NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — Description of business, basis of presentation, and summary of significant accounting policies
Description of business: Gannett Co., Inc. ("Gannett", "we", "us", "our", or "the Company") is an innovative, digitally focused media and marketing solutions company committed to fostering the communities in our network and helping them build relationships with their local businesses. On November 19, 2019, New Media Investment Group Inc. ("New Media") completed their acquisition of Gannett ("Legacy Gannett"), which retained the name Gannett Co., Inc. and trades on the New York Stock Exchange under the ticker symbol “GCI”.
Our current portfolio of media assets includes USA TODAY, local media organizations in 46 states in the U.S. and Guam, and Newsquest (a wholly owned subsidiary operating in the United Kingdom (U.K.) with more than 140 local media brands. Gannett also owns the digital marketing services companies ReachLocal, Inc. ("ReachLocal"), UpCurve, Inc. ("UpCurve"), and WordStream, Inc. ("WordStream") and runs the largest media-owned events business in the U.S.
Through USA TODAY, our local property network, and Newsquest, Gannett delivers high-quality, trusted content where and when consumers want to engage on virtually any device or platform. Additionally, the Company has strong relationships with thousands of local and national businesses in both our U.S. and U.K. markets due to our large local and national sales forces and a robust advertising and marketing solutions product suite. The Company reports in two operating segments, Publishing and Marketing Solutions, plus a corporate and other category. A full description of our segments is included in Note 14 - Segment reporting of the notes to the consolidated financial statements.
Basis of presentation and consolidation: The consolidated financial statements include the accounts of Gannett and its subsidiaries, which includes approximately six weeks of revenues and expenses for Legacy Gannett. All significant intercompany accounts and transactions have been eliminated. The Company consolidates entities that it controls due to ownership of a majority voting interest.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Examples of significant estimates include pension and postretirement benefit obligation assumptions, income taxes, leases, self-insurance liabilities, goodwill impairment analysis, stock-based compensation, and valuation of property, plant and equipment and intangible assets. Actual results could differ from those estimates.
Fiscal year: Starting in 2019 and subsequent to our acquisition of Legacy Gannett, our fiscal year coincides with the Gregorian calendar. In 2018 and prior, our fiscal years ended on the last Sunday of the calendar year. Our fiscal year for 2018 was a 52-week year ending on December 30, 2018. Our fiscal year 2017 was a 53-week year ending on December 31, 2017.
Newspaper industry: The newspaper industry and the Company have experienced declining same-store revenue and profitability over the past several years. As a result, the Company has implemented, and continues to implement, plans to reduce costs and preserve cash flow. These actions include cost-reduction programs and the sale of non-core assets. The Company believes these initiatives along with cash provided by operating activities will provide it with the financial resources necessary to invest in the business and provide sufficient cash flow to enable the Company to meet its commitments. However, the Company did recognize goodwill and mastheads impairments during 2019 and 2017. Refer to Note 6 — Goodwill and other intangible assets for further discussion.
Reclassifications: Certain amounts in prior period consolidated financial statements have been reclassified to conform to the current year presentation.
Advertising and marketing services revenues: Pursuant to our acquisition of Legacy Gannett, we realigned the presentation of marketing services revenues generated by our UpCurve subsidiary from other revenues to advertising and marketing services revenue on the Consolidated statements of operations and comprehensive income (loss). As a result of this updated presentation, advertising and marketing services revenues increased and other revenues decreased $58.2 million and $42.0 million for 2018 and 2017, respectively. Operating revenues, net income, retained earnings, and earnings per share remained unchanged.
Segment presentation: In connection with our Legacy Gannett acquisition and as noted above, we reorganized our reportable segments to include (1) Publishing, which consists of our portfolio of regional, national, and international newspaper publishers and (2) Marketing Solutions, which is comprised of our marketing solutions subsidiaries ReachLocal, UpCurve and WordStream. In addition to these operating segments, we have a corporate category that includes activities not directly attributable to a specific segment. This category primarily consists of broad corporate functions and includes legal, human resources, accounting, analytics, finance, and marketing as well as activities and costs not directly attributable to a particular segment and other general business costs.
Accounts receivable: Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company’s allowance for doubtful accounts is based upon several factors including the length of time the receivables are past due, historical payment trends and current economic factors. The Company generally does not require collateral.
Inventories: Inventory consists principally of newsprint, which is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method.
Property, plant, and equipment, software development costs, and depreciation: Property, plant, and equipment are recorded at cost or at fair value for property, plant and equipment related to acquired businesses. Routine maintenance and repairs are expensed as incurred. Depreciation is calculated under the straight-line method over the estimated useful lives, principally up to 40 years for buildings and improvements, up to 30 years for machinery and equipment, and up to 10 years for furniture, fixtures and computer software. Leasehold improvements are amortized under the straight-line method over the shorter of the lease term or estimated useful life of the asset.
We capitalize costs to develop software for internal use when it is determined the development efforts will result in new or additional functionality or new products. Costs incurred prior to meeting these criteria and costs associated with ongoing maintenance are expensed as incurred and included in Operating costs, in addition to amortization of capitalized software development costs, in the accompanying Consolidated statements of operations and comprehensive income (loss). We monitor our existing capitalized software costs and reduce their carrying value as a result of releases rendering previous features or functions obsolete. Software development costs are evaluated for impairment in accordance with our policy for finite-lived intangible assets and other long-lived assets. Costs capitalized as internal use software are amortized on a straight-line basis over an estimated useful life of 3 to 5 years.
A breakout of property, plant and equipment and software is presented below:
|
|
|
|
|
|
|
|
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
Land
|
$
|
105,805
|
|
|
$
|
39,036
|
|
Buildings and improvements
|
416,537
|
|
|
204,753
|
|
Machinery and equipment
|
474,418
|
|
|
274,748
|
|
Furniture, fixtures, and computer software
|
82,651
|
|
|
35,679
|
|
Construction in progress
|
13,687
|
|
|
4,648
|
|
Total
|
1,093,098
|
|
|
558,864
|
|
Less: accumulated depreciation
|
(277,291
|
)
|
|
(219,256
|
)
|
Net property, plant and equipment
|
$
|
815,807
|
|
|
$
|
339,608
|
|
Depreciation expense was $67.2 million, $50.8 million, and $50.4 million for the years ended December 31, 2019, December 30, 2018, and December 31, 2017, respectively.
Business combinations: The Company accounts for acquisitions in accordance with the provisions of Accounting Standards Codification ("ASC") 805 "Business Combinations" ("ASC 805"), which provides guidance for recognition and measurement of identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value. In a business combination, the assets acquired, liabilities assumed and noncontrolling interest in the acquiree are recorded as of the date of acquisition at their respective fair values with limited exceptions. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition.
Goodwill, intangible, and long-lived assets: Intangible assets consist of non-compete agreements, advertiser, subscriber and customer relationships, mastheads, trade names, publication rights and acquired technology. Goodwill is not amortized pursuant to ASC Topic 350 “Intangibles – Goodwill and Other” (“ASC 350”). Mastheads are not amortized because it has been determined that the useful lives of such mastheads are indefinite. Intangible assets that have definite useful lives are amortized over those useful lives and are evaluated for impairment as described above.
In accordance with ASC 350, goodwill and intangible assets with indefinite lives are typically tested for impairment annually or when events indicate that an impairment could exist which may include an economic downturn in a market, a change in the assessment of future operations or a decline in the Company’s stock price. As required by ASC 350, the Company performs its impairment analysis on each of its reporting units. The Company has the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company elects to perform a qualitative assessment and concludes it is not more likely than not that the fair value of the reporting unit is less than its carrying value, no further assessment of that reporting unit’s goodwill is necessary; otherwise goodwill must be tested for impairment. The reporting units have discrete financial information which are regularly reviewed by management. The fair value of the applicable reporting unit is compared to its carrying value. Calculating the fair value of a reporting unit requires significant estimates and assumptions by the Company. The Company estimates fair value by applying third-party market value indicators to projected cash flows and/or projected earnings before interest, taxes, depreciation, and amortization (EBITDA). In applying this methodology, the Company relies on a number of factors, including current operating results and cash flows, expected future operating results and cash flows, future business plans, and market data. If the carrying value of the reporting unit exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value of goodwill over its estimated fair value. For indefinite-lived intangible assets, we perform an impairment test annually or more often if circumstances dictate. Intangible assets that have definite useful lives are amortized over those useful lives and are evaluated for impairment.
Prior to the acquisition of Legacy Gannett, the Company performed its annual impairment assessment on the last day of its fiscal second quarter. As a result of the acquisition of Legacy Gannett in 2019, the Company changed its reporting units. Due to the change in reporting units, goodwill and intangibles were tested for impairment immediately before and immediately after the acquisition. Refer to Note 6 — Goodwill and other intangible assets for additional information on the impairment testing of goodwill and indefinite lived intangible assets.
The Company accounts for long-lived assets in accordance with the provisions of ASC Topic 360, “Property, Plant and Equipment” (“ASC 360”). The Company assesses the recoverability of its long-lived assets, including property, plant and equipment and finite lived intangible assets, whenever events or changes in business circumstances indicate the carrying amount of the assets, or related group of assets, may not be fully recoverable. Impairment indicators include significant under performance relative to historical or projected future operating losses, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business, and significant negative industry or economic trends. 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, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value.
Equity investments: The Company uses the equity method of accounting for investments over which it exercises significant influence but does not control. The Company's share of net earnings or losses from equity method investments is included in Other (income) expense in the Consolidated statements of operations and comprehensive income (loss).
Equity method investments are reviewed for impairment by comparing their fair value to their respective carrying amounts. With respect to private company investments, the Company makes its estimate of fair value by considering available information, that may include recent investee equity transactions, discounted cash flow analyses, estimates based on comparable public company operating multiples and, in certain situations, balance sheet liquidation values. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of time and extent to which the market value has been below cost, the financial condition and near-term prospects of the issuer of the security, the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value and other factors influencing the fair market value, such as general market conditions.
The Company accounts for non-marketable investments over which the Company does not have the ability to exercise significant influence at cost less any impairment. Equity securities without a readily determinable fair value are accounted for at cost, adjusted for impairments and observable price changes in orderly transactions.
Redeemable noncontrolling interests: The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity” (“ASC 480-10-S99-3A”), because their exercise is outside the control of the Company. The redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in one of the Company’s majority-owned subsidiaries. As of December 31, 2019, the redeemable noncontrolling interests are not exercisable.
Revenue recognition: Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are recognized as performance obligations that are satisfied either at a point in time, such as when an advertisement is published, or over time, such as customer subscriptions. The Company’s Consolidated statements of operations and comprehensive income (loss) presents revenues disaggregated by revenue type. Sales taxes and other usage-based taxes are excluded from revenues. For further details surrounding our major revenue streams and specific recognition principles, refer to Note 2 — Revenues.
Income taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 10 — Income taxes for further discussion.
We also evaluate any uncertain tax positions and recognize a liability for the tax benefit associated with an uncertain tax position if it is more likely than not that the tax position will not be sustained on examination by the taxing authorities upon consideration of the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We record a liability for uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs.
Fair value of financial instruments: The carrying value of the Company’s cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short maturity of these instruments. An estimate of the fair value of the Company’s debt is disclosed in Note 7 — Indebtedness. For further details surrounding our policies on fair value measurement including the fair values of our pension plan assets, refer to Note 13 — Fair value measurement.
Cash, cash equivalents, and restricted cash: Cash equivalents represent highly liquid certificates of deposit which have original maturities of three months or less. Restricted cash is held as cash collateral for certain business operations. Restricted cash primarily consists of funding for letters of credit, cash held in an irrevocable grantor trust for our deferred compensation plans and cash held with banking institutions for insurance plans.
The following table presents a reconciliation of cash, cash equivalents, and restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Cash and cash equivalents
|
$
|
156,042
|
|
|
$
|
48,651
|
|
|
$
|
43,056
|
|
Restricted cash included in prepaid expenses and other current assets
|
10,800
|
|
|
4,119
|
|
|
3,106
|
|
Restricted cash included in other assets
|
21,822
|
|
|
—
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
188,664
|
|
|
$
|
52,770
|
|
|
$
|
46,162
|
|
Deferred financing costs: Deferred financing costs consist of costs incurred in connection with debt financings and are recorded as a contra-liability in long-term debt. Such costs are amortized using the effective interest method over the estimated remaining term of the debt. This amortization represents a component of interest expense.
Advertising costs: Advertising costs are expensed in the period incurred. The Company incurred total advertising expenses for the years ended December 31, 2019, December 30, 2018, and December 31, 2017 of $26.8 million, $18.2 million, and $14.6 million, respectively.
Earnings (loss) per share: Basic earnings (loss) per share is computed as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur from the issuance of common shares upon conversion of common stock equivalents.
Stock-based employee compensation: ASC Topic 718, “Compensation – Stock Compensation” requires that all share-based payments to employees and the board of directors, including grants of stock options and restricted stock, be recognized in the consolidated financial statements over the service period (generally the vesting period) based on fair values measured on grant dates, less forfeitures.
Pension and postretirement liabilities: ASC Topic 715, “Compensation – Retirement Benefits” requires recognition of an asset or liability in the consolidated balance sheet reflecting the funded status of pension and other postretirement benefit plans such as retiree health and life, with current-year changes in the funded status recognized in accumulated other comprehensive (loss) income. For the year ended December 31, 2019, net actuarial gains of $7.4 million, net of taxes of $5.1 million were recognized in other comprehensive loss. A net actuarial loss of $1.5 million after valuation allowances was recognized in other comprehensive loss for both years ended December 30, 2018 and December 31, 2017. See Note 8 — Retirement plans and Note 9 — Postretirement benefits other than pension for further details.
Self-insurance liability accruals: The Company maintains self-insured medical and workers’ compensation programs. The Company purchases stop loss coverage from third parties which limits our exposure to large claims. The Company records a liability for healthcare and workers’ compensation costs during the period in which they occur, including an estimate of incurred but not reported claims.
Concentration of risk: Due to the distributed nature of our operations, we are not subject to significant concentrations of risk relating to customers, products, or geographic locations. Our foreign revenues, principally from businesses in the U.K. and ReachLocal international operations, totaled approximately $31.8 million in 2019. Our long-lived assets in foreign countries, principally in the U.K. and ReachLocal international operations, totaled approximately $361.9 million at December 31, 2019.
Leases: We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, Other current liabilities, and Long-term operating lease liabilities on our Consolidated balance sheets. Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The rates implicit within the Company's leases are generally not determinable; therefore, the Company uses judgment to determine the incremental borrowing rate used to calculate the present value of lease payments. The incremental borrowing rate for each lease is primarily based on publicly available information for companies within the same industry and with similar credit profiles and adjusted for the impact of collateralization, the lease term, and other specific terms included in the Company’s lease arrangements. ROU assets are assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
Our lease terms include options to extend or terminate. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
For certain equipment leases, we apply a portfolio approach to account for the operating lease ROU assets and liabilities.
Accrued expenses: A breakout of accrued expenses is presented below:
|
|
|
|
|
|
|
|
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
Compensation
|
$
|
131,006
|
|
|
$
|
30,922
|
|
Taxes (primarily property and sales taxes)
|
18,073
|
|
|
4,466
|
|
Benefits
|
33,070
|
|
|
8,273
|
|
Interest
|
23,602
|
|
|
3,240
|
|
Other
|
100,882
|
|
|
62,696
|
|
Total accrued liabilities
|
$
|
306,633
|
|
|
$
|
109,597
|
|
Loss contingencies: We are subject to various legal proceedings, claims, and regulatory matters, the outcomes of which are subject to significant uncertainty. We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible, or probable and whether it can be reasonably estimated. We accrue
for loss contingencies when such amounts are probable and reasonably estimable. If a contingent liability is only reasonably possible, we will disclose the potential range of the loss if material and estimable.
Foreign currency translation: The statements of income of foreign operations have been translated to U.S. dollars using the average currency exchange rates in effect during the relevant period. The balance sheets have been translated using the currency exchange rates as of the end of the accounting period. The impact of currency exchange rate changes on the translation of the balance sheets are included in Comprehensive income (loss) in the Consolidated statements of operations and comprehensive income (loss) and are classified as Accumulated other comprehensive loss (income) in the Consolidated balance sheets and Consolidated statements of equity.
