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20180331 Q1

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2018 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no. 1-33741





Picture 1



A. H. Belo Corporation

(Exact name of registrant as specified in its charter)







 

 





 

 

Delaware

 

38-3765318

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

P. O. Box 224866, Dallas, Texas 75222-4866

 

(214) 977-8222

(Address of principal executive offices, including zip code)

 

(Registrant’s telephone number, including area code)



Former name, former address and former fiscal year, if changed since last report.

None

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes      No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 

 

 

 

 

Large accelerated filer:  

 

Accelerated filer:  

 

Non-accelerated filer:  

 

Smaller reporting company:  

 

 

 

 

(Do not check if a smaller reporting company)

Emerging growth company  

 

 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes      No 



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest possible date.





 

 



 

 



 

Outstanding at

Class

 

April 30, 2018

Common Stock, $.01 par value

 

21,711,319





Total Common Stock consists of 19,241,684 shares of Series A Common Stock and 2,469,635 shares of Series B Common Stock. 

 

 


 

Table of Contents

 



A. H. BELO CORPORATION



FORM 10-Q



TABLE OF CONTENTS





 

 

 





 

 

 

 

 

Page

PART I

Item 1.

Financial Information

 

PAGE   3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

PAGE 18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

PAGE 25

Item 4.

Controls and Procedures

 

PAGE 25

 

 

 

 

PART II 

 

 

Item 1.

Legal Proceedings

 

PAGE 27

Item 1A.

Risk Factors

 

PAGE 27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

PAGE 27

Item 3.

Defaults Upon Senior Securities

 

PAGE 27

Item 4.

Mine Safety Disclosures

 

PAGE 27

Item 5.

Other Information

 

PAGE 27

Item 6.

Exhibits

 

PAGE 28

Signatures

 

PAGE 31

Exhibit Index

 

PAGE 32



 

A. H. Belo Corporation First Quarter 2018 on Form 10-Q


 

Table of Contents

 



PART I

Item 1.  Financial Information



A. H. Belo Corporation and Subsidiaries

Consolidated Statements of Operations





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,

In thousands, except share and per share amounts (unaudited)

 

2018

 

2017

Net Operating Revenue:

 

 

 

 

 

 

Advertising and marketing services

 

$

25,741 

 

$

35,204 

Circulation

 

 

17,747 

 

 

19,166 

Printing, distribution and other

 

 

5,965 

 

 

6,531 

Total net operating revenue

 

 

49,453 

 

 

60,901 

Operating Costs and Expense:

 

 

 

 

 

 

Employee compensation and benefits

 

 

24,672 

 

 

28,734 

Other production, distribution and operating costs

 

 

23,014 

 

 

28,326 

Newsprint, ink and other supplies

 

 

5,311 

 

 

5,901 

Depreciation

 

 

2,473 

 

 

2,506 

Amortization

 

 

200 

 

 

200 

Asset impairments

 

 

 —

 

 

228 

Total operating costs and expense

 

 

55,670 

 

 

65,895 

Operating loss

 

 

(6,217)

 

 

(4,994)

Other income, net

 

 

888 

 

 

522 

Loss Before Income Taxes

 

 

(5,329)

 

 

(4,472)

Income tax benefit

 

 

(1,315)

 

 

(42)

Net Loss

 

$

(4,014)

 

$

(4,430)



 

 

 

 

 

 

Per Share Basis

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

Basic and diluted

 

$

(0.19)

 

$

(0.21)

Number of common shares used in the per share calculation:

 

 

 

 

 

 

Basic and diluted

 

 

21,716,419 

 

 

21,690,371 



See the accompanying Notes to the Consolidated Financial Statements.

 

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     3


 

Table of Contents

 

A. H. Belo Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,

In thousands (unaudited)

 

2018

 

2017

Net Loss

 

$

(4,014)

 

$

(4,430)

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

Amortization of actuarial losses

 

 

158 

 

 

57 

Total other comprehensive income, net of tax

 

 

158 

 

 

57 

Total Comprehensive Loss

 

$

(3,856)

 

$

(4,373)



See the accompanying Notes to the Consolidated Financial Statements.

 

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     4


 

Table of Contents

 

A. H. Belo Corporation and Subsidiaries

Consolidated Balance Sheets







 

 

 

 

 

 

  

 

 

 

 

 

 



 

March 31,

 

December 31,

In thousands, except share amounts (unaudited)

 

2018

 

2017

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,975 

 

$

57,660 

Accounts receivable (net of allowance of $847 and $1,055 at March 31, 2018

and December 31, 2017, respectively)

 

 

20,450 

 

 

26,740 

Inventories

 

 

4,027 

 

 

3,171 

Prepaids and other current assets

 

 

14,356 

 

 

13,734 

Assets held for sale

 

 

1,089 

 

 

1,089 

Total current assets

 

 

93,897 

 

 

102,394 

Property, plant and equipment, at cost

 

 

419,978 

 

 

418,730 

Less accumulated depreciation

 

 

(389,437)

 

 

(387,024)

Property, plant and equipment, net

 

 

30,541 

 

 

31,706 

Intangible assets, net

 

 

3,873 

 

 

4,073 

Goodwill

 

 

13,973 

 

 

13,973 

Deferred income taxes, net

 

 

6,974 

 

 

5,355 

Other assets

 

 

4,575 

 

 

5,347 

Total assets

 

$

153,833 

 

$

162,848 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

7,737 

 

$

10,303 

Accrued compensation and benefits

 

 

6,278 

 

 

8,243 

Other accrued expense

 

 

6,407 

 

 

4,275 

Advance subscription payments

 

 

12,233 

 

 

11,670 

Total current liabilities

 

 

32,655 

 

 

34,491 

Long-term pension liabilities

 

 

21,941 

 

 

23,038 

Other post-employment benefits

 

 

1,175 

 

 

2,052 

Other liabilities

 

 

5,938 

 

 

5,568 

Total liabilities

 

 

61,709 

 

 

65,149 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $.01 par value; Authorized 2,000,000 shares; none issued

 

 

 —

 

 

 —

Common stock, $.01 par value; Authorized 125,000,000 shares

 

 

 

 

 

 

Series A: issued 20,817,514 and 20,700,292 shares at March 31, 2018

and December 31, 2017, respectively

 

 

209 

 

 

208 

Series B: issued 2,469,635 and 2,469,755 shares at March 31, 2018

and December 31, 2017, respectively

 

 

24 

 

 

