10-K 1 gci-20171231x10k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 1-36874
GANNETT CO., INC.
(Exact name of registrant as specified in its charter)
Delaware
 
47-2390983
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7950 Jones Branch Drive, McLean, Virginia
 
22107-0910
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (703) 854-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (Check box if no delinquent filers). ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x
The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant's Common Stock as reported on The New York Stock Exchange on June 25, 2017 was $970,229,308. The registrant has no non-voting common equity.
As of February 19, 2018, 112,823,971 shares of the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders to be held on May 8, 2018 is incorporated by reference in Part III to the extent described therein.
 



INDEX TO GANNETT CO., INC.
2017 FORM 10-K
 
Item No.
 
Page
 
 
 
 
 
1
 
 
 
1A.
 
 
 
1B.
 
 
 
2
 
 
 
3
 
 
 
4
 
 
 
 
 
 
 
 
5
 
 
 
6
 
 
 
7
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
7A.
 
 
 
8
 
 
 
9
 
 
 
9A.
 
 
 
 
 
 
 
 
10
 
 
 
11
 
 
 
12
 
 
 
13
 
 
 
14
 
 
 
 
 
 
 
 
15
 
 
 
16

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PART I

ITEM 1. BUSINESS

Overview

Gannett Co., Inc. (Gannett, we, us, our, or the company) is an innovative, digitally focused media and marketing solutions company committed to strengthening communities across our network. Gannett owns ReachLocal, Inc. (ReachLocal), a digital marketing solutions company, the USA TODAY NETWORK (made up of USA TODAY (USAT) and 109 local media organizations in 34 states in the U.S. and Guam, including digital sites and affiliates), and Newsquest (a wholly owned subsidiary operating in the United Kingdom (U.K.) with more than 170 local media brands). Through the USA TODAY NETWORK and Newsquest, Gannett delivers high-quality, trusted content where and when consumers want to engage with it on virtually any device or platform. Additionally, the company has strong relationships with thousands of marketers in both our U.S. and U.K. markets due to our large local and national sales forces and robust advertising and marketing solutions product suite. The company reports in two operating segments, publishing and ReachLocal, plus a corporate and other category. A full description of our segments is included in Note 14 — Segment reporting of the notes to the consolidated and combined financial statements.

The company has made both internal and external digital investments to address consumers' changing habits toward the consumption of news and information on digital devices as well as marketers' changing spending habits towards digital products. In 2017, total digital revenues were $994.9 million, or 32% of total company revenues. The USA TODAY NETWORK, with more than 3,000 journalists, averaged approximately 117 million(a) (see "References" section below) monthly unique visitors who access content through desktops, smartphones, and tablets. In September 2017, the company achieved a record 125 million(a) unique digital visitors in the U.S. In the U.K., Newsquest is a publishing and digital leader with more than 900 journalists and a network of web sites that attracts over 26 million(b) unique visitors monthly.

Publishing Segment

Our publishing segment comprises the USA TODAY NETWORK (as described above) and Newsquest. Since its introduction in 1982, USA TODAY has been a cornerstone of the national news landscape and is a recognizable and respected brand. Through the execution of our business strategy over the last two years, we have taken a series of steps that have culminated in the creation of the USA TODAY NETWORK.

In 2015, we began to include the USA TODAY local edition as an insert each day in 35 of our local daily publications, which includes News, Money, and Life content, and throughout the network USA TODAY sports coverage was integrated into local sports sections.
In 2016, we leveraged the strong USA TODAY brand and created the largest local to national media network in the country, the USA TODAY NETWORK.
In 2017, we started a branding refresh of our print and digital products across our U.S. markets that will continue into 2018. This refresh is designed to unify our digital network, modernize our visual storytelling, create a more contemporary look for our advertisers and partnerships, and attract new audiences.

The USA TODAY NETWORK brand and audience reach will be further leveraged as we build out new digital businesses, similar to our successful launch of “For the Win” (ftw.usatoday.com), a unique digital property that provides sports fans with social news and curated analysis, and our recent investment in Grateful Ventures, a startup digital content network that operates in the lifestyle vertical.

The scale of our consumer audience across our publishing business makes us an attractive marketing partner to various national and local businesses trying to reach consumers. We are the leading newspaper publisher in the U.S. in terms of circulation and have the third largest digital audience in the News and Information category based on December 2017 comScore Media Metrics; per those metrics, our content reaches more people digitally than Fox News, CBSnews.com, New York Times Digital, BuzzFeed.com, NBC News, or WashingtonPost.com.(a) 

At our U.S. local publishing operations, the average daily print readership is more than 11 million on Sundays and 5 million daily Monday through Saturday, while the digital audience averages 43 million(a) unique visitors per month. At our flagship brand, USA TODAY, print readership averages over 2.6 million daily Monday to Friday, while the digital audience averages over 93 million(a) unique visitors per month. While our print audience tends to skew to an older demographic, our digital audience skews younger as evidenced by 54%(a) of the total U.S. digital millennial audience (ages 18 - 34) accessing USA TODAY NETWORK content.

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In the U.K., our wholly-owned subsidiary Newsquest has a total average print readership of over 5.7 million every week. Newsquest’s digital audience continued to grow in 2017, with average monthly unique users of its network rising to 26.3 million(b).