Supplementary cash flow information: Supplementary cash flow information, including non-cash investing and financing activities, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Cash paid for taxes, net of refunds
|
$
|
1,192
|
|
|
$
|
1,272
|
|
|
$
|
52
|
|
Cash paid for interest
|
$
|
40,208
|
|
|
$
|
31,178
|
|
|
$
|
33,626
|
|
Accrued capital expenditures
|
$
|
2,227
|
|
|
$
|
69
|
|
|
$
|
72
|
|
Common stock issued in exchange for Legacy Gannett shares
|
$
|
391,809
|
|
|
$
|
—
|
|
|
$
|
—
|
|
New accounting pronouncements adopted: The following are new accounting pronouncements which we have adopted in fiscal year 2019:
Leases: On January 1, 2019, the Company adopted ASU 2016-02: Leases (Topic 842), the FASB's new leasing standard. We utilized the modified retrospective transition method by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. We also elected the package of practical expedients permitted under the transition guidance within the new standard, which allows us to carry forward 1) our historical lease classification, 2) our assessment on whether a contract is or contains a lease, and 3) our treatment of initial direct costs for any leases that exist prior to adoption of the new standard. We have also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. We did not elect to apply the hindsight practical expedient when determining the lease term and assessing impairment of right-of-use assets.
Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The rates implicit within the company's leases are generally not determinable; therefore, the company uses judgment to determine the incremental borrowing rate used to calculate the present value of lease payments. The incremental borrowing rate for each lease is primarily based on publicly available information for companies within the same industry and with similar credit profiles and adjusted for the impact of collateralization, the lease term, and other specific terms included in the company’s lease arrangements.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, we recognized net right-of-use assets of approximately $102.5 million and lease liabilities for operating leases of approximately $109.2 million on January 1, 2019. The standard did not materially impact our Consolidated statements of operations and comprehensive income (loss) or Consolidated statements of cash flow. Refer to Note 3 — Leases for further details on the Company's leases.
Income Statement—Reporting Comprehensive Income: In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”)”. This ASU provides entities the option to reclassify tax effects to retained earnings from AOCI which are impacted by the Tax Cuts and Jobs Act (“TCJA”). The ASU is effective for fiscal years beginning after December 15, 2018 but early adoption is permitted. The Company elected not to reclassify stranded tax effects from AOCI to retained earnings, as historically we maintained a full valuation allowance for tax benefits related to AOCI. Therefore, resulting impact of adopting this guidance was not material to our consolidated financial results.
Compensation—Stock Compensation: In June 2018, the FASB issued ASU 2018-07: Compensation - Stock compensation (Topic 718) - Improvements to non-employee share-based payment accounting. This standard contained new guidance which expanded the scope of share based compensation accounting by applying, with limited exceptions, the specific requirements of
employee stock compensation to the accounting for non-employee awards granted in exchange for goods and services. Adopting this guidance did not have a material impact on our consolidated financial statements.
New accounting pronouncements not yet adopted: The following are new accounting pronouncements that we are evaluating for future impacts on our financial position:
Intangibles—Internal-Use Software: In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and other - Internal-use software (Subtopic 350-40): Customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. This guidance is effective for fiscal years beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
Fair Value Measurement—Disclosure Framework: In August 2018, the FASB issued ASU 2018-13: Fair value measurement (Topic 820) - Disclosure framework - Changes to the disclosure requirements for fair value measurement. This new guidance changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption to have a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses: In June 2016, the FASB issued ASU 2016-13: Financial instruments - Credit losses (Topic 326) - Measurement of credit losses on financial instruments, which contains new guidance amending the principles around the recognition of credit losses by mandating entities incorporate an estimate of current expected credit losses when determining the value of certain assets. The guidance also amends reporting around allowances for credit losses on available-for-sale marketable securities. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption to have a material impact on our consolidated financial statements.
Compensation—Retirement Plans: In August 2018, the FASB issued ASU 2018-14: Compensation - retirement benefits - Defined benefit plans - General (Subtopic 715-20) - Disclosure framework - Changes to the disclosure requirements for defined benefit plans. This new guidance changes disclosures related to defined benefit pension and other postretirement benefit plans as part of the disclosure framework project. This guidance is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the provisions of the updated guidance and assessing the impact on our consolidated financial statements.
NOTE 2 — Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the previously applicable accounting standards under ASC Topic 605.
The adoption of ASC Topic 606 resulted in no change to accumulated deficit as of January 1, 2018. Revenue and expenses related to certain license agreements and recognized during the year ended December 30, 2018 decreased by $5.9 million as a result of applying ASC Topic 606.
The following table presents our revenues disaggregated by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Fiscal year ended
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017(1)
|
Print advertising
|
$
|
689,595
|
|
|
$
|
625,065
|
|
|
$
|
598,273
|
|
Digital advertising and marketing services
|
263,049
|
|
|
161,512
|
|
|
127,731
|
|
Total advertising and marketing services
|
952,644
|
|
|
786,577
|
|
|
726,004
|
|
Circulation
|
704,842
|
|
|
574,963
|
|
|
474,324
|
|
Other
|
210,423
|
|
|
164,484
|
|
|
141,676
|
|
Total revenues
|
$
|
1,867,909
|
|
|
$
|
1,526,024
|
|
|
$
|
1,342,004
|
|
(1) Prior period amounts have not been adjusted under the modified retrospective method.
Revenues generated from international operations comprised 2% of our 2019 revenues, which consists of approximately six weeks of operations from Legacy Gannett.
Summary of Accounting Policies for Revenue Recognition
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenues are recognized as performance obligations that are satisfied either at a point in time, such as when an advertisement is published, or over time, such as customer subscriptions.
The Company’s Consolidated statements of operations and comprehensive income (loss) presents revenues disaggregated by revenue type. Sales taxes and other usage-based taxes are excluded from revenues.
Advertising and Marketing Services Revenues
The Company generates advertising revenues primarily by delivering advertising in its national publication, USA TODAY, and in its local publications including newspapers and websites. Advertising revenues are categorized as local retail, local classified, online and national. Revenue is recognized upon publication of the advertisement.
For online marketing products provided by our Marketing Solutions segment, we enter into agreements for products in which our clients typically pay in advance and on a monthly basis. These prepayments include all charges for the included technology and any media services, management, third-party content, and other costs and fees, all of which are accounted for as a single performance obligation. Revenue is then recognized as we purchase and deliver media on behalf of the customer and perform other marketing-related services.
For our advertising and marketing services revenues, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) by performing analyses regarding whether we control the provision of specified goods or services before they are transferred to our customers. We report advertising and marketing services revenues gross when we control advertising inventory before it is transferred to the customer. Our control is evidenced by us being primarily responsible or sharing responsibility for the fulfillment of services and maintaining control over transaction pricing. Certain customers may receive credits, which are accounted for as a separate performance obligation. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We recognize revenue when the performance obligation is satisfied.
Circulation Revenues
Circulation revenues are derived from print and digital subscriptions as well as single copy sales at retail stores, vending racks and boxes. Circulation revenues from subscribers are generally billed to customers at the beginning of the subscription period and are typically recognized over the subscription period as the performance obligations are delivered. The term of customer subscriptions normally ranges from three to twelve months. Circulation revenues from single-copy income are recognized based on the date of publication, net of provisions for related returns.
Commercial Printing and Other Revenues
The Company provides commercial printing services to third parties as a means to generate incremental revenue and utilize excess printing capacity. These customers consist primarily of other publishers that do not have their own printing presses and do not compete with other Gannett publications. The Company also prints other commercial materials, including flyers, business cards and invitations. Revenue is generally recognized upon delivery.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company’s allowance for doubtful accounts is based upon several factors including the length of time the receivables are past due, historical payment trends, and current economic factors. The Company recorded bad debt expense of $9.7 million, $7.7 million and $5.6 million during the years ended December 31, 2019, December 30, 2018, and December 31, 2017, respectively.
Practical Expedients and Exemptions
The Company expenses sales commissions or other costs to obtain contracts when incurred because the amortization period is generally one year or less. These costs are recorded within Selling, general and administrative expenses.
The Company does not disclose unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
Deferred revenue: The Company records deferred revenues when cash payments are received in advance of the Company’s performance. The most significant unsatisfied performance obligation is the delivery of publications to subscription customers. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next three to twelve months in accordance with the terms of the subscriptions.
The Company's payment terms vary by the type and location of the customer and the products or services offered. The period between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
The following table presents changes in the deferred revenue balance for the twelve months ended December 31, 2019 by type of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Year ended December 31, 2019
|
|
Advertising, Marketing Services, and Other
|
|
Circulation
|
|
Total
|
Beginning balance
|
$
|
22,542
|
|
|
$
|
82,645
|
|
|
$
|
105,187
|
|
Acquired deferred revenue
|
42,369
|
|
|
95,341
|
|
|
137,710
|
|
Cash receipts
|
128,504
|
|
|
529,004
|
|
|
657,508
|
|
Revenue recognized
|
(125,971
|
)
|
|
(555,611
|
)
|
|
(681,582
|
)
|
Ending balance
|
$
|
67,444
|
|
|
$
|
151,379
|
|
|
$
|
218,823
|
|
The company’s primary source of deferred revenue is from circulation subscriptions paid in advance of the service provided. The majority of our subscription customers are billed and pay on monthly terms. The remaining deferred revenue balance relates to advertising and other revenue. The $113.6 million increase in deferred revenue as compared to the year ended December 30, 2018 is primarily due to acquired deferred revenue from the acquisition of Legacy Gannett.
NOTE 3 — Leases
We lease certain real estate, vehicles, and equipment. Our leases have remaining lease terms of 1 to 15 years, some of which may include options to extend the leases, and some of which may include options to terminate the leases. The exercise of lease renewal options is at our sole discretion. The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
As of December 31, 2019, our Consolidated balance sheets include $309.1 million of operating lease right-to use assets, $40.0 million of short-term operating lease liabilities included in Other current liabilities, and $297.7 million of long-term operating lease liabilities.
The components of lease expense for 2019 were as follows:
|
|
|
|
|
In thousands
|
2019
|
Operating lease cost (a)
|
$
|
38,985
|
|
Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less
|
5,086
|
|
Net lease cost
|
$
|
44,071
|
|
(a) Includes variable lease costs of $8.4 million and sublease income of $2.5 million for 2019.
Future minimum lease payments under non-cancellable leases as of December 31, 2019 are as follows:
|
|
|
|
|
In thousands
|
Year Ending December 31, (a)
|
2020
|
76,339
|
|
2021
|
76,569
|
|
2022
|
69,230
|
|
2023
|
57,142
|
|
2024
|
50,564
|
|
Thereafter
|
233,615
|
|
Total future minimum lease payments
|
563,459
|
|
Less: Imputed interest
|
225,759
|
|
Total
|
$
|
337,700
|
|
(a) Operating lease payments exclude $8.4 million of legally binding minimum lease payments for leases signed but not yet commenced.
Other information related to leases for 2019 were as follows:
|
|
|
|
|
In thousands, except lease term and discount rate
|
2019
|
Supplemental information
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
35,837
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
28,545
|
|
|
|
Weighted-average remaining lease term (in years)
|
8.3
|
|
Weighted-average discount rate
|
12.4
|
%
|
NOTE 4 — Acquisitions and dispositions
Acquisitions
2019 Acquisitions
The Company acquired substantially all the assets, properties, and business of Legacy Gannett on November 19, 2019. The acquisition, which included the USA TODAY NETWORK (made up of USA TODAY ("USAT") and 109 local media organizations in 46 states in the U.S. and Guam, including digital sites and affiliates), ReachLocal, Inc. ("ReachLocal"), a marketing solutions company, and Newsquest (a wholly owned subsidiary of Legacy Gannett operating in the United Kingdom with more than 140 local media brands), was completed for an aggregate purchase price of $1.3 billion. The acquisition was financed from the new Apollo term loan facility as described in Note 7 — Indebtedness and the issuance of common stock to Legacy Gannett shareholders as described in Note 11 — Supplemental equity information. The rationale for the acquisition was primarily the attractive nature of the various publications, businesses, and digital platforms as well as the estimated cash flows and cost-saving and revenue-generating opportunities.
The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets and liabilities assumed, deferred income taxes, and assumed income and non-income based tax liabilities. The following table summarizes the preliminary determination of fair values of the assets and liabilities for the Legacy Gannett acquisition:
|
|
|
|
|
in thousands
|
|
Cash and restricted cash acquired
|
$
|
149,452
|
|
Current assets
|
383,965
|
|
Other assets
|
97,459
|
|
Property, plant and equipment
|
536,511
|
|
Operating lease assets
|
200,550
|
|
Developed technology
|
47,770
|
|
Advertiser relationships
|
272,740
|
|
Subscriber relationships
|
104,490
|
|
Customer relationships
|
63,820
|
|
Trade names
|
16,470
|
|
Mastheads
|
97,340
|
|
Goodwill
|
644,766
|
|
Total assets
|
2,615,333
|
|
Current liabilities assumed
|
513,752
|
|
Long-term liabilities assumed
|
787,019
|
|
Total liabilities
|
1,300,771
|
|
Net assets
|
$
|
1,314,562
|
|
Outside of the Legacy Gannett acquisition, the Company also acquired substantially all the assets, properties and business of certain publications and businesses in 2019, which included 11 daily newspapers, 11 weekly publications, nine shoppers, a remnant advertising agency, five events production businesses, and a business community and networking platform for an aggregate purchase price of $46.6 million including estimated working capital. The acquisitions were financed from cash on hand. The rationale for the acquisitions was primarily the attractive nature, as applicable, of the various publications, businesses, and digital platforms as well as the estimated cash flows and cost-saving and revenue-generating opportunities available.
The following table summarizes the preliminary determination of fair values of the assets and liabilities for the aforementioned acquisitions:
|
|
|
|
|
in thousands
|
|
Cash acquired
|
$
|
323
|
|
Current assets
|
9,320
|
|
Other assets
|
950
|
|
Property, plant and equipment
|
20,492
|
|
Non-compete agreements
|
280
|
|
Advertiser relationships
|
2,357
|
|
Subscriber relationships
|
1,457
|
|
Customer relationships
|
1,323
|
|
Software
|
140
|
|
Trade names
|
299
|
|
Mastheads
|
2,896
|
|
Goodwill
|
20,850
|
|
Total assets
|
60,687
|
|
Current liabilities assumed
|
11,961
|
|
Long-term liabilities assumed
|
463
|
|
Total liabilities
|
12,424
|
|
Minority interest
|
1,651
|
|
Net assets
|
$
|
46,612
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. Three basic approaches were used to determine value: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets).
The weighted average amortization periods for recently acquired amortizable intangible assets are equal to or similar to the periods presented in Note 6 — Goodwill and other intangible assets.
The Company expensed $60.6 million of acquisition-related costs during the year ended December 31, 2019. For tax purposes, the amount of goodwill that is expected to be deductible is $17.0 million and is related to 2019 acquisitions other than Legacy Gannett. Refer to allocation of goodwill by segment in Note 6 — Goodwill and other intangible assets.
2018 Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on November 16, 2018, November 14, 2018, October 1, 2018, August 15, 2018, July 2, 2018, June 18, 2018, June 4, 2018, May 11, 2018, May 1, 2018, April 2, 2018, March 31, 2018, March 6, 2018, February 28, 2018, February 23, 2018, and February 7, 2018 (“2018 Acquisitions”), which included seven business publications, eight daily newspapers, 16 weekly publications, one shopper, a print facility, an events production business, cloud services, and digital platforms and related domains for an aggregate purchase price of $205.8 million, including working capital and contingent consideration. The acquisitions were financed from cash on hand. The rationale for the acquisitions was primarily the attractive nature, as applicable, of the various publications, businesses, and digital platforms as well as the estimated cash flows and cost-saving and revenue-generating opportunities available.
