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, 201
7
. 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
”)
2014-09
–
Revenue 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 adopt
ed
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 adopt
ed
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
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 2016-02
–
Leases (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 th
is 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
P
ublisher
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
The tables
below set forth
summarized financial information for the Company’s reportable segments.
|
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|
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|
|
|
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
|
N
et 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, 201
8 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 i
mpact
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.
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|
Three Months Ended March 31, 2018
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|
|
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
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 subscription
s where the Company recorded
revenue for the grace period of newspapers delivered after a subscription expire
s
. 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.
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|
|
|
|
|
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
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 a
t
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. The
se c
osts 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
i
n
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 provide
d
for
a pro-rata distribution of
50
percent and
100
percent of DMV Holdings’ free cash flow for fiscal years 201
6
and 201
5
, 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
Note
5
:
Goodwill and Intangible Assets
The table
below sets forth
g
oodwill
and other
intangible assets by reportable segment as of
March 31, 2018
and
December 31, 201
7
.
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.
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|
March 31,
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|
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, 201
7,
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
6
:
Long-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.
S
tock 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
, 201
8
, 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.
T
he
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 award
s
to be redeemed in cash
was
$904
.
A. H. Belo Corporation First Quarter 2018 on Form 10-Q
13
The
table below sets forth a summary of RSU activity under the
Company’s long-term incentive plans.
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|
|
|
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
3
2,
376
shares were redeemed in cash for RSUs
that were previously vested as of December 31, 201
7
. In addition,
322,823 and 290,825 RSUs
were vested and outstanding as of
March 31, 2018
and December 31, 201
7
, 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 t
o be recognized over a weighted
average period
of
2
.
5
year
s
.
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
C
ompany, 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
C
ompany 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
C
ompany’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
3
1
, 201
8
and
201
7
, 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
3
1
, 201
8
and
201
7
, respectively.
The
effective
income
tax
rate for the
three
months ended
March 31
, 201
8
, 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
Note
8
:
Pension 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 201
8
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 P
lan 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’ compensa
tion.
During the
three
months ended
March
31
, 201
8
and
201
7
, the Company recorded
expense of
$243
and
$264
, respectively,
for matching contributions
to the
Savings P
lan
.
Note
9
:
Shareholders’ Equity
Dividends.
On
March 1
, 201
8
, the Company
’s board of directors declared
a
n
$0.08
per share dividend to shareholders of record and holders of RSUs as of the close of business on
May 11
, 201
8
, which is payable on
June
1
, 201
8
.
During the
three
months ended
March 31
,
201
8
, the Company
recorded
$1,
7
8
5
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 $55
5
.
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 c
onsists of
actuarial gains and losses a
ttributable to
the A. H. Belo Pension Plans
,
gains and losses resulting from
Pension P
lan
s’
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 P
lan
s’
participants. Gains and losses associated with the Company’s
OPEB
plans are amortized over the average remaining service period of active
OPEB
plan
s’
participants.
N
et 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
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 an
d
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
3
1
, 201
8
and
201
7
, respectively,
were excluded from the calculation because the effect was anti-dilutive.
Note 1
1
: 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
Note 1
2
:
Sales 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 Ju
ly 30, 2023.
A. H. Belo Corporation First Quarter 2018 on Form 10-Q
17
It
em 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
c
onsolidated
f
inancial
s
tatements and related
n
otes
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 deliver
s
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
Conn
ect (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
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 201
7.
N
et 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, 201
8 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, t
he Company’s
primary
revenue
s
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 ha
s
faced a significant revenue
decline
over the past decade.
Therefore, t
he Company has sought to diversify its revenue
s
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 a
dvertising 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
2
4
.
0
percent
of consolidated revenue in 201
5
, have declined
to
17.6
percent
of consolidated revenue thus far in 201
8
, 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.
T
herefore
,
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
The Company’s e
xpanded digital and marke
ting 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
5
2.
0
percent
and
5
7
.
8
percent
of total revenue
for the three months ended
March
3
1
, 201
8 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
A
dvertising
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,
201
8
,
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 de
clines,
driven by a
retail
volume dec
rease
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 rea
l 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
,
201
8
, due to
the
sale of promotional merchandise by MarketingFX.