As digital media consumption shifts to mobile devices and social media, our audiences on these platforms continue to grow. The USA TODAY NETWORK consistently ranks in the top 3 in mobile web unique visitors in the News and Information category, finishing December 2017 at #2(a). Total mobile web page views for the USA TODAY NETWORK grew 5%(b) in 2017, evidence our content successfully resonates on mobile devices. In the fourth quarter of 2017, we began to roll out a new mobile web experience with preliminary results showing greater user engagement. At Newsquest, mobile monthly unique users increased 7%(b) and mobile article page views grew 15%(b) in 2017 on a year-over-year basis. On social platforms, we focused on creating franchises to drive user engagement and had great success with our Animalkind and Humankind franchises. In 2017, Animalkind produced 266.3 million(c) video views and Humankind produced 95.9 million(c) video views on Facebook with 119 million(c) post engagements (liked, shared, commented) and 62 million(c) post engagements, respectively. These results show that regardless of platform our content drives engagement.

Gannett continues to build an innovative video network, with best-in-class video content to attract new audiences and drive revenue growth through enhancing existing revenue streams and creating new innovative products. In 2017, our U.S. local properties generated 292 million(b) cross-platform video plays, an increase of 33%(b) year-over-year. Building on the success of our first season of VRtually There, a series that tells the nation’s stories and delivers immersive and original content in virtual reality, we launched season two in 2017. Also during the year, we launched a drone storytelling initiative in 10 markets to support local and national storytelling; this program was critical in providing the comprehensive video coverage of hurricanes Harvey and Irma, giving readers a bird’s eye view of the damage caused by the hurricanes.

The publishing segment generates revenue primarily through advertising and subscriptions to our print and digital publications and to a lesser extent commercial printing and distribution, marketing, and data services. USA TODAY and our local publications have developed an efficient operating model utilizing integrated shared support for back-office operations such as financial services and accounting, content design and layout services, print and digital creative development and certain sales and service platforms. This model also serves as a point of leverage and synergy opportunity with respect to businesses acquired by the company.

Advertising: In 2017, publishing segment advertising revenues of $1.5 billion comprised 53% of total publishing segment revenues, down from 55% in 2016. We sell and track our advertising sales in three primary categories: retail, national, and classified. Below are descriptions of the three categories:

Retail advertising is associated with local merchants or locally owned businesses. Retail includes regional and national chains (such as department and grocery stores) that sell in the local market. Ads run in our print products and across our digital network.
National advertising is principally associated with advertisers who are promoting national products or brands. Examples are pharmaceuticals, travel, airlines, or packaged goods. Both retail and national ads also include preprints, typically stand-alone multiple page fliers inserted into daily and Sunday print products.
Classified advertising includes the major categories of automotive, employment, legal, and real estate/rentals. Advertising for classified segments is published in the classified sections or other sections within the publication, on our digital platforms, on affiliated digital platforms, and in certain magazines.

We have an experienced local advertising staff that sells retail, all classified excluding employment, and national advertising across multiple platforms, including print, desktop, mobile and tablet, as well as niche publications. Additionally, our staff sells the ReachLocal suite of digital marketing solutions, including search engine marketing, social media marketing, and website development. We have a separate national advertising sales force focused on the largest national advertisers and a separate sales organization to support classified employment sales.

Our advertising staff employs a multi-platform approach to advertising sales, which can be specifically tailored to the individual needs of advertisers from small, locally-owned merchants to large, complex businesses. We believe local and national advertisers find it challenging to manage the complexity of their media budgets, particularly on the digital side. They are seeking to reach a shifting audience and are struggling to influence attitudes and behavior at each stage of the purchase path. Our diverse sales force, unique industry scale, and broad portfolio of print and digital products position us to solve these challenges. Through our media planning process, we present advertisers with targeted, integrated solutions that help advertisers reach this shifting audience. The planning process leverages our considerable strength in data analysis and secondary research, with the result being a tailored media and marketing plan in which the individual elements work in concert to amplify and reinforce advertisers' messages and solve their business needs.

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Our advertising revenues are subject to moderate seasonality due primarily to fluctuations in advertising volumes. Our advertising revenues for publishing are typically highest in the company's fourth quarter due to holiday and seasonal advertising and lowest in the first quarter following the holiday season. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.

Circulation: In 2017, publishing segment circulation revenues of $1.1 billion comprised 40% of total publishing segment revenues, consistent with 39% in 2016. In a trend generally consistent within the domestic publishing industry, print circulation volumes declined in 2017. Circulation revenues in the U.S. are derived from our All Access Content Subscription Model, single-copy sales, hotel sales, and digital-only sales. Circulation revenues at Newsquest are more centered on single-copy sales with a larger portion of weekly paid-for titles and free titles as compared to our U.S. publications. Additionally, Newsquest employs a regional model, generally involving clustering of the publication of a free print product alongside a paid-for print product, which allows for the cross-selling of advertising serving the same or contiguous markets.

Our All Access Content Subscription Model in our local markets includes access to our content via multiple platforms including websites, smartphone and tablet applications, and e-newspapers, with subscription prices that vary according to the frequency of delivery of the print edition. Also available to subscribers are digital only or digital plus Sunday subscriptions. We currently have more than 1.8 million digital activated subscribers via our All Access Content Subscription Model. We offer our customers EZ Pay, a payment system which automatically deducts subscription payments from customers' credit cards or bank accounts; we see better subscriber retention with our EZ Pay customers. At the end of 2017, EZ Pay was used by 58% of all subscribers at local U.S. Gannett sites (not including USA TODAY).

Growing our digital only subscribers is a strategic priority and, in 2017, our digital only subscribers increased by 50% to 340,808. Our primary digital subscriber acquisition tactics include onsite promotion, email marketing, social marketing and event marketing. A variety of pricing strategies are used throughout the year, including discounted introductory periods and sales, to encourage trial and habituation before transitioning to the full rate. In the U.S. local markets, approximately 81% of circulation revenue is derived from our All Access Content Subscription Model and digital-only subscriptions.

In addition to the subscription model in our U.S. local markets, single-copy print editions continue to be sold at retail outlets and account for approximately 11% of daily and 20% of Sunday net paid circulation volume. Approximately 81% of net paid circulation volumes of USA TODAY are generated by single-copy sales at retail outlets, vending machines, or hotels that provide copies to their guests. The remainder is generated by home and office delivery, mail, educational, and other sales.

Production and Distribution: Gannett Publishing Services (GPS) was formed to improve the efficiency and reduce the cost associated with the production and distribution of the Gannett printed products across all divisions in the U.S. GPS manages the production and circulation operations for all our local daily and non-daily newspapers as well as USA TODAY and runs a commercial printing and delivery business that generates revenues from third party publishers.

GPS leverages our existing assets, including employee talent and experience, physical plants and equipment, and our vast national and local distribution networks. GPS is particularly focused on maximizing our geographic footprint to most efficiently produce and transport our printed product. GPS is responsible for internal and external printing, packaging, and distribution. Over the last several years, GPS has actively outsourced printing activities to competitive local market or regional printing businesses in situations where the cost to outsource would benefit Gannett. Alternatively, in certain cases, GPS will utilize excess printing capacity to print competitor and other publications.

Newsquest operates its publishing activities in a similar manner to GPS, through regional centers to maximize the use of management, finance, printing, and personnel resources. This regional approach allows the business to leverage a variety of back-office and administrative activities to optimize financial results and enables the group to offer readers and advertisers a range of attractive products across the market.

Competition: Our U.S. and U.K. publishing operations and affiliated digital platforms compete with other media and digital companies for advertising and marketing spend. Our publishing operations also compete for circulation and readership against other news and information outlets and amateur content creators. While very few of our publishing operations have similar daily print competitors that are published in the same city, our print products compete with the following types of businesses:

National, regional and smaller suburban area newspapers and free or paid publications

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Other media including magazines, television, direct mail, cable television, radio, outdoor/billboard advertising, directories, e-mail marketing, web sites, mobile-device platforms and social platforms.

Development of opportunities in, and competition from, digital media, including web sites, tablet, mobile and social products continues to increase. As such, there is very little barrier to entry and limited capital requirements for new companies to enter the market with competitive digital products. The company will continue to expand its audience reach in the digital media industry through internal audience development efforts, content distribution programs, acquisitions and partnerships to protect its audience market share. Additionally, the company will continue to improve its suite of advertising and marketing services products through both internal development and acquisitions and partnerships to protect its advertising market share.

Environmental Regulation: The company is committed to protecting the environment. Our goal is to ensure our production and distribution facilities comply with federal, state, local, and foreign environmental laws and to incorporate appropriate environmental practices and standards in its operations. We are one of the industry leaders in the use of recycled newsprint. During 2017, 11% of our domestic newsprint purchases contained recycled content, with an average recycled content of 20%.

Our operations use inks, solvents, and fuels. The use, management and disposal of these substances are sometimes regulated by environmental agencies. We retain a corporate environmental consultant who, along with internal and outside counsel, oversees regulatory compliance and preventive measures. Some of our subsidiaries have been included among the potentially responsible parties in connection with sites that have been identified as possibly requiring environmental remediation, although we do not currently anticipate these designations will have a material impact on our results of operations or cash flows.

Raw Materials: Newsprint, which is the basic raw material used in our print publications, has been and may continue to be subject to significant price changes from time to time. We purchase newsprint primarily from 12 domestic and global suppliers. During 2017, our total newsprint consumption was approximately 270,000 metric tons, including consumption by our owned and operated print sites, third-party printing sites, and Newsquest. Newsprint consumption in 2017 was 9% less than in 2016. On a pro-forma basis without tonnage from businesses acquired during 2016, newsprint consumption was 20% lower compared to 2016. We continue to moderate newsprint consumption and expense through the use of lighter basis weight paper. Our ability to supply the needs of our publishing operations depends upon the continuing availability of newsprint at an acceptable price, and the results of operations of our publishing segment may be impacted significantly by changes in newsprint prices. The availability and price of newsprint is subject to numerous risks and uncertainties, which are described more fully under “Risk Factors” in this Annual Report on Form 10-K.

Joint Operating Agencies: Our publishing subsidiaries in Detroit and York each participate in a joint operating agency (JOA). In each instance, the JOA performs the production, sales, distribution, and back office functions for our subsidiaries and the publisher of another publication pursuant to a joint operating agreement. Operating results for the Detroit and York JOAs are fully consolidated along with a charge for the minority partner's share of profits.

ReachLocal Segment

The mission of our ReachLocal segment is to deliver customers to local businesses. ReachLocal, Inc., which began in 2004 and was acquired by Gannett in 2016, helps local businesses advertise online to find those customers. We believe local businesses want a single, unified solution to solve their digital marketing needs. Our total digital marketing solution consists of products and solutions in three categories: digital advertising (including ReachSearch™, ReachDisplay™, ReachSocial Ads™, and ReachRetargeting™), web presence (including ReachSite+ReachEdge™, ReachSEO™, ReachCast™, ReachListings™, and TotalLiveChat™), and software-as-a-service (ReachEdge™ and Kickserv™). In April 2017, Gannett acquired SweetIQ, a provider of location and reputation management Software-as-a-Service (“SaaS”) solutions that enable businesses to manage their location data and measure consumer engagement. SweetIQ was integrated into our ReachLocal product suite as ReachListings™ and continues to be sold to multi-location businesses under the SweetIQ brand.