In the August 15, 2018 acquisition, the Company acquired an 80% equity interest in the acquiree, and the minority equity owners retained a 20% interest, which has been classified as noncontrolling interest in the accompanying financial statements. Noncontrolling interests with embedded redemption features, such as put rights, that are not solely within the control of the Company are considered redeemable noncontrolling interests and are presented outside of stockholders’ equity on the Company's Consolidated balance sheets. At any time following the second anniversary of the closing of the acquisition, the minority equity owners shall have the right to sell all but not less than all of their shares at fair market value.
Certain of the Company's 2018 Acquisitions include contingent consideration arrangements, which are primarily payable to the sellers based on the passage of time or as a component of earnings above an agreed-upon target and are recorded at estimated fair value. As of December 31, 2019, the Company has a liability for contingent consideration of $1.1 million.
The Company accounted for the 2018 Acquisitions using the acquisition method of accounting for those acquisitions determined to meet the definition of a business. The net assets, including goodwill, have been recorded in the Consolidated balance sheets at their fair values in accordance with Accounting Standards Codification ("ASC") 805, “Business Combinations” (“ASC 805”).
The 2018 Acquisitions that were determined to be asset acquisitions were measured at the fair value of the consideration transferred on the acquisition date. Intangible assets acquired in an asset acquisition have been recognized in accordance with ASC 350 “Intangibles - Goodwill and Other”. Goodwill is not recognized in an asset acquisition.
The following table summarizes the determination of fair values of the assets and liabilities for the 2018 Acquisitions:
|
|
|
|
|
in thousands
|
|
Cash acquired
|
$
|
1,688
|
|
Current assets
|
29,169
|
|
Other assets
|
447
|
|
Property, plant and equipment
|
18,340
|
|
Non-compete agreements
|
370
|
|
Advertiser relationships
|
51,395
|
|
Subscriber relationships
|
36,115
|
|
Customer relationships
|
14,063
|
|
Trade names
|
1,810
|
|
Mastheads
|
13,678
|
|
Goodwill
|
72,879
|
|
Total assets
|
239,954
|
|
Current liabilities assumed
|
32,441
|
|
Long-term liabilities assumed
|
92
|
|
Total liabilities
|
32,533
|
|
Redeemable noncontrolling interest
|
1,636
|
|
Net assets
|
$
|
205,785
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. Three basic approaches were used to determine value: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets).
The weighted average amortization periods for recently acquired amortizable intangible assets are equal to or similar to the periods presented in Note 6 — Goodwill and other intangible assets.
The Company expensed $2.7 million of acquisition-related costs for the 2018 Acquisitions during the year ended December 30, 2018. For tax purposes, the amount of goodwill that is expected to be deductible is $72.0 million, excluding goodwill attributable to the 20% noncontrolling interest. Refer to allocation of goodwill by segment in Note 6 — Goodwill and other intangible assets.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies.
2017 Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on November 6, 2017, October 30, 2017, October 2, 2017, July 6, 2017, June 30, 2017, February 10, 2017, and January 31, 2017
(“2017 Acquisitions”), which included four business publications, 22 daily newspapers, 34 weekly publications, 24 shoppers, two customer relationship management solutions providers, a social media app, and an event production business for an aggregate purchase price of $165.1 million, including working capital. The acquisitions were financed from cash on hand. The rationale for the acquisitions was primarily due to the attractive nature, as applicable, of the newspaper assets and event production business, and cash flows combined with cost-saving and revenue-generating opportunities available.
The Company accounted for the 2017 Acquisitions under the acquisition method of accounting. The net assets, including goodwill, have been recorded in the Consolidated balance sheets at their fair values in accordance with ASC 805.
The following table summarizes the fair values of the assets and liabilities for the 2017 Acquisitions:
|
|
|
|
|
in thousands
|
|
Current assets
|
$
|
20,870
|
|
Other assets
|
108
|
|
Property, plant and equipment
|
49,883
|
|
Noncompete agreements
|
532
|
|
Advertiser relationships
|
34,077
|
|
Subscriber relationships
|
26,926
|
|
Customer relationships
|
5,638
|
|
Software
|
704
|
|
Mastheads
|
9,902
|
|
Goodwill
|
37,652
|
|
Total assets
|
186,292
|
|
Current liabilities assumed
|
21,100
|
|
Long-term liabilities assumed
|
139
|
|
Total liabilities
|
21,239
|
|
Net assets
|
$
|
165,053
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed, using the same three approaches that were used to determine value in 2018: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets). The weighted average amortization periods for recently acquired amortizable intangible assets are in line with those listed in Note 6 — Goodwill and other intangible assets.
The Company expensed $2.0 million of acquisition-related costs for the 2017 Acquisitions during the year ended December 31, 2017. For tax purposes, the amount of goodwill that is expected to be deductible is $37.7 million. Refer to allocation of goodwill by segment in Note 6 — Goodwill and other intangible assets
Dispositions
On May 11, 2018, the Company completed its sale of certain publications and related assets in Alaska for approximately $2.4 million, including working capital. As a result, a nominal pre-tax gain, net of selling expenses, is included in Net (gain) loss on sale or disposal of assets on the Consolidated statements of operations and comprehensive income (loss) during the year ended December 30, 2018.
On February 27, 2018, the Company sold a parcel of land and a building located in Framingham, Massachusetts for a sale price of $9.3 million and recognized a pre-tax gain of approximately $3.3 million, net of selling expenses, which is included in Net (gain) loss on sale or disposal of assets on the Consolidated statements of operations and comprehensive income (loss) during the year ended December 30, 2018.
On June 2, 2017, we completed the sale of the Mail Tribune, located in Medford, Oregon, for approximately $14.7 million, including working capital. As a result, a pre-tax gain of approximately $5.4 million, net of selling expenses, is included in Net
(gain) loss on sale or disposal of assets on the Consolidated statements of operations and comprehensive income (loss) during the year ended December 31, 2017.
Pro forma information
The following table sets forth unaudited pro forma results of operations assuming the Legacy Gannett acquisition, along with transactions necessary to finance the acquisitions, occurred at the beginning of 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
Unaudited
|
in thousands (except per share amounts)
|
2019
|
|
2018
|
Total revenues
|
$
|
4,177,583
|
|
|
$
|
4,440,491
|
|
Net loss
|
$
|
(292,395
|
)
|
|
$
|
(169,617
|
)
|
Earnings per share - diluted
|
$
|
(2.27
|
)
|
|
$
|
(1.31
|
)
|
This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect depreciation expense and amortization of intangibles related to the fair value adjustments of the assets acquired, additional interest expense related to the financing of the transactions, the elimination of acquisition-related costs, and the related tax effects of the adjustments.
NOTE 5 — Integration and reorganization costs and long-lived asset impairments
Over the past several years, in furtherance of the Company’s cost-reduction and cash-preservation plans outlined in Note 1 — Description of business, basis of presentation, and summary of significant accounting policies, the Company has engaged in a series of individual restructuring programs designed primarily to right-size the Company’s employee base, consolidate facilities, and improve operations, including those of recently acquired entities. These initiatives impact all of the Company’s geographic regions and are often influenced by the terms of union contracts within the region. All costs related to these programs, which primarily include severance expense, are accrued at the time of the program announcement or over the remaining service period.
Severance-related expenses: We recorded expenses for severance and related costs by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
2019
|
|
2018
|
|
2017
|
Severance and Related Costs
|
|
|
|
|
|
Publishing
|
$
|
19,556
|
|
|
$
|
11,678
|
|
|
$
|
6,703
|
|
Marketing Solutions
|
1,916
|
|
|
—
|
|
|
512
|
|
Corporate and other
|
19,080
|
|
|
262
|
|
|
445
|
|
Total
|
$
|
40,552
|
|
|
$
|
11,940
|
|
|
$
|
7,660
|
|
A rollforward of the accrued severance and related costs included in accrued expenses on the balance sheet for the years ended December 31, 2019 and December 30, 2018 is outlined below:
|
|
|
|
|
in thousands
|
Severance and
Related Costs
|
Balance at December 31, 2017
|
$
|
717
|
|
Restructuring provision included in integration and reorganization costs
|
11,940
|
|
Cash payments
|
(10,103
|
)
|
Balance at December 31, 2018
|
2,554
|
|
Acquired restructuring provision balances
|
692
|
|
Restructuring provision included in integration and reorganization costs
|
40,552
|
|
Cash payments
|
(13,013
|
)
|
Balance at December 31, 2019
|
$
|
30,785
|
|
The restructuring reserve balance is expected to be paid out over the next twelve months.
Facility consolidation and other restructuring-related expenses: We recorded facility consolidation charges and other restructuring-related costs by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
2019
|
|
2018
|
|
2017
|
Facility Consolidation and Other Restructuring-Related Charges
|
|
|
|
|
|
Publishing
|
$
|
1,780
|
|
|
$
|
2,809
|
|
|
$
|
1,243
|
|
Marketing Solutions
|
21
|
|
|
—
|
|
|
—
|
|
Corporate and other
|
5,048
|
|
|
262
|
|
|
—
|
|
Total
|
$
|
6,849
|
|
|
$
|
3,071
|
|
|
$
|
1,243
|
|
Long-lived asset impairment charges and accelerated depreciation: As part of ongoing cost efficiency programs, the Company has ceased a number of print operations. Pursuant to these actions, we recorded long-lived asset impairment charges by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Publishing
|
$
|
3,009
|
|
|
$
|
1,538
|
|
|
$
|
7,042
|
|
Corporate and other
|
—
|
|
|
—
|
|
|
100
|
|
Total
|
$
|
3,009
|
|
|
$
|
1,538
|
|
|
$
|
7,142
|
|
In addition to the long-lived asset impairment charges outlined above, we also recorded accelerated depreciation of $7.9 million, $3.6 million, and $2.4 million for the years ended December 31, 2019, December 30, 2018, and December 31, 2017,
respectively. These expenses, which were recorded as a component of Depreciation and amortization on the Consolidated statements of operations and comprehensive income (loss), were incurred at the Publishing segment.
NOTE 6 — Goodwill and other intangible assets
Goodwill and intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortized intangible assets:
|
|
|
|
Advertiser relationships
|
$
|
534,161
|
|
|
$
|
75,363
|
|
|
$
|
458,798
|
|
Customer relationships
|
109,674
|
|
|
14,303
|
|
|
95,371
|
|
Subscriber relationships
|
259,391
|
|
|
44,878
|
|
|
214,513
|
|
Other intangible assets
|
76,552
|
|
|
11,229
|
|
|
65,323
|
|
Total
|
$
|
979,778
|
|
|
$
|
145,773
|
|
|
$
|
834,005
|
|
Nonamortized intangible assets:
|
|
|
|
|
|
Goodwill
|
$
|
914,331
|
|
|
|
|
|
Mastheads
|
178,559
|
|
|
|
|
|
Total
|
$
|
1,092,890
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortized intangible assets:
|
|
|
|
Advertiser relationships
|
$
|
260,142
|
|
|
$
|
53,477
|
|
|
$
|
206,665
|
|
Customer relationships
|
44,630
|
|
|
8,704
|
|
|
35,926
|
|
Subscriber relationships
|
153,923
|
|
|
31,560
|
|
|
122,363
|
|
Other intangible assets
|
13,046
|
|
|
7,802
|
|
|
5,244
|
|
Total
|
$
|
471,741
|
|
|
$
|
101,543
|
|
|
$
|
370,198
|
|
Nonamortized intangible assets:
|
|
|
|
|
|
Goodwill
|
$
|
310,737
|
|
|
|
|
|
Mastheads
|
115,856
|
|
|
|
|
|
Total
|
$
|
426,593
|
|
|
|
|
|
As of December 31, 2019, the weighted average amortization periods for amortizable intangible assets are 11.1 years for advertiser relationships, 9.8 years for customer relationships, 10.5 years for subscriber relationships, and 4.6 years for other intangible assets. The weighted average amortization period in total for all amortizable intangible assets is 10.3 years.
Amortization expense was $44.7 million, $34.0 million, and $24.0 million for the years ended December 31, 2019, December 30, 2018, and December 31, 2017, respectively. Estimated future amortization expense as of December 31, 2019, is as follows:
|
|
|
|
|
In thousands
|
2020
|
$
|
110,136
|
|
2021
|
109,854
|
|
2022
|
108,179
|
|
2023
|
102,994
|
|
2024
|
101,026
|
|
Thereafter
|
301,816
|
|
Total
|
$
|
834,005
|
|
The balances and changes in the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Publishing
|
|
Marketing Solutions
|
|
Consolidated
|
Balance at December 31, 2017, net of accumulated impairment losses of $25,641:
|
$
|
208,828
|
|
|
$
|
27,727
|
|
|
$
|
236,555
|
|
Goodwill acquired in business combinations
|
71,011
|
|
|
2,715
|
|
|
73,726
|
|
Measurement period adjustments
|
456
|
|
|
—
|
|
|
456
|
|
Balance at December 30, 2018, net of accumulated impairment losses of $25,641:
|
$
|
280,295
|
|
|
$
|
30,442
|
|
|
$
|
310,737
|
|
Goodwill acquired in business combinations
|
498,061
|
|
|
167,555
|
|
|
665,616
|
|
Goodwill impairment
|
(62,280
|
)
|
|
—
|
|
|
(62,280
|
)
|
Goodwill related to divestitures
|
(42
|
)
|
|
—
|
|
|
(42
|
)
|
Measurement period adjustments
|
(852
|
)
|
|
—
|
|
|
(852
|
)
|
Foreign currency exchange rate changes
|
1,152
|
|
|
—
|
|
|
1,152
|
|
Balance at December 31, 2019, net of accumulated impairment losses of $87,921:
|
$
|
716,334
|
|
|
$
|
197,997
|
|
|
$
|
914,331
|
|
Historically, the Company’s annual impairment assessment is made on the last day of its fiscal second quarter. In 2019, the Company performed an additional assessment during the fourth quarter as a result of the acquisition of Legacy Gannett and the related restructuring of its reporting units.
The Company performed its 2019 annual assessment for possible impairment of the carrying value of goodwill and indefinite-lived intangibles as of June 30, 2019. The fair values of the Company’s reporting units, including Newspapers and BridgeTower, which include newspaper mastheads, were estimated using the expected present value of future cash flows, recent industry multiples and using estimates, judgments and assumptions that management believes were appropriate in the circumstances. The estimates and judgments used in the assessment included multiples for EBITDA, the weighted average cost of capital, and the terminal growth rate. The Company determined the future cash flow and industry multiple analyses provided the best estimate of the fair value of its reporting units. Key assumptions in the impairment analysis include revenue and EBITDA projections, discount rates, long-term growth rates, and the effective tax rate the Company determined to be appropriate. Revenue projections reflected slight declines in the current and next year, and revenues were expected to moderate to a terminal growth rate of 0.5%. The fair value of the Newspaper reporting unit exceeded the carrying value by less than 10%.
The total Company’s estimate of reporting unit fair values was reconciled to its then market capitalization (based upon the stock market price and fair value of debt) plus an estimated control premium.
The Company used a “relief from royalty” approach, a discounted cash flow model, to determine the fair value of its indefinite-lived intangible assets. The estimated fair value equaled or exceeded carrying value for the masthead units of accounting, including east, central, west and BridgeTower. The fair value of mastheads exceeded carrying value by less than 10% for the central and east regions. Key assumptions within the masthead analysis included revenue projections, discount rates, royalty rates, long-term growth rates and the effective tax rate that the Company determined to be appropriate. Revenue projections reflected declines in the current and next year, and revenues were expected to moderate to a terminal growth rate of 0.5%.
After the completion of its acquisition of Legacy Gannett, the Company reorganized its reporting units to align with its new segment structure. Due to the change in the composition of the reporting units, the Company performed additional impairment tests for goodwill and indefinite-lived intangible assets before and after the reorganization. Similar methodologies and assumptions were utilized for the post-reorganization impairment assessment, as described above. Fair values of the reporting units were determined to be greater than the carrying value of the reporting units, and the estimated fair value exceeded carrying value for all mastheads.
In the analysis performed before the reorganization, the fair value of the Newspapers reporting unit did not exceed the carrying value. The primary factors impacting the decrease in fair value were the Company’s third and fourth quarter financial performance and its declining stock price, which was, in part, related to the announcement of the Company’s acquisition of Legacy Gannett. As a result, the Company recorded a goodwill impairment of $62.3 million within the Newspapers reporting unit. In addition, the fair value of the mastheads in the east, central, west and BridgeTower regions did not exceed carrying value and accordingly the Company recorded an impairment of $38.4 million. Key assumptions within the impairment analyses included revenue and EBITDA projections, discount rates, royalty rates, long-term growth rates, and the effective tax rate that the Company considers appropriate. Revenue projections reflected continued declines in early years, which are expected to moderate to a terminal rate of loss of 1% with in the Newspapers reporting unit. EBITDA projections as a percentage of revenue show improvement over the next couple of years, largely due to continued expense reductions, and are expected to stabilize to an average rate of approximately 17% in the outer years. Discount rates were 20%, royalty rates ranged from 1.25% to 1.50%, and the effective tax rate was 27%.
The Company considered the impairment of goodwill and mastheads in Newspapers to be a potential indicator of impairment under ASC 360. The Company determined the long-lived asset groups were the same as its units of accounting. The Company performed an analysis of its undiscounted cash flows in the east, central and west regions to determine if there was an impairment of long-lived assets. The sum of undiscounted cash flows over the primary asset’s weighted-average remaining useful life exceeded the group’s carrying value, so no impairment was recorded. There were no indicators of impairment on the long-lived asset group for BridgeTower.
Subsequent to the acquisition of Legacy Gannett and management restructuring, the Company’s reporting units are Domestic Publishing, Newsquest and Marketing Solutions. The Legacy New Media units of accounting (east, central, west and BridgeTower) were reviewed for impairment and the Company concluded no impairment indicators were present. The fair values for Domestic Publishing and Marketing Solutions goodwill are greater than the carrying values; however, the difference between the two values is less than 10%. There is no headroom for Newsquest. For Domestic Publishing, the revenue projections mirrored the Legacy New Media analysis and were increased by the revenues expected to be earned by the Legacy Gannett business. They reflected continued declines in early years and that revenues are expected to moderate to a terminal rate of loss of 0.5%. EBITDA projections as a percentage of revenue show improvement over the next couple of years, largely due to expected synergies, facility consolidation and continued expense reductions, and then average to a rate of approximately 22% in the outer years. Discount rates were 21%, and the effective tax rate was 27%. For Marketing Solutions, revenues are expected to increase at a rate of approximately 7% to 10% for several years. The terminal growth rate is 3%. EBITDA projections as a percentage of revenue show improvement over the next couple of years and then average to approximately 12% to 13% beyond that. Discount rates were 21%, and the effective tax rate was 27%. Since there were no changes to the Newsquest reporting unit as a result of the acquisition, the fair value of Newsquest was derived from the analysis performed for the purchase price allocation.
As of December 31, 2019, the Company performed a review of potential impairment indicators, noting its financial results and forecast had not changed materially since the assessment due to restructuring, and it was determined no indicators of impairment were present.
As of December 30, 2018, the Company had performed a review of potential impairment indicators, noting its financial results and forecast had not changed materially since the annual impairment assessment, and it was determined no indicators of impairment were present.
The newspaper industry and the Company have experienced declining same-store revenue and profitability over the past several years. Should general economic, market or business conditions decline and have a negative impact on estimates of future cash flow and market transaction multiples, the Company may be required to record additional impairment charges in the future.
NOTE 7 — Indebtedness
Apollo Term Loan
In November 2019, pursuant to the acquisition of Legacy Gannett, the Company entered into a five-year, senior-secured term loan facility with Apollo Capital Management, L.P. ("Apollo") in an aggregate principal amount of approximately $1.8 billion. The term loan facility, which matures on November 19, 2024, generally bears interest at the rate of 11.5% per annum. Origination fees totaled 6.5% of the total principal amount of the financing at closing. Pursuant to the agreement, Apollo has the right to designate two individuals to attend Board of Directors meetings as non-fiduciary and non-voting observers and participants. In addition, the Company's total gross leverage ratio, defined generally as the ratio of consolidated debt to EBITDA, cannot exceed 4.00:1.00 as of the origination date, gradually decreasing to an upper threshold of 3.00:1.00. If the total gross leverage ratio exceeds the aforementioned thresholds, Apollo has the right to appoint up to two voting directors.
In connection with the Apollo term loan facility, the Company incurred approximately $4.9 million of fees and expenses, which were capitalized in deferred financing costs and will be amortized over the term of the term loan facility using the effective interest method. In addition, the Company recognized $116.6 million of lender fees, which are capitalized and will also be amortized over the term of the term loan facility.
The Company is permitted to prepay the principal of the term loan facility, in whole or in part, at par plus accrued and unpaid interest, without any prepayment premium or penalty. The term loan facility is guaranteed by the wholly-owned material subsidiaries of the Company, and all obligations of the Company and its subsidiary guarantors are or will be secured by first priority liens on certain material real property, equity interests, land, buildings, and fixtures. The term loan facility contains customary representations and warranties, affirmative covenants, and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, dividends and other distributions, capital expenditures, and events of default. The Company used the proceeds of the term loan facility to (i) partially fund the acquisition of Legacy Gannett, (ii) repay, prepay, repurchase, redeem, or otherwise discharge in full each of the existing financing facilities (as defined in the agreement and discussed in part below), and (iii) pay fees and expenses incurred to obtain the term loan facility. As of December 31, 2019, the Company is in compliance with all of the covenants and obligations under the Apollo term loan facility.
As of December 31, 2019, the Company had $1.8 billion in aggregate principal outstanding under the term loan facility,$4.7 million of deferred financing costs, and $111.8 million of capitalized lender fees. During the year ended December 31, 2019, the Company recorded $23.5 million in interest expense. Amortization of deferred financing costs totaled $2.6 million for the year ended December 31, 2019. The effective interest rate is 13.2%.
New Media Credit Agreement
Prior to the acquisition of Legacy Gannett, the Company, through its wholly-owned subsidiary New Media Holdings II LLC (the “New Media Borrower”) maintained secured credit facilities (the “Credit Facilities”) under an agreement (the “New Media Credit Agreement”) with a syndication of lenders, including a term loan facility and a revolving credit facility. The term loan facility was scheduled to expire on July 14, 2022 and the revolving credit facility was scheduled to expire on July 14, 2021. Maximum borrowings under the revolving credit facility, including letters of credit, totaled $40.0 million. The New Media Credit Agreement contained customary representations and warranties and affirmative covenants and negative covenants applicable to Holdings I, the New Media Borrower, and the New Media Borrower's subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, dividends and other distributions, and events of default. The New Media Credit Agreement also contained a financial covenant requiring Holdings I, the New Media Borrower, and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of 3.25:1.00.
Pursuant to the acquisition of Legacy Gannett in November 2019 and the origination of the Apollo term loan facility, all outstanding secured term facilities, incremental facilities, revolving credit facilities, and incremental term loans under the New Media Credit Agreement were paid in full or terminated. Furthermore, all guarantees and security interests in respect of the New Media Credit Agreement were released. As a result, the Company recognized a loss on extinguishment of debt of $3.7 million.
Advantage Credit Agreements
In connection with the purchase of the assets of Halifax Media in 2015, the Company assumed obligations of Halifax Media including the amount owing ($8.0 million at that time) under the credit agreement dated June 18, 2013 between Halifax
Alabama, LLC and Southeast Community Development Fund V, LLC. This debt bore interest at an annual rate of 2% and was repaid in full on April 1, 2019.
Convertible debt
On April 9, 2018, Legacy Gannett completed an offering of 4.75% convertible senior notes, with an initial offering size of $175.0 million aggregate principal amount. As part of the offering, the initial purchaser of the notes exercised its option to purchase an additional $26.3 million aggregate principal amount of notes, resulting in total aggregate principal of $201.3 million and net proceeds of approximately $195.3 million. Interest on the notes is payable semi-annually in arrears. The notes mature on April 15, 2024 with our earliest redemption date being April 15, 2022. The stated conversion rate of the notes is 82.4572 shares per $1,000 in principal or approximately $12.13 per share.
Upon conversion, we have the option to settle in cash, shares of our common stock, or a combination of the two. Additionally, holders may convert the notes at their option prior to January 15, 2024 only if one or more of the following conditions are present: (1) if, during any 20 of the 30 trading days immediately preceding a quarter end, our common stock trading price is 130% of the stated conversion price, (2) if, during the 5 business day period after any 10 consecutive trading day period, the trading price per $1,000 principal amount of notes is less than 98% of the product of (a) the last reported sale price of the Company's common stock and (b) the conversion rate on each such trading day, or (3) a qualified change in control event occurs. Depending on the nature of the triggering event, the conversion rate may also be subject to adjustment.
The Company's acquisition of Legacy Gannett constituted a Fundamental Change and Make-Whole Fundamental Change under the terms of the indenture governing the notes. At the acquisition date, the Company delivered to noteholders a notice offering the right to surrender all or a portion of their notes for cash on December 31, 2019. Holders were required to surrender their notes by December 30, 2019 and in return, the Company redeemed the notes for either (1) cash at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest from October 15, 2019 to December 29, 2019 (2) converted equity plus cash at the stated conversion rate of 82.4572 shares per $1,000 in principal, comprised of 0.5427 shares of Parent common stock, plus $6.25 of cash. On December 31, 2019, we completed the redemption of $198.0 million in aggregate principal in exchange for cash.
The $3.3 million principal value of the notes is reported as convertible debt in the Consolidated balance sheets. The effective interest rate on the notes was 6.05% as of December 31, 2019. During the year ended December 31, 2019, the Company recorded $1.3 million in interest expense, of which $1.1 million is cash interest paid on aforementioned redemption.
NOTE 8 — Retirement plans
Defined benefit plans
The Company maintains a number of defined benefit pension plans which cover certain employees. The Company uses the accrued benefit actuarial method and best estimate assumptions to determine pension costs, liabilities, and other pension information for defined benefit plans.
In connection with the acquisition of Legacy Gannett, the Company assumed the assets and obligations of four defined benefit plans: the Gannett Retirement Plan ("GRP"), the Newsquest and Romanes Pension Schemes in the U.K. ("U.K. Pension Plans"), the Newspaper Guild of Detroit Pension Plan, the 2015 SERP, and a supplemental non-qualified retirement plan assumed pursuant to Legacy Gannett's acquisition of JMG (JMG Plan). Upon the change in control, all of the Gannett SERP benefits accrued as of the date of acquisition are to be paid out as a lump sum within 45 days following the transaction. As of December 31, 2019, the Company has paid $87.8 million of these lump sum payouts.
Additionally, the George W. Prescott Company pension plan was assumed in the Enterprise News Media, LLC acquisition in 2006. This plan was amended to freeze all future benefit accruals by December 31, 2008, except for a select group of union employees whose benefits were frozen during 2009. The Times Publishing Company pension plan, another defined benefit plan assumed pursuant to an acquisition, was frozen prior to the acquisition.
The following table provides a reconciliation of benefit obligations, plan assets, and funded status, along with the related amounts in the consolidated balance sheets, of the Company’s pension plans as of December 31, 2019 and December 30, 2018:
|
|
|
|
|
|
|
|
|
in thousands
|
Year Ended
|
|
December 31, 2019
|
|
December 30, 2018
|
Change in projected benefit obligation:
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
74,190
|
|
|
$
|
82,344
|
|
Service cost
|
999
|
|
|
606
|
|
Interest cost
|
12,408
|
|
|
2,775
|
|
Actuarial (gain) loss
|
3,701
|
|
|
(6,228
|
)
|
Foreign currency translation
|
11,812
|
|
|
—
|
|
Benefits and expenses paid
|
(111,842
|
)
|
|
(5,307
|
)
|
Acquisitions
|
2,981,914
|
|
|
—
|
|
Projected benefit obligation at end of period
|
$
|
2,973,182
|
|
|
$
|
74,190
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
54,035
|
|
|
$
|
61,539
|
|
Actual return on plan assets
|
38,054
|
|
|
(3,648
|
)
|
Employer contributions
|
91,466
|
|
|
1,451
|
|
Acquisitions
|
2,771,796
|
|
|
—
|
|
Benefits paid
|
(111,022
|
)
|
|
(4,705
|
)
|
Foreign currency translation
|
12,787
|
|
|
—
|
|
Expenses paid
|
(820
|
)
|
|
(602
|
)
|
Fair value of plan assets at end of period
|
$
|
2,856,296
|
|
|
$
|
54,035
|
|
Reconciliation of funded status:
|
|
|
|
Benefit obligation at end of period
|
$
|
(2,973,182
|
)
|
|
$
|
(74,190
|
)
|
Fair value of assets at end of period
|
2,856,296
|
|
|
54,035
|
|
Funded status
|
(116,886
|
)
|
|
(20,155
|
)
|
Unrecognized actuarial (gain) loss
|
(4,527
|
)
|
|
7,986
|
|
Net accrued benefit cost
|
$
|
(121,413
|
)
|
|
$
|
(12,169
|
)
|
Balance sheet presentation:
|
|
|
|
Other assets
|
$
|
58,818
|
|
|
$
|
—
|
|
Accrued expenses
|
6,771
|
|
|
—
|
|
Pension and other postretirement benefit obligations
|
168,933
|
|
|
20,155
|
|
Accumulated other comprehensive (loss) income
|
4,527
|
|
|
(7,986
|
)
|
Net accrued benefit cost
|
$
|
(121,413
|
)
|
|
$
|
(12,169
|
)
|
The following table presents information for our retirement plans for which accumulated benefits exceed assets:
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
December 31,
2019
|
|
December 30,
2018
|
Accumulated benefit obligation
|
$
|
2,039,075
|
|
|
$
|
74,190
|
|
Fair value of plan assets
|
$
|
1,865,123
|
|
|
$
|
54,035
|
|
The following table presents information for our retirement plans for which assets exceed accumulated benefits:
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
December 31,
2019
|
|
December 30,
2018
|
Accumulated benefit obligation
|
$
|
932,357
|
|
|
$
|
—
|
|
Fair value of plan assets
|
$
|
991,173
|
|
|
$
|
—
|
|
The following table presents information for our retirement plans for which projected benefit obligations exceed assets:
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
December 31,
2019
|
|
December 30,
2018
|
Projected benefit obligation
|
$
|
2,040,825
|
|
|
$
|
74,190
|
|
Fair value of plan assets
|
$
|
1,865,123
|
|
|
$
|
54,035
|
|
The following table presents information for our retirement plans for which assets exceed projected benefit obligations:
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
December 31,
2019
|
|
December 30,
2018
|
Projected benefit obligation
|
$
|
932,357
|
|
|
$
|
—
|
|
Fair value of plan assets
|
$
|
991,173
|
|
|
$
|
—
|
|
The funded status (on a projected benefit obligation basis) of our plans at December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
Fair Value of Plan Assets
|
|
Benefit Obligation
|
|
Funded Status
|
GRP
|
$
|
1,705,225
|
|
|
$
|
1,842,480
|
|
|
$
|
(137,255
|
)
|
George W. Prescott Pension Plan
|
20,079
|
|
|
25,499
|
|
|
(5,420
|
)
|
Times Publishing Company Pension Plan
|
36,693
|
|
|
49,830
|
|
|
(13,137
|
)
|
SERP
|
—
|
|
|
7,360
|
|
|
(7,360
|
)
|
U.K. Pension Plans
|
991,175
|
|
|
932,357
|
|
|
58,818
|
|
Newspaper Guild of Detroit Plan
|
103,124
|
|
|
113,189
|
|
|
(10,065
|
)
|
JMG Plan
|
—
|
|
|
2,467
|
|
|
(2,467
|
)
|
Total
|
$
|
2,856,296
|
|
|
$
|
2,973,182
|
|
|
$
|
(116,886
|
)
|
The following table provides the components of net periodic benefit cost and other changes in plan assets recognized in other comprehensive income (loss) of the Company’s pension plans for the years ended December 31, 2019, December 30, 2018, and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Year Ended
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Service cost
|
$
|
999
|
|
|
$
|
606
|
|
|
$
|
630
|
|
Non-operating expenses:
|
|
|
|
|
|
Interest cost
|
12,408
|
|
|
2,775
|
|
|
3,143
|
|
Expected return on plan assets
|
(22,303
|
)
|
|
(4,452
|
)
|
|
(4,157
|
)
|
Amortization of unrecognized loss (gain)
|
158
|
|
|
113
|
|
|
194
|
|
Other adjustment
|
305
|
|
|
—
|
|
|
—
|
|
Total non-operating expenses included in Other (income) expense
|
(9,432
|
)
|
|
(1,564
|
)
|
|
(820
|
)
|
Net periodic expense (benefit)
|
$
|
(8,433
|
)
|
|
$
|
(958
|
)
|
|
$
|
(190
|
)
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
(12,050
|
)
|
|
$
|
1,872
|
|
|
$
|
1,618
|
|
Amortization of net actuarial (loss) gain
|
(158
|
)
|
|
(113
|
)
|
|
(194
|
)
|
Other adjustment
|
(305
|
)
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive income (loss)
|
$
|
(12,513
|
)
|
|
$
|
1,759
|
|
|
$
|
1,424
|
|
The following assumptions were used in connection with the Company’s actuarial valuation of its defined benefit plans obligation:
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 30, 2018
|
Weighted average discount rate
|
2.9
|
%
|
|
4.1
|
%
|
Rate of increase in future compensation levels (1)
|
2.0
|
%
|
|
—
|
|
Weighted average expected return on assets
|
7.0
|
%
|
|
7.5
|
%
|
(1) Relates only to the GRP, SERP and Newspaper Guild of Detroit Pension Plans.
The following assumptions were used to calculate the net periodic benefit cost for the Company’s defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Weighted average discount rate
|
3.1
|
%
|
|
3.5
|
%
|
|
4.1
|
%
|
Rate of increase in future compensation levels (1)
|
2.0
|
%
|
|
—
|
|
|
—
|
|
Weighted average expected return on assets
|
6.1
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
(1) Relates only to the GRP, SERP and Newspaper Guild of Detroit Pension Plans.
To determine the expected long-term rate of return on pension plan assets, the Company considers 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. The expected allocation of pension plan assets is based on a diversified portfolio consisting of domestic and international equity securities and fixed income securities. This expected return is then applied to the fair value of plan assets. The Company amortizes experience gains and losses, including the effects of changes in actuarial assumptions and plan provisions, over a period equal to the average future service of plan participants or over the average remaining life expectancy of inactive participants.
The fiduciaries of the pension plans set investment policies and strategies for the pension trusts. Objectives include preserving the funded status of the plan and balancing risk against return.
The weighted average target asset allocation of our plans for 2020 and allocations at the end of 2019 and 2018, by asset category, are presented in the table below:
|
|
|
|
|
|
|
|
Target Allocation
|
|
Allocation of Plan Assets
|
|
2020
|
|
2019
|
|
2018
|
Equity securities
|
35%
|
|
39%
|
|
63%
|
Debt securities
|
47%
|
|
46%
|
|
35%
|
Alternative investments(a)
|
18%
|
|
15%
|
|
2%
|
Total
|
100%
|
|
100%
|
|
100%
|
(a)Alternative investments include real estate, private equity and hedge funds.
The aggregate amount of net actuarial gain related to the Company’s pension plans recognized in other comprehensive (loss) income as of December 31, 2019 was $12.1 million, of which $107,000 is expected to be amortized in 2020.
Cash flows: We expect to make the following benefit payments, which reflect expected future service. The amounts below represent the benefit payments for our pension plans.
|
|
|
|
|
in thousands
|
Pension
|
2020
|
$
|
202,994
|
|
2021
|
$
|
193,282
|
|
2022
|
$
|
190,764
|
|
2023
|
$
|
188,713
|
|
2024
|
$
|
175,235
|
|
2025 - 2029
|
$
|
826,289
|
|
The amounts above exclude the participants' share of the benefit cost. We expect no subsidy benefits for 2020 and beyond.
Employer contributions, for the Company's defined benefit pension plans, expected to be paid during the year ended December 31, 2020 is $61.2 million.
Multiemployer plans that provide pension benefits
The Company is a participant in six multiemployer pension plans covering certain employees with collective bargaining agreements (“CBAs”). Three of these multiemployer pension plans were assumed in connection with the acquisition of Legacy Gannett. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
|
|
•
|
The Company plays no part in the management of plan investments or any other aspect of plan administration.
|
|
|
•
|
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the unfunded status of the plan, referred to as withdrawal liability.
|
The Company’s participation in these plans for the year ended December 31, 2019 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (EIN) and the three-digit plan number. Unless otherwise noted, the two most recent Pension Protection Act (PPA) zone statuses available are for the plans for the years ended 2019 and 2018, respectively. The zone status is based on information the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65% funded; plans in the orange zone are both a) less than 80% funded and b) have an accumulated/expected funding deficiency in any of the next six plan years, net of any amortization extensions; plans in the yellow zone meet either one of the criteria mentioned in the orange zone; and plans in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject. The Company
makes all required contributions to these plans as determined under the respective CBAs. For each of the plans listed below, the Company’s contribution represented less than 5% of total contributions to the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiemployer Pension Plans
|
|
EIN Number/
|
Zone Status
Dec. 31,
|
FIP/RP Status
Pending/Implemented
|
Contributions (in thousands)
|
Surcharge Imposed
|
Expiration Dates of CBAs
|
Pension Plan Name
|
Plan Number
|
2019
|
2018
|
2019
|
2018
|
2017
|
CWA/ITU Negotiated Pension Plan
|
13-6212879/001
|
Red
|
Red
|
Implemented
|
$
|
51
|
|
$
|
9
|
|
$
|
10
|
|
No
|
Under negotiation
|
GCIU—Employer Retirement Benefit Plan(a)
|
91-6024903/001
|
Red
|
Red
|
Implemented
|
75
|
|
78
|
|
84
|
|
Yes
|
1/5/2022
|
The Newspaper Guild International Pension Plan(a)
|
52-1082662/001
|
Red
|
Red
|
Implemented
|
31
|
|
19
|
|
36
|
|
No
|
Under negotiation and June 8, 2019
|
IAM National Pension Plan(a) (b)
|
51-6031295/002
|
Red
|
Green
|
Implemented
|
11
|
|
—
|
|
—
|
|
Yes
|
1/7/2022
|
Teamsters Pension Trust Fund of Philadelphia and Vicinity(a)
|
23-1511735/001
|
Yellow
|
Yellow
|
Implemented
|
139
|
|
—
|
|
—
|
|
N/A
|
(c)
|
Central Pension Fund of the International Union of Operating Engineers and Participating Employers(a)
|
36-6052390/001
|
Green as of Jan. 31, 2019
|
Green as of Jan. 31, 2018
|
N/A
|
6
|
|
—
|
|
—
|
|
N/A
|
1/10/2022
|
Total
|
|
|
|
|
$
|
313
|
|
$
|
106
|
|
$
|
130
|
|
|
|
|
|
(a)
|
This plan has elected to utilize special amortization provisions provided under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010.
|
|
|
(b)
|
The trustees of this plan have voluntarily elected to put the fund in critical status to strengthen its funding position.
|
(c) In February 2018, an interim agreement was executed to maintain the terms and contributions of the plan past the expiration date of 12/31/2017. This agreement is subject to additional negotiation.
The Company assumed three multiemployer plan withdrawal liabilities in an acquisition in 2019. The liability at the acquisition date was estimated to be approximately $40.8 million, excluding interest. The penalties are payable over twenty years. The total unpaid balance for the Company's withdrawal liabilities as of December 31, 2019 is approximately $41.8 million.
Defined contribution plans
The Company sponsors the New Media Investment Group Inc. Retirement Savings Plan (the “New Media 401(k) Plan”), which is intended to be a qualified defined contribution plan with a cash or deferred arrangement under Section 401(k) of the Code. In general, eligible employees of the Company and participating affiliates who satisfy minimum age and service requirements are eligible to participate. Eligible employees can contribute amounts up to 100% of their eligible compensation to the New Media 401(k) Plan, subject to IRS limitations. The New Media 401(k) Plan also provides for discretionary matching and non-elective contributions that can be made in separate amounts among different allocation groups. For the years ended December 31, 2019, December 30, 2018, and December 31, 2017, the Company’s matching contributions to the New Media 401(k) Plan were $4.9 million, $4.0 million, and $3.4 million, respectively. The Company did not make non-elective contributions for the reported years.
In connection with the acquisition of Legacy Gannett, the Company assumed the Gannett Co., Inc. 401(k) Savings Plan (the "Gannett 401(k) Plan"). The Gannett 401(k) Plan will continue to cover Legacy Gannett employees until it is merged with the New Media 401(k) Plan. With respect to the Gannett 401(k) Plan, employees are immediately eligible to participate while employees covered under collective bargaining agreements are eligible to participate only if participation has been bargained. Employees can elect to save up to 75% of compensation on a pre-tax basis subject to certain limits. For most participants, the plan's matching formula is 100% of the first 4% of employee contributions and 50% on the next 2% of employee contributions. The Company’s matching contributions to the Gannett 401(k) Plan were immaterial for the year ended December 31, 2019.
Deferred compensation plans
The Company maintains two non-qualified deferred compensation plans for certain of its employees. The Company maintains the GateHouse Media, Inc. Publishers’ Deferred Compensation Plan (“Publishers' Plan”), a non-qualified deferred compensation plan for the benefit of certain designated publishers of the Company’s newspapers. Under the Publishers' Plan, the Company credits an amount to a bookkeeping account established for each participating publisher pursuant to a pre-determined formula, which is based upon the gross operating profits of each such publisher’s newspaper. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts
credited to the bookkeeping account on behalf of each participating publisher vest on an installment basis over a period of 15 years. A participating publisher forfeits all amounts under the Publishers' Plan in the event that the publisher’s employment with the Company is terminated for “cause”, as defined in the Publishers' Plan. Amounts credited to a participating publisher’s bookkeeping account are distributable upon termination of the publisher’s employment with the Company and will be made in a lump sum or installments as elected by the publisher. The Publishers' Plan was frozen effective as of December 31, 2006, and all accrued benefits of participants under the terms of the Publishers' Plan became 100% vested.
The Company also maintains the GateHouse Media, Inc. Executive Benefit Plan (“Executive Benefit Plan”), a non-qualified deferred compensation plan for the benefit of certain key employees of the Company. Under the Executive Benefit Plan, the Company credits an amount, determined at the Company’s sole discretion, to a bookkeeping account established for each participating key employee. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating key employee vest on an installment basis over a period of 5 years. A participating key employee forfeits all amounts under the Executive Benefit Plan in the event that the key employee’s employment with the Company is terminated for “cause”, as defined in the Executive Benefit Plan. Amounts credited to a participating key employee’s bookkeeping account are distributable upon termination of the key employee’s employment with the Company and will be made in a lump sum or installments as elected by the key employee. The Executive Benefit Plan was frozen effective as of December 31, 2006, and all accrued benefits of participants under the terms of the Executive Benefit Plan became 100% vested.
NOTE 9 — Postretirement benefits other than pension
As a result of acquisitions, the Company maintains several postretirement medical and life insurance plans which cover certain employees. We provide health care and life insurance benefits to certain retired employees who meet age and service requirements. Most of our retirees contribute to the cost of these benefits and retiree contributions are increased as actual benefit costs increase.
The George W. Prescott Company postretirement medical and life insurance plan had its benefits frozen in 2008, and the plan was amended to limit future benefits to a select group of active employees under the Enterprise News Media, LLC postretirement medical and life insurance plan. Benefits under the postretirement medical and life insurance plan assumed with the Copley Press, Inc. acquisition are only available to Brush-Moore employees hired before January 1, 1976.
The cost of providing retiree health care and life insurance benefits is actuarially determined. Our policy is to fund benefits as claims and premiums are paid. We use a December 31 measurement date for these plans.
The following table provides a reconciliation of benefit obligations, plan assets and funded status, along with the related amounts in the consolidated balance sheets of the Company’s postretirement medical and life insurance plans as of December 31, 2019 and December 30, 2018:
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2019
|
|
December 30, 2018
|
Change in projected benefit obligation:
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
4,330
|
|
|
$
|
4,835
|
|
Service cost
|
17
|
|
|
7
|
|
Interest cost
|
419
|
|
|
153
|
|
Actuarial gain
|
(484
|
)
|
|
(363
|
)
|
Benefits and expenses paid
|
(1,117
|
)
|
|
(500
|
)
|
Acquisitions
|
70,325
|
|
|
—
|
|
Participant contributions
|
200
|
|
|
221
|
|
Employer implicit subsidy fulfilled
|
(23
|
)
|
|
(23
|
)
|
Projected benefit obligation at end of period
|
$
|
73,667
|
|
|
$
|
4,330
|
|
Change in plan assets:
|
|
|
|
Employer contributions
|
$
|
844
|
|
|
$
|
—
|
|
Participant contributions
|
164
|
|
|
—
|
|
Benefits paid
|
(1,008
|
)
|
|
—
|
|
Fair value of plan assets at end of period
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation of funded status:
|
|
|
|
Benefit obligation at end of period
|
$
|
(73,667
|
)
|
|
$
|
(4,330
|
)
|
Funded status
|
(73,667
|
)
|
|
(4,330
|
)
|
Unrecognized actuarial gain
|
(1,518
|
)
|
|
(1,105
|
)
|
Net accrued benefit cost
|
$
|
(75,185
|
)
|
|
$
|
(5,435
|
)
|
Balance sheet presentation:
|
|
|
|
Accrued expenses
|
$
|
6,694
|
|
|
$
|
355
|
|
Pension and other postretirement benefit obligations
|
66,973
|
|
|
3,975
|
|
Accumulated other comprehensive income
|
1,518
|
|
|
1,105
|
|
Net accrued benefit cost
|
$
|
75,185
|
|
|
$
|
5,435
|
|
The following table provides the components of net periodic benefit cost and other changes in plan assets recognized in other comprehensive income (loss) of the Company’s postretirement medical and life insurance plans for the years ended December 31, 2019, December 30, 2018, and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Service cost
|
$
|
17
|
|
|
$
|
7
|
|
|
$
|
11
|
|
Non-operating expenses:
|
|
|
|
|
|
Interest cost
|
419
|
|
|
153
|
|
|
189
|
|
Expected return on plan assets
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized gain
|
(72
|
)
|
|
(24
|
)
|
|
(148
|
)
|
Total non-operating expense
|
347
|
|
|
129
|
|
|
41
|
|
Net periodic expense
|
$
|
364
|
|
|
$
|
136
|
|
|
$
|
52
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
|
|
|
|
|
|
Net actuarial gain
|
$
|
(484
|
)
|
|
$
|
(363
|
)
|
|
$
|
(88
|
)
|
Amortization of net actuarial gain
|
72
|
|
|
24
|
|
|
148
|
|
Total recognized in other comprehensive income (loss)
|
$
|
(412
|
)
|
|
$
|
(339
|
)
|
|
$
|
60
|
|
The following assumptions were used in connection with the Company’s actuarial valuation of its postretirement plans obligation:
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 30, 2018
|
Weighted average discount rate
|
3.3
|
%
|
|
4.0
|
%
|
Rate of increase in future compensation levels (1)
|
2.0
|
|
|
—
|
|
Current year medical trend
|
5.9
|
%
|
|
6.2
|
%
|
Ultimate year medical trend
|
4.5
|
%
|
|
4.5
|
%
|
Year of ultimate trend
|
2034
|
|
|
2034
|
|
(1) Relates only to the Legacy Gannett postretirement plans.
The following assumptions were used to calculate the net periodic benefit cost for the Company’s postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Weighted average discount rate
|
3.3
|
%
|
|
3.3
|
%
|
|
3.9
|
%
|
Rate of increase in future compensation levels (1)
|
2.0
|
|
|
—
|
|
|
—
|
|
Current year medical trend
|
6.1
|
%
|
|
6.4
|
%
|
|
6.7
|
%
|
Ultimate year medical trend
|
4.5
|
%
|
|
4.5
|
%
|
|
4.5
|
%
|
Year of ultimate trend
|
2035
|
|
|
2026
|
|
|
2026
|
|
(1) Relates only to the Legacy Gannett postretirement plans.
The following table summarizes the effect of a 1% change in the assumed health care cost trend rates would have on the amounts reported related to Legacy New Media:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Effect of 1% increase in health care cost trend rates
|
|
|
|
Accumulated postretirement benefit obligation
|
$
|
4,431
|
|
|
$
|
4,617
|
|
Dollar change
|
$
|
307
|
|
|
$
|
287
|
|
Percent change
|
7.5
|
%
|
|
6.6
|
%
|
Effect of 1% decrease in health care cost trend rates
|
|
|
|
Accumulated postretirement benefit obligation
|
$
|
3,858
|
|
|
$
|
4,082
|
|
Dollar change
|
$
|
(265
|
)
|
|
$
|
(248
|
)
|
Percent change
|
(6.4
|
)%
|
|
(5.7
|
)%
|
Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. The effect of a 1% change in the health care cost trend rate would have no impact on the 2019 postretirement benefit obligation and would result in no measurable change in the aggregate service and interest components of the 2019 expense for the Legacy Gannett postretirement plans.
Cash flows: We expect to make the following benefit payments, which reflect expected future service. The amounts below represent the benefit payments for our postretirement plans.
|
|
|
|
|
In thousands
|
Postretirement
|
2020
|
$
|
6,695
|
|
2021
|
$
|
6,372
|
|
2022
|
$
|
6,071
|
|
2023
|
$
|
5,762
|
|
2024
|
$
|
5,475
|
|
2025 - 2029
|
$
|
23,181
|
|
The amounts above exclude the participants' share of the benefit cost. Furthermore, the postretirement plans are not funded, and we expect no subsidy benefits for 2020 and beyond.
Employer contributions, for the Company's postretirement medical and life insurance plans, expected to be paid during the year ended December 31, 2020 is $6.7 million.
NOTE 10 — Income taxes
Income tax expense (benefit) on income (loss) from continuing operations before income taxes for the periods shown below consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Current
|
|
Deferred
|
|
Total
|
Year Ended December 31, 2019:
|
|
|
|
|
|
U.S. Federal
|
$
|
113
|
|
|
$
|
(85,144
|
)
|
|
$
|
(85,031
|
)
|
State and local
|
1,725
|
|
|
(2,833
|
)
|
|
(1,108
|
)
|
Foreign
|
(68
|
)
|
|
213
|
|
|
145
|
|
Total
|
$
|
1,770
|
|
|
$
|
(87,764
|
)
|
|
$
|
(85,994
|
)
|
Year Ended December 30, 2018:
|
|
|
|
|
|
U.S. Federal
|
$
|
—
|
|
|
$
|
(2,690
|
)
|
|
$
|
(2,690
|
)
|
State and local
|
1,679
|
|
|
2,923
|
|
|
4,602
|
|
Total
|
$
|
1,679
|
|
|
$
|
233
|
|
|
$
|
1,912
|
|
Year Ended December 31, 2017:
|
|
|
|
|
|
U.S. Federal
|
$
|
—
|
|
|
$
|
(617
|
)
|
|
$
|
(617
|
)
|
State and local
|
1,003
|
|
|
95
|
|
|
1,098
|
|
Total
|
$
|
1,003
|
|
|
$
|
(522
|
)
|
|
$
|
481
|
|
The components of net income (loss) before income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
(206,270
|
)
|
|
$
|
20,019
|
|
|
$
|
(434
|
)
|
Foreign
|
(914
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
(207,184
|
)
|
|
$
|
20,019
|
|
|
$
|
(434
|
)
|
The provision for income taxes varies from the U.S. federal statutory tax rate as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
U.S. statutory tax rate
|
21.0
|
|
|
21.0
|
|
|
34.0
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
State/other income taxes, net of federal benefit
|
0.7
|
|
|
21.1
|
|
|
(266.0
|
)
|
Change in valuation allowance
|
22.6
|
|
|
(13.4
|
)
|
|
(612.9
|
)
|
Non-deductible meals, entertainment, and other expenses
|
(0.8
|
)
|
|
5.0
|
|
|
(232.6
|
)
|
Transaction costs
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
Tax effects of 2017 legislation
|
—
|
|
|
(24.1
|
)
|
|
966.5
|
|
Effective tax rate
|
41.5
|
|
|
9.6
|
|
|
***
|
|
*** Indicates a percentage that is not meaningful.
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2019 and December 30, 2018 are presented below(a):
|
|
|
|
|
|
|
|
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
Deferred tax liabilities:
|
|
|
|
Fixed assets
|
$
|
(30,246
|
)
|
|
$
|
(16,642
|
)
|
Right of use asset
|
(83,588
|
)
|
|
—
|
|
Definite and indefinite lived intangible assets
|
(85,528
|
)
|
|
(13,714
|
)
|
Total deferred tax liabilities
|
$
|
(199,362
|
)
|
|
$
|
(30,356
|
)
|
Deferred tax assets:
|
|
|
|
Accrued compensation costs
|
32,719
|
|
|
2,185
|
|
Accrued expenses
|
16,717
|
|
|
5,697
|
|
Disallowed interest
|
11,247
|
|
|
—
|
|
Pension and other postretirement benefit obligations
|
56,611
|
|
|
3,122
|
|
Partnership investments including impairments
|
7,971
|
|
|
994
|
|
Loss carryforwards
|
189,912
|
|
|
71,431
|
|
Lease liabilities
|
85,177
|
|
|
—
|
|
Other
|
25,073
|
|
|
3,324
|
|
Total deferred tax assets
|
$
|
425,427
|
|
|
$
|
86,753
|
|
Less: Valuation allowance
|
(158,820
|
)
|
|
(64,679
|
)
|
Total net deferred tax assets
|
$
|
266,607
|
|
|
$
|
22,074
|
|
Noncurrent net deferred tax assets/(liabilities)
|
$
|
67,245
|
|
|
$
|
(8,282
|
)
|
(a) We changed the presentation of the components of the deferred tax liabilities and deferred tax assets as we believe the new presentation reflects better the deferred tax assets/(liabilities) at December 31, 2019, after the acquisition of Legacy Gannett. This reclassification is not material as the changes do not impact the 2018 financial statements nor the total net deferred tax assets/(liabilities) previously reported.
In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the year ended December 31, 2019, the Company released $46.9 million of valuation allowance against its deferred tax assets. The Company considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets was needed. The Company reached the conclusion it was appropriate to release valuation allowance reserves against a significant portion of its federal deferred tax assets in light of strong positive evidence. We relied on evidence shown by reversing taxable temporary differences, as well as expectation of future taxable income from the acquisition of Legacy Gannett, which has a history of profitability. The Company continues to maintain its existing valuation allowance against net deferred tax assets in many of its state and foreign jurisdictions as it is not believed to be more likely than not that its deferred tax assets will be realized in such jurisdictions.
The following table summarizes the activity related to our valuation allowance for deferred tax assets for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions / (Reductions) Charged to Expenses
|
|
Additions / (Reductions for Acquisitions / Dispositions
|
|
Other Additions to / (Deductions from) Reserves
|
|
Foreign Currency Translation
|
|
Balance at End of Period
|
$
|
64,679
|
|
|
$
|
(28,017
|
)
|
|
$
|
121,572
|
|
|
$
|
—
|
|
|
$
|
586
|
|
|
$
|
158,820
|
|
The aforementioned valuation allowance relates to unamortizable intangible assets, state and foreign net operating losses and other tax attributes that are deemed unrealizable as of December 31, 2019.
At December 31, 2019, the Company had approximately $435.0 million of U.S. federal net operating loss carryforwards, $52.0 million of U.S. federal disallowed business interest expense carryforwards, $989.6 million of apportioned state net operating loss carryforwards, and $233.6 million of foreign net operating loss carryforwards which are available to offset future taxable income. Additionally, the Company had $6.5 million of other business tax credits, $2.4 million of foreign tax credits, $5.8 million of state credits, and $31 million of foreign capital loss carryforwards. The federal tax loss carryforwards begin to expire in 2030 through 2037 and state loss carryforwards begin to expire in 2020. A portion of the operating losses are subject
to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if significant ownership changes have occurred for federal tax purposes.
The following table summarizes the activity related to unrecognized tax benefits, excluding the federal tax benefit of state tax deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Change in unrecognized tax benefits
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
1,190
|
|
|
$
|
1,160
|
|
|
$
|
1,176
|
|
Additions based on tax positions related to the current year
|
658
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
—
|
|
|
30
|
|
|
—
|
|
Reductions for tax positions or prior years
|
(352
|
)
|
|
—
|
|
|
(16
|
)
|
Increase due to current year business acquisitions
|
32,578
|
|
|
—
|
|
|
—
|
|
Balance at end of year
|
$
|
34,074
|
|
|
$
|
1,190
|
|
|
$
|
1,160
|
|
At December 31, 2019, the Company’s uncertain tax positions of $32.4 million, if recognized, would impact the effective tax rate. Included in the 2019 increase to unrecognized tax benefits is $31.1 million related to tax positions acquired through the acquisition of Legacy Gannett. It is reasonably possible that further adjustments to our unrecognized tax benefits may be made within the next twelve months due to audit settlements and regulatory interpretations of existing tax laws. At this time, an estimate of potential change to the amount of unrecognized tax benefits cannot be made. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2019 and December 30, 2018, the accrual for uncertain tax positions included $1.9 million and $0.3 million of interest and penalties, respectively. The increase in cumulative accrued interest and penalties was mainly a result of the acquisition of Legacy Gannett.
The Company files a U.S. federal consolidated income tax return for which the statute of limitations remains open for the 2015 tax year and subsequent years. U.S. state jurisdictions have statute of limitations generally ranging from 3 to 6 years. The federal income tax returns for calendar years 2015 - 2017 for Legacy Gannett are under federal audit. The statute of limitations for the Company's U.K. income tax return remains open for tax years for 2018 and forward.
NOTE 11 — Supplemental equity information
Earnings (loss) per share
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
in thousands, except share data
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Net income (loss) attributable to Gannett
|
$
|
(119,842
|
)
|
|
$
|
18,196
|
|
|
$
|
(915
|
)
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
67,671,398
|
|
|
58,013,617
|
|
|
53,010,421
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options and restricted stock grants
|
—
|
|
|
384,530
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
67,671,398
|
|
|
58,398,147
|
|
|
53,010,421
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to Gannett
|
$
|
(1.77
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.02
|
)
|
Diluted net income (loss) per share attributable to Gannett
|
$
|
(1.77
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.02
|
)
|
The Company excluded the following securities from the computation of diluted income per share because their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
in thousands, except share data
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Stock warrants
|
1,362,479
|
|
|
1,362,479
|
|
|
1,362,479
|
|
Stock options
|
2,904,811
|
|
|
700,000
|
|
|
2,214,811
|
|
Restricted stock grants
|
9,494,161
|
|
|
—
|
|
|
342,264
|
|
Equity activity
In connection with the consummation of the acquisition of Legacy Gannett on November 19, 2019, each share of Legacy Gannett common stock issued and outstanding immediately prior to the acquisition date was converted automatically into 0.5427 of a fully paid and non-assessable share of parent common stock. As a result, approximately 62.4 million shares of parent common stock were issued to former holders of Legacy Gannett common stock at the acquisition date, including shares issued to satisfy outstanding equity-based awards that were accelerated and converted into the acquisition consideration.
During April 2018, the Company completed the sale of 6.9 million shares of the Company's common stock, including 25,000 shares of the Company's common stock sold to an officer of the Company. The estimated net proceeds of the sale were approximately $110.7 million. For the purpose of compensating the Manager for its successful efforts in raising capital for the Company, in connection with this offering, the Company granted options to the Manager to purchase 0.7 million shares of the Company’s common stock at a price of $16.45, which had an aggregate fair value of approximately $1.4 million as of the grant date. The assumptions used in an option valuation model to value the options were a 2.8% risk-free rate, a 8.0% dividend yield, 28.1% volatility, and an expected life of 10 years.
In 2018, the Company issued 13,008 shares of its common stock to its Non-Officer Directors to settle a liability of $0.2 million for 2017 services.
Share repurchase program
On May 17, 2017, the Board of Directors authorized the repurchase of up to $100.0 million of the Company's common stock ("Share Repurchase Program") over the next twelve months. The Board of Directors has authorized extensions of the Share Repurchase Program through May 19, 2020. Under the Share Repurchase Program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions, subject to restrictions in our credit facility. No shares were repurchased under the program during 2019.
Manager stock options and warrants
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the 862,500 options granted to the Manager in 2016 were equitably adjusted in 2018 from $16.00 to $13.24 as a result of return of capital distributions.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the 700,000 options granted to the Manager in 2015 were equitably adjusted in 2018 from $20.36 to $18.94 as a result of return of capital distributions.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the 652,311 remaining options granted to the Manager in 2014 were equitably adjusted in 2018 from $14.37 to $12.95 as a result of return of capital distributions.
In addition to the above stock options, the Company has issued warrants collectively representing the right to acquire common stock at a future date. At origination, these warrants, which have a strike price of $46.35, collectively represented approximately 5% of common stock outstanding. As of December 31, 2019, the warrants are equal to approximately 1% of common stock outstanding.
In connection with the acquisition of Legacy Gannett, the Company issued shares of its common stock as consideration for the acquisition. For the purpose of compensating the Manager for its successful efforts in facilitating the acquisition, the Company granted options to the Manager to purchase 3,163,264 shares of the Company’s common stock at a price of 15.50, which had an aggregate fair value of approximately $0.3 million as of the grant date. The assumptions used in the Black-Scholes model to value the options were: a 1.7% risk-free rate, a 15.6% dividend yield, 37.8% volatility and an expected life of 10 years. The fair value of the options issued as compensation to the Manager was recorded as an increase in equity with an offsetting reduction in capital.
The following table includes additional information regarding the Manager stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands, except share data
|
Number of Options
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value ($000)
|
Outstanding at December 31, 2017
|
2,214,811
|
|
|
$
|
4.08
|
|
|
$
|
16.90
|
|
|
7.7
|
|
$
|
2,245
|
|
Granted
|
690,000
|
|
|
$
|
2.04
|
|
|
$
|
16.45
|
|
|
|
|
|
Outstanding at December 30, 2018
|
2,904,811
|
|
|
$
|
3.59
|
|
|
$
|
15.31
|
|
|
7.3
|
|
$
|
—
|
|
Granted
|
3,163,264
|
|
|
$
|
0.11
|
|
|
$
|
15.50
|
|
|
|
|
|
Outstanding at December 31, 2019
|
6,068,075
|
|
|
$
|
1.78
|
|
|
$
|
14.70
|
|
|
8.2
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
2,780,253
|
|
|
$
|
—
|
|
|
$
|
13.79
|
|
|
6.3
|
|
$
|
—
|
|
Stock compensation
The Company recognized compensation cost for share-based payments of $11.3 million for the year ended December 31, 2019, $3.2 million for the year ended December 30, 2018, and $3.1 million for the year ended December 31, 2017. The total compensation cost not yet recognized related to non-vested awards as of December 31, 2019 was $4.2 million, which is expected to be recognized over a weighted average period of 1.8 years through October 2022.
Restricted stock grants (“RSGs”)
On February 3, 2014, the Board of Directors of legacy New Media (the "Board" or "Board of Directors") adopted the New Media Investment Group Inc. Nonqualified Stock Option and Incentive Award Plan (the “Incentive Plan”) that authorized up to 15.0 million shares that may be granted under the Incentive Plan. On the same date, the Board adopted a form of the New Media Investment Group Inc. Non-Officer Director Restricted Stock Grant Agreement (the “Form Grant Agreement”) to govern the terms of awards of restricted stock (“New Media Restricted Stock”) granted under the Incentive Plan to directors who are not officers or employees of New Media (the “Non-Officer Directors”). On February 24, 2015, the Board adopted a form of the New Media Investment Group Inc. Employee Restricted Stock Grant Agreement (the “Form Employee Grant Agreement”) to govern the terms of awards of New Media Restricted Stock granted under the Incentive Plan to employees of New Media and its subsidiaries (the “Employees”). Both the Form Grant Agreement and the Form Employee Grant Agreement provide for the grant of New Media Restricted Stock that vests in equal annual installments on each of the first, second, and third anniversaries of the grant date, subject to continued service, and immediate vesting in full upon death or disability. If service terminates for any other reason, all unvested shares of New Media Restricted Stock are forfeited. During the period prior to the lapse and removal of the vesting restrictions, a grantee of a RSG will have all the rights of a stockholder, including without limitation, the right to vote and the right to receive all dividends or other distributions. Any dividends or other distributions that are declared with respect to the shares of New Media Restricted Stock will be paid at the time such shares vest. The value of the RSGs on the date of issuance is recognized in selling, general, and administrative expense over the vesting period with a corresponding increase to additional paid-in-capital.
The following table outlines RSG activity specific to Legacy Gannett for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2019
|
in thousands, except per share data
|
Number
of RSGs
|
|
Weighted-
Average
Grant Date
Fair Value
|
Unvested at beginning of year
|
—
|
|
|
$
|
—
|
|
Granted
|
10,465,778
|
|
|
6.28
|
|
Vested
|
(3,080,766
|
)
|
|
6.28
|
|
Forfeited
|
(16,580
|
)
|
|
6.28
|
|
Unvested at end of year
|
7,368,432
|
|
|
$
|
6.28
|
|
Legacy New Media RSG activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
in thousands, except per share data
|
Number
of RSGs
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number
of RSGs
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Number
of RSGs
|
|
Weighted-
Average
Grant Date
Fair Value
|
Unvested at beginning of year
|
384,471
|
|
|
$
|
16.11
|
|
|
342,264
|
|
|
$
|
16.86
|
|
|
335,593
|
|
|
$
|
18.18
|
|
Granted
|
300,952
|
|
|
13.62
|
|
|
227,388
|
|
|
16.43
|
|
|
186,153
|
|
|
15.85
|
|
Vested
|
(273,845
|
)
|
|
15.45
|
|
|
(170,422
|
)
|
|
18.01
|
|
|
(128,952
|
)
|
|
18.87
|
|
Forfeited
|
(94,489
|
)
|
|
15.12
|
|
|
(14,759
|
)
|
|
16.55
|
|
|
(50,530
|
)
|
|
16.80
|
|
Unvested at end of year
|
317,089
|
|
|
$
|
14.61
|
|
|
384,471
|
|
|
$
|
16.11
|
|
|
342,264
|
|
|
$
|
16.86
|
|
As of December 31, 2019, the aggregate intrinsic value of unvested RSGs was $49.0 million.
In connection with our acquisition of Legacy Gannett, we assumed management of the Gannett Co. Inc. 2015 Omnibus Incentive Compensation Plan. Pursuant to a Form S-8 filed with the Securities and Exchange Commission on November 20, 2019, we registered 16.4 million shares of common stock under this plan and two other plans assumed pursuant to the acquisition. Of this total, approximately 10.5 million shares of Legacy Gannett common stock under the Gannett Co. Inc. 2015 Omnibus Incentive Compensation Plan which were outstanding immediately prior to the acquisition were registered for issuance. When these outstanding shares vest, the payment of shares will occur under the Legacy Gannett Omnibus Plan and not the New Media Incentive Plan.
Accumulated other comprehensive loss
The changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2019 and December 30, 2018 are outlined below.
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Retirement Plans
|
|
Foreign Currency Translation
|
|
Total
|
Balance at December 25, 2016
|
$
|
(3,977
|
)
|
|
$
|
—
|
|
|
$
|
(3,977
|
)
|
Other comprehensive loss before reclassifications
|
(1,530
|
)
|
|
—
|
|
|
(1,530
|
)
|
Amounts reclassified from accumulated other comprehensive loss (1)
|
46
|
|
|
—
|
|
|
46
|
|
Net current period other comprehensive loss, net of taxes
|
(1,484
|
)
|
|
—
|
|
|
(1,484
|
)
|
Balance at December 31, 2017
|
$
|
(5,461
|
)
|
|
$
|
—
|
|
|
$
|
(5,461
|
)
|
Other comprehensive loss before reclassifications
|
(1,509
|
)
|
|
—
|
|
|
(1,509
|
)
|
Amounts reclassified from accumulated other comprehensive loss (1)
|
89
|
|
|
—
|
|
|
89
|
|
Net current period other comprehensive loss, net of taxes
|
(1,420
|
)
|
|
—
|
|
|
(1,420
|
)
|
Balance at December 30, 2018
|
$
|
(6,881
|
)
|
|
$
|
—
|
|
|
$
|
(6,881
|
)
|
Other comprehensive loss before reclassifications
|
7,731
|
|
|
7,266
|
|
|
14,997
|
|
Amounts reclassified from accumulated other comprehensive loss (1)
|
86
|
|
|
—
|
|
|
86
|
|
Net current period other comprehensive loss, net of taxes
|
7,817
|
|
|
7,266
|
|
|
15,083
|
|
Balance at December 31, 2019
|
$
|
936
|
|
|
$
|
7,266
|
|
|
$
|
8,202
|
|
|
|
(1)
|
This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 8 — Retirement plans and Note 9 — Postretirement benefits other than pension.
|
Amounts reclassified from Accumulated other comprehensive income (loss) to net income (loss) during the years ended December 31, 2019, December 30, 2018, and December 31, 2017 were not material.
Dividends
During the year ended December 31, 2019, the Company paid dividends of $1.52 per share of Common Stock. During the year ended December 30, 2018, the Company paid dividends of $1.49 per share of Common Stock. During the year ended December 31, 2017, the Company paid dividends of $1.42 per share of Common Stock.
NOTE 12 — Commitments, contingencies, and other matters
The Company is and may become involved from time to time in legal proceedings in the ordinary course of its business, including but not limited to with respect to such matters as libel, invasion of privacy, intellectual property infringement, wrongful termination actions, complaints alleging employment discrimination, and regulatory investigations and inquiries. In addition, the Company is involved from time to time in governmental and administrative proceedings concerning employment, labor, environmental, and other claims. Insurance coverage mitigates potential loss for certain of these matters. Historically, such claims and proceedings have not had a material adverse effect on the Company’s consolidated results of operations or financial position.
Equity purchase arrangements that are exercisable by the counterparty to the agreement and that are outside the sole control of the Company are accounted for in accordance with ASC 480-10-S99-3A and are classified as Redeemable noncontrolling interests in the Consolidated balance sheets. Other than the arrangements classified as Redeemable noncontrolling interests, the Company is also a party to contingent consideration arrangements primarily payable based on the passage of time or as a component of earnings above an agreed-upon target.
Litigation in connection with the Legacy Gannett acquisition: Following the August 5, 2019 announcement of the company's pending acquisition of Legacy Gannett, a total of six lawsuits were filed in various jurisdictions: Stein v. Gannett Co. Inc, et al., filed on September 11, 2019 (D. Del.), Scarantino v. Gannett Co. Inc., et al., filed on September 16, 2019 (D. Del.), Humbert v. Gannett Co. Inc., et al., filed on September 30, 2019 (S.D.N.Y.), Steiner v. Gannett Co. Inc., et al., filed on October 2, 2019 (D. Del.), Litwin v. Gannett Co. Inc., et al., filed on October 17, 2019 (S.D.N.Y.), and Johnson v. Gannett Co., Inc., et al., filed on October 23, 2019 (D. Del.). The plaintiffs in each action allege, among other things, the company and individual defendants violated Section 14(a) and Section 20(a) of the Exchange Act by providing inadequate disclosure regarding the proposed acquisition either in the registration statement on Form S-4 filed by New Media with the SEC or in the definitive proxy statement on Schedule 14A filed by the company with the SEC. The plaintiffs variously sought, among other things, to enjoin or rescind the acquisition, an award of damages in the event the acquisition is consummated, and an award of costs and attorney’s fees; plaintiffs in Scarantino and Steiner also seek class action certification. All of the lawsuits have been voluntarily dismissed.
Environmental contingency: We assumed responsibility for certain environmental contingencies in connection with our acquisition of Legacy Gannett. More specifically, in March 2011, the Advertiser Company (Advertiser), a subsidiary that publishes the Montgomery Advertiser, was notified by the U.S. Environmental Protection Agency (EPA) that it had been identified as a potentially responsible party (PRP) for the investigation and remediation of groundwater contamination in downtown Montgomery, AL. The Advertiser is a member of the Downtown Environmental Alliance, which has agreed to jointly fund and conduct all required investigation and remediation. In 2016, the Advertiser and other members of the Downtown Environmental Alliance reached a settlement with the U.S. EPA regarding the costs the U.S. EPA spent to investigate the site. The U.S. EPA has transferred responsibility for oversight of the site to the Alabama Department of Environmental Management, which has approved the work plan for the additional site investigation that is currently underway. The Advertiser's final costs cannot be determined until the investigation is complete, a determination is made on whether any remediation is necessary, and contributions from other PRPs are finalized.
Other litigation: We are defendants in judicial and administrative proceedings involving matters incidental to our business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, the Company does not expect its current and any threatened legal proceedings to have a material adverse effect on the Company’s business, financial position or consolidated results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on the Company’s financial results.
Rent expense: Total rent expense was $44.2 million in 2019, $32.8 million in 2018, and $27.2 million in 2017.
Purchase obligations: We have future expected purchase obligations of $496.3 million related to wire services, interactive marketing agreements, professional services, paper distribution agreements, printing contracts, and other legally binding commitments. Amounts which we are liable for under purchase orders outstanding at December 31, 2019 are reflected in the Consolidated balance sheets as Accounts payable and are excluded from the amounts referred to above.
Self-insurance: We are self-insured for most of our employee medical coverage and for our casualty, general liability, and libel coverage (subject to a cap above which third party insurance is in place). The liabilities, which are reflected in Accounts payable and Other long-term liabilities in the Consolidated balance sheets, are established on an actuarial basis with the advice
of consulting actuaries and totaled $65.4 million and $11.7 million as of December 31, 2019 and December 30, 2018, respectively.
NOTE 13 — Fair value measurement
Fair value measurement
The Company measures and records in the accompanying consolidated financial statements certain assets and liabilities at fair value on a recurring basis. ASC 820 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs).
These inputs are prioritized as follows:
|
|
•
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs; and
|
|
|
•
|
Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop their own assumptions about how market participants price the asset or liability.
|
The valuation techniques that may be used to measure fair value are as follows:
|
|
•
|
Market approach—Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
|
|
|
•
|
Income approach—Uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts;
|
|
|
•
|
Cost approach—Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
|
As of December 31, 2019 and December 30, 2018, assets and liabilities recorded at fair value and measured on a recurring basis primarily consist of pension plan assets. As permitted by U.S. GAAP, we use net asset values as a practical expedient to determine the fair value of certain investments. These investments measured at net asset value have not been classified in the fair value hierarchy.
The Term Loan Facility is recorded at carrying value, which approximates fair value, in the Consolidated balance sheets and is classified as Level 3.
The amounts presented in the table below are intended to permit reconciliation to the amounts presented in the Consolidated balance sheets.
The following tables set forth, by level within the fair value hierarchy, the December 31 measurement date fair values of our pension plans assets relating to the George W. Prescott Company pension plan, the Times Publishing Company pension plan, the GRP, the U.K. Pension Plans, and the Newspaper Guild of Detroit Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Assets/Liabilities
|
In thousands
|
Fair value measurement as of December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
27,884
|
|
|
$
|
4,003
|
|
|
$
|
—
|
|
|
$
|
31,887
|
|
Corporate common stock
|
537,295
|
|
|
—
|
|
|
—
|
|
|
537,295
|
|
Real estate
|
—
|
|
|
—
|
|
|
99,223
|
|
|
99,223
|
|
Interest in common/collective trusts:
|
|
|
|
|
|
|
|
|
Equities
|
19,191
|
|
|
249,890
|
|
|
—
|
|
|
269,081
|
|
Fixed income
|
12,435
|
|
|
506,586
|
|
|
—
|
|
|
519,021
|
|
Partnership/joint venture interests
|
—
|
|
|
—
|
|
|
149,018
|
|
|
149,018
|
|
Hedge funds
|
—
|
|
|
—
|
|
|
123,126
|
|
|
123,126
|
|
Derivative contracts
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Total assets at fair value excluding those measured
at net asset value
|
$
|
596,805
|
|
|
$
|
760,479
|
|
|
$
|
371,372
|
|
|
$
|
1,728,656
|
|
Instruments measured at net asset value using the practical expedient:
|
Real estate funds
|
|
|
|
|
|
|
10,966
|
|
Interest in common/collective trusts:
|
|
|
|
|
|
|
|
Equities
|
|
|
|
|
|
|
314,955
|
|
Fixed income
|
|
|
|
|
|
|
766,512
|
|
Partnership/joint venture interests
|
|
|
|
|
|
|
37,145
|
|
Other
|
|
|
|
|
|
|
1,202
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
2,859,436
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
(634
|
)
|
|
$
|
(498
|
)
|
|
$
|
(2,008
|
)
|
|
$
|
(3,140
|
)
|
Total liabilities at fair value
|
$
|
(634
|
)
|
|
$
|
(498
|
)
|
|
$
|
(2,008
|
)
|
|
$
|
(3,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Fair value measurement as of December 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
780
|
|
|
$
|
—
|
|
|
$
|
780
|
|
Interest in registered investment companies
|
|
|
|
|
|
|
—
|
|
Equities
|
18,746
|
|
|
—
|
|
|
—
|
|
|
18,746
|
|
Fixed income
|
14,074
|
|
|
—
|
|
|
—
|
|
|
14,074
|
|
Total assets at fair value excluding those measured
at net asset value
|
$
|
32,820
|
|
|
$
|
780
|
|
|
$
|
—
|
|
|
$
|
33,600
|
|
Instruments measured at net asset value using the practical expedient:
|
Interest in registered investment companies
|
|
|
|
|
|
|
|
Equities
|
|
|
|
|
|
|
15,104
|
|
Fixed income
|
|
|
|
|
|
|
4,357
|
|
Other
|
|
|
|
|
|
|
974
|
|
Total assets at fair value
|
|
|
|
|
|
|
$
|
54,035
|
|
Valuation methodologies used for assets and liabilities measured at fair value are as follows:
|
|
•
|
Corporate stock is valued primarily at the closing price reported on the active market on which the individual securities are traded.
|
|
|
•
|
Investments in direct real estate have been valued by an independent qualified valuation professional in the U.K. using a valuation approach that capitalizes any current or future income streams at an appropriate multiplier. Investments in real estate funds are mainly valued utilizing the net asset valuations provided by the underlying private investment companies or through proprietary models with varying degrees of complexity.
|
|
|
•
|
Interests in common/collective trusts and interests in 103-12 investments are primarily equity and fixed income investments valued either through the use of a net asset value as provided monthly by the fund family or fund company or through proprietary models with varying degrees of complexity. Shares in the common/collective trusts are generally redeemable upon request.
|
|
|
•
|
Interests in registered investment companies are primarily valued using the published net asset values as quoted through publicly available pricing sources or through proprietary models with varying degrees of complexity. Additionally, the interests are redeemable on request.
|
|
|
•
|
Investments in partnerships and joint venture interests classified in Level 3 are valued based on an assessment of each underlying investment, considering items such as expected cash flows, changes in market outlook, and subsequent rounds of financing. These investments are included in Level 3 of the fair value hierarchy because exit prices tend to be unobservable and reliance is placed on the above methods. Most of the partnerships are general leveraged buyout funds, others include a venture capital fund, a fund formed to invest in special credit opportunities, an infrastructure fund and a real estate fund. Interest in partnership investments could be sold on the secondary market but cannot be redeemed. Instead, distributions are received as the underlying assets of the funds are liquidated. There are $7.0 million in unfunded commitments related to partnership/joint venture interests. One of the Plan's investments in partnerships and joint venture interests represents a limited partnership commingled fund valued using the net asset value as reported by the fund manager.
|
|
|
•
|
Investments in hedge funds consist of investments that were formed to invest in mortgage and trading opportunities and are valued at the net asset value as reported by the fund managers. Additionally, there is an investment that consists of a fund of hedge funds whose strategy is to produce a return uncorrelated with market movements. This fund is classified as a Level 3 because its valuation is derived from unobservable inputs and a proprietary assessment of the underlying investments. Shares in the hedge funds are generally redeemable twice a year or on the last business day of each quarter with at least 60 days written notice subject to a potential 5% holdback.
|
|
|
•
|
Derivatives primarily consist of forward and swap contracts. Forward contracts are valued at the spot rate, plus or minus forward points between the valuation date and maturity date. Swaps are valued at the mid-evaluation price using discounted cash flow models. Items in Level 3 are valued based on the market values of other securities for which they represent a synthetic combination.
|
We review appraised values, audited financial statements and additional information to evaluate fair value estimates from our investment managers or fund administrator.
The following tables set forth a summary of changes in the fair value of our pension plan assets and liabilities that are categorized as Level 3:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Pension Plan Assets/Liabilities
|
In thousands
|
For the year ended December 31, 2019
|
|
|
|
|
|
Actual Return on Plan
Assets
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Level 3 Assets Acquired
|
|
Relating to Assets Still Held at Report Date
|
|
Relating to Assets Sold During the Period
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
Balance at
End of
Year
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
$
|
—
|
|
|
$
|
109,047
|
|
|
$
|
(1,324
|
)
|
|
$
|
2,911
|
|
|
$
|
—
|
|
|
$
|
(11,411
|
)
|
|
$
|
—
|
|
|
$
|
99,223
|
|
Partnership/joint venture interests
|
—
|
|
|
147,225
|
|
|
3,185
|
|
|
—
|
|
|
133
|
|
|
—
|
|
|
(1,525
|
)
|
|
149,018
|
|
Hedge funds
|
—
|
|
|
121,588
|
|
|
1,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
123,126
|
|
Derivative contracts
|
—
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Total
|
$
|
—
|
|
|
$
|
377,864
|
|
|
$
|
3,400
|
|
|
$
|
2,911
|
|
|
$
|
133
|
|
|
$
|
(11,411
|
)
|
|
$
|
(1,525
|
)
|
|
$
|
371,372
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
—
|
|
|
$
|
2,008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,008
|
|
There were no Level 3 assets held for the year ended December 30, 2018.
There were no transfers between Levels 1 and 2 for the years ended December 31, 2019 and December 30, 2018.
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our assets that are measured on a nonrecurring basis are assets held for sale (Level 3), which are evaluated by using executed purchase agreements, letters of intent or third party valuation analyses when certain circumstances arise.
The non-financial assets measured at fair value on a nonrecurring basis in the accompanying Consolidated balance sheets are for Assets held for sale at December 31, 2019 and December 30, 2018 of $25.5 million and $1.9 million, respectively.
NOTE 14 — Segment reporting
We define our reportable segments based on the way the Chief Operating Decision Maker (CODM), currently the Chief Executive Officer of our operating subsidiary, manages the operations for purposes of allocating resources and assessing performance. Our reportable segments include the following:
|
|
•
|
Publishing, which consists of our portfolio of local, regional, national, and international newspaper publishers. The results of this segment include local, classified, and national advertising revenues consisting of both print and digital advertising, circulation revenues from the distribution of our publications on our digital platforms, home delivery of our publications, single copy sales, and other revenues from commercial printing and distribution arrangements. The Publishing reportable segment is an aggregation of two operating segments: Domestic Publishing and the U.K.
|
|
|
•
|
Marketing Solutions, which is comprised of our digital marketing solutions subsidiaries ReachLocal and UpCurve. The results of this segment include advertising and marketing services revenues through multiple services including search advertising, display advertising, search optimization, social media, website development, web presence products, and software-as-a-service solutions.
|
In addition to the above operating segments, we have a corporate and other category that includes activities not directly attributable to a specific segment. This category primarily consists of broad corporate functions and includes legal, human resources, accounting, finance, and marketing as well as other general business costs.
In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.
The CODM uses adjusted EBITDA to evaluate the performance of the segments and allocate resources. Adjusted EBITDA is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our businesses and may be different than similarly-titled non-GAAP financial measures used by other companies. We define Adjusted EBITDA as net income (loss) from continuing operations attributable to Gannett before (1) income tax expense (benefit), (2) interest expense, (3) gains or losses on early extinguishment of debt, (4) non-operating items, primarily pension costs, (5) depreciation and amortization, (6) integration and reorganization costs, (7) impairment of long-lived assets, (8) goodwill and intangible impairments, (9) net loss (gain) on sale or disposal of assets, (10) non-cash compensation, (11) acquisition costs, and (12) certain other non-recurring charges.
Management considers adjusted EBITDA to be the appropriate metric to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as it eliminates the effect of items which we do not believe are indicative of each segment's core operating performance.
The following table presents our segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
Publishing
|
|
Marketing Solutions
|
|
Corporate and Other
|
|
Intersegment Eliminations
|
|
Consolidated
|
2019
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
$
|
819,046
|
|
|
$
|
131,003
|
|
|
$
|
2,595
|
|
|
$
|
—
|
|
|
$
|
952,644
|
|
Advertising and marketing services - intersegment sales
|
78,539
|
|
|
—
|
|
|
—
|
|
|
(78,539
|
)
|
|
—
|
|
Circulation
|
704,811
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
704,842
|
|
Commercial printing and other
|
190,256
|
|
|
18,239
|
|
|
1,928
|
|
|
—
|
|
|
210,423
|
|
Total revenues
|
$
|
1,792,652
|
|
|
$
|
149,242
|
|
|
$
|
4,554
|
|
|
$
|
(78,539
|
)
|
|
$
|
1,867,909
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
268,916
|
|
|
$
|
(3,279
|
)
|
|
$
|
(41,766
|
)
|
|
$
|
—
|
|
|
$
|
223,871
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
$
|
704,945
|
|
|
$
|
80,086
|
|
|
$
|
1,546
|
|
|
$
|
—
|
|
|
$
|
786,577
|
|
Advertising and marketing services - intersegment sales
|
68,089
|
|
|
—
|
|
|
—
|
|
|
(68,089
|
)
|
|
—
|
|
Circulation
|
574,961
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
574,963
|
|
Commercial printing and other
|
147,129
|
|
|
15,785
|
|
|
1,570
|
|
|
—
|
|
|
164,484
|
|
Total revenues
|
$
|
1,495,124
|
|
|
$
|
95,871
|
|
|
$
|
3,118
|
|
|
$
|
(68,089
|
)
|
|
$
|
1,526,024
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
220,415
|
|
|
$
|
(6,404
|
)
|
|
$
|
(33,718
|
)
|
|
$
|
—
|
|
|
$
|
180,293
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services - external sales
|
$
|
666,907
|
|
|
$
|
58,102
|
|
|
$
|
995
|
|
|
$
|
—
|
|
|
$
|
726,004
|
|
Advertising and marketing services - intersegment sales
|
47,221
|
|
|
—
|
|
|
—
|
|
|
(47,221
|
)
|
|
—
|
|
Circulation
|
474,320
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
474,324
|
|
Commercial printing and other
|
126,562
|
|
|
13,172
|
|
|
1,942
|
|
|
—
|
|
|
141,676
|
|
Total revenues
|
$
|
1,315,010
|
|
|
$
|
71,274
|
|
|
$
|
2,941
|
|
|
$
|
(47,221
|
)
|
|
$
|
1,342,004
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
216,482
|
|
|
$
|
(11,463
|
)
|
|
$
|
(39,728
|
)
|
|
$
|
—
|
|
|
$
|
165,291
|
|
The following table presents our reconciliation of adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
in thousands
|
|
|
|
|
|
Net income (loss) attributable to Gannett (GAAP basis)
|
$
|
(119,842
|
)
|
|
$
|
18,196
|
|
|
$
|
(915
|
)
|
Income tax expense (benefit)
|
(85,994
|
)
|
|
1,912
|
|
|
481
|
|
Interest expense
|
63,660
|
|
|
36,072
|
|
|
30,476
|
|
Loss on early extinguishment of debt
|
6,058
|
|
|
2,886
|
|
|
4,767
|
|
Other non-operating items, net
|
(9,511
|
)
|
|
(1,554
|
)
|
|
(776
|
)
|
Depreciation and amortization
|
111,882
|
|
|
84,791
|
|
|
74,394
|
|
Integration and reorganization costs
|
47,401
|
|
|
15,011
|
|
|
8,903
|
|
Acquisition costs
|
60,618
|
|
|
2,651
|
|
|
1,975
|
|
Impairment of long-lived assets
|
3,009
|
|
|
1,538
|
|
|
7,142
|
|
Goodwill and mastheads impairment
|
100,743
|
|
|
—
|
|
|
27,448
|
|
Net (gain) loss on sale or disposal of assets
|
4,723
|
|
|
(3,971
|
)
|
|
(1,649
|
)
|
Non-cash compensation
|
11,324
|
|
|
3,156
|
|
|
3,135
|
|
Other items
|
29,800
|
|
|
19,605
|
|
|
9,910
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
223,871
|
|
|
$
|
180,293
|
|
|
$
|
165,291
|
|
Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment. Additionally, equity income in unconsolidated investees, net, interest expense, other non-operating items, net, and provision for income taxes, as reported in the consolidated financial statements, are not part of operating income and are primarily recorded at the corporate level.
NOTE 15 — Quarterly statements of income (unaudited)
Selected unaudited financial data for each quarter of the last two fiscal years is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands, except per share amounts
|
Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 29
|
|
December 31
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Revenues
|
$
|
387,599
|
|
|
$
|
404,387
|
|
|
$
|
376,649
|
|
|
$
|
699,274
|
|
Operating income (loss)
|
(1,435
|
)
|
|
12,173
|
|
|
(1,942
|
)
|
|
(155,773
|
)
|
Income (loss) before income taxes
|
(11,309
|
)
|
|
2,272
|
|
|
(11,742
|
)
|
|
(186,405
|
)
|
Net income (loss) attributable to Gannett *
|
(9,106
|
)
|
|
2,815
|
|
|
(18,463
|
)
|
|
(95,088
|
)
|
Earnings (loss) per share - Basic
|
(0.15
|
)
|
|
0.05
|
|
|
(0.31
|
)
|
|
(1.05
|
)
|
Earnings (loss) per share - Diluted
|
(0.15
|
)
|
|
0.05
|
|
|
(0.31
|
)
|
|
(1.05
|
)
|
* Net income (loss) figures per the table above were impacted by the following:
• Net loss for the first quarter of 2019 includes integration and reorganization costs of $4.1 million, acquisition costs of $0.8 million, and impairment of long-lived assets of $1.2 million.
• Net loss for the second quarter of 2019 includes integration and reorganization costs of $3.2 million, acquisition costs of $2.4 million, and impairment of long-lived assets of $1.3 million.
• Net income for the third quarter of 2019 includes integration and reorganization costs of $2.2 million, and acquisition costs of $12.2 million.
• Net loss for the fourth quarter of 2019 includes integration and reorganization costs of $37.9 million, acquisition costs of $45.3 million, goodwill and mastheads impairment of $100.7 million, and impairment of long-lived assets of $0.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands, except per share amounts
|
Quarter Ended
|
|
April 1
|
|
July 1
|
|
September 30
|
|
December 30
|
Year Ended December 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
340,765
|
|
|
$
|
388,801
|
|
|
$
|
380,419
|
|
|
$
|
416,039
|
|
Operating income (loss)
|
7,051
|
|
|
23,314
|
|
|
2,570
|
|
|
25,204
|
|
Income (loss) before income taxes
|
(781
|
)
|
|
14,652
|
|
|
(6,112
|
)
|
|
12,260
|
|
Net income (loss) attributable to Gannett *
|
(665
|
)
|
|
11,706
|
|
|
(6,105
|
)
|
|
13,260
|
|
Earnings (loss) per share - Basic
|
(0.01
|
)
|
|
0.20
|
|
|
(0.10
|
)
|
|
0.22
|
|
Earnings (loss) per share - Diluted
|
(0.01
|
)
|
|
0.20
|
|
|
(0.10
|
)
|
|
0.22
|
|
* Net income (loss) figures per the table above were impacted by the following:
• Net loss for the first quarter of 2018 includes integration and reorganization costs of $2.4 million and acquisition costs of $0.6 million.
• Net income for the second quarter of 2018 includes integration and reorganization costs of $1.7 million and acquisition costs of $0.7 million.
• Net loss for the third quarter of 2018 includes integration and reorganization costs of $9.1 million, acquisition costs of $0.6 million, and impairment of long-lived assets of $1.1 million.
• Net income for the fourth quarter of 2018 includes integration and reorganization costs of $1.8 million, acquisition costs of $0.8 million, and impairment of long-lived assets of $0.4 million.
NOTE 16 — Related party transactions
As of December 31, 2019, the Company's manager, FIG LLC (the "Manager"), which is an affiliate of Fortress Investment Group LLC ("Fortress"), and its affiliates owned approximately 4% of the Company’s outstanding stock and approximately 40% of the Company’s outstanding warrants. The Manager or its affiliates hold 6,068,075 stock options of the Company’s stock as of December 31, 2019. During the years ended December 31, 2019, December 30, 2018 and December 31, 2017, Fortress and its affiliates were paid $1.0 million, $1.0 million, and $1.0 million in dividends, respectively.
The Company's Chief Executive Officer is an employee of Fortress (or one of its affiliates), and his salary is paid by Fortress (or one of its affiliates).
Amended and Restated Management Agreement
On November 26, 2013, New Media entered into a management agreement (as amended and restated, "the Management Agreement") with FIG LLC ("the Manager"), an affiliate of Fortress, pursuant to which the Manager managed the operations of New Media. New Media paid the Manager an annual management fee equal to 1.50% of New Media’s Total Equity (as defined in the Management Agreement), and the Manager was eligible to receive incentive compensation.
On August 5, 2019, in connection with the execution of the Legacy Gannett acquisition agreement, the Company and the Manager entered into the Amended and Restated Management and Advisory Agreement (the “Amended Management Agreement”). Effective upon the consummation of the acquisition on November 19, 2019, the Amended Management Agreement replaced the Management Agreement. The Amended Management Agreement (i) establishes a termination date for the Manager’s services of December 31, 2021, in lieu of annual renewals of the term; (ii) reduces the “incentive fee” payable under the Amended Management Agreement from 25% to 17.5% for the remainder of the term; (iii) reduces by 50% the number of options that would otherwise be issuable in connection with the issuance of shares as consideration for the acquisition, and imposes a premium on the exercise price; (iv) eliminates the Manager’s right to receive options in connection with future equity raises by the Company; and (v) eliminates certain payments otherwise due at or after the end of the term of the prior management agreement.
In connection with entering into the Amended Management Agreement and the occurrence of the consummation of the acquisition, the Company issued to the Manager 4,205,607 shares of Company Common Stock and granted to the Manager options to acquire 3,163,264 shares of Company Common Stock. The Manager is restricted from selling the issued shares until the expiration of the Amended Management Agreement, or otherwise upon a change in control and certain other extraordinary events. The options will have an exercise price of $15.50 and become exercisable upon the first trading day immediately following the first 20 consecutive trading day period in which the closing price of the Company Common Stock (on its principal U.S. national securities exchange) is at or above $20 per share (subject to adjustment) and also upon a change in control and certain other extraordinary events.
Upon expiration of the term of the Amended Management Agreement, the Manager will cease providing external management services to the Company, and the Manager will no longer be the employer of the person serving in the role of Chief Executive Officer of the consolidated company.
The following table provides the management and incentive fees recognized and paid to the Manager for the years ended December 31, 2019, December 30, 2018, and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
In thousands
|
December 31, 2019
|
|
December 30, 2018
|
|
December 31, 2017
|
Management fee expense
|
$
|
10,992
|
|
|
$
|
10,674
|
|
|
$
|
10,622
|
|
Incentive fee expense
|
4,067
|
|
|
11,143
|
|
|
11,654
|
|
Management fees paid
|
11,078
|
|
|
9,619
|
|
|
11,349
|
|
Incentive fees paid
|
6,675
|
|
|
14,129
|
|
|
9,195
|
|
Reimbursement for expenses
|
2,905
|
|
|
2,501
|
|
|
1,567
|
|
The Company had an outstanding liability for all Management Agreement related fees of $6.5 million and $10.7 million at December 31, 2019 and December 30, 2018, respectively, included in accrued expenses.