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; the
Denton
Record-Chronicle
(
www.dentonrc.com
), a daily newspaper operating in Denton, Texas, and various niche publications targeting specific audiences. A. H. Belo also offers digital marketing solutions through
DMV Digital Holdings Company (“DMV Holdings”) and
Your Speakeasy, LLC (“Speakeasy”), and
provides event activation, promotion and marketing services through DMN CrowdSource LLC (“CrowdSource”).
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
6
. 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 January 2017, the FASB issued ASU 2017-04 –
Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.
This update simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted.
In the three months ended September 30, 2017, t
he
Company
early adopted this standard
.
The adoption of this standard did not materially
impact the Company’s consolidated financial statements.
New Accounting Pronouncements.
The
Financial Accounting Standards Board (“
FASB
”)
issued the following accounting pronouncements and guidance which may be applicable to the Company but have not yet become effective.
In May 2014, the 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 be
ginning 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 currently anticipates adopting ASU 2014-09 using the modified retrospective approach as of January 1, 2018. This approach consists of recognizing the cumulative effect of initially applying the standard as an adjustment to opening retained earnings.
The Company coordinated a team of key stakeholders to develop
a bottom-up approach to analyze the impact of the new standard on
its portfolio
of contracts. Based upon the Company’s initial evaluation,
some of the issues currently being reviewed
include the impact of gross versus net, level of disaggregation of revenue disclosed in the Company’s financial statements and evaluating the standalone selling price related to
certain performance obligations
. The Company is currently quantifying the impact that the updated guidance will have on the Company’s financial statements and related disclosures.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
8
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 retrospectively. 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.
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 guidance will be effective for fiscal years beginning after December 15, 201
7
, including interim periods within those fiscal years. Early adoption is permitted.
The Company currently anticipates adopting 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, after adoption, the entire net periodic benefit cost will be presented in the Consolidated Statements of Operations in non-operating income (expense)
.
Note
2
: Segment Reporting
In the first quarter of 2017, in conjunction with the promotion of Grant Moise from Senior Vice President Business Development / Niche Products to General Manager of
The Dallas Morning News
and Executive Vice President of A. H. Belo, the Company reorganized its two reportable segments based on changes in 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. These operations generate revenue from sales of advertising within its newspaper and digital platforms, subscription and retail sales of its newspapers, sponsorship advertising for events, commercial printing and distribution services, primarily related to national and regional newspapers, and preprint advertisers. Businesses within the
P
ublishing 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 Holdings, Speakeasy and digital advertising through Connect (programmatic advertising). The Company operates the 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, the General Manager of
The Dallas Morning News
and Executive Vice President of A. H
.
Belo Corporation. The CODMs allocate
resources and
capital to the Publishing and Marketing Services segments at the segment level.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
9
The following tables show summarized financial information for the Company’s reportable segments.
Due to the first quarter 2017 reorganization of the Company’s two reportable segments, the prior year
period
s
fi
nancial information by
segment w
ere
recast
for comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
(Recast)
|
|
|
|
|
(Recast)
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
$
|
52,603
|
|
$
|
55,825
|
|
$
|
160,916
|
|
$
|
172,905
|
Marketing Services
|
|
|
7,956
|
|
|
8,955
|
|
|
23,633
|
|
|
20,984
|
Total
|
|
$
|
60,559
|
|
$
|
64,780
|
|
$
|
184,549
|
|
$
|
193,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
$
|
(5,885)
|
|
$
|
(1,654)
|
|
$
|
(11,818)
|
|
$
|
(2,456)
|
Marketing Services
|
|
|
836
|
|
|
1,165
|
|
|
2,215
|
|
|
2,845
|
Total
|
|
$
|
(5,049)
|
|
$
|
(489)
|
|
$
|
(9,603)
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
2,565
|
|
$
|
2,471
|
|
$
|
7,762
|
|
$
|
7,669
|
Amortization
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
79
|
Goodwill impairment
|
|
|
—
|
|
|
—
|
|
|
228
|
|
|
—
|
Total
|
|
$
|
2,565
|
|
$
|
2,498
|
|
$
|
7,990
|
|
$
|
7,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
42
|
|
$
|
17
|
|
$
|
78
|
|
$
|
56
|
Amortization
|
|
|
200
|
|
|
198
|
|
|
599
|
|
|
601
|
Total
|
|
$
|
242
|
|
$
|
215
|
|
$
|
677
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(Recast)
|
Total Assets
|
|
|
|
|
|
|
Publishing
|
|
$
|
129,933
|
|
$
|
170,820
|
Marketing Services
|
|
|
23,860
|
|
|
21,911
|
Total
|
|
$
|
153,793
|
|
$
|
192,731
|
Note 3: Acquisitions
On
February 16, 2017
, the Company acquired the remaining
30
percent voting interest in Speakeasy for a cash purchase price of
$2,111
, and on
March 2, 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
for a cash purchase price of
$14,110
. DMV Digital Holdings Company 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.