A. H. Belo Corporation First Quarter 2018 on Form 10-Q
20
Circulation revenue
Circulation
revenue
was
3
5.9
percent
and
31.5
p
ercent of total revenue for the
three months ended
March 31
, 201
8 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
2
2.7
percent
, respectively,
for the
three
months ended
March 31
,
201
8
.
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 expire
s
. 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
1
2
.
1
percent
and
1
0.7
percent of total revenue for the three months ended
March 31
,
201
8 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 market
s
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
Operating Costs and Expense
The table below sets forth the components of the Company’s
o
perating
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)
|
%
|
|
|
25,326
|
Newsprint, ink and other supplies
|
|
|
5,141
|
|
(8.7)
|
%
|
|
|
5,629
|
Depreciation
|
|
|
2,436
|
|
(2.2)
|
%
|
|
|
2,491
|
Asset impairments
|
|
|
—
|
|
(100.0)
|
%
|
|
|
228
|
Marketing Services
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,357
|
|
0.7
|
%
|
|
|
3,333
|
Other production, distribution and operating costs
|
|
|
1,761
|
|
(41.3)
|
%
|
|
|
3,000
|
Newsprint, ink and other supplies
|
|
|
170
|
|
(37.5)
|
%
|
|
|
272
|
Depreciation
|
|
|
37
|
|
146.7
|
%
|
|
|
15
|
Amortization
|
|
|
200
|
|
—
|
%
|
|
|
200
|
Total Operating Costs and Expense
|
|
$
|
55,670
|
|
(15.5)
|
%
|
|
$
|
65,895
|
Publishing
Employee compensation and benefits
– The Company continues to implement measures to optimize its workforce and reduce risk associated with future obligations
towards employee
benefit plans.
Employee compensation and
benefits
decreased
$
4,0
86
in the three months ended
March 31
,
201
8
, primarily due to
headcount reductions within the Company that were effected in 2017.
Other
production, distribution and operating costs
–
Expense decreased in the Company’s Publishing segment reflecting savings as the Company continues to manage discretionary
spending.
In addition
to the
reduction
of expense
related to
a
doption of the
new
revenue guidance, s
avings were generated by reductions in
temporary
and consulting
services
, as well as
distribution expense related to
delivery of the Company’s various publications and products
.
Newsprint, ink and other supplies
–
Expense decreased due to reduced newsprint costs associated with lower circulation volumes. Newsprint consumption for the three months ended
March 31
, 201
8
and 201
7
, approximated
4,999
and
5,835
metric tons, respectively, at an average cost per metric ton of
$608
and $
563
, respectively. The average purchase price for newsprint was
$620
and $
565
for the three months ended
March
3
1
, 201
8
and 201
7
respectively
.
Depreciation
–
Expense
decreased
in the
three
months ended
March 31
, 201
8
, due to
a lower depreciable asset base as a higher level of in-service assets are now fully depreciated.
Asset
impairment
s
–
In
the
three months
ended
March 31
, 2017
, operating costs and expense for the Publishing segment
reflect a noncash goodwill impairment charge of $2
2
8.
Marketing Services
Employee compensation and benefits
–
Expense
remained flat
in
the
three
months ended
March 31
,
201
8
.
Other production, distribution and operating costs
–
E
xpense
decreased
$
1,239
in the
three
months ended
March 31
, 201
8
,
primarily due
to
the adoption of the new revenue guidance
.
Newsprint, ink and other supplies
–
Expense
decreased
$1
02
in the
three
months ended
March 31
,
201
8,
primarily due to
a decrease
in promotional material printing costs associated with MarketingFX.
Depreciation
–
Marketing
S
ervices’ cost structure is primarily labor driven. Capital purchases are required to support technology investments
.
Capital assets are primarily depreciated over a life of three years.
Amortization
–
Expense
is
primarily related to
customer
lists associated with DMV Holdings
.
A. H. Belo Corporation First Quarter 2018 on Form 10-Q
22
Other
The table below sets forth the other components of the Company’s results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
Percentage
Change
|
|
2017
|
Other income, net
|
|
$
|
888
|
|
70.1
|
%
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(1,315)
|
|
N/M
|
|
|
$
|
(42)
|
“N/M” – not meaningful
Other
i
ncome (
e
xpense)
–
Other income (expense) is primarily comprised
of
gain (los
s) on disposal of fixed assets
and gain (loss) from
investment
s
.
N
et 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
,
other
income, net
increased
by the n
et periodic
pension and other post-employment benefit of
$930 and
$859 for the three months ended March 31, 201
8 and 2017, respectively
.
Tax provision
–
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
.
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
23
Liquidity and Capital Resources
The Company’s cash balances as of
March 31, 2018
and
December 31, 2017
,
were
$53,975
and
$57,660
, respectively
.
The Company intends to hold existing cash for purposes of future investment opportunities, potential return of capital to shareholders and for contingency purposes. Although revenue from
P
ublishing operations is expected to continue to decline in future periods, operating contributions expected from the Company’s
M
arketing
S
ervices businesses and other cost cutting measures, are expected to be sufficient to fund operating activities and capital spending of
approximately $
4
,000
over
the
remainder of the year.
The future payment of dividends is dependent upon available cash after considering future operating and investing requirements and cannot be guaranteed.
The
Company re
sume
d
open market stock repurchases in the fourth quarter of 2017
under its prior board-authorized repurchase authority. Cu
rrent holdings of treasury stock c
ould
be used to satisfy its obligations related to share-based awards issued to employees and directors, or can be sold on the open market.
The following discusses the changes in cash flows by operating, investing and financing activities.
Operating Cash Flows
Net cas
h provided by operating activities
for the
three months ended
months ended
March 31, 2018
and 201
7
,
was
$
94
7
and
$1,037
, respectively.
Cash flows from
operating
activities
decreased
by
$
9
0
during the
three
months
ended
March
3
1
, 201
8
, when compared to the prior year period
, primarily due to
changes in working capital and other operating assets and liabilities.
Investing Cash Flows
Net cash used for investing activities
was
$
2,307
and
$
852
for the
three months ended
March 31, 2018
and 201
7
, respectively
, all of which is attributable to capital spending.
Financing Cash Flows
Net cash used for financing activities
was
$
2,32
5
and
$
11
,051
for the
three months ended
March 31, 2018
and 201
7
, respectively.
Cash flows used for financing activities
decreased
in 201
8
compared to 201
7
, due to the first quarter 2017 acquisitions of the remaining interests in DMV Holdings and Speakeasy for a purchase price of $7,120 and $2,111, respectively.
Cash used for financing activities
also
included dividend
payments of
$1,770
and
$
1,763
in 201
8
and 201
7
, respectively.
Financing Arrangements
None.
Contractual Obligations
Under the applicable tax and labor laws governing pension plan funding, no contributions to the A. H. Belo Pension Plans are required in 201
8
.
On
March 1
, 201
8
, 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
, 201
8
, which is payable on
June
1, 201
8
.
Additional information related to the Company’s contractual obligations is available in Company’s Annual Report on Form 10
‑K for the year ended
December 31, 2017
, filed on March
1
6
, 201
8
, with the Securities and Exchange Commission (“SEC”).
A. H. Belo Corporation First Quarter 2018 on Form 10-Q
24
Critical Accounting Policies and Estimates
Beginning January 1, 2018, the Company adopted
ASU 2014-09
–
Revenue from Contracts with Customers (Topic 606)
.
The Company
implemented changes to the Company’s
polices
related to
processes around recording revenue
for
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.
Except for adoption of the new revenue guidance (Topic 606), n
o material changes were made to the Company’s critical accounting policies as set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 201
7
.
Forward-Looking Statements
Statements in this communication concerning A. H. Belo
Corporation
’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends, capital expenditures, investments, dispositions, impairments, business initiatives, acquisitions, pension plan contributions and obligations, real estate sales, working capital, future financings and other financial and non-financial items that are not historical facts, are “forward-looking statements” as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements.
Such risks, trends and uncertainties are, in most instances, beyond
the Company’s
control, and include changes in advertising demand and other economic conditions; consumers’ tastes; newsprint prices; program costs; labor relations; technology obsolescence
;
as well as other risks described in the Company’s Annual Report on Form 10-K and in the Company’s other public disclosures and filings with the Securities and Exchange Commission.
Forward-looking statements, which are as of the date of this filing, are not updated to reflect events or circumstances after the date of the statement.