24 

Treasury stock, Series A, at cost; 1,539,739 and 1,430,961 shares held at March 31, 2018

and December 31, 2017, respectively

 

 

(11,857)

 

 

(11,302)

Additional paid-in capital

 

 

495,605 

 

 

494,989 

Accumulated other comprehensive loss

 

 

(24,774)

 

 

(24,932)

Accumulated deficit

 

 

(367,083)

 

 

(361,288)

Total shareholders’ equity

 

 

92,124 

 

 

97,699 

Total liabilities and shareholders’ equity

 

$

153,833 

 

$

162,848 



See the accompanying Notes to the Consolidated Financial Statements.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     5


 

Table of Contents

 

A. H. Belo Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

In thousands, except share amounts  (unaudited)

Shares   
Series A

Shares
Series B

Amount

Additional

Paid-in

Capital

 

Shares

Series A

Amount

Accumulated

Other

Comprehensive

Loss

Accumulated
Deficit

Noncontrolling
Interests

Total

Balance at December 31, 2016

20,620,461 

2,472,680 

$

231 

$

499,552 

 

(1,416,881)

$

(11,233)

$

(39,308)

$

(361,324)

$

1,234 

$

89,152 

Net loss

 —

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,430)

 

 —

 

(4,430)

Other comprehensive income

 —

 —

 

 —

 

 —

 

 —

 

 —

 

57 

 

 —

 

 —

 

57 

Distributions to noncontrolling interests

 —

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(118)

 

(118)

Issuance of shares for restricted stock units

55,206 

 —

 

 

(1)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Share-based compensation

 —

 —

 

 —

 

441 

 

 —

 

 —

 

 —

 

 —

 

 —

 

441 

Purchases of noncontrolling interests

 

 

 

 

 

(5,506)

 

 

 

 

 

 

 

 

 

(1,116)

 

(6,622)

Dividends

 —

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(1,777)

 

 —

 

(1,777)

Balance at March 31, 2017

20,675,667 

2,472,680 

$

232 

$

494,486 

 

(1,416,881)

$

(11,233)

$

(39,251)

$

(367,531)

$

 —

$

76,703 

Balance at December 31, 2017

20,700,292 

2,469,755 

$

232 

$

494,989 

 

(1,430,961)

$

(11,302)

$

(24,932)

$

(361,288)

$

 —

$

97,699 

Net loss

 —

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,014)

 

 —

 

(4,014)

Other comprehensive income

 —

 —

 

 —

 

 —

 

 —

 

 —

 

158 

 

 —

 

 —

 

158 

Treasury stock purchases

 —

 —

 

 —

 

 —

 

(108,778)

 

(555)

 

 —

 

 —

 

 —

 

(555)

Issuance of shares for restricted stock units

117,102 

 —

 

 

(1)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Share-based compensation

 —

 —

 

 —

 

617 

 

 —

 

 —

 

 —

 

 —

 

 —

 

617 

Conversion of Series B to Series A

120 

(120)

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Dividends

 —

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(1,781)

 

 —

 

(1,781)

Balance at March 31, 2018

20,817,514 

2,469,635 

$

233 

$

495,605 

 

(1,539,739)

$

(11,857)

$

(24,774)

$

(367,083)

$

 —

$

92,124



See the accompanying Notes to the Consolidated Financial Statements.

 

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     6


 

Table of Contents

 

A. H. Belo Corporation and Subsidiaries

Consolidated Statements of Cash Flows







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,

In thousands (unaudited)

 

2018

 

2017

Operating Activities

 

 

 

 

 

 

Net loss

 

$

(4,014)

 

$

(4,430)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,673 

 

 

2,706 

Net periodic pension and other post-employment benefit

 

 

(930)

 

 

(859)

Share-based compensation

 

 

617 

 

 

441 

Deferred income taxes

 

 

(1,619)

 

 

 —

Loss on disposal of fixed assets

 

 

186 

 

 

 —

Asset impairments

 

 

 —

 

 

228 

Changes in working capital and other operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

6,290 

 

 

3,590 

Inventories, prepaids and other current assets

 

 

(1,478)

 

 

(1,829)

Other assets

 

 

772 

 

 

(133)

Accounts payable

 

 

(2,566)

 

 

2,514 

Compensation and benefit obligations

 

 

(2,089)

 

 

(1,902)

Other accrued expenses

 

 

3,428 

 

 

178 

Advance subscription payments

 

 

563 

 

 

548 

Other post-employment benefits

 

 

(886)

 

 

(15)

Net cash provided by operating activities

 

 

947 

 

 

1,037 

Investing Activities

 

 

 

 

 

 

Purchases of assets

 

 

(2,307)

 

 

(852)

Net cash used for investing activities

 

 

(2,307)

 

 

(852)

Financing Activities

 

 

 

 

 

 

Purchases of noncontrolling interests

 

 

 —

 

 

(9,231)

Dividends paid

 

 

(1,770)

 

 

(1,763)

Distributions to noncontrolling interests

 

 

 —

 

 

(57)

Purchases of treasury stock

 

 

(555)

 

 

 —

Net cash used for financing activities

 

 

(2,325)

 

 

(11,051)

Net decrease in cash and cash equivalents

 

 

(3,685)

 

 

(10,866)

Cash and cash equivalents, beginning of period

 

 

57,660 

 

 

80,071 

Cash and cash equivalents, end of period

 

$

53,975 

 

$

69,205 



 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

Income tax paid, net (refund)

 

$

(300)

 

$

(127)

Noncash investing and financing activities:

 

 

 

 

 

 

Investments in property, plant and equipment payable

 

 

327 

 

 

680 

Dividends payable

 

 

1,785 

 

 

1,777 

Distributions to noncontrolling interests payable

 

 

 —

 

 

122 



See the accompanying Notes to the Consolidated Financial Statements.

 



 

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     7


 

Table of Contents

 

A. H. Belo Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

 

Note 1:  Basis of Presentation and Recently Issued Accounting Standards



Description of Business.    A. H. Belo Corporation and subsidiaries are referred to collectively herein as “A. H. Belo” or the “Company.” The Company, headquartered in Dallas, Texas, is a leading local news and information publishing company with commercial printing, distribution and direct mail capabilities, as well as expertise in emerging media and digital marketing. With a continued focus on extending the Company’s media platform, A. H. Belo delivers news and information in innovative ways to a broad spectrum of audiences with diverse interests and lifestyles. The Company publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes, and various niche publications targeting specific audiences.  In December 2017, the Company completed the sale of the Denton Record-Chronicle and the Company no longer owns newspaper operations in Denton, Texas.