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
nine
months ended
September
30
, 2017 and 2016, the Company
recorded
pro-rata distributions to noncontrolling interests of
$163
and
$264
, respectively, in connection with this agreement based on 2016 and 2015 free cash flow as defined, respectively.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
10
Redeemable noncontrolling interest
.
Also, i
n connection with the 2015 acquisition
of
80 percent voting interest in
DMV Holdings, the Company entered into a shareholder agreement which provide
d
for a put option to a noncontrolling shareholder. The put option provide
d
the shareholder with the right to require the Company to purchase up to
25
percent of the noncontrolling ownership interest in DMV Holdings between the second and third anniversaries of the agreement and up to
50
percent of the noncontrolling ownership interest in DMV Holdings between the fourth and fifth anniversaries of the agreement.
Redeemable noncontrolling interest
was
recorded at fair value on the acquisition date and the carrying value
was
adjusted each period for its share of the earnings related to DMV Holdings
and for any distributions
.
T
he carrying value
was
also
adjusted for the change in fair value, which
was based on the
estimated redemption value
as of December 31, 2016
. Adjustments
were
recorded to retained earnings or additional paid in capital, as applicable, and have no effect to earnings of the Company. During the
nine
months ended
September
30
, 2017
and 2016
, redeemable noncontrolling interest was decreased by
$61
and
$99
, respectively,
for distributions related to
the 2016 and
2015 free cash flow
, respectively,
as required under the shareholder agreement
.
The exercisability of the noncontrolling interest put option
was
outside the control of the Company. As such, the redeemable noncontrolling interest of
$2,670
was
reported in the mezzanine equity section of the Consolidated Balance Sheet as of December 31, 2016
. As a result of the purchase of the remaining 20 percent voting interest in DMV Holdings, the shareholder agreement was terminated and the redeemable noncontrolling interest was eliminated as of March 31, 2017.
Note
4
:
Goodwill and Intangible Assets
The following table shows g
oodwill
and other
intangible assets by reportable segment as of
September 30, 2017
and
December 31, 2016. Due
to the first quarter 2017 reorganization of the Company’s two reportable segments, the prior year period financial information by segment w
as
recast for comparative purposes.
|
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|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
|
|
|
(Recast)
|
Goodwill
|
|
|
|
|
|
Publishing
|
$
|
—
|
|
$
|
228
|
Marketing Services
|
|
13,973
|
|
|
13,973
|
Total
|
$
|
13,973
|
|
$
|
14,201
|
|
|
|
|
|
|
Intangible Assets
|
|
|
|
|
|
Publishing
|
|
|
|
|
|
Cost
|
$
|
—
|
|
$
|
240
|
Accumulated Amortization
|
|
—
|
|
|
(240)
|
Net Carrying Value
|
$
|
—
|
|
$
|
—
|
Marketing Services
|
|
|
|
|
|
Cost
|
$
|
6,470
|
|
$
|
6,470
|
Accumulated Amortization
|
|
(2,197)
|
|
|
(1,598)
|
Net Carrying Value
|
$
|
4,273
|
|
$
|
4,872
|
In the
nine
months ended
September
30, 2017
, the Publishing segment’s
fully amortized
intangible assets of
$240
of customer relationships were written-off and
had no remaining useful life
.
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
and
$599
for the
three and nine months ended
September 30, 2017
,
respectively
, and
$225
and
$680
for the three and
nine
months ended
September
30, 2016, respectively
.
C
ertain
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
.
The
Publishing reporting unit’s goodwill was
determined to be
fully impaired
as of December 31,
2016
.
T
herefore
,
the
Company recorded a
n
oncash goodwill impairment charge of
$228
in the first quarter of 2017.
The Company tested goodwill for impairment as of December 31, 2016 at the reporting unit level 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 values of the businesses.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
11
Because the Company’s annual test indicated that the Publishing reporting unit’s carrying value exceeded its estimated fair value, a second phase of the goodwill impairment test (“Step 2”) was performed specific to the Publishing reporting unit. Under Step 2, the fair value of the Publishing reporting unit’s assets and liabilities were estimated, including intangible assets, for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of goodwill was then compared to the recorded goodwill to determine the amount of the impairment.
Upon completion of the annual test, the Publishing reporting unit’s goodwill was determined to be impaired, and the Company recorded a noncash goodwill impairment charge
of
$22,682
in the
fourth quarter of 2016, fully impairing the Publishing reporting unit’s goodwill.
Note
5
:
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.
No
grants have yet been made under the 2017 Plan.
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
September 30, 2017
.
The
table below sets forth a summary of
stock option
activity under the Plan.
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
Outstanding at December 31, 2016
|
114,979
|
|
$
|
8.21
|
Canceled
|
(14,635)
|
|
|
20.16
|
Outstanding at September 30, 2017
|
100,344
|
|
|
6.46
|
As of September 30, 2017, the aggregate intrinsic value of outstanding options
was
$8
and
the weighted average remaining contractual life of the Company’s stock options
was
approximately 1
year
.
No options were exercised in the three months ended September 30, 2016.
The aggregate intrinsic valu
e of options exercised
in the nine months ended September 30,
2016
,
was
$300
.
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
September 30, 2017
, the liability for the portion of the award
s
to be redeemed in cash
was
$853
.
The
table below sets forth a summary of RSU activity under the Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
121,131
|
|
|
|
|
|
|
|
|
$
|
5.65
|
Granted
|
284,868
|
|
|
|
|
|
|
|
|
|
6.11
|
Vested and outstanding
|
(159,212)
|
|
|
|
|
|
|
|
|
|
5.71
|
Vested and issued
|
(22,734)
|
|
13,634
|
|
9,100
|
|
$
|
57
|
|
|
6.90
|
Non-vested at September 30, 2017
|
224,053
|
|
|
|
|
|
|
|
|
|
6.07
|
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
12
In
the
nine months ended
September 30, 2017
, the Company
issued
63,272
shares
of Series A common stock
and
42,189
shares were redeemed in cash for RSUs
that were previously vested as of December 31, 201
6
. In addition, there
were
290,825
and
237,074
RSUs
that were vested and outstanding as of
September 30, 2017
and December 31, 201
6
, 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
September 30, 2017
, unrecognized compensation
expense
related to non-vested
RSUs totaled
$1,160
, which
is expected t
o be recognized over a weighted
average period
of
1.7
year
s
.
Compensation Expense.
A. H. Belo recognizes compensation expense for
awards
granted
under the P
lan over the vesting period of the award. Compensation
expense related to RSUs granted under the Plan is
set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
Redeemable
in Stock
|
|
RSUs
Redeemable
in Cash
|
|
Total
RSU Awards
Expense
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
2017
|
$
|
149
|
|
$
|
82
|
|
$
|
231
|
2016
|
|
86
|
|
|
303
|
|
|
389
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2017
|
$
|
775
|
|
$
|
399
|
|
$
|
1,174
|
2016
|
|
534
|
|
|
604
|
|
|
1,138
|
Note
6
: Income Taxes
The interim provision for income taxes reflects the Company’s estimate of the effective tax rate expected to be applied for the full fiscal year, adjusted for any discrete transactions which are reported in the period in which they occur. The estimated annual effective tax rate is reviewed each quarter based on the Company’s estimated income tax expense for the year. Under certain circumstances, the Company may be precluded from estimating an annual effective tax rate. Such circumstances may include periods in which tax rates vary significantly due to earnings trends, in addition to the existence of significant permanent or temporary differences. Under such circumstances, a discrete tax rate is calculated for the period.
The Company recognized income tax
provision
from continuing operations of
$10
and
$77
for the
three
months ended
September 30, 2017
and
2016
, respectively
, and
$261
and
$1,361
for the
nine
months ended
September
30, 2017 and 2016, respectively
.
Effective income tax rates from continuing operations were
(10.9)
percent and
137.5
percent for the
nine months ended
September 30, 2017
and
2016
, respectively.
The
effective
income
tax
rate for the
nine
months ended
September
30
, 2017, was
due to
the federal tax benefit fully reserved with a valuation allowance and the effect of the Texas
m
argin tax. The 2017 effective income tax rate was
lower when compared to the prior year period due
to taxable income generated from operations and the disposition of certain fixed assets
in 2016
.
Note
7
:
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
7 under the applicable tax and labor laws governing pension plan funding.
In the third quarter
,
the Company
made a voluntary contribution of
$20,000
to the Pension Plans and using
the contribution
, in addition to
liquidating
$23,455
of
plan assets, transferred
$43,455
of pension liabilities to an insurance company. As a result
of this de-risking action
,
the Company
reduced
the number of participants in our Pension Plans by
796
, or
36
percent
.
In the three months ended September 30, 2017, a charge to pension expense for
$5,911
was recorded to reflect the amortization of losses in accumulated other comprehensive loss associated with this transaction.
In addition, the projected
benefit
obligation was
rem
easured as of September 30, 2017, which resulted in an actuarial gain of $3,648 that was recorded to other comprehensive income (loss) in the three months ended September 30, 2017; see
Note 8 – Shareholders’ Equity
.
This transaction
occurred on September 20, 2017, but the Company elected to use the measurement date practical expedient, allowing the Company to use September 30, 2017 as the alternative measurement date. No material transactions or changes in market conditions occurred between the transaction date and the alternative measurement date.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
13
Net Periodic
Pension
Expense (
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
expense (
benefit
)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest cost
|
|
$
|
2,386
|
|
$
|
2,525
|
|
$
|
7,158
|
|
$
|
7,574
|
Expected return on plans' assets
|
|
|
(3,313)
|
|
|
(3,396)
|
|
|
(9,940)
|
|
|
(10,189)
|
Amortization of actuarial loss
|
|
|
75
|
|
|
11
|
|
|
224
|
|
|
42
|
Recognized settlement loss
|
|
|
5,911
|
|
|
—
|
|
|
5,911
|
|
|
—
|
Net periodic pension expense (benefit)
|
|
$
|
5,059
|
|
$
|
(860)
|
|
$
|
3,353
|
|
$
|
(2,573)
|
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 on a per-pay-period basis.
During the
three
months ended
September 30, 2017
and
2016
, the Company recorded
expense of
$175
and
$248
, respectively, and during the
nine
months ended
September
30, 2017 and 2016, the Company recorded expense of
$670
and
$749
, respectively
, for matching contributions
to the
Savings P
lan
.
Note
8
:
Shareholders’ Equity
Dividends.
On
September 6
, 201
7
, 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
November 9
, 201
7
, which is payable on
December
1
, 201
7
.
During the
three
months ended
September
30
, 201
7
, the Company
recorded
$1,
775
to
accrue
for dividends declared but not
yet
paid.
On October 27, 2017, the Company’s board of directors declared a special, one-time cash dividend of $0.1
4
per share to shareholders of record and holders of RSUs as of the close of business on November 9, 2017, which is payable on December 1, 2017.
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 associated with
the
accumulated other comprehensive loss are fully reserved.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
14
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 September 30,
|
|
|
2017
|
|
2016
|
|
|
Total
|
|
Defined
benefit pension
plans
|
|
Other post-
employment
benefit plans
|
|
Total
|
|
Defined
benefit pension
plans
|
|
Other post-
employment
benefit plans
|
Balance, beginning of period
|
|
$
|
(39,195)
|
|
$
|
(39,588)
|
|
$
|
393
|
|
$
|
(38,474)
|
|
$
|
(38,867)
|
|
$
|
393
|
Actuarial gains
|
|
|
3,648
|
|
|
3,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Amortization
|
|
|
5,967
|
|
|
5,986
|
|
|
(19)
|
|
|
(17)
|
|
|
11
|
|
|
(28)
|
Balance, end of period
|
|
$
|
(29,580)
|
|
$
|
(29,954)
|
|
$
|
374
|
|
$
|
(38,491)
|
|
$
|
(38,856)
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Total
|
|
Defined
benefit pension
plans
|
|
Other post-
employment
benefit plans
|
|
Total
|
|
Defined
benefit pension
plans
|
|
Other post-
employment
benefit plans
|
Balance, beginning of period
|
|
$
|
(39,308)
|
|
$
|
(39,737)
|
|
$
|
429
|
|
$
|
(38,442)
|
|
$
|
(38,898)
|
|
$
|
456
|
Actuarial gains
|
|
|
3,648
|
|
|
3,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Amortization
|
|
|
6,080
|
|
|
6,135
|
|
|
(55)
|
|
|
(49)
|
|
|
42
|
|
|
(91)
|
Balance, end of period
|
|
$
|
(29,580)
|
|
$
|
(29,954)
|
|
$
|
374
|
|
$
|
(38,491)
|
|
$
|
(38,856)
|
|
$
|
365
|
Note
9
: Earnings Per Share
The table below sets forth
the
reconciliation
s
for net
income (
loss
)
and
weighted average shares used for calculating basic and diluted earnings per share (“EPS”). The Company’s Series A an
d B common stock equally share
in the distributed and undistributed earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Earnings (Numerator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. H. Belo Corporation
|
|
$
|
2,580
|
|
$
|
(497)
|
|
$
|
(2,655)
|
|
$
|
(436)
|
Less: Dividends to participating securities
|
|
|
35
|
|
|
29
|
|
|
117
|
|
|
83
|
Net income (loss) available to common shareholders from continuing operations
|
|
$
|
2,545
|
|
$
|
(526)
|
|
$
|
(2,772)
|
|
$
|
(519)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
|
21,753,166
|
|
|
21,676,260
|
|
|
21,729,212
|
|
|
21,601,828
|
Effect of dilutive securities
|
|
|
1,461
|
|
|
—
|
|
|
—
|
|
|
—
|
Adjusted weighted average shares outstanding (diluted)
|
|
|
21,754,627
|
|
|
21,676,260
|
|
|
21,729,212
|
|
|
21,601,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.12
|
|
$
|
(0.02)
|
|
$
|
(0.13)
|
|
$
|
(0.02)
|
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
615,222
and
504,648
options and RSUs
outstanding
as of
September 30, 2017
and
2016
, respectively,
were excluded from the calculation because the effect was anti-dilutive.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
15
Note 1
0
: 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.
Note 1
1
:
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 second quarter of 2017, the Company announced that
three
parcels of land located in downtown Dallas, Texas were available for sale.
On September 22, 2017, the Company completed the sale of
one
parcel of land and received net cash proceeds of
$8,252
, generating a gain of
approximately
$
5,
000
.
The
remaining
two parcels
of land
,
with a total carrying value of
$
5,510
, are reported as assets held for sale as of
September 30
, 2017.
On October
19
, 2017, the Company completed the sale of the remaining
two
parcels of land and received net cash proceeds of
$
13,048
, generating a gain of approximately $7,
500
.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
16
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.
In the first quarter of 2017, in conjunction with the promotion of Grant Moise from Senior Vice President Business Development / Niche Products to General Manager of
The Dallas Morning News
and Executive Vice President of A. H. Belo, the Company reorganized its two reportable segments based on changes in 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 Company’s Publishing segment includes the operations of
The Dallas Morning News
(
www.dallasnews.com
), Texas’ leading newspaper and winner of nine Pulitzer Prizes; the
Denton Record-Chronicle
(
www.dentonrc.com
), a daily newspaper operating in Denton, Texas, and various niche publications targeting specific audiences.
These operations generate revenue from sales of advertising within its newspaper and digital platforms, subscription and retail sales of its newspapers, sponsorship advertising for events, commercial printing and distribution services, primarily related to national and regional newspapers, and preprint advertisers. Businesses within the
P
ublishing segment leverage the production facilities, subscriber and advertiser base
,
and digital news platforms to provide additional contribution margin.
The Marketing Services segment includes
marketing services generated
by
DMV Digital Holdings Company (“DMV Holdings”)
and its
subsidiaries
Distribion
, Inc.
, Vertical Nerve
, Inc.
and
CDFX, LLC (“MarketingFX”)
.
The Marketing Services segment also includes Your Speakeasy, LLC (“Speakeasy”)
and digital advertising through Connect (programmatic advertising). The Company operates the 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.
On February 16, 2017, the Company acquired the remaining 30 percent voting interest in Speakeasy for a cash purchase price of $2,111, and on
March 2, 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 for a cash purchase price of $14,
110. DMV
Holdings holds
all outstanding ownership interests of
three Dallas-based companies,
Distribion, Inc., Vertical Nerve, Inc. and
MarketingFX
.
These businesses specialize in local marketing automation, search engine marketing,
and
direct mail and promotional products, respectively.
T
h
e
s
e
acquisition
s
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.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
17
RESULTS OF CONTINUING OPERATIONS
Consolidated Results of Continuing 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
and
nine
months ended
September
30
, 2017 and 2016. D
ue to the first quarter 2017 reorganization of the Company’s two reportable segments, the prior year period
s
financial information by segment w
ere
recast for comparative purposes.
The table below sets forth the components of A. H. Belo’s
operating income (loss) by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
|
|
|
|
|
|
(Recast)
|
|
|
|
|
|
|
|
(Recast)
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
|
$
|
26,919
|
|
(8.3)
|
%
|
|
$
|
29,349
|
|
$
|
82,468
|
|
(9.0)
|
%
|
|
$
|
90,597
|
Circulation
|
|
|
18,845
|
|
(4.0)
|
%
|
|
|
19,633
|
|
|
57,099
|
|
(4.5)
|
%
|
|
|
59,806
|
Printing, distribution and other
|
|
|
6,839
|
|
(0.1)
|
%
|
|
|
6,843
|
|
|
21,349
|
|
(5.1)
|
%
|
|
|
22,502
|
Total Net Operating Revenue
|
|
|
52,603
|
|
(5.8)
|
%
|
|
|
55,825
|
|
|
160,916
|
|
(6.9)
|
%
|
|
|
172,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Costs and Expense
|
|
|
58,488
|
|
1.8
|
%
|
|
|
57,479
|
|
|
172,734
|
|
(1.5)
|
%
|
|
|
175,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(5,885)
|
|
(255.8)
|
%
|
|
$
|
(1,654)
|
|
$
|
(11,818)
|
|
(381.2)
|
%
|
|
$
|
(2,456)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing services
|
|
$
|
7,956
|
|
(11.2)
|
%
|
|
$
|
8,955
|
|
$
|
23,633
|
|
12.6
|
%
|
|
$
|
20,984
|
Total Net Operating Revenue
|
|
|
7,956
|
|
(11.2)
|
%
|
|
|
8,955
|
|
|
23,633
|
|
12.6
|
%
|
|
|
20,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Costs and Expense
|
|
|
7,120
|
|
(8.6)
|
%
|
|
|
7,790
|
|
|
21,418
|
|
18.1
|
%
|
|
|
18,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
836
|
|
(28.2)
|
%
|
|
$
|
1,165
|
|
$
|
2,215
|
|
(22.1)
|
%
|
|
$
|
2,845
|
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
26.6
percent of consolidated revenue in 201
4
, have declined
to
19.0
percent
of consolidated revenue thus far in 201
7
, 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. The Publishing reporting unit’s goodwill was
fully impaired
.
T
herefore
,
the
Company recorded a
n
oncash 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.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
18
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
57.6
percent and 5
7
.
5
percent
of tot
al revenue for the three and
nine
months ended
September
30, 201
7
,
respectively
, and
5
9
.1
percent and
5
7
.
5
percent for the three and
nine
months ended
September
30, 2016, respectively
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
|
|
|
|
|
|
(Recast)
|
|
|
|
|
|
|
|
(Recast)
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display advertising
|
|
$
|
6,750
|
|
(14.9)
|
%
|
|
$
|
7,933
|
|
$
|
21,487
|
|
(13.7)
|
%
|
|
$
|
24,910
|
Classified advertising
|
|
|
4,432
|
|
(11.1)
|
%
|
|
|
4,984
|
|
|
13,534
|
|
(9.1)
|
%
|
|
|
14,882
|
Preprint advertising
|
|
|
9,971
|
|
(12.3)
|
%
|
|
|
11,365
|
|
|
30,503
|
|
(10.7)
|
%
|
|
|
34,140
|
Digital advertising
|
|
|
5,766
|
|
13.8
|
%
|
|
|
5,067
|
|
|
16,944
|
|
1.7
|
%
|
|
|
16,665
|
Marketing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital services
|
|
|
6,194
|
|
(21.4)
|
%
|
|
|
7,880
|
|
|
19,902
|
|
8.7
|
%
|
|
|
18,301
|
Other services
|
|
|
1,762
|
|
63.9
|
%
|
|
|
1,075
|
|
|
3,731
|
|
39.1
|
%
|
|
|
2,683
|
Advertising and Marketing Services
|
$
|
34,875
|
|
(9.0)
|
%
|
|
$
|
38,304
|
|
$
|
106,101
|
|
(4.9)
|
%
|
|
$
|
111,581
|
Publishing
Display
–
Display revenue primarily represents sales of non-classified 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
. Revenue decreased due to lower retail advertising in substantially all categories
in both periods,
except
the financial category in the three and nine
months ended
September
30
, 2017.
The department store,
entertainment,
food and beverage
, medical
,
furniture
and other
retail
categories experienced the greatest declines with a combined revenue decrease of approximately $
1,178
and $
3,086
,
for the three and
nine
months ended
September
30, 2017, respectively. The revenue decrease was
driven heavily by a
retail
volume decline of
10.4
percent
and
10.
1
percent, for the three and
nine
months ended
September
30
, 201
7
, respectively
.
Classified
– Classified primarily represents sales of classified advertising space within the Company’s
core and niche newspapers.
Growth in c
lassified advertising
revenue continues to be
challenging as alternative digital outlets continue to emerge
. Rate improvement trends in certain display advertising categories partially offset the volume decline
. Overall classified revenue
declined
for
the
three and
nine
months ended
September
30
,
2017
, due to lower volumes in substantially all categories except employment.
Preprint
– Preprint 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
rate
decline in preprint newspaper inserts
and
home delivery mail advertising.
Digital
–
Digital publishing is primarily comprised of banner and real estate classified advertising on
The Dallas Morning News’
website
dallasnews.com
,
sales of online automotive classifieds on the
cars.com
platform,
as well as online employment and obituary classified advertising on third-party websites sold under a print/digital bundle package
. Revenue
increased
in the
three and
nine
months ended
September
30
, 2017
, due to a
higher
volume of online automotive classifieds on the
cars.com
platform.
Marketing Services
Digital services –
Digital marketing includes targeted and multi-channel advertising placed on third-party websites, content development, social media management, search optimization,
and
other consulting
. DMV Holdings provided a significant portion of the growth in digital marketing
revenue.
DMV Holdings revenue increased $
992
and $
4,868
in the
three
and
nine
months ended
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
19
September
30
, 2017
, respectively
.
The
digital services
revenue increase offset
3
6.5
percent
of the core print advertising revenue decline in the
nine
months ended
September
3
0
,
2017.
Other
services
–
Other services revenue
increased
$687 and $1,048
in the
three and
nine
months ended
September
30
,
2017
,
respectively,
due to
the
sale of promotional merchandise by MarketingFX.
Circulation revenue
Circulation
revenue was
31.1
percent and
30.9
p
ercent of total revenue for the
three and
nine
months ended
September
30, 2017, respectively, and
30
.
3
percent and
3
0
.
8
percent for the three and
nine
months ended
September
30,
2016,
respectively
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Circulation
|
|
$
|
18,845
|
|
(4.0)
|
%
|
|
$
|
19,633
|
|
$
|
57,099
|
|
(4.5)
|
%
|
|
$
|
59,806
|
Revenue decreased
primarily
due to a decline in home delivery
volume of
7.1
percent
and
8.
3
percent,
for the
three and
nine
months ended
September
30
, 2017
, respectively
. Single copy revenue
also de
creased compared
to prior year, driven by
a decline in single copy
paid print circulation volume of
21.4
percent
and
19.3
percent
,
for the
three and
nine
months ended
September
30
,
2017
,
respectively
.
The single copy volume decline was
partially offset by an increase in the daily single copy rate, which we put in place in November 2016.
Volume declines in circulation revenue have been more pronounced with single copy sales as it competes for retail space. Price increases and supplemental editions are critical to maintaining the revenue base to support this product. During the
three and
nine
months ended
September
30
,
2017,
the Company generated
$1
09
and
$
400
, respectively,
of incremental circulation revenue through the distribution of specialty magazines to its core subscribers.
Printing, distribution and other revenue
Printing, distribution and other revenue
was
11.3
percent and
11.6
percent of total revenue for the three
and
nine
months ended
September
30,
201
7
, respectively,
and
1
0
.
6
percent and
1
1
.
7
percent
for the three and
nine
months ended
September
30,
2016
,
respectively
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
|
|
|
|
|
|
(Recast)
|
|
|
|
|
|
|
|
(Recast)
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing, Distribution and Other
|
|
$
|
6,839
|
|
(0.1)
|
%
|
|
$
|
6,843
|
|
$
|
21,349
|
|
(5.1)
|
%
|
|
$
|
22,502
|
The Company aggressively market
s
the capacity of
its
printing and distribution assets to other newspapers that would benefit from cost sharing arrangements.
Additionally, t
he Company’s
event activation, promotion and marketing services provider
,
CrowdSource,
works closely with cities and other corporate sponsors to bring large entertainment events to
local
communities.
Revenue
remained flat
in the three months ended
September
30, 2017
,
and decreased in the nine months ended September 30, 2017
,
due
to a decline in
revenue related to
events the Company did not host in 2017.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
20
Operating Costs and Expense
The table below sets forth the components of the Company’s
o
perating
costs and
expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
|
|
|
|
|
|
|
(Recast)
|
|
|
|
|
|
|
|
(Recast)
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
26,384
|
|
16.0
|
%
|
|
$
|
22,753
|
|
$
|
72,426
|
|
4.5
|
%
|
|
$
|
69,280
|
Other production, distribution and operating costs
|
|
|
24,192
|
|
(7.8)
|
%
|
|
|
26,225
|
|
|
75,637
|
|
(5.6)
|
%
|
|
|
80,138
|
Newsprint, ink and other supplies
|
|
|
5,347
|
|
(10.9)
|
%
|
|
|
6,003
|
|
|
16,681
|
|
(8.3)
|
%
|
|
|
18,195
|
Depreciation
|
|
|
2,565
|
|
3.8
|
%
|
|
|
2,471
|
|
|
7,762
|
|
1.2
|
%
|
|
|
7,669
|
Amortization
|
|
|
—
|
|
(100.0)
|
%
|
|
|
27
|
|
|
—
|
|
(100.0)
|
%
|
|
|
79
|
Goodwill impairment
|
|
|
—
|
|
N/A
|
|
|
|
—
|
|
|
228
|
|
N/A
|
|
|
|
—
|
Marketing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,309
|
|
15.2
|
%
|
|
|
2,873
|
|
|
9,995
|
|
22.8
|
%
|
|
|
8,137
|
Other production, distribution and operating costs
|
|
|
3,268
|
|
(25.6)
|
%
|
|
|
4,390
|
|
|
9,885
|
|
13.5
|
%
|
|
|
8,706
|
Newsprint, ink and other supplies
|
|
|
301
|
|
(3.5)
|
%
|
|
|
312
|
|
|
861
|
|
34.7
|
%
|
|
|
639
|
Depreciation
|
|
|
42
|
|
147.1
|
%
|
|
|
17
|
|
|
78
|
|
39.3
|
%
|
|
|
56
|
Amortization
|
|
|
200
|
|
1.0
|
%
|
|
|
198
|
|
|
599
|
|
(0.3)
|
%
|
|
|
601
|
Total Operating Costs and Expense
|
|
$
|
65,608
|
|
0.5
|
%
|
|
$
|
65,269
|
|
$
|
194,152
|
|
0.3
|
%
|
|
$
|
193,500
|
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
increased
$
3,631
and $
3,146
in the three
and
nine
months ended
September
30
, 201
7
, respectively, primarily due to
a noncash pension settlement charge of $5,911 recorded in three months ended September 30, 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. Savings were generated by reductions in
temporary
services and
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 from the Company and certain third-party newspapers and the discontinuation of unprofitable product lines. Newsprint consumption for the three months ended
September
30
, 201
7
and 201
6
, approximated
5,721
and
6,627
metric tons, respectively, at an average cost per metric ton of
$560
and $
542
, respectively.
Newsprint consumption for the
nine
months ended
September
30
, 2017 and 2016, approximated
17,475
and
20,022
metric tons, respectively, at an average cost per metric ton of $56
1
and $
523
, respectively.
The average purchase price for newsprint was
$558
and $
561
for the three months ended
September
30
, 201
7
and 201
6
, respectively
, and $
56
1
and $5
32
for
the nine
months ended
September
30, 2017 and 2016, respectively
.
Depreciation
– Expense
increased in the
three and
nine
months ended
September
30, 2017, due to capital purchases to support the Company’s financial and human resource software application.
Amortization
–
All definite-lived intangible assets are fully amortized.
Goodwill impairment
–
In
the
nine
months ended
September
30
, 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 increased in
the
three and
nine
months ended
September
30
,
2017,
primarily related to the growth associated with DMV Holdings of $
335
and $1,
682
, respectively
. As of
September
30
, 201
7
and 201
6
, DMV Holdings employed
81
and
7
6
personnel, respectively.
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
21
Other production, distribution and operating costs
–
E
xpense
decreased
$
1,
122
in the
three
months ended
September
30
, 201
7
,
related to expense reductions at Speakeasy. Expense increased $1,179 in the nine months ended September 30, 2017,
in connection with
growth in
DMV Holdings
.
Newsprint, ink and other supplies
–
Expense
decreased
$1
1
in the
three
months ended
September
30
,
2017
. Expense increased $222 in the nine months ended September 30, 2017,
primarily due to an increase in promotional material printing costs associated with MarketingFX.
Depreciation
–
Marketing and event services’ cost structure is primarily labor driven. Capital purchases are required to support technology investments, the Company’s websites and customer engaging applications. Capital assets are primarily depreciated over a life of three years.
Amortization
–
Expense
is
primarily related to
customer
lists associated with DMV Holdings
.
Other
The table below sets forth the other components of the Company’s results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
Percentage
Change
|
|
2016
|
|
2017
|
|
Percentage
Change
|
|
2016
|
Other income, net
|
|
$
|
7,639
|
|
N/M
|
|
|
$
|
114
|
|
$
|
7,209
|
|
N/M
|
|
|
$
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
10
|
|
(87.0)
|
%
|
|
$
|
77
|
|
$
|
261
|
|
(80.8)
|
%
|
|
$
|
1,361
|
“N/M” – not meaningful
Other
i
ncome (
e
xpense)
–
Other income (expense) is primarily comprised
of investment
activity
and gain (los
s) on disposal of fixed assets.
Tax provision
–
The Company recognized income tax provision from continuing operations of
$10
and $77 for the three months ended September 30, 2017 and 2016, respectively, and
$261
and $1,361 for the
nine
months ended
September
30, 2017 and 2016, respectively. Effective income tax rates from continuing operations were
(10.9)
percent and 137.5 percent for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rate for the
nine
months ended
September
30, 2017, was due to
the federal tax benefit fully reserved with a valuation allowance and the effect of the Texas margin tax. The 2017 effective income tax rate was lower when compared to the prior year period due to taxable income generated from operations and the disposition of certain fixed assets in 2016.
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 second quarter of 2017, the Company announced that
three
parcels of land located in downtown Dallas, Texas were available for sale. On September 22, 2017, the Company completed the sale of
one
parcel of land and received net cash proceeds of
$8,252
, generating a gain of
approximately
$5,
000
. The remaining two parcels of land, with a total carrying value of
$5,510
, are reported as assets held for sale as of September 30, 2017.
On October 19, 2017, the Company completed the sale of the remaining
two
parcels of land and received net cash proceeds of
$13,048
, generating a gain of approximately $7,
500
.
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 Third Quarter 2017 on Form 10-Q
22
Liquidity and Capital Resources
The Company’s cash balances as of
September 30, 2017
and
December 31, 2016
,
were
$49,955
and
$80,071
, 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 $
5
,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
plans
to re
sume
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
(used for)
operating activities
for the
nine months ended
months ended
September 30, 2017
and 201
6
, was
$
(15,79
0
)
and
$
6,679
, respectively.
Cash flows from
operating activities
decreased
by
$
22,4
69
during the
nine
months
ended
September
30
, 201
7
, when compared to the prior year period, primarily due to
the voluntary contribution of $20,000 to the A. H. Belo Pension Plans
.
Investing Cash Flows
Net cash
provided by (
used for
)
investing activities was
$
3
97
and
$
(
3,
840
)
for the
nine months ended
September 30, 2017
and 201
6
, respectively
. Cash flow for investing activities include $7,837 and $4,168 of capital spending in 2017 and 2016, respectively.
Cash
proceeds of $8,252 were received during 2017 related to
the sale of
a
parcel of land in downtown Dallas, Texas.
Financing Cash Flows
Net cash used for financing activities
was
$
14,723
and
$
2
,
878
for the
nine months ended
September 30, 2017
and 201
6
, respectively.
Cash flows used for financing activities increased in 2017 compared to 2016, 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
$5,313
and
$
5
,
265
in 201
7
and 201
6
, 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
7
.
On
September 6
, 2017, 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
November 9
, 2017, which is payable on
December
1
, 2017
.
On October 27, 2017, the Company’s board of directors declared a special, one-time cash dividend of $0.1
4
per share to shareholders of record and holders of RSUs as of the close of business on November 9, 2017, which is payable on December 1, 2017.
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, 2016
, filed on March
10
, 201
7
, with the Securities and Exchange Commission (“SEC”).
A. H. Belo Corporation Third Quarter 2017 on Form 10-Q
23
Critical Accounting Policies and Estimates
No 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
6
.
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.