Products: Our search engine marketing (SEM) solution, ReachSearch™, combines search engine marketing optimized across multiple publishers, call tracking and call recording services, and industry leading campaign performance transparency. ReachSearch™ is a leading SEM offering for local businesses and has won numerous awards since its rollout, including most recently winning Google's Quality Score Champion Award in North America. ReachSearch™ is optimized for local markets in each of the territories in which our ReachLocal segment operates. ReachSearch™ accounted for 77% of our ReachLocal segment’s revenue for the year ended December 31, 2017.


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We also offer online advertising products focused on maximizing local businesses’ exposure by displaying their ads on websites that, in the aggregate, reach an estimated 90% of the U.S. online audience. Our display products include a retargeting solution to target consumers who have previously visited a specific client's website through a ReachSearch™ campaign or a ReachDisplay™ campaign or who have previously searched for a client's keywords (ReachRetargeting™) and a Facebook advertising solution (ReachSocial Ads™), among other products. These products are generally available in North America and selectively available in ReachLocal's international markets.

In addition, we offer a number of web presence solutions. These solutions include websites (ReachSite™), search engine optimization (ReachSEO™), social (ReachCast™), chat (TotalLiveChat™), listings (ReachListings™), and other products and solutions, all focused on expanding and leveraging clients' web presence. Often, these products are designed to work in concert with our digital advertising products with a goal of enhancing clients’ marketing return on investment. These products are generally available in North America and selectively available in our international markets.

We also offer software products designed to enable our clients to both easily assess the efficacy of their marketing efforts and to facilitate their interactions with their customers. Our ReachEdge™ solution is a marketing automation platform that includes tools for capturing web traffic information and converting leads into new customers for clients. ReachEdge™ provides clients with tools designed to significantly improve their conversion of leads to customers and helps clients stay top-of-mind during the prospect's decision-making process by using integrated marketing automation to send new prospects targeted e-mails and alerts to the client's staff reminding them to follow up on each lead. ReachEdge™ also provides reports to show clients how many leads they are getting from each marketing source and other important business insights. ReachEdge™ is available in most of our markets. Our Kickserv™ solution is a cloud-based business management software for service businesses. Kickserv™ allows us to provide an end-to-end solution to clients that starts with lead generation (e.g., ReachSearch™, ReachDisplay™, and ReachSEO™), includes lead conversion (ReachEdge™), and then closes and manages the business relationship (Kickserv™). Kickserv™ is available in North America.

Distribution: We deliver our suite of products and solutions to local businesses through a combination of our proprietary technology platform, our sales force, and select third-party agencies and resellers. Our ReachLocal segment has sales operations in the United States, Canada, Australia, New Zealand, Japan, Germany, Austria, Brazil, and Mexico. Approximately 77% of revenues are derived in North America and the remaining 23% from other international markets. All ReachLocal segment revenues are digital revenues.

Competition: The market for local online advertising solutions is intensely competitive and rapidly changing. The market is highly fragmented as there are a number of smaller companies which provide internet marketing services at highly competitive prices and, increasingly, we compete with vertical-specific small and medium-sized business (SMB) marketing providers who offer solutions tailored for specific verticals. In addition, the online publishers that we utilize for clients, such as Google, Yahoo!, and Microsoft, generally offer their products and services through self-service platforms. Many traditional, offline media companies also offer online advertising solutions and have large, direct sales forces and digital publishing properties. With the introduction of new technologies and market entrants, ReachLocal expects competition to intensify in the future.

Strategy

Gannett’s vision is to become the daily destination for consumers and marketers seeking meaningful connections with their communities across print, digital, and other channels. We are committed to a business strategy that drives audience growth and engagement by delivering deeper content experiences to our audience while offering the products and marketing expertise our advertisers desire. The execution of this strategy should allow the company to continue its evolution from a more traditional print media business to a digitally focused media and marketing services business. As part of the execution of this strategy, in late 2017, the company announced a management reorganization to align its operations under two main areas: Marketing Solutions and Consumer.

Key elements of our strategy are as follows:

Leverage nationwide scale and local presence to expand and deepen our relationships with consumers and marketers. The broad reach of both the USA TODAY NETWORK, with 109 local properties plus USA TODAY, and Newsquest, with more than 170 local media brands, gives us the ability to deepen our relationships with both consumers and advertisers at a national and local level. Through the USA TODAY NETWORK, we bring consumers the local news and information that impacts their day-to-day lives while keeping them informed of the national events that impact their country. To further drive audience growth and engagement across our domestic and international media brands, we will leverage the network to expand our content offerings to extend beyond news into new verticals, including lifestyle content such as food, health and fitness. We

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will deepen our relationships with our subscribers by offering a membership model, providing access to local events and experiences. For advertisers, we will leverage our broad sales footprint and strong customer relationships to aggressively expand our digital marketing services business into our local markets, both domestically and internationally. Given our extensive client base and volume of digital campaigns, we will also use data and insights to offer new and dynamic advertising products that can deliver superior results.

Accelerate expansion of our digital businesses through innovative consumer experiences and new marketing solutions. In 2017, we continued development of new consumer experiences through innovative storytelling mediums like virtual reality and drones, as well as improvements to our digital products. We will continue to deepen overall engagement and drive audience growth in 2018 and beyond by extending our content offerings to new platforms such as podcasts, voice and longer form video franchises. During 2017, we successfully integrated ReachLocal into our local markets as our digital marketing services provider. In 2018, we will continue to expand our digital marketing footprint in these markets as currently only a small percentage of our client base takes advantage of our digital marketing capabilities. We will introduce new customer solutions that will enable marketers to more easily track their return on investment across all their marketing channels. We also plan on extending our branded content offerings to the local level and continuing to evolve our innovative ad products offered to both national and local advertisers.

Pursue opportunistic acquisitions. We are well-positioned to pursue value-enhancing investments and acquisitions while being both disciplined and opportunistic in our acquisition strategy. Our balance sheet remains strong and our cash flow generation capabilities provide us with the financial flexibility to pursue opportunities of various sizes. Our focus has shifted from acquiring traditional print businesses to digital acquisitions that either expand our digital marketing services portfolio or broaden our content offerings. For example, in 2017 we acquired SweetIQ, a location and customer engagement software provider, which helped expand the product portfolio of ReachLocal. In 2017, we made a majority investment in a startup digital content network (“Grateful Ventures”) that operates in the lifestyle vertical to quickly and efficiently expand our content offerings beyond the traditional news category. We will still explore traditional print acquisitions that fit our geographic profile and offer strong synergy opportunities but likely on a smaller scale than previous acquisitions.

Maximize the value of our legacy print business and rationalize our cost base. We will continue to drive the profitability of our traditional print operations by rationalizing our cost infrastructure and maximizing our revenue base. To drive greater cost savings, we will continue to centralize operations to increase efficiencies with focus on our printing and distribution centers, content creation network and advertising sales structure. Our economies of scale will enable us to continue to reduce supply chain costs while streamlining the process of producing newspapers. We will also explore outsourcing certain business functions to reduce costs. On the revenue side, we have implemented a new print advertising pricing program that encourages more frequent advertising in our printed product, which should deliver the advertiser improved return on investment and reduce the advertiser churn we are experiencing. Our circulation pricing strategy will center on strategic price increases while delivering greater value to our most loyal subscribers through membership opportunities.

Maintain a flexible balance sheet with emphasis on capital allocation. Through aggressive cost management and disciplined financial policies, we have been able to maintain a strong balance sheet with relatively low debt levels compared to our peers. Our strong balance sheet has enabled us to keep a flexible capital allocation policy with an emphasis on returning cash to shareholders. Since the beginning of 2016, we have paid a quarterly dividend of $0.16 per share to shareholders. In July 2015, our Board of Directors authorized a three-year, $150 million share repurchase program. As of December 31, 2017, 5.75 million shares have been repurchased under the program at an average cost of $8.70 per share.

Strategic Acquisitions

SweetIQ Analytics Corp. (SweetIQ): In April 2017, we completed the acquisition of SweetIQ Analytics Corp. SweetIQ is a provider of location and reputation management software that enables businesses to manage their location data and measure consumer engagement.

ReachLocal, Inc. (ReachLocal): In August 2016, we completed the acquisition of ReachLocal, Inc.

North Jersey Media Group, Inc. (NJMG): In July 2016, we completed the acquisition of certain assets of North Jersey Media Group, Inc. NJMG is a media company with print and digital publishing operations serving primarily the northern New Jersey market. Its brands include such established names as The Record (Bergen County) and The Herald.

Journal Media Group, Inc. (JMG): In April 2016, we completed the acquisition of Journal Media Group, Inc. JMG is a media company with print and digital publishing operations serving 15 U.S. markets in nine states, including the Milwaukee

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Journal Sentinel, the Knoxville News Sentinel, and The Commercial Appeal in Memphis. The acquisition expanded our print and digital publishing operations domestically.

Texas-New Mexico Newspapers Partnership (TNP): In June 2015, we completed the acquisition of the remaining 59.4% interest in the Texas-New Mexico Newspapers Partnership that we did not own. The acquisition added one news organization in Texas, six in New Mexico, and four in Pennsylvania.

Romanes Media Group (RMG): In May 2015, we acquired the Romanes Media Group located in the U.K. Romanes includes one daily and 28 weekly publications and their associated digital platforms. The transaction was completed by our subsidiary, Newsquest.

History

Our newspaper business was founded by Frank E. Gannett and associates in 1906 and incorporated in 1923. We were separated from our former parent on June 29, 2015 when our former parent distributed 98.5% of the outstanding shares of Gannett common stock (also referred to herein as the spin-off or separation) to its stockholders on a pro rata basis. We are listed on the New York Stock Exchange under the symbol GCI and are headquartered in McLean, VA near Washington, DC.

Employees

We employed approximately 15,300 persons at our subsidiaries in the U.S. as of December 31, 2017. Approximately 14% of those employed by us in the U.S. are represented by labor unions, most of which are affiliated with one of seven international unions. These represented employees are covered by approximately 60 collective bargaining agreements. These agreements conform generally with the pattern of labor agreements in the publishing industry. We do not engage in industry-wide or company-wide bargaining. Our U.K. subsidiaries bargain with two unions over working practices, wages, and health and safety issues only. There were approximately 3,700 employees outside of the U.S., including approximately 3,000 employed by Newsquest in the U.K.

Internet Access

Our reports on Forms 10-K, 10-Q, and 8-K and all amendments to those reports are available without charge through the company's website (www.gannett.com) on the internet as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (SEC). We also will disclose on this website changes to, or waivers of, our corporate Ethics Policy. Information on our website does not constitute part of this Form 10-K.

References

(a) comScore Media Metrics

(b) Adobe Analytics

(c) Facebook

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Major Publications and Markets We Serve

We reach a large, diverse audience through our print and digital daily and non-daily publications throughout the U.S. Our local and national media brands are united under the USA TODAY NETWORK, the largest local to national media network in the U.S. The network is powered by an integrated and award-winning news organization comprising more than 3,000 journalists with deep roots in 109 local communities, plus USA TODAY, and a combined reach of more than 117 million visitors monthly.

The following table lists information for our major publications and their affiliated digital platforms in the U.S. as of December 31, 2017:

Title
 
Related Website(s)
 
Location
 
Daily(a)
 
Sunday(a)
USA TODAY
 
www.usatoday.com
 
McLean, Virginia
 
3,078,773
 
2,985,615
The Arizona Republic
 
www.azcentral.com
 
Phoenix, Arizona
 
227,176
 
422,510
Detroit Free Press
 
www.freep.com
 
Detroit, Michigan
 
182,455
 
930,818
Milwaukee Journal Sentinel
 
www.jsonline.com
 
Milwaukee, Wisconsin
 
116,680
 
180,268
The Indianapolis Star
 
www.indystar.com
 
Indianapolis, Indiana
 
93,612
 
213,870
The Record
 
www.northjersey.com
 
Bergen, New Jersey
 
91,032
 
97,149
The Cincinnati Enquirer
 
www.cincinnati.com
 
Cincinnati, Ohio
 
84,669
 
157,670
The Courier-Journal
 
www.courier-journal.com
 
Louisville, Kentucky
 
83,888
 
174,022
The Des Moines Register
 
www.desmoinesregister.com
 
Des Moines, Iowa
 
68,165
 
144,049
The Tennessean
 
www.tennessean.com
 
Nashville, Tennessee
 
65,383
 
159,617
(a) 
Daily and Sunday combined average circulation is print, digital replica, digital non-replica, and affiliated publications according to the Alliance for Audited Media's December 2017 Quarterly Publisher's Statement.


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The following table presents information for our local media organizations and affiliated digital platforms within the USA TODAY NETWORK on a state-by-state basis, including the major publications listed in the table above, as of December 31, 2017:

USA TODAY NETWORK MEDIA ORGANIZATIONS AND AFFILIATED DIGITAL PLATFORMS
State / Territory
 
Number of Local Media Organizations
 
Daily(a)
 
Sunday(a)
Alabama
 
1
 
17,623
 
20,484
Arizona
 
1
 
227,176
 
422,510
Arkansas
 
1
 
6,128
 
111
California
 
5
 
85,539
 
84,276
Colorado
 
1
 
16,794
 
20,735
Delaware
 
1
 
48,627
 
83,213
Florida
 
6
 
205,492
 
296,129
Guam
 
1
 
9,308
 
8,247
Indiana
 
5
 
159,017
 
301,790
Iowa
 
2
 
75,799
 
144,653
Kentucky
 
2
 
88,139
 
179,272
Louisiana
 
5
 
57,799
 
72,423
Maryland
 
1
 
8,875
 
11,358
Michigan
 
5
 
233,774
 
1,120,951
Minnesota
 
1
 
15,370
 
19,422
Mississippi
 
2
 
37,947
 
44,305
Missouri
 
1
 
22,080
 
42,839
Montana
 
1
 
18,259
 
18,433
Nevada
 
1
 
26,340
 
46,420
New Jersey
 
8
 
213,861
 
255,951
New Mexico
 
6
 
31,272
 
23,756
New York
 
6
 
159,870
 
226,558
North Carolina
 
1
 
22,574
 
40,197
Ohio
 
11
 
139,994
 
213,979
Oregon
 
1
 
23,419
 
29,599
Pennsylvania
 
4
 
51,951
 
62,839
South Carolina
 
2
 
45,391
 
102,016
South Dakota
 
1
 
22,767
 
47,844
Tennessee
 
6
 
196,226
 
352,841
Texas
 
5
 
73,407
 
162,364
Utah
 
1
 
9,648
 
11,715
Vermont
 
1
 
18,852
 
20,713
Virginia
 
2
 
3,088,026
 
2,996,553
Washington
 
1
 
22,033
 
16,347
Wisconsin
 
11
 
240,240
 
330,718
(a) 
Daily and Sunday combined average circulation is print, digital replica, digital non-replica, and affiliated publications according to the Alliance for Audited Media's December 2017 Quarterly Publisher's Statement.

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Newsquest has a portfolio of over 170 news brands and more than 80 magazines, published in print and online in the U.K. With a digital audience of more than 26 million users a month and more than 5.7 million readers in print, Newsquest's content is read by a substantial portion of the U.K. population. In addition to local news brands, Newsquest owns the digital businesses s1 and Exchange & Mart and a specialist magazine business.

The following table presents information for our major local media organizations and affiliated digital platforms operated by Newsquest in the U.K. as of December 31, 2017. All circulation figures are according to ABC results for the period January to December 2017 unless otherwise noted:

DAILY PAID-FOR LOCAL MEDIA ORGANIZATIONS AND AFFILIATED DIGITAL PLATFORMS / NEWSQUEST
Publication
 
City
 
Local Media
Organization / Web Site
 
Circulation
Monday - Saturday
Basildon & Southend Echo
 
Basildon, Southend on Sea
 
www.echo-news.co.uk
 
17,932
Bolton News
 
Bolton
 
www.theboltonnews.co.uk
 
9,271
Bournemouth - The Daily Echo
 
Bournemouth
 
www.bournemouthecho.co.uk
 
12,795
Bradford Telegraph & Argus
 
Bradford
 
www.thetelegraphandargus.co.uk
 
13,264
Colchester Daily Gazette
 
Colchester
 
www.gazette-news.co.uk
 
9,525
Dorset Echo
 
Dorset
 
www.dorsetecho.co.uk
 
10,055
Glasgow - Evening Times
 
Glasgow
 
www.eveningtimes.co.uk
 
22,397
Greenock Telegraph
 
Greenock
 
www.greenocktelegraph.co.uk
 
9,555(a)
Lancashire Telegraph
 
Blackburn, Burnley
 
www.lancashiretelegraph.co.uk
 
10,532
Oxford Mail
 
Oxford
 
www.oxfordmail.co.uk
 
9,922
South Wales Argus - Newport
 
Newport
 
www.southwalesargus.co.uk
 
10,578
Southampton - Southern Daily Echo
 
Southampton
 
www.dailyecho.co.uk
 
15,620
Swindon Advertiser
 
Swindon
 
www.swindonadvertiser.co.uk
 
9,104
The Argus Brighton
 
Brighton
 
www.theargus.co.uk
 
10,370
The Herald, Scotland
 
Glasgow, Edinburgh
 
www.heraldscotland.co.uk
 
27,655
The National, Scotland
 
Glasgow, Edinburgh
 
www.thenational.scot
 
8,496(a)
The Northern Echo
 
Darlington
 
www.thisisthenortheast.co.uk
 
22,622
The Press - York
 
York
 
www.yorkpress.co.uk
 
14,075
Worcester News
 
Worcester
 
www.worcesternews.co.uk
 
6,815
The Leader
 
Wrexham
 
www.leaderlive.co.uk
 
16,577
(a) 
Circulation figures are according to ABC results for the period January to December 2016 as 2017 results are not available.

ITEM 1A. RISK FACTORS

In addition to the other information contained or incorporated by reference into this Form 10-K, prospective investors should consider carefully the following risk factors before investing in our securities. The risks described below may not be the only risks we face. Additional risks that we do not yet perceive or that we currently believe are immaterial may adversely affect our business and the trading price of our securities.

Risks Relating to Our Strategic Transformation

We face risks and challenges in connection with our strategic transformation into a digital company focused on our marketing solutions and consumer businesses.

In the fourth quarter of 2017, we commenced a management reorganization of our company to align more definitively with our business strategy, which focuses on two primary areas: marketing solutions and consumer. See “Business - Strategy” section of this Annual Report on Form 10-K for additional information regarding our strategic objectives and the related reorganization. Our ability to achieve our strategic transformation is subject to several risks, including:

The transformation may require significant time and investment, and the investments may result in lower margins and increase our operating expenses or capital expenditures.

The reorganization of our executive management team, including the departure of certain executives, may be

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disruptive to, or cause uncertainty in, our business. The failure to ensure a smooth transition and effective transfer of knowledge involving senior employees could hinder our strategic execution and succession planning.

We may be unsuccessful in recruiting and retaining the talent required to operate and grow our digital marketing solutions and content businesses or to internally develop related technologies. We expect to face competition for such talent from larger or more well established digital companies with a stronger digital brand association and greater resources.

The technology required to support our digital marketing solutions or consumer businesses may be unavailable, and we may be unsuccessful in developing it internally.

Even if we implement our strategy effectively, it may not produce an increase in digital revenues that sufficiently offsets the declines we are experiencing in our traditional print media business. If we fail to implement our strategy effectively, or if our strategy ultimately does not yield a sufficient increase in digital revenues, our business, financial condition, and results of operations may be adversely affected.

Risks Relating to Our Publishing Segment
 
Our publishing segment's operating results may be materially adversely affected if we do not respond successfully to the shift in our consumers’ preferences, behaviors, and demographics away from traditional print and towards digital media, and the associated shift in the allocation of advertising expenditures. Significant capital investments may be needed to respond to this shift.

The media industry has experienced rapid evolution in consumer demands and expectations due to advances in technology, which have led to a proliferation of delivery methods for news and information. The number of consumers who access online services through devices other than personal computers, such as smartphones, handheld tablets and mobile devices, has increased dramatically in recent years and likely will continue to increase. Presented with a multitude of media choices and sources of free information, consumers generally appear to be focusing more on when, where, how and at what price they consume content and less on the source, representation, quality or reliability of the content. The consumption and acceptance of "fake news" online and through social media has undercut certain competitive advantages that we possessed as a trusted provider of local news and information across the USA TODAY NETWORK and at Newsquest. The media industry also continues to be affected by demographic shifts, with traditional print newspaper readers getting older and younger generations developing the habit of consuming news through digital media. In addition, the revenues generated by media companies have been affected significantly by the shift in advertising expenditures towards digital media. Media companies generally charge much lower rates for digital advertising than for print advertising due to the range of advertising choices across digital products and platforms and the large inventory of available digital advertising space, and mobile advertising rates typically are even lower than desktop digital rates.

Our success therefore depends on our ability to develop and manage our digital businesses in response to the shift in consumers’ preferences, behavior and demographics, as well as the related shift in the allocation of advertising expenditures, as described above. In particular, we must:

Continue to increase digital audiences;
Attract advertisers to our digital products;
Tailor our products for mobile devices;
Structure our sales force to focus more effort on sales of digital rather than print;
Attract and retain employees with the skills and knowledge needed to successfully operate digital businesses;
Manage the transition to a digital business from historical print businesses, including by reducing the physical and distribution infrastructure and related fixed costs associated with those businesses;
Broaden our content offerings to encompass offerings outside of the traditional news and information category; and
Invest funds and resources in digital opportunities.

If we are unable to exploit new and existing technologies to distinguish our publishing segment's products and services from those of our competitors, develop in a timely manner compelling new products and services that engage users across multiple platforms, or expand our content offerings beyond the news and information category, our business, financial condition, and results of operations may be adversely affected. Responding to the changes described above may require us to make significant

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capital investments and incur significant research and development costs related to building, maintaining, and evolving our technology infrastructure, and our ability to make the level of investments required may be limited.

As digital revenues increase as a proportion of our total revenues, we will become increasingly subject to risks associated with digital media operations.

A central component of our business strategy involves transitioning from traditional print businesses to digital media businesses and, accordingly, we expect our digital revenues to increase as a percentage of our total revenues in future periods. We therefore expect to face increasing risks related to our digital media operations, including:

Rates we achieve in the marketplace for the advertising inventory on our digital platforms may be adversely affected by:
News aggregation websites and customized news feeds (often free to users), which may reduce our traffic levels by creating a disincentive for users to visit our websites or use our digital products;
Our inability to successfully manage changes in search engine optimization and social media traffic to increase our digital presence and visibility, which also may reduce our traffic levels; or
Our inability to maintain and improve the performance of our customers' advertising on our digital properties;
Our use of subscription models (which may require users to pay for content after accessing a limited number of pages or news articles for free on our websites each month) may cause consumers to opt out of subscription offers in greater numbers than anticipated or result in fewer page views or unique visitors to our websites than projected;
Technical or other problems could prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, and users could develop negative views about the quality or usefulness of our products;
New delivery platforms may lead to pricing restrictions, loss of distribution control, or loss of direct relationships with consumers;
Mobile devices, including smartphones and tablets, may present challenges for traditional display advertising; and
Technology developed to block the display of advertising on websites could proliferate, impairing our ability to generate digital revenues.

Our inability to respond successfully to these or similar challenges could materially adversely impact our ability to maintain and grow our digital revenues.

Our media businesses operate in highly competitive markets, and our ability to maintain market share and generate operating revenues depends on how effectively we compete with existing and new competition.

Our media businesses compete for audiences and advertising revenue with newspapers and other media such as the Internet, magazines, broadcast, cable and satellite television, radio, direct mail, outdoor billboards and yellow pages. Some of our current and potential competitors have greater financial and other resources than we do. If we fail to compete effectively with competing newspapers and other media, our results of operations may be materially adversely affected. In addition, our publications generate a significant portion of their advertising revenues from a few categories, including automotive and employment classified advertising and retail advertising. As a result, even in the absence of a recession or economic downturn, technological, industry or other changes specifically affecting these advertising sources could reduce advertising revenues and materially and adversely affect our results of operations. Further, our print editions and digital platforms compete directly with well-established websites dedicated to classified advertising, particularly in the automotive, employment, real estate, and legal verticals. Our results may be negatively affected if we do not compete effectively online in the classified advertising market.

Economic conditions may adversely affect demand for print and digital advertising, which could lead to further revenue declines in our publishing segment.

Our advertising revenues depend on the strength of the economy. Our revenues are sensitive to economic trends and uncertainties, as well as discretionary spending by advertisers both at the national level and in the local markets we serve. A decline in the financial or economic prospects of current or periodic advertisers could alter their spending priorities. Certain segments of the economy have been challenged in recent years, particularly in the brick and mortar retail sector, and total advertising revenues have declined as a result. Advertising revenues may worsen if advertisers reduce their budgets, shift their spending priorities, are forced to consolidate or cease operations.


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We rely on revenue from the printing and distribution of publications for third parties that may be subject to many of the same business and industry risks facing us.

We generate a portion of our revenue from printing and distributing third-party publications, and our relationships with these third parties are generally pursuant to short-term contracts. Those third parties may be negatively affected by the same macroeconomic and industry trends affecting our media business, such as the sensitivity to perceived economic weakness of discretionary spending by advertisers and subscribers, circulation declines, shifts in consumer habits, and the increasing popularity of digital media. If the third-party publications are negatively affected by these trends, they may reduce the volume of publications they print or distribute through us, and as a result we may lose some, or all, of the associated revenue.

Newsprint prices are volatile and may increase in the future, and newsprint supply may become increasingly scarce as paper mills exit the market.

Our publishing operations depend significantly upon the continuing availability of newsprint, and our publishing segment's results of operations may be impacted significantly by changes in newsprint prices. Newsprint prices have been, and continue to be, volatile and newsprint supply is rapidly declining. The price we pay for newsprint may increase due to a number of factors, including:

Declines in newsprint supply due to paper mill closures or conversions to other grades of paper;
The imposition of tariffs or other restrictions on non-U.S. suppliers of paper;
Increases in supplier operating expenses due to rising raw material or energy costs or other factors;
Reduction in the number of suppliers due to continuing consolidation of newsprint mills in the U.S. and Canada;
Decreases in our current consumption levels; and
Our inability to maintain existing relationships with our newsprint suppliers.

In addition, our ability to supply our publishing operations with newsprint has been and may continue to be disrupted by such factors as:

Our suppliers may be unable to deliver newsprint to us due to labor unrest;
Trucks or other means of transporting newsprint may become unavailable; and
Paper mills may close at a rate that outstrips declines in the demand for paper.

If newsprint prices increase significantly, or we experience significant disruptions in the availability of newsprint, our operating results may be materially adversely affected.

Our business or results of operations could suffer if we fail to protect our publishing segment's intellectual property and other proprietary rights.

Our publishing segment's ability to compete depends, in part, upon our intellectual property, including our trademarks (e.g., mastheads), copyrights (e.g., content), and proprietary technology (e.g., digital platforms). If we are unable to protect this intellectual property, we may not realize the full value of our intellectual property assets, and our business and results of operations may suffer. We rely on a combination of intellectual property rights, including contractual provisions, confidentiality procedures and agreements, and trademark, copyright, patