$670.5 million and$5.09 for the year endedDecember 31, 2020 , respectively. The change reflects the various items discussed above. Segment Results Publishing segment
A summary of the results of our publishing sector is presented below:
Year ended December 31, In thousands 2021 2020 Change % Change Operating revenues: Advertising and marketing services$ 1,337,203 $ 1,409,500 $ (72,297) (5 %) Circulation 1,249,669 1,391,983 (142,314) (10 %) Other 299,863 278,964 20,899 7 % Total operating revenues 2,886,735 3,080,447 (193,712) (6 %) Operating expenses: Operating costs 1,722,473 1,842,825 (120,352) (7 %) Selling, general and administrative expenses 736,766 787,770 (51,004) (6 %) Depreciation and amortization 157,212 221,746 (64,534) (29 %) Integration and reorganization costs 15,960 60,852 (44,892) (74 %) Asset impairments 3,976 10,312 (6,336) (61 %) Goodwill and intangible impairments - 352,947 (352,947) (100 %) Loss (gain) on sale or disposal of assets, net 17,468 (7,541) 25,009 *** Total operating expenses 2,653,855 3,268,911 (615,056) (19 %) Operating income (loss)$ 232,880 $ (188,464) $ 421,344 ***
*** Indicates a percent change in absolute value greater than 100.
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Operating revenues
The following table provides the breakout of total operating revenues by
category:
Year ended December 31,
In thousands 2021 2020 Change % Change
Local and national print $ 502,014 $ 584,929 $ (82,915) (14 %)
Classified print 290,272 316,392 (26,120) (8 %)
Print advertising 792,286 901,321 (109,035) (12 %)
Digital media 361,288 341,259 20,029 6 %
Digital marketing services 131,733 108,930 22,803 21 %
Digital classified 51,896 57,990 (6,094) (11 %)
Digital advertising and marketing services 544,917 508,179 36,738 7 %
Advertising and marketing services 1,337,203 1,409,500 (72,297) (5 %)
Print circulation 1,149,181 1,316,695 (167,514) (13 %)
Digital-only circulation 100,488 75,288 25,200 33 %
Circulation 1,249,669 1,391,983 (142,314) (10 %)
Other 299,863 278,964 20,899 7 %
Total operating revenues $ 2,886,735 $ 3,080,447 $ (193,712) (6 %)
The overall decrease in Print advertising revenues for the year ended December
31, 2021 compared to 2020 was driven primarily by secular industry trends
impacting all categories and the absence of $28.0 million of revenues related to
a business we divested in the fourth quarter of 2020. For the year ended
December 31, 2021 , Local and national print advertising revenues decreased
compared to 2020 primarily due to lower advertising volumes, including a
decrease in advertiser inserts. For the year ended December 31, 2021 , Classified
print advertising revenues decreased compared to 2020 due to lower spend on
classified advertisements, including legal, real estate, and automotive.
The overall increase in Digital advertising and marketing services revenues for
the year ended December 31, 2021 compared to 2020 was due to continued
improvement in operating trends since the prior year impacts of the COVID-19
pandemic, partially offset by the absence of $5.6 million of revenues associated
with a business we divested in the fourth quarter of 2020. The increase in
Digital media revenues for the year ended December 31, 2021 compared to 2020 was
driven by a higher mix of premium media sold, including premium sports products,
as well as an overall increase in pricing across both owned and operated sites
as well as third-party sites. The increase in Digital marketing services
revenues for the year ended December 31, 2021 compared to 2020 was due to higher
average revenue per customer for digital marketing services sold primarily as a
result of focusing on strategic initiatives across our local marketing sales
force and a realigned product suite. The decrease in Digital classified revenues
for the year ended December 31, 2021 compared to 2020 was due to reduced spend
in automotive advertisements.
For the year ended December 31, 2021 , Print circulation revenues decreased
compared to 2020, driven by a reduction in the volume of home delivery
subscribers, a decline in single copy sales reflecting the overall secular
trends impacting the industry, the absence of $10.2 million of revenues related
to a business we divested in the fourth quarter of 2020, and the impact of the
COVID-19 pandemic on business travel and overall consumer activity, partially
offset by an increase in pricing. For the year ended December 31, 2021 ,
Digital-only circulation revenues increased compared to 2020, driven by an
increase of 49% in paid digital-only subscribers, including those subscribers on
introductory subscription offers, to approximately 1.6 million compared to the
prior year.
For the year ended December 31, 2021 , Other revenues increased compared to 2020
primarily due to an increase in digital content syndication volume, an increase
in digital other revenues, as well as commercial print growth in local markets
driven by continued improvement in operating trends since the prior year impacts
of the COVID-19 pandemic and customer retention, partially offset by a decline
in event revenues as a result of the COVID-19 pandemic and the resulting
negative impact on the
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ability to host in-person events, and the absence of $8.8 million of revenues
related to a business we divested in the fourth quarter of 2020.
Operating Expenses
For the year endedDecember 31, 2021 , Operating costs decreased$120.4 million compared to 2020. The following table provides the breakout of the decrease in Operating costs: Year ended December 31, In thousands 2021 2020 Change % Change Newsprint and ink$ 105,557 $ 130,912 $ (25,355) (19 %) Distribution 431,412 406,784 24,628 6 % Compensation and benefits 553,807 629,643 (75,836) (12 %) Outside services 338,292 333,435 4,857 1 % Other 293,405 342,051 (48,646) (14 %) Total operating costs$ 1,722,473 $ 1,842,825 $ (120,352) (7 %) For the year endedDecember 31, 2021 , Newsprint and ink costs decreased compared to 2020, due to lower print circulation driven by the decline in volume of home delivery and single copy sales, as well as declines in print advertising volumes, partially offset by an increase in newsprint rates. For the year endedDecember 31, 2021 , Distribution costs increased compared to 2020, due to an increase in distribution postage costs, as well as activity in our commercial print business, partially offset by the decline in print circulation and print advertising volumes. For the year endedDecember 31, 2021 , Compensation and benefits costs decreased compared to 2020, due to a reduction in costs associated with ongoing integration efforts, including headcount reductions, as well as the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic and$12.1 million of PPP loan forgiveness, offset by the absence of the temporary reduction of expenses in the prior year, such as furloughs and wage reductions in response to the COVID-19 pandemic. For the year endedDecember 31, 2021 , Outside services costs, which include outside printing, professional services fulfilled by third parties, paid search and ad serving, feature services, and credit card fees, increased compared to 2020, due to higher costs associated with the increase in Digital media and Digital marketing services revenues, including paid search fees and affiliate revenue share as well as other related costs, partially offset by a reduction in costs associated with ongoing integration efforts and the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic.