Basis of Presentation.     The interim consolidated financial statements included herein are unaudited; however, they include adjustments of a normal recurring nature which, in the Company’s opinion, are necessary to present fairly the interim consolidated financial information as of and for the periods indicated. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. All dollar amounts presented herein, except share and per share amounts, are in thousands, unless the context indicates otherwise.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net operating revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.



Recently Adopted Accounting Pronouncements.



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09Revenue from Contracts with Customers (Topic 606). This guidance prescribes a single comprehensive model for entities to use in the accounting of revenue arising from contracts with customers. The core principle contemplated by this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. Since May 2014, the FASB issued clarifying updates to the new standard specifically to address certain core principles including the identification of performance obligations, licensing guidance, the assessment of the collectability criterion, the presentation of taxes collected from customers, noncash considerations, contract modifications, and completed contracts at transition. The new guidance will supersede virtually all existing revenue guidance under GAAP and is effective for fiscal years beginning after December 31, 2017. There are two transition options available to entities, the full retrospective approach, in which the Company would restate prior periods, or the modified retrospective approach. The Company adopted ASU 2014-09 using the modified retrospective approach as of January 1, 2018;  see Note 3 – Revenue.



In March 2017, the FASB issued ASU 2017-07 – Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update clarifies the presentation and classification of the components of net periodic benefit cost in the Consolidated Statement of Operations. Specifically, this standard requires the service cost component of net periodic benefit cost to be recorded in the same income statement line as other employee compensation costs and all other components of net periodic benefit cost must be presented as non-operating items. The Company adopted this standard retrospectively as of January 1, 2018. The Company’s defined benefit plans have been frozen, so the Company is no longer incurring service costs related to the plans. Therefore, the entire net periodic pension and other post-employment expense (benefit) will be presented in the Consolidated Statements of Operations in non-operating income (expense).



As a result of adopting this guidance, total operating costs and expense increased $930 and $859 for the three months ended March 31, 2018 and 2017, respectively, with the offsetting change recorded to non-operating income (expense). There was no impact to net income (loss), retained earnings and earnings per share for both years.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     8


 

Table of Contents

 

New Accounting Pronouncements.    The FASB issued the following accounting pronouncements and guidance, which may be applicable to the Company but have not yet become effective.



In February 2016, the FASB issued ASU 2016-02Leases (Topic 842). This update requires an entity to recognize a right-of-use asset and a lease liability for virtually all of its leases. The liability will be equal to the present value of lease payments. The asset will generally be based on the liability. For income statement purposes operating leases will result in straight-line expense and finance leases will result in expenses similar to current capital leases. The guidance also requires additional disclosures to enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. The guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and will be applied using the modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the requirements of this update and has not yet determined its impact on the Company’s consolidated financial statements.



In February 2017, the FASB issued ASU 2017-06 – Plan Accounting – Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962) and Health and Welfare Benefit Plans (Topic 965):  Employee Benefit Plan Master Trust Reporting. This update clarifies the presentation requirements for a plan’s interest in a master trust and requires more detailed disclosures of the plan’s interest in the master trust. The guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of this update and has not yet determined its impact on the Company’s consolidated financial statements.



Note 2:  Segment Reporting



The Company identified two reportable segments based on reporting structure and the go-to-market for the Company’s service and product offerings. The two reportable segments are Publishing and Marketing Services.



The Publishing segment includes the Company’s core print and digital operations associated with its newspapers, niche publications and related websites and apps. These operations generate revenue from sales of advertising within its newspaper and digital platforms, subscription and retail sales of its newspapers, commercial printing and distribution services, primarily related to national and regional newspapers, and preprint advertisers. Businesses within the Publishing segment leverage the production facilities, subscriber and advertiser base, and digital news platforms to provide additional contribution margin. The Company evaluates Publishing operations based on operating profit and cash flows from operating activities.



The Marketing Services segment includes the operations of DMV Digital Holdings Company (“DMV Holdings”),  Your Speakeasy, LLC (“Speakeasy”) and digital advertising through Connect (programmatic advertising). The Company operates this integrated portfolio of assets within its Marketing Services segment as separate businesses that sell digital marketing and advertising through different channels, including programmatic advertising and content marketing within the social media environment.



Based on the organization of the Company’s structure and organizational chart, we believe the Company’s chief operating decision makers (the “CODMs”) are its Chief Executive Officer, Jim Moroney, and Grant Moise, Executive Vice President of A. H. Belo Corporation and  Publisher and President of The Dallas Morning News. The CODMs allocate resources and capital to the Publishing and Marketing Services segments at the segment level.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     9


 

Table of Contents

 

The tables below set forth summarized financial information for the Company’s reportable segments.







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

Revenue

 

 

 

 

 

 

Publishing

 

$

44,010 

 

$

53,491 

Marketing Services

 

 

5,443 

 

 

7,410 

Total

 

$

49,453 

 

$

60,901 



 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

Publishing

 

$

(6,135)

 

$

(5,584)

Marketing Services

 

 

(82)

 

 

590 

Total

 

$

(6,217)

 

$

(4,994)



 

 

 

 

 

 

Noncash Expenses

 

 

 

 

 

 

Publishing

 

 

 

 

 

 

Depreciation

 

$

2,436 

 

$

2,491 

Asset impairments

 

 

 —

 

 

228 

Total

 

$

2,436 

 

$

2,719 



 

 

 

 

 

 

Marketing Services

 

 

 

 

 

 

Depreciation

 

$

37 

 

$

15 

Amortization

 

 

200 

 

 

200 

Total

 

$

237 

 

$

215 







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Total Assets

 

 

 

 

 

 

Publishing

 

$

124,758 

 

$

137,409 

Marketing Services

 

 

29,075 

 

 

25,439 

Total

 

$

153,833 

 

$

162,848 



Net periodic pension and other post-employment expense (benefit) is now included in non-operating income (expense) in the Consolidated Statements of Operations; see Note 1 – Basis of Presentation and Recently Issued Accounting Standards.  As a result of adopting the new retirement benefits guidance, Publishing operating costs and operating loss increased by $930 and $859 for the three months ended March 31, 2018 and 2017, respectively.



Note 3:  Revenue



Adoption of ASU 2014-09 – Revenue from Contracts with Customers (Topic 606)



On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented in accordance with the new guidance under ASU 2014-09, while prior period amounts are not restated.



The table below sets forth the impact on the Company’s Consolidated Statement of Operations for the three months ended March 31, 2018, due to the adoption of the new revenue guidance.  There was no impact to opening retained earnings.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31, 2018



 

As Reported

 

Balances Without Adoption

 

Effect of Change (Decrease)

Revenue

 

 

 

 

 

 

 

 

 

Advertising and marketing services

 

$

25,741 

 

$

28,594 

 

$

(2,853)

Circulation

 

 

17,747 

 

 

18,005 

 

 

(258)



 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Other production, distribution and operating costs

 

$

23,014 

 

$

26,125 

 

$

(3,111)



A. H. Belo Corporation First Quarter 2018 on Form 10-Q     10


 

Table of Contents

 

The primary impact was to advertising and marketing services revenue, related to digital advertising placed on third-party websites where the Company acted as an agent under the new standard. Prior to adoption, such revenue was generally recorded gross, but under the new standard this revenue is recorded net. The impact to circulation revenue is related to home delivery subscriptions where the Company recorded revenue for the grace period of newspapers delivered after a subscription expires. Prior to adoption, any non-payment of grace was recorded as bad debt expense, but under the new standard this is considered variable consideration and revenue is reduced for the non-payment.



Revenue Recognition



Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. This occurs when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales tax collected concurrent with revenue-producing activities are excluded from revenue.



Accounts receivable are reported net of a valuation reserve that represents an estimate of amounts considered uncollectible. The Company estimates the allowance for doubtful accounts based on historical write-off experience and the Company’s knowledge of the customers’ ability to pay amounts due. Accounts are written-off after all collection efforts fail; generally, after one year has expired. Expense for such uncollectible amounts is included in other production, distribution and operating costs.



The table below sets forth revenue disaggregated by revenue source. As stated above, prior period amounts have not been restated under the modified retrospective approach.





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

Advertising revenue

 

$

20,298 

 

$

27,794 

Digital services

 

 

4,087 

 

 

6,282 

Other services

 

 

1,356 

 

 

1,128 

Advertising and marketing services

 

25,741 

 

 

35,204 

Circulation

 

 

17,747 

 

 

19,166 

Printing, distribution and other

 

 

5,965 

 

 

6,531 

Total Revenue

 

$

49,453 

 

$

60,901 



Advertising and Marketing Services Revenue



Advertising revenue, included in the Publishing segment results, is generated by selling print and digital advertising products. Print advertising revenue represents sales of advertising space within the Company’s core and niche newspapers, as well as preprinted advertisements inserted into the Company’s core newspapers and niche publications or distributed to non-subscribers through the mail. Digital advertising is generated by selling banner and real estate classified advertising on The Dallas Morning News’ website dallasnews.com, online employment and obituary classified advertising on third-party websites sold under a print/digital bundle package and sales of online automotive classifieds on the cars.com platform.



Digital services and other services revenues are included in the Marketing Services segment results. Digital services revenue includes targeted and multi-channel (programmatic)  advertising placed on third-party websites, content development, social media management, search optimization, and other consulting. Other services revenue is primarily generated from the sale of promotional merchandise.



Advertising and marketing services revenue is primarily recognized at a point in time when the ad or service is complete and delivered. If the customer has signed a contract for additional services in the future, that revenue is not recognized until the delivery date. In addition, certain digital advertising revenue related to website access is recognized over time, based on the customers’ monthly rate.



For ads placed on certain third-party websites, the Company must evaluate whether it is acting as the principal, where revenue is reported on a gross basis, or acting as the agent, where revenue is reported on a net basis. Generally, the Company reports advertising revenue for ads placed on third-party websites on a net basis, meaning the amount recorded to revenue is the amount billed to the customer net of amounts paid to the publisher of the third-party website. The Company is acting as the agent because the publisher controls the advertising inventory.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     11


 

Table of Contents

 

Circulation



Circulation revenue, included in the Publishing segment results, is generated primarily by selling home delivery and digital subscriptions, as well as single copy sales to non-subscribers. Home delivery and single copy revenue is recognized at a point in time when the paper is delivered or purchased. Digital subscriptions are recognized over time, based on the customers’ monthly rate.



Printing, Distribution and Other



Printing, distribution and other revenue, included in the Publishing segment results, is primarily generated from printing and distribution of other newspapers, as well as production of preprinted advertisements for other newspapers. Printing, distribution and other revenue is recognized at a point in time when the product or service is delivered.



Remaining Performance Obligations



The Company has various Publishing advertising contracts and Marketing Services digital services contracts that range from 13 months to 36 months. The Company recognizes revenue on the advertising contracts over the term of the agreement at  a point in time when the service or product is delivered. The Company recognizes revenue on the digital services contracts over time, based on the customers’ monthly rate. At March 31, 2018, the remaining performance obligation was $2,412. We expect to recognize approximately $1,242 over the remainder of 2018 and $1,170 thereafter.



Deferred Revenue



Deferred revenue is recorded when cash payments are received in advance of the Company’s performance, including amounts which are refundable. The short-term and long-term deferred revenue increase of $918 for the three months ended March 31, 2018, was primarily driven by cash payments received in advance of satisfying our performance obligations, offset by $6,569 of revenue recognized that was included in the deferred revenue balance at the beginning of the period.



Practical Expedients and Exemptions



The Company generally expenses sales commissions and circulation acquisition costs when incurred because the amortization period would have been one year or less. These costs are recorded within employee compensation and benefits expense and other production, distribution and operating costs expense, respectively.



The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which revenue is recognized at the amount invoiced for services performed.









Note 4: Acquisitions



In February 2017, the Company acquired the remaining 30 percent voting interest in Speakeasy for a cash purchase price of $2,111, and in  March 2017, the Company acquired the remaining 20 percent voting interest in DMV Holdings for a cash purchase price of $7,120. The initial purchase of 80 percent voting interest in DMV Holdings occurred in January 2015. DMV Holdings holds all outstanding ownership interests of three Dallas-based businesses, Distribion, Inc., Vertical Nerve, Inc. and CDFX, LLC. These businesses specialize in local marketing automation, search engine marketing, and direct mail and promotional products, respectively. These acquisitions complement the product and service offerings currently available to A. H. Belo clients, thereby strengthening the Company’s diversified product portfolio and allowing for greater penetration in a competitive advertising market. Operating results of the businesses acquired have been included in the Consolidated Statements of Operations from the initial acquisition date forward.



Pro-rata distributions.    In connection with the 2015 acquisition of 80 percent voting interest in DMV Holdings, the shareholder agreement provided for a pro-rata distribution of 50 percent and 100 percent of DMV Holdings’ free cash flow for fiscal years 2016 and 2015, respectively. Free cash flow is defined as earnings before interest, taxes, depreciation and amortization less capital expenditures, debt amortization and interest expense, as applicable. In the three months ended March 31, 2017, the Company recorded pro-rata distributions to noncontrolling interests of $163 in connection with this agreement based on 2016 free cash flow as defined.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     12


 

Table of Contents

 

Note 5Goodwill and Intangible Assets



The table below sets forth goodwill and other intangible assets by reportable segment as of March 31, 2018 and December 31, 2017.  In the first quarter of 2017, the Company reorganized reporting units based on reporting structure and the go-to-market for the Company’s service and product offerings. The Company’s Publishing and Marketing Services segments each operate as a single reporting unit.





 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,



2018

 

2017

Goodwill

 

 

 

 

 

Marketing Services

$

13,973 

 

$

13,973 



 

 

 

 

 

Intangible Assets

 

 

 

 

 

Marketing Services

 

 

 

 

 

Cost

$

6,470 

 

$

6,470 

Accumulated Amortization

 

(2,597)

 

 

(2,397)

Net Carrying Value

$

3,873 

 

$

4,073 



Intangible assets consist of $4,950 of customer relationships with estimated useful lives of 10 years and $1,520 of developed technology with an estimated useful life of five years. Aggregate amortization expense was $200 for the three months ended March 31, 2018 and 2017.



As a result of the first quarter 2017 segment reorganization, certain goodwill and intangible assets previously reported in the Marketing Services segment were moved to the Publishing segment, which was fully impaired as of December 31, 2016. Therefore, the Company recorded a noncash goodwill impairment charge of $228 in the first quarter of 2017.



The Company tested the Marketing Services segment’s goodwill for impairment as of December 31, 2017, using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital, combined with a market approach using peer-based earnings multiples. The Company believes the use of a discounted cash flow approach, combined with the market approach, is the most reliable indicator of the estimated fair value of the business. Upon completion of the annual test, it was determined the Marketing Services reporting unit’s fair value exceeded its carrying value by approximately 93 percent. Accordingly, no impairment was warranted.



Note 6Long-term Incentive Plan



A. H. Belo sponsors a long-term incentive plan (the “Plan”) under which 8,000,000 shares of the Company’s Series A and Series B common stock are authorized for equity-based awards. Awards may be granted to A. H. Belo employees and outside directors in the form of non-qualified stock options, incentive stock options, restricted share awards,  restricted stock units (“RSUs”), performance shares, performance units or stock appreciation rights. In addition, stock options may be accompanied by full and limited stock appreciation rights. Rights and limited stock appreciation rights may also be issued without accompanying stock options. Awards under the Plan were also granted to holders of stock options issued by A. H. Belo’s former parent company in connection with the Company’s separation from its former parent in 2008. Due to the expiration of the Plan on February 8, 2018, A. H. Belo implemented, and shareholders approved, a new long-term incentive plan (the “2017 Plan”) under which an additional 8,000,000 shares of the Company’s Series A and Series B common stock are authorized for equity-based awards. Like its predecessor plan, awards under the 2017 Plan may be granted to A. H. Belo employees and outside directors in the form of non-qualified stock options, incentive stock options, restricted share awards, RSUs, performance shares, performance units or stock appreciation rights.



Stock Options.    Stock options granted under the Plan are fully vested and exercisable. No options have been granted since 2009, and all compensation expense associated with stock options has been fully recognized as of March 31, 2018.



There were 100,344 options outstanding at a weighted average exercise price of $6.46 as of March 31, 2018 and December 31, 2017. There was no activity in the first quarter of 2018 and 2017. As of March 31, 2018, the aggregate intrinsic value of outstanding options was $9 and the weighted average remaining contractual life of the Company’s stock options was less than one year.



Restricted Stock Units.    The Company’s RSUs have service and/or performance conditions and, subject to retirement eligibility, vest over a period of up to three years. Vested RSUs are redeemed 60 percent in A. H. Belo Series A common stock and 40 percent in cash over a period of up to three years. As of March 31, 2018, the liability for the portion of the awards to be redeemed in cash was $904.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     13


 

Table of Contents

 

The table below sets forth a summary of RSU activity under the Company’s long-term incentive plans.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Total
RSUs

 

Issuance of
Common
Stock

 

RSUs
Redeemed in
Cash

 

Cash
Payments at
Closing Price
of Stock

 

Weighted
Average Price
on Date of
Grant

Non-vested at December 31, 2017

224,053 

 

 

 

 

 

 

 

 

$

6.07 

Granted

253,783 

 

 

 

 

 

 

 

 

 

5.15 

Canceled

(3,711)

 

 

 

 

 

 

 

 

 

6.06 

Vested and outstanding

(112,933)

 

 

 

 

 

 

 

 

 

5.18 

Vested and issued

(114,248)

 

68,543 

 

45,705 

 

$

235 

 

 

6.29 

Non-vested at March 31, 2018

246,944 

 

 

 

 

 

 

 

 

 

5.43 



In the three months ended March 31, 2018, the Company issued 48,559 shares of Series A common stock and 32,376 shares were redeemed in cash for RSUs that were previously vested as of December 31, 2017. In addition, 322,823 and 290,825 RSUs were vested and outstanding as of March 31, 2018 and December 31, 2017, respectively.



The fair value of RSU grants is determined using the closing trading price of the Company’s Series A common stock on the grant date. As of March 31, 2018, unrecognized compensation expense related to non-vested RSUs totaled $1,227, which is expected to be recognized over a weighted average period of 2.5 years.



Compensation Expense.     A. H. Belo recognizes compensation expense for awards granted under the Company’s long-term incentive plans over the vesting period of the award. Compensation expense related to granted RSUs is set forth in the table below.





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Three Months Ended March 31,

RSUs

Redeemable

in Stock

 

RSUs
 Redeemable
 in Cash

 

Total
RSU Awards
 Expense

2018

$

617 

 

$

278 

 

$

895 

2017

 

441 

 

 

279 

 

 

720 









Note 7:  Income Taxes



The Company calculates the income tax provision based on the year-to-date pretax loss adjusted for permanent differences and discrete items on a pro-rata basis. As such, a discrete tax rate was calculated for the period.



In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

 

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $3,570 decrease in income tax benefit for the year ended December 31, 2017.



The Company recognized income tax benefit of $1,315 and $42 for the three months ended March 31, 2018 and 2017, respectively. The benefit in the first quarter of 2018 was calculated using the newly enacted income tax rate, which caused the income tax benefit to be less by $1,229 than if calculated at the historic 35 percent income tax rate. Effective income tax rates were 24.7 percent and 0.9 percent for the three months ended March 31, 2018 and 2017, respectively. The effective income tax rate for the three months ended March 31, 2018, was due to changes in the valuation allowance, an increase in the net operating loss deferred tax asset and the effect of the Texas margin tax. The change to the valuation allowance for the first quarter of 2018 was a decrease of $419, primarily due to the pension liability, accrued bonuses and the allowance for bad debt.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     14


 

Table of Contents

 

Note 8Pension and Other Retirement Plans



Defined Benefit Plans.   The Company sponsors the A. H. Belo Pension Plans (the “Pension Plans”), which provide benefits to approximately 1,500 current and former employees of the Company. A. H. Belo Pension Plan I provides benefits to certain current and former employees primarily employed with The Dallas Morning News or the A. H. Belo corporate offices. A. H. Belo Pension Plan II provides benefits to certain former employees of The Providence Journal Company. This obligation was retained by the Company upon the sale of the newspaper operations of The Providence Journal.  No additional benefits are accruing under the A. H. Belo Pension Plans, as future benefits were frozen.



No contributions are required to the A. H. Belo Pension Plans in 2018 under the applicable tax and labor laws governing pension plan funding.



Net Periodic Pension Benefit



The Company’s estimates of net periodic pension expense or benefit are based on the expected return on plan assets, interest on the projected benefit obligations and the amortization of actuarial gains and losses that are deferred in accumulated other comprehensive loss. The table below sets forth components of net periodic pension benefit, which is included in non-operating income (expense) in the Consolidated Statements of Operations.







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

Interest cost

 

$

1,796 

 

$

2,386 

Expected return on plans' assets

 

 

(2,894)

 

 

(3,313)

Amortization of actuarial loss

 

 

168 

 

 

75 

Net periodic pension benefit

 

$

(930)

 

$

(852)



Defined Contribution Plans.   The A. H. Belo Savings Plan (the “Savings Plan”), a defined contribution 401(k) plan, covers substantially all employees of A. H. Belo. Participants may elect to contribute a portion of their pretax compensation as provided by the Savings Plan and the Internal Revenue Code. Employees can contribute up to 100 percent of their annual eligible compensation less required withholdings and deductions up to statutory limits. The Company provides an ongoing dollar-for-dollar match of eligible employee contributions, up to 1.5 percent of the employees’ compensation. During the three months ended March 31, 2018 and 2017, the Company recorded expense of $243 and $264, respectively, for matching contributions to the Savings Plan.

 

Note 9Shareholders’ Equity



Dividends.    On March 1, 2018, the Company’s board of directors declared  an $0.08 per share dividend to shareholders of record and holders of RSUs as of the close of business on May 11, 2018, which is payable on June  1, 2018. During the three months ended March 31, 2018, the Company recorded $1,785 to accrue for dividends declared but not yet paid.



Treasury Stock.   The Company repurchased shares of its common stock pursuant to a publicly announced share repurchase program authorized by the Company’s board of directors. In the fourth quarter of 2017, the Company resumed open market repurchases under a repurchase plan agreement limited to a total of $2,500.  During the first quarter of 2018, the Company repurchased 108,778 shares of its Series A common stock at a total cost of $555. 



Outstanding Shares.    The Company had Series A and Series B common stock outstanding of 19,277,775 and 2,469,635, respectively, net of treasury shares at March 31, 2018. At December 31, 2017, the Company had Series A and Series B common stock outstanding of 19,269,331 and 2,469,755, respectively, net of treasury shares.



Accumulated other comprehensive loss.    Accumulated other comprehensive loss consists of actuarial gains and losses attributable to the A. H. Belo Pension Plans,  gains and losses resulting from Pension Plans’ amendments and other actuarial experience attributable to other post-employment benefit (“OPEB”) plans. The Company records amortization of the components of accumulated other comprehensive loss in employee compensation and benefits in its Consolidated Statements of Operations. Gains and losses associated with the A. H. Belo Pension Plans are amortized over the weighted average remaining life expectancy of the Pension Plans’ participants. Gains and losses associated with the Company’s OPEB plans are amortized over the average remaining service period of active OPEB plans’ participants. Net deferred tax assets related to amounts recorded in accumulated other comprehensive loss are fully reserved.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     15


 

Table of Contents

 

The table below sets forth the changes in accumulated other comprehensive loss, net of tax, as presented in the Company’s consolidated financial statements.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017



 

Total

 

Defined
benefit pension
plans

 

Other post-

employment

benefit plans

 

Total

 

Defined
benefit pension
plans

 

Other post-

employment

benefit plans

Balance, beginning of period

 

$

(24,932)

 

$

(25,434)

 

$

502 

 

$

(39,308)

 

$

(39,737)

 

$

429 

Amortization

 

 

158 

 

 

168 

 

 

(10)

 

 

57 

 

 

75 

 

 

(18)

Balance, end of period

 

$

(24,774)

 

$

(25,266)

 

$

492 

 

$

(39,251)

 

$

(39,662)

 

$

411 











Note 10:  Earnings Per Share



The table below sets forth the reconciliation for net loss and weighted average shares used for calculating basic and diluted earnings per share (“EPS”). The Company’s Series A and  Series B common stock equally share in the distributed and undistributed earnings.







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

Earnings (Numerator)

 

 

 

 

 

 

Net loss

 

$

(4,014)

 

$

(4,430)

Less: dividends to participating securities

 

 

45 

 

 

39 

Net loss available to common shareholders

 

$

(4,059)

 

$

(4,469)



 

 

 

 

 

 

Shares (Denominator)

 

 

 

 

 

 

Weighted average common shares outstanding (basic and diluted)

 

 

21,716,419 

 

 

21,690,371 



 

 

 

 

 

 

Loss Per Share

 

 

 

 

 

 

Basic and diluted

 

$

(0.19)

 

$

(0.21)



Holders of service-based RSUs participate in A. H. Belo dividends on a one-for-one share basis. Distributed and undistributed income associated with participating securities is included in the calculation of EPS under the two-class method as prescribed under ASC 260 – Earnings Per Share.



The Company considers outstanding stock options and RSUs in the calculation of earnings per share. A  total of 670,111 and 594,185 options and RSUs outstanding as of March 31, 2018 and 2017, respectively, were excluded from the calculation because the effect was anti-dilutive. 



Note 11:  Contingencies



Legal proceedings.    From time to time, the Company is involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. Management routinely assesses the likelihood of adverse judgments or outcomes in these matters, as well as the ranges of probable losses to the extent losses are reasonably estimable. Accruals for contingencies are recorded when, in the judgment of management, adverse judgments or outcomes are probable and the financial impact, should an adverse outcome occur, is reasonably estimable. The determination of likely outcomes of litigation matters relates to factors that include, but are not limited to, past experience and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. Predicting the outcome of claims and litigation and estimating related costs and financial exposure involves substantial uncertainties that could cause actual results to vary materially from estimates and accruals. In the opinion of management, liabilities, if any, arising from other currently existing claims against the Company would not have a material adverse effect on A. H. Belo’s results of operations, liquidity or financial condition.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     16


 

Table of Contents

 

Note 12Sales of Assets



Sales of Assets.    Assets held for sale include long-lived assets being actively marketed for which a sale is considered probable within the next 12 months. These assets are recorded at the lower of their fair value less costs to sell or their carrying value at the time they are classified as assets held for sale.  In the fourth quarter of 2017, the Company announced real estate assets in downtown Dallas, Texas, previously used as the corporate headquarters, are available for sale. These assets, with a total carrying value of $1,089, are reported as assets held for sale as of March 31, 2018 and December 31, 2017.



Other Dispositions.   On December 31, 2017, the Company completed the sale of the outstanding capital stock of the Denton Publishing Company, owner of the Denton Record-Chronicle, to Denton Media Company, Inc. (the “purchaser”). The business did not meet the requirements of a discontinued operation; therefore, all financial results were included in continuing operations. Prior to the disposition, the Denton Record-Chronicle was included in the Publishing segment results.



The Company entered into multi-year agreements with the purchaser, effective January 1, 2018, including an advertising services reseller agreement, printing, distribution and content services agreements. The Company also entered into an agreement to provide transition services to the purchaser through June 30, 2018.  In connection with the sale, the Company entered into a sublease with Denton Publishing Company for a term ending on July 30, 2023.



A. H. Belo Corporation First Quarter 2018 on Form 10-Q     17


 

Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



A. H. Belo intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect its financial statements. The following information should be read in conjunction with the Company’s consolidated financial statements and related notes filed as part of this report. Unless otherwise noted, amounts in Management’s Discussion and Analysis reflect continuing operations of the Company, and all dollar amounts are presented in thousands, except share and per share amounts.



OVERVIEW



A. H. Belo, headquartered in Dallas, Texas, is a leading local news and information publishing company with commercial printing, distribution and direct mail capabilities, as well as expertise in emerging media and digital marketing. With a continued focus on extending the Company’s media platform, A. H. Belo delivers news and information in innovative ways to a broad spectrum of audiences with diverse interests and lifestyles.



The Company’s Publishing segment includes the operations of The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes, and various niche publications targeting specific audiences. Its newspaper operations also provide commercial printing and distribution services to large national and regional newspapers and other businesses in Texas. In addition, the segment includes sales of online automotive classifieds on the cars.com platform.



All other operations are reported within the Company’s Marketing Services segment. These operations primarily include DMV Digital Holdings Company (“DMV Holdings”) and its subsidiaries Distribion, Inc. (“Distribion”), Vertical Nerve, Inc. (“Vertical Nerve”) and CDFX, LLC (“MarketingFX”). The segment also includes Your Speakeasy, LLC (“Speakeasy”) and targeted display advertising generated by Connect (programmatic advertising).



In March 2017, the Company acquired the remaining 20 percent voting interest in DMV Holdings for a cash purchase price of $7,120. The initial purchase of 80 percent voting interest in DMV Holdings occurred in January 2015. DMV Holdings holds all outstanding ownership interests of three Dallas-based businesses, Distribion, Vertical Nerve and MarketingFX. These businesses specialize in local marketing automation, search engine marketing, and direct mail and promotional products, respectively. The Company believes this acquisition complements the product and service offerings currently available to A. H. Belo customers, thereby strengthening the Company’s diversified product portfolio and allowing for greater penetration in a competitive marketing environment.  Operating results of the businesses acquired have been included in the Consolidated Statements of Operations from the initial acquisition date forward.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     18


 

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RESULTS OF OPERATIONS



Consolidated Results of Operations



This section contains discussion and analysis of net operating revenue, expense and other information relevant to an understanding of results of operations for the three months ended March 31, 2018 and 2017. Net periodic pension and other post-employment expense (benefit) is now included in non-operating income (expense) in the Consolidated Statements of Operations; see Note 1 – Basis of Presentation and Recently Issued Accounting Standards. As a result of adopting the new retirement benefits guidance, Publishing operating costs and operating loss increased by $930 and $859 for the three months ended March 31, 2018 and 2017, respectively.



The table below sets forth the components of A. H. Belo’s operating income (loss) by segment.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

Percentage
Change

 

2017

Publishing

 

 

 

 

 

 

 

 

 

Advertising and marketing services

 

$

20,298 

 

(27.0)

%

 

$

27,794 

Circulation

 

 

17,747 

 

(7.4)

%

 

 

19,166 

Printing, distribution and other

 

 

5,965 

 

(8.7)

%

 

 

6,531 

Total Net Operating Revenue

 

 

44,010 

 

(17.7)

%

 

 

53,491 



 

 

 

 

 

 

 

 

 

Total Operating Costs and Expense

 

 

50,145 

 

(15.1)

%

 

 

59,075 



 

 

 

 

 

 

 

 

 

Operating Loss

 

$

(6,135)

 

(9.9)

%

 

$

(5,584)



 

 

 

 

 

 

 

 

 

Marketing Services

 

 

 

 

 

 

 

 

 

Advertising and marketing services

 

$

5,443 

 

(26.5)

%

 

$

7,410 

Total Net Operating Revenue

 

 

5,443 

 

(26.5)

%

 

 

7,410 



 

 

 

 

 

 

 

 

 

Total Operating Costs and Expense

 

 

5,525 

 

(19.0)

%

 

 

6,820 



 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

$

(82)

 

(113.9)

%

 

$

590 



Traditionally, the Company’s primary revenues are generated from advertising within its core newspapers, niche publications and related websites and from subscription and single copy sales of its printed newspapers. As a result of competitive and economic conditions, the newspaper industry has faced a significant revenue decline over the past decade. Therefore, the Company has sought to diversify its revenues through development and investment in new product offerings, increased circulation rates and leveraging of its existing assets to offer cost efficient commercial printing and distribution services to its local markets. The Company continually evaluates the overall performance of its core products to ensure existing assets are deployed adequately to maximize return.



The Company’s advertising revenue from its core newspapers continues to be adversely affected by the shift of advertiser spending to other forms of media and the increased accessibility of free online news content, as well as news content from other sources, which resulted in declines in advertising and paid print circulation volumes and revenue. The most significant decline in advertising revenue has been attributable to print display and classified categories. These categories, which represented 24.0 percent of consolidated revenue in 2015, have declined to 17.6 percent of consolidated revenue thus far in 2018, and further declines are likely in future periods. Decreases in print display and classified categories are indicative of continuing trends by advertisers towards digital platforms, which are widely available from many sources. In the current environment, companies are allocating more of their advertising spending towards programmatic channels that provide digital advertising on multiple platforms with enhanced technology for targeted delivery and measurement. As a result of the continued declines the Publishing segment experienced, and expects to continue to experience, in advertising and print circulation revenues, the Publishing reporting unit’s goodwill was determined to be fully impaired as of December 31, 2016.  Certain goodwill and intangible assets previously reported in the Marketing Services segment were moved to the Publishing segment as a result of the first quarter 2017 segment reorganization. Therefore, the Company recorded a noncash goodwill impairment charge of $228 in the first quarter of 2017.



The Company has responded to these challenges by expanding programmatic channels through which it works to meet customer demand for digital advertisement opportunities in display, mobile, video and social media categories. By utilizing advertising exchanges to apply marketing insight, the Company believes it offers greater value to clients through focused targeting of advertising to potential customers. In May 2016, the Company installed a meter on its website and began to build a base of paid digital subscribers.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     19


 

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The Company’s expanded digital and marketing services product offerings leverage the Company’s existing resources and relationships to offer additional value to existing and new advertising clients. Solutions provided by DMV Holdings include development of mobile websites, search engine marketing and optimization, video, mobile advertising, email marketing, advertising analytics and online reputation management services. Through Speakeasy, the Company is able to target middle-market business customers and provide turnkey social media account management and content development services.



Advertising and marketing services revenue



Advertising and marketing services revenue was 52.0 percent and 57.8 percent of total revenue for the three months ended March  31, 2018 and 2017, respectively.









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

Percentage
Change

 

2017

Publishing

 

 

 

 

 

 

 

 

 

Advertising revenue

 

$

20,298 

 

(27.0)

%

 

$

27,794 

Marketing Services

 

 

 

 

 

 

 

 

 

Digital services

 

 

4,087 

 

(34.9)

%

 

 

6,282 

Other services

 

 

1,356 

 

20.2 

%

 

 

1,128 

Advertising and Marketing Services

$

25,741 

 

(26.9)

%

 

$

35,204 



Publishing



Advertising Revenue  – The Company has a comprehensive portfolio of print and digital advertising products, which include display, classified, preprint and digital advertising. Display and classified revenue primarily represents sales of advertising space within the Company’s core and niche newspapers. As advertisers continue to diversify marketing budgets to incorporate more and varied avenues of reaching consumers, traditional display advertising continues to decline. Display revenue decreased in the three months ended March 31, 2018,  primarily due to lower retail advertising in substantially all categories except food and beverage.  In retail, the financial, entertainment, medical and other retail categories experienced the greatest declines, driven by a retail volume decrease of 24.9 percent for the three months ended March 31, 2018.



Preprint revenue primarily reflects preprinted advertisements inserted into the Company’s core newspapers and niche publications, or distributed to non-subscribers through the mail. Revenue decreased due to a volume decline in home delivery mail advertising and preprint newspaper inserts, consistent with the decline in circulation volumes discussed below.



Digital Publishing revenue is primarily comprised of banner and real estate classified advertising on The Dallas Morning News’ website dallasnews.com, online employment and obituary classified advertising on third-party websites sold under a print/digital bundle package and sales of online automotive classifieds on the cars.com platform. Revenue decreased primarily due to the adoption of the new revenue guidance; see Note 1 – Basis of Presentation and Recently Issued Accounting Standards.



Marketing Services



Digital services – Digital marketing revenue includes targeted and multi-channel advertising placed on third-party websites, content development, social media management, search optimization, and other consulting.  Adoption of the new revenue guidance resulted in a revenue decrease of $1,013 in the three months ended March 31, 2018.



Other services –  Other services revenue increased $228 in the three months ended March 31,  2018, due to the sale of promotional merchandise by MarketingFX.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     20


 

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Circulation revenue



Circulation revenue was 35.9 percent and 31.5  percent of total revenue for the three months ended March 31, 2018 and 2017, respectively.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

Percentage
Change

 

2017

Publishing

 

 

 

 

 

 

 

 

 

Circulation

 

$

17,747 

 

(7.4)

%

 

$

19,166 





Revenue decreased due to a decline in home delivery and single copy paid print circulation volumes of 10.3 percent and 22.7 percent, respectively, for the three months ended March 31,  2018. Volume declines in circulation revenue have been more pronounced with single copy sales. Price increases and supplemental editions are critical to maintaining the revenue base to support this product. The daily single copy rate was increased in November 2016. In addition, circulation revenue was reduced by $258 for the three months ended March 31, 2018, related to home delivery subscriptions where the Company recorded revenue for the grace period of newspapers delivered after a subscription expires. Prior to adoption, any non-payment of grace was recorded as bad debt expense, but under the new standard, revenue is reduced for the non-payment.



Printing, distribution and other revenue



Printing, distribution and other revenue was 12.1 percent and 10.7 percent of total revenue for the three months ended March 31, 2018 and 2017, respectively.







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

Percentage
Change

 

2017

Publishing

 

 

 

 

 

 

 

 

 

Printing, Distribution and Other

 

$

5,965 

 

(8.7)

%

 

$

6,531 





The Company aggressively markets the capacity of its printing and distribution assets to other newspapers that would benefit from cost sharing arrangements. Revenue decreased in the three months ended March 31, 2018, due to a discontinued product line and a decrease in commercial printing volumes associated with certain national newspapers.

A. H. Belo Corporation First Quarter 2018 on Form 10-Q     21


 

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Operating Costs and Expense



The table below sets forth the components of the Company’s operating costs and expense.







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

Percentage
Change

 

2017

Publishing

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

21,315 

 

(16.1)

%

 

$

25,401 

Other production, distribution and operating costs

 

 

21,253 

 

(16.1)