For the year ended
For the year ended
Year ended December 31, In thousands 2021 2020 Change % Change Compensation and benefits$ 381,437 $ 396,017 $ (14,580) (4 %) Outside services and other 355,329 391,753 (36,424) (9 %) Total selling, general and administrative expenses$ 736,766 $ 787,770 $ (51,004) (6 %) For the year endedDecember 31, 2021 , Compensation and benefits costs decreased compared to 2020, due to a reduction in costs associated with ongoing integration efforts, including headcount reductions, the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic, and PPP loan forgiveness of$4.3 million , partially offset by the impact of higher payroll and commission expenses driven by the growth in Advertising and marketing services revenues, an increase in costs associated with employee insurance benefits and the absence of the temporary reduction of expenses in the prior year, such as furloughs and wage reductions in response to the COVID-19 pandemic. 45
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For the year endedDecember 31, 2021 , Outside services and other costs, which include services fulfilled by third parties, decreased compared to 2020, due to lower facility related costs, lower bad debt expense, a reduction in costs associated with ongoing integration efforts, and the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic, partially offset by increases in professional and promotion fees. For the year endedDecember 31, 2021 , Depreciation and amortization expense decreased compared to 2020, due to a decrease in accelerated depreciation of$35.6 million as a result of a decrease in the number of printing facilities closed in 2021 compared to 2020, along with a decrease in depreciation expense reflecting the impact of closing and consolidating print facilities in 2020. For the year endedDecember 31, 2021 , Integration and reorganization costs decreased compared to 2020, mainly due to a decline in severance costs of$41.1 million . For the year endedDecember 31, 2021 , severance costs were primarily related to our ongoing integration activities and facility consolidation and for the year endedDecember 31, 2020 , severance costs were related to our voluntary severance program and our plan to outsource certain processes to a third party, as well as continued consolidation of our operations as a result of ongoing implementation of our plans to reduce costs and preserve cash flow. For the year endedDecember 31, 2021 , we recorded Asset impairment charges of$4.0 million due to the impairment of real estate related to disposals. For the year endedDecember 31, 2020 , we recorded Asset impairment charges of$10.3 million as a result of a recoverability test for long-lived assets, as well as fixed asset disposals related to the continued consolidation of operations. There were noGoodwill and intangible impairment charges incurred in 2021. For the year endedDecember 31, 2020 , we recorded aGoodwill and intangible impairment charge of$352.9 million due to the impact of the COVID-19 pandemic on our operations. For the year endedDecember 31, 2021 , the change in Loss (gain) on sale or disposal of assets, net compared to 2020 was driven by the loss on the sale of assets as part of our plan to monetize non-core assets, partially offset by a gain on sale of real estate previously owned byNewsquest in 2021, compared to the gain related to the sale of assets in 2020.
Publishing sector adjusted EBITDA
Year ended December 31,
In thousands 2021 2020 Change % Change
Net income (loss) attributable to Gannett
$ 444,705 *** Interest expense - 142 (142) (100 %) Non-operating pension income (95,357) (71,858) (23,499) 33 % Depreciation and amortization 157,212 221,746 (64,534) (29 %) Integration and reorganization costs 15,960 60,852 (44,892) (74 %) Asset impairments 3,976 10,312 (6,336) (61 %) Goodwill and intangible impairments - 352,947 (352,947) (100 %) Loss (gain) on sale or disposal of assets, net 17,468 (7,541) 25,009 *** Other items (1,385) 1,201 (2,586) ***
Adjusted EBITDA (non-GAAP basis)(a)
$ (25,222) (5 %) Net income (loss) attributable to Gannett margin 11.6 % (3.5) % Adjusted EBITDA margin (non-GAAP basis)(a)(b) 15.0 % 14.9 % *** 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.
The decline in adjusted EBITDA of our Publishing sector compared to 2020 is mainly attributable to the changes mentioned above.
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Digital Marketing Solutions segment
A summary of our Digital Marketing Solutions segment results is presented below:
Year ended December 31,
In thousands 2021 2020 Change % Change
Operating revenues:
Advertising and marketing services $ 441,394 $ 411,940 $ 29,454 7 %
Other 905 16,665 (15,760) (95 %)
Total operating revenues 442,299 428,605 13,694 3 %
Operating expenses:
Operating costs 299,014 276,859 22,155 8 %
Selling, general and administrative
expenses 92,325 128,834 (36,509) (28 %)
Depreciation and amortization 30,061 25,878 4,183 16 %
Integration and reorganization costs 1,710 6,663 (4,953) (74 %)
Asset impairments - 717 (717) (100 %)
Goodwill and intangible impairments - 40,499 (40,499) (100 %)
(Gain) loss on sale or disposal of assets,
net (604) 1,727 (2,331) ***
Total operating expenses 422,506 481,177 (58,671) (12 %)
Operating income (loss) $ 19,793 $ (52,572) $ 72,365 ***
*** Indicates a percent change in absolute value greater than 100.
operating income
For the year endedDecember 31, 2021 , Advertising and marketing services revenues increased compared to 2020 due to growth in the core direct business as well as a growth in revenues associated with local markets and a continued improvement in operating trends since the prior year impacts of the COVID-19 pandemic, partially offset by the absence of revenues in 2021 of$19.6 million associated with both the change in media rebate programs and a business we divested in the third quarter of 2020.
For the year ended
Operating Expenses
For the year endedDecember 31, 2021 , Operating costs increased$22.2 million compared to 2020. The following table provides the breakout of the increase in Operating costs: Year ended December 31, In thousands 2021 2020 Change % Change Outside services$ 260,504 $ 216,847 $ 43,657 20 % Compensation and benefits 31,136 44,441 (13,305) (30 %) Other 7,374 15,571 (8,197) (53 %) Total operating costs$ 299,014 $ 276,859 $ 22,155 8 % For the year endedDecember 31, 2021 , Outside services costs, which include professional services fulfilled by third parties, media fees and other digital costs, paid search and ad serving and feature services, increased compared to 2020 due to an increase in expenses associated with third-party media fees driven by a corresponding increase in revenues, partially offset by the absence of costs associated with a business we divested in the fourth quarter of 2020. For the year endedDecember 31, 2021 , Compensation and benefits costs decreased compared to 2020 due to a reduction in costs associated with ongoing integration efforts, including headcount reductions as well as the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic, partially offset by the absence of the temporary reduction of expenses in the prior year, such as furloughs and wage reductions in response to the COVID-19 pandemic. 47
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For the year ended
Year ended December 31, In thousands 2021 2020 Change % Change Compensation and benefits$ 69,749 $ 113,314 $ (43,565) (38 %) Outside services and other 22,576 15,520 7,056 45 % Total selling, general and administrative expenses$ 92,325 $ 128,834 $ (36,509) (28 %) For the year endedDecember 31, 2021 , Compensation and benefits costs decreased compared to 2020 due to a reduction in costs associated with ongoing integration efforts, including headcount reductions, the benefit in 2021 of cost containment initiatives implemented in 2020 in connection with the COVID-19 pandemic, and the absence of costs associated with businesses we divested in 2020, partially offset by the absence of the temporary reduction of expenses in the prior year, such as furloughs and wage reductions in response to the COVID-19 pandemic. For the year endedDecember 31, 2021 , Outside services and other costs increased compared to 2020 due to an increase in various miscellaneous expenses, including higher technology costs, partially offset by lower bad debt expense. For the year endedDecember 31, 2021 , Depreciation and amortization expense increased compared to 2020 due to an increase in amortization of capitalized software and the impact of accelerated depreciation related to assets impacted by the realignment of our product portfolio which began in the fourth quarter of 2020.
For the year ended
There were noGoodwill and impairment charges incurred in 2021. For the year endedDecember 31, 2020 , we recorded aGoodwill and intangible impairment charge of$40.5 million due to the impact of the COVID-19 pandemic on our operations.
For the year ended
Digital Marketing Solutions Adjusted EBITDA
Year ended December 31, In thousands 2021 2020 Change % Change
Net income (loss) attributable to Gannett
$ 60,936 *** Depreciation and amortization 30,061 25,878 4,183 16 % Integration and reorganization costs 1,710 6,663 (4,953) (74 %) Asset impairments - 717 (717) (100 %) Goodwill and intangible impairments - 40,499 (40,499) (100 %) (Gain) loss on sale or disposal of assets, net (604) 1,727 (2,331) *** Other items 1,351 (8,629) 9,980 ***
Adjusted EBITDA (non-GAAP basis)(a)
$ 26,599 *** Net income (loss) attributable to Gannett margin 4.2 % (9.9) % Adjusted EBITDA margin (non-GAAP basis)(a)(b) 11.5 % 5.7 % *** 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.
The increase in adjusted EBITDA of our DMS segment compared to 2020 is mainly attributable to the changes discussed above.
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For the year ended
For the year ended
Year ended December 31, In thousands 2021 2020 Change % Change Operating expenses: Operating costs 8,780 23,013 (14,233) (62 %) Selling, general and administrative expenses 73,592 89,102 (15,510) (17 %) Depreciation and amortization 16,685 16,195 490 3 % Integration and reorganization costs 31,614 78,216 (46,602) (60 %) Other operating expenses 20,952 11,152 9,800 88 % Loss on sale or disposal of assets, net 344 134 210 *** Total operating expenses$ 151,967 $ 217,812 $ (65,845) (30 %)
*** Indicates a percent change in absolute value greater than 100.
For the year endedDecember 31, 2021 , Corporate and other Operating expenses decreased compared to 2020 due primarily to a decrease in Integration and reorganization costs driven by a decrease in severance costs of$22.7 million and a decrease of$23.9 million in other integration costs, mainly due to the absence in 2021 of a$30.4 million expense related to the early termination of the Former Management Agreement with the Former Manager paid in 2020, partially offset by an increase in costs associated with systems implementation and outsourcing of corporate functions. In addition, both Selling, general and administrative expenses and Operating costs decreased, mainly due to cost containment initiatives, partially offset by the absence of the temporary reduction of expenses in the prior year such as furloughs and wage reductions in response to the COVID-19 pandemic. These decreases were partially offset by an increase in Other operating expenses due to third party fees that were expensed in 2021 related to the 5-Year Term Loan, the$400 million aggregate principal amount of 6.00% first lien notes dueNovember 1, 2026 (the "2026 Senior Notes"), and to a lesser extent the New Senior Secured Term Loan, compared to$11.2 million of acquisition costs incurred in 2020.
CASH AND CAPITAL RESOURCES
Our primary cash requirements are for working capital, debt securities and capital expenditures.
We expect to fund our operations through cash provided by operating activities and available financing capacity under our credit facility. 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.
Details of our cash flows are included in the table below:
Year Ended
December 31, December 31,
In thousands 2021 2020
Cash provided by operating activities $ 127,453 $ 57,770
Cash provided by investing activities 70,647 160,136
Cash used for financing activities (261,172) (201,342)
Effect of currency exchange rate change (35) 1,498
Increase (decrease) in cash, cash equivalents and restricted cash
Cash flows provided by operating activities: Our largest source of cash provided
by 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, outside
services, newsprint, and delivery.
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For the year ended December 31, 2021 , cash flows provided by operating
activities were $127.5 million compared to $57.8 million for the year ended
December 31, 2020 . The increase in cash provided by operating activities was
primarily due to a decrease in interest paid of $114.2 million , a decrease in
severance payments of $51.3 million , $16.4 million in PPP funding received in
support of certain of our locations that were meaningfully affected by the
COVID-19 pandemic and an increase in tax refunds of $4.4 million , partially
offset by a decrease in working capital of $112.8 million due to the overall
timing of payments, including accrued compensation and accounts receivable
collections, an increase in deposits of $12.9 million , and an increase in
contributions to our pension and postretirement benefit plans of $9.5 million .
Cash flows provided by investing activities: For the year ended December 31,
2021 , cash flows provided by investing activities were $70.6 million compared to
$160.1 million for the year ended December 31, 2020 . The decrease in cash
provided by investing activities was primarily due to a decrease in proceeds
from the sale of real estate and other assets of $84.6 million and an increase
in purchases of property, plant, and equipment of $2.6 million .
Cash flows used for financing activities: For the year ended December 31, 2021 ,
cash flows used for financing activities were $261.2 million compared to $201.3
million for the year ended December 31, 2020 . The increase in cash used for
financing activities was primarily due to an increase in repayments of long-term
debt of $1.475 billion , the absence in 2021 of borrowings of convertible debt of
$497.1 million in 2020, the increase in repurchases of convertible debt of $15.0
million and an increase in payments of debt issuance costs of $18.8 million ,
offset by borrowings of long-term debt of $1.935 billion in 2021.
Debt
October debt refinancing
OnOctober 15, 2021 ,Gannett Holdings , our wholly-owned subsidiary, entered into the New Senior Secured Term Loan withCitibank N.A ., as collateral agent and administrative agent for the lenders. Also onOctober 15, 2021 ,Gannett Holdings completed a private offering of the 2026 Senior Notes. The proceeds of the New Senior Secured Term Loan, together with the net proceeds from the 2026 Senior Notes were applied towards the full repayment of the 5-Year Term Loan. There were certain lenders that participated in both the 5-Year Term Loan and the New Senior Secured Term Loan and 2026 Senior Notes and their balances in the 5-Year Term Loan were deemed to be modified. We continue to defer, over the terms of the 2026 Senior Notes and New Senior Secured Term Loan, the deferred financing fees and original issue discount from the 5-Year Term Loan of$7.0 million and$25.2 million , respectively, related to those lenders. Further, certain lenders in the 5-Year Term Loan did not participate in the New Senior Secured Term Loan and 2026 Senior Notes and their balances in the 5-Year Term Loan were deemed to be extinguished. Third-party fees of approximately$7.2 million were allocated to the new lenders in the 2026 Senior Notes on a pro-rata basis, and$5.2 million of original issue discount on the New Senior Secured Term Loan were capitalized and are being amortized over the respective terms of the 2026 Senior Notes and New Senior Secured Term Loan using the effective interest method. For the year endedDecember 31, 2021 , third-party fees of$1.8 million and$7.9 million related to the New Senior Secured Term Loan and 2026 Senior Notes, respectively, which were allocated to the lenders whose balances were deemed to be modified, were expensed and recorded in Other operating expenses in the Consolidated statements of operations and comprehensive income (loss).
Modification of the new senior secured term loan
OnJanuary 31, 2022 ,Gannett Holdings entered into the Term Loan Amendment to its New Senior Secured Term Loan to provide for Incremental Term Loans in an aggregate principal amount of$50 million . The Incremental Term Loans have substantially identical terms as the New Senior Secured Term Loan and are treated as a single tranche with the New Senior Secured Term Loan. The Term Loan Amendment also amended the New Senior Secured Term Loan to transition the interest rate base from LIBOR to the Adjusted Term SOFR and to permit the repurchase of up to$50 million of Common Stock under the Stock Repurchase Program consummated on or prior toDecember 31, 2022 , in addition to capacity forGannett Holdings to make restricted payments, including stock repurchases, currently permitted under other provisions of the New Senior Secured Term Loan and our other debt facilities, including the 2026 Senior Secured Notes Indenture and the 2027 Notes Indenture.
Term loans
New Senior Secured Term Loan
Prior to the Term Loan Amendment, loans under the New Senior Secured Term Loan
bore interest at a per annum rate equal to LIBOR (which shall not be less than
0.50% per annum) plus a margin of 5.00% or an alternate base rate (which shall
not be less than 1.50% per annum) plus a margin equal to 4.00%. Since the
effectiveness of the Term Loan Amendment, the
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loans under the New Senior Secured Term Loan (including the Incremental Term
Loans) bear interest at a per annum rate equal to the Adjusted Term SOFR (which
shall not be less than 0.50% per annum) plus a margin equal to 5.00% per annum
or an alternate base rate (which shall not be less than 1.50% per annum) plus a
margin equal to 4.00% per annum. Loans under the New Senior Secured Term Loan
may be prepaid, at the option of Gannett Holdings , at any time without premium,
except a premium equal to 1.00% of the aggregate principal amount of the loans
being repaid in connection with certain refinancing or repricing events that
reduce the all-in yield applicable to the loans and occur on or before October
15, 2022 . In addition, we are required to repay the New 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 New 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 of the
Company (beginning with the fiscal year ending December 31, 2021 ). The New
Senior Secured Term Loan amortizes in equal quarterly installments, beginning
June 30, 2022 , at a rate equal to 10% per annum (or, if the ratio of debt
secured on an equal basis with the New Senior Secured Term Loan less
unrestricted cash of the Company and its restricted subsidiaries to Consolidated
EBITDA (as such terms are defined in the New 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, 5%
per annum. All obligations under the New Senior Secured Term Loan are secured by
all or substantially all of the assets of the Company and the wholly-owned
domestic subsidiaries of the Company (the "Guarantors"). The obligations of
Gannett Holdings under the New Senior Secured Term Loan are guaranteed on a
senior secured basis by the Company and the Guarantors.
The New Senior Secured Term Loan contains usual and customary covenants for
credit facilities of this type, including a requirement to have minimum
unrestricted cash of $30 million as of the last day of each fiscal quarter, and
restricts, among other things, our ability to incur debt, grant liens, sell
assets, and make investments and pay dividends, in each case with customary
exceptions, including an exception that permits dividends and repurchases of
outstanding junior debt or equity in (i) an amount of up to $25 million per
fiscal quarter if the First Lien Net Leverage Ratio for such fiscal quarter is
equal to or less than 2.00 to 1.00, (ii) an amount of up to $50 million per
fiscal quarter if the First Lien Net Leverage Ratio for such fiscal quarter is
equal to or less than 1.50 to 1.00 and (iii) an unlimited amount if First Lien
Net Leverage Ratio for such fiscal quarter is equal to or less than 1.00 to
1.00. As of December 31, 2021 , we were in compliance with all of the covenants
and obligations under the New Senior Secured Term Loan.
As of December 31, 2021 , the effective interest rate for the New Senior Secured
Term Loan was 6.4%. For the year ended December 31, 2021 , we made prepayments,
inclusive of both mandatory and optional prepayments, totaling $35.9 million ,
which were classified as financing activities in the Consolidated statements of
cash flows.
5-Year Term Loan
On February 9, 2021 , we entered into the 5-Year Term Loan. The 5-Year Term Loan
was to mature on February 9, 2026 and, at our option, bore interest at a rate
equal to LIBOR plus a margin equal to 7.00% per annum or an alternate base rate
plus a margin equal to 6.00% per annum. Interest on the 5-Year Term Loan was
payable at least every three months in arrears, beginning in May 2021 .
Proceeds from the 5-year term loan were used to repay the remaining principal balance and accrued interest of
There were certain lenders that participated in both the Acquisition Term Loan and the 5-Year Term Loan and their balances in the Acquisition Term Loan were deemed to be modified. We continued to defer, over the term, the deferred financing fees and original issue discount from the Acquisition Term Loan of$1.5 million and$34.7 million , respectively, related to those lenders. Further, certain lenders in the Acquisition Term Loan did not participate in the 5-Year Term Loan and their balances in the Acquisition Term Loan were deemed to be extinguished. Third-party fees of approximately$13.0 million were allocated to the new lenders in the 5-Year Term Loan on a pro-rata basis, and$20.9 million of original issue discount were capitalized and amortized over the term of the 5-Year Term Loan using the effective interest method. For the year endedDecember 31, 2021 , third-party fees of$10.9 million , which were allocated to the lenders whose balances were deemed to be modified, were expensed and recorded in Other operating expenses in the Consolidated statements of operations and comprehensive income (loss). Under the 5-Year Term Loan, we were contractually obligated to make prepayments with the proceeds from asset sales and elected to make optional payments with excess free cash flow from operations. The 5-Year Term Loan was repaid in full onOctober 15, 2021 and the repayment was classified as financing activities in the Consolidated statements of cash flows. 51 -------------------------------------------------------------------------------- Table of Contents Term Loans Summary We recorded interest expense, paid interest expense, and recognized amortization of original issue discount and deferred financing fees under the New Senior Secured Term Loan, the 5-Year Term Loan and the Acquisition Term Loan (collectively, the "Term Loans"). In connection with the Term Loans, during the year endedDecember 31, 2021 , we recognized interest expense of$72.8 million , paid interest expense of$72.8 million and recognized amortization of original issue discount and deferred financing fees of$10.7 million and$2.6 million , respectively. Additionally, during the year endedDecember 31, 2021 , we recognized losses on early extinguishment of$47.9 million , as a result of the write-off of original issue discount and deferred financing fees, primarily related to lenders whose debt was deemed extinguished as well as early prepayments, including$20.7 million related to the 5-Year Term Loan,$17.2 million related to the Acquisition Term Loan and approximately$10.0 million related to the write-off of original issue discount and deferred financing fees as a result of early prepayments on the Term Loans.
Senior Secured Notes Due 2026
The 2026 Senior Notes were issued pursuant to an Indenture, datedOctober 15, 2021 (the "2026 Senior Notes Indenture") amongGannett Holdings , the Company, the Guarantors from time to time party thereto,U.S. Bank National Association , as trustee, andU.S. Bank National Association , as collateral agent, registrar, paying agent and authenticating agent. Interest on the 2026 Senior Notes is payable semi-annually in arrears, beginning onMay 1, 2022 . The 2026 Senior Notes mature onNovember 1, 2026 , unless redeemed or repurchased earlier pursuant to the 2026 Senior Notes Indenture. The 2026 Senior Notes may be redeemed at the option ofGannett Holdings , in whole or in part, at any time and from time to time afterNovember 1, 2023 , at the redemption prices set forth in the 2026 Senior Notes Indenture. At any time prior to such date,Gannett Holdings will be entitled at its option to redeem all, but not less than all, of the 2026 Senior Notes at the "make-whole" redemption price set forth in the 2026 Senior Notes Indenture. Additionally, at any time prior toNovember 1, 2023 ,Gannett Holdings may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the 2026 Senior Notes at the redemption price set forth in the 2026 Senior Notes Indenture with the net cash proceeds of certain equity offerings. If certain changes of control with respect toGannett Holdings or the Company occur,Gannett Holdings must offer to purchase the 2026 Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest to, but excluding, the date of purchase. In addition, during any twelve-month period commencing on or afterOctober 15, 2021 and ending prior toNovember 1, 2023 , up to 10% of the aggregate principal amount of the 2026 Senior Notes issued under the 2026 Senior Notes Indenture may be redeemed at a purchase price equal to 103% of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to but excluding, the redemption date. The 2026 Senior Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantors. The 2026 Senior Notes and such guarantees are secured on a first-priority basis by the collateral, consisting of substantially all of the assets ofGannett Holdings and the Guarantors, subject to certain intercreditor arrangements. The 2026 Senior Notes Indenture limits the Company and its restricted subsidiaries' ability to, among other things, make investments, loans, advances, guarantees and acquisitions; incur or guarantee additional debt and issue certain disqualified equity interests and preferred stock; make certain restricted payments, including a limit on dividends on equity securities or payments to redeem, repurchase or retire equity securities or other indebtedness; dispose of assets; create liens on assets to secure debt; engage in transactions with affiliates; enter into certain restrictive agreements; and consolidate, merge, sell or otherwise dispose of all or substantially all of their or a Guarantor's assets. These covenants are subject to a number of limitations and exceptions. The 2026 Senior Notes Indenture also contains customary events of default. Debt issuance costs of$7.2 million will be amortized over the 5-year contractual life of the 2026 Senior Notes. Additionally,$4.0 million of debt issuance costs and$14.3 million of original issue discount were deferred from the refinancing of the 5-Year Term Loan. The unamortized discount and unamortized debt issuance costs will be amortized over the remaining contractual life of the 2026 Senior Notes. In connection with the 2026 Senior Notes, for the year endedDecember 31, 2021 we recognized amortization of debt issuance costs and amortization of the original issue discount of$0.5 million and$0.6 million , respectively, and recognized$5.1 million of interest expense. The effective interest rate on the 2026 Senior Notes was 7.3% as ofDecember 31, 2021 . 52 -------------------------------------------------------------------------------- Table of Contents Senior Secured Convertible Notes due 2027 The 2027 Notes were issued pursuant to an Indenture dated as ofNovember 17, 2020 , as amended by the First Supplemental Indenture dated as ofDecember 21, 2020 and the Second Supplemental Indenture dated as ofFebruary 9, 2021 (collectively, the "2027 Notes Indenture"), between the Company andU.S. Bank National Association , as trustee. In connection with the issuance of the 2027 Notes, we entered into an Investor Agreement (the "Investor Agreement") with the holders of the 2027 Notes (the "Holders") establishing certain terms and conditions concerning the rights and restrictions on the Holders with respect to the Holders' ownership of the 2027 Notes. We also entered into an amendment to the Registration Rights Agreement datedNovember 19, 2019 , with the Former Manager. Interest on the 2027 Notes is payable semi-annually in arrears. The 2027 Notes mature onDecember 1, 2027 , unless earlier repurchased or converted. The 2027 Notes may be converted at any time by the holders into cash, shares of 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"). The conversion rate is subject to customary adjustment provisions as provided in the 2027 Notes Indenture. In addition, the conversion rate will be subject to adjustment in the event of any issuance or sale of Common Stock (or securities convertible into Common Stock) at a price equal to or less than the Conversion Price in order to ensure that following such issuance or sale, the 2027 Notes would be convertible into approximately 42% (adjusted for repurchases and certain other events that reduce the outstanding amount of the 2027 Notes) of the Common Stock after giving effect to such issuance or sale (assuming the initial principal amount of the 2027 Notes remains outstanding). After giving effect to the repurchases of the 2027 Notes described below, such percentage is approximately 41%. Upon the occurrence of a "Make-Whole Fundamental Change" (as defined in the 2027 Notes Indenture), we will in certain circumstances increase the conversion rate for a specified period of time. If a "Fundamental Change" (as defined in the 2027 Notes Indenture) occurs, the Company will be required to offer to repurchase the 2027 Notes at a repurchase price of 110% of the principal amount thereof. Holders of the 2027 Notes will have the right to put up to approximately$100 million of the 2027 Notes at par on or after the date that is 91 days after the maturity date of the New Senior Secured Term Loan. Under the 2027 Notes Indenture, we can only pay cash dividends up to an agreed-upon amount, provided the ratio of consolidated debt to EBITDA (as such terms are defined in the 2027 Notes Indenture) does not exceed a specified ratio. In addition, the 2027 Notes Indenture provides that, at any time that the Company's Total Gross Leverage Ratio (as defined in the 2027 Notes Indenture) exceeds 1.5 and we approve the declaration of a dividend, we must offer to purchase a principal amount of 2027 Notes equal to the proposed amount of the dividend. Until the four-year anniversary of the issuance date, we will have the right to redeem for cash up to approximately$99.4 million of the 2027 Notes at a redemption price of 130% of the principal amount thereof, with such amount reduced ratably by any principal amount of 2027 Notes that has been converted by the holders or redeemed or purchased by us. The 2027 Notes are guaranteed byGannett Holdings and any subsidiaries of the Company that guaranteed the 5-Year Term Loan. The 2027 Notes are secured by the same collateral that secured the 5-Year Term Loan. The 2027 Notes rank as senior secured debt of the Company and are secured by a second priority lien on the same collateral package that secured the indebtedness incurred in connection with the 5-Year Term Loan. The 2027 Notes Indenture includes affirmative and negative covenants, including limitations on liens, indebtedness, dispositions, loan, advances and investors, sale and leaseback transactions, restricted payments, transactions with affiliates, restrictions on dividends and other payment restrictions affecting restricted subsidiaries, negative pledges and modifications to certain agreements. The 2027 Notes Indenture also requires that the Company maintain, as of the last day of each fiscal quarter, at least$30.0 million of Qualified Cash (as defined in the 2027 Notes Indenture). The 2027 Notes Indenture includes customary events of default. For the year endedDecember 31, 2021 , no shares were issued upon conversion, exercise, or satisfaction of the required conditions. Refer to Note 13 - Supplemental equity information for details on the convertible debt's impact to diluted earnings per share under the if-converted method. 53 -------------------------------------------------------------------------------- Table of Contents InNovember 2021 , we entered into separate, privately negotiated agreements with certain holders of our 2027 Notes and repurchased$11.8 million aggregate principal of our outstanding 2027 Notes for$15.3 million in cash, including accrued interest. The repurchase was treated as an extinguishment of a portion of the 2027 Notes and as a result, for the year endedDecember 31, 2021 the Company recognized a Loss on extinguishment of$0.8 million and a write-off of unamortized original issue discount of$2.3 million and an immaterial write-off of unamortized deferred financing costs. The repurchase of the 2027 Notes resulted in a$4.2 million reduction in Additional paid-in capital, net of tax, in the Consolidated balance sheets. The remaining 2027 Notes are convertible into 97.1 million shares of Common Stock, based on a conversion price of$5.00 per share.
Senior Convertible Bonds due 2024
The$3.3 million principal value of the remaining 4.75% convertible senior notes due 2024 (the "2024 Notes") outstanding is reported as convertible debt in the Consolidated balance sheets. The effective interest rate on the 2024 Notes was 6.05% as ofDecember 31, 2021 .
Further information
Shelf Listing Statement
OnMarch 19, 2021 , we filed an automatic shelf registration statement with theSEC , under which we have the ability to offer and sell an indeterminate amount of various types of securities in the future. This replaced our previous shelf registration statement datedApril 5, 2018 . The specific terms of any securities that may be issued under our shelf registration statement and the timing of any such offers and sales will depend on a variety of factors, including the underlying price of our Common Stock and our capital needs. We believe that the shelf registration statement provides us with additional financing flexibility to efficiently access the capital markets when desired.
Other information
We continue to evaluate 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 containment initiatives. We presently have no intention to declare or pay a dividend and there can be no assurance that we will pay dividends in the future. In addition, the terms of our indebtedness, including our credit facility, the New Senior Secured Term Loan, and the 2026 Senior Secured Notes Indenture and the 2027 Notes Indenture have terms that restrict our ability to pay dividends.
At
The CARES Act, enactedMarch 27, 2020 , provided various forms of relief to companies impacted by the COVID-19 pandemic. As part of the relief available under the CARES Act, we deferred remittance of our 2020 Federal Insurance Contributions Act ("FICA") taxes as allowed by the legislation. We deferred$41.6 million of the employer portion of FICA taxes for payroll paid betweenMarch 27, 2020 andDecember 31, 2020 . We paid 50% of the FICA deferral during the year endedDecember 31, 2021 with the remaining 50% to be remitted on or beforeDecember 31, 2022 . For the GR Plan in theU.S. , we have deferred our contractual contribution and negotiated a contribution payment plan of$5 million per quarter through the end ofSeptember 30, 2022 . We expect our capital expenditures during the year endedDecember 31, 2022 to total approximately$45.0 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 developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our New Senior Secured Term Loan, the 2026 Senior Secured Notes, and the 2027 Notes. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological, and other changes in our industry and economic conditions generally. 54 -------------------------------------------------------------------------------- Table of Contents Although we currently forecast sufficient liquidity, a resurgence of the COVID-19 pandemic and related counter-measures could have a material negative impact on our liquidity and our ability to meet our ongoing obligations, including obligations under the New Senior Secured Term Loan, the 2026 Senior Secured Notes, and the 2027 Notes. We continue to closely monitor the COVID-19 pandemic and will continue to take the steps necessary to appropriately manage liquidity.
From
Contractual obligations and commitments
We enter into various contractual arrangements as a part of our operations. Many of these contractual obligations are discussed in the notes to our Consolidated financial statements. As ofDecember 31, 2021 , material obligations discussed in the notes to our consolidated financial statements included (i) principal payments on our long-term debt, prior to the impact of the amendment to the New Senior Secured Term Loan, discussed in Note 9 - Debt, (ii) operating leases discussed in Note 4 - Leases, and (iii) pension and postretirement benefits discussed in Note 10 - Pensions and other postretirement benefit plans. We anticipate interest payments associated with our long-term debt totaling$79.2 million in 2022,$75.0 million in 2023 and$203.8 million thereafter. Due to uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits atDecember 31, 2021 , we are unable to make reasonably reliable estimates of the period of cash settlement. See Note 12 - Income taxes to the Consolidated financial statements for a further discussion of income taxes. In addition, we have purchase obligations which include printing contracts, digital licenses and IT services, professional services, interactive marketing agreements, and other legally binding commitments. As ofDecember 31, 2021 , we had future purchase obligations totaling$235.8 million due in 2022,$149.6 million due in 2023, and$173.6 million due thereafter. Amounts for which we are liable under purchase orders outstanding atDecember 31, 2021 are reflected in the Consolidated balance sheets as Accounts payable and accrued liabilities. We also have other noncurrent liabilities primarily related to IT leases atNewsquest , a subsidiary in theU.K , totaling$3.9 million due in 2022,$3.2 million due in 2023, and$8.0 million due thereafter.
NON-GAAP FINANCIAL MEASURES
A non-GAAP financial measure is generally defined as a measure that purports to measure historical or future financial performance, condition or cash flows, but that excludes or includes amounts that would not be so excluded or included in most comparable measures.
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 under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), or any other measure of performance or liquidity derived in accordance 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. 55 -------------------------------------------------------------------------------- Table of Contents 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) 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 loss attributable to Gannett to Adjusted EBITDA and Adjusted EBITDA margin along with our Consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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 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 loss attributable to Gannett to Adjusted EBITDA and Net loss attributable to Gannett margin to Adjusted EBITDA margin for the periods presented: Year ended December
31,
In thousands 2021 2020 Net loss attributable to Gannett$ (134,962) $
(670,479)
Provision (benefit) for income taxes 48,250
(33,450)
Interest expense 135,748
228,513
Loss on early extinguishment of debt 48,708
43,760
Non-operating pension income (95,357)
(72,149)
Loss on convertible notes derivative 126,600
74,329
Depreciation and amortization 203,958
263,819
Integration and reorganization costs 49,284 145,731 Other operating expenses 20,952 11,152 Asset impairments 3,976 11,029 Goodwill and intangible impairments -
393,446
Loss (gain) on sale or disposal of assets, net 17,208 (5,680) Stock-based compensation expense
18,439
26,350
Other items (9,092)
(2,476)
Adjusted EBITDA (non-GAAP basis)$ 433,712 $
413,895
Net loss attributable to Gannett margin (4.2) % (19.7) % Adjusted EBITDA margin (non-GAAP basis) 13.5 % 12.2 %
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make decisions based on estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
We evaluate each of our reporting units annually as of the end of our second
fiscal quarter, as well as when changes in our operating structure occur. We
have the option to qualitatively assess whether it is more likely than not that
the fair value of a
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reporting unit is less than its carrying value. If we elect to perform a
qualitative assessment and conclude it is more likely than not that the fair
value of the reporting unit is equal to or greater than its carrying value, no
further assessment of that reporting unit's goodwill is necessary; otherwise
goodwill must be tested for impairment. In the quantitative test, we are
required to determine the fair value of each reporting unit and compare it to
the carrying amount of the reporting unit. Fair value of the reporting unit is
defined as the price that would be received to sell the unit as a whole in an
orderly transaction between market participants at the measurement date. We
generally determine the fair value of a reporting unit using a combination of a
discounted cash flow analysis and a market-based approach. Estimates of fair
value include inputs that are subjective in nature, involve uncertainties, and
involve matters of significant judgment that are made at a specific point in
time. Changes in key assumptions from period to period could significantly
affect the estimates of fair value. Significant assumptions used in the fair
value estimates include projected revenues and related growth rates over time,
projected operating cash flow margins, discount rates, and future economic and
market conditions. If the carrying value of the reporting unit exceeds the
estimate of fair value, we calculate the impairment as the excess of the
carrying value of goodwill over its implied fair value.
Newspaper mastheads (newspaper titles) are not subject to amortization as it has
been determined that the useful lives of such mastheads are indefinite.
Newspaper mastheads are tested for impairment annually, or more frequently if
events or changes in circumstances indicate the asset might be impaired. The
impairment test consists of a comparison of the fair value of each group of
mastheads with their carrying amount. We used a relief from royalty approach,
which utilizes a discounted cash flow model to determine the fair value of
newspaper mastheads. Our judgments and estimates of future operating results in
determining the reporting unit fair values are consistently applied in
determining the fair value of mastheads.
The performance of our annual impairment analyses resulted in no impairments to
goodwill or indefinite-lived intangible assets in fiscal 2021. We have not
subsequently identified any indicators of impairment that would indicate our
reporting units are at risk of failing the goodwill or indefinite-lived
intangible asset impairment tests subsequent to the second quarter of 2021. See
Note 7 - Goodwill and intangible assets for further discussion.
Long-lived assets
We evaluate the carrying value of property, plant and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. The evaluation is performed by asset group, which is the lowest level of identifiable cash flows independent of other assets. The assessment of recoverability is based on management's estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset groups to its carrying value of the asset groups to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by the asset group, an impairment is recognized to the extent the carrying value of such asset group exceeds its fair value. The market approach is used in some cases to estimate the fair value of property, plant and equipment, particularly when there is a change in the use of an asset.
As part of ongoing profitability programs, we have ceased a number of printing activities. As part of these actions, certain assets and properties to be decommissioned were tested for impairment. See Note 8 – Integration and reorganization costs and asset impairments for an analysis of the impairment charges recognized.
Revenue recognition
Our contracts with customers sometimes include promises to transfer multiple products and services to a customer. Revenue from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.
Income taxes
We are subject to income taxes in theU.S. and various foreign jurisdictions in which we operate and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties in the application of tax laws and regulations. We account for income taxes under the provisions of ASC Topic 740, "Income Taxes" ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. The 57 -------------------------------------------------------------------------------- Table of Contents assessment of the realizability of deferred tax assets involves a high degree of judgment and complexity. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected either in income or as an adjustment to goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized. Our actual effective tax rate and income tax expense could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, tax planning and our forecasted financial condition, and results of operations in future periods. Although we believe current estimates are reasonable, actual results could differ from these estimates. ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under ASC 740, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Retirement and post-retirement liabilities
ASC Topic 715, "Compensation-Retirement Benefits," requires recognition of an asset or liability in the consolidated balance sheet reflecting the funded status of pension and other postretirement benefit plans, such as retiree health and life, with current-year changes in the funded status recognized in the statement of stockholders' equity. The determination of pension plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement benefit plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining other postretirement benefit obligations and expense are the discount rate and the assumed health care cost-trend rates. Our pension plans have assets valued at$3.2 billion as ofDecember 31, 2021 and the plans' benefit obligation is$3.0 billion , resulting in the plans being 107% funded. For 2021, the assumption used for the funded status discount rate was 2.95% for our principal retirement plan obligations. As an indication of the sensitivity of pension liabilities to the discount rate assumption, a 50 basis point reduction in the discount rate at the end of 2021 would have increased plan obligations by approximately$84.0 million . A 50 basis point change in the discount rate used to calculate 2021 benefit would have changed total pension plan expense for 2021 by approximately$7.0 million . To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants, and long-term inflation assumptions. For our principal retirement plan, we used an assumption of 6.3% for our expected return on pension plan assets for 2021. If we were to reduce our expected rate of return assumption by 50 basis points, the benefit for 2021 would have increased by approximately$9.2 million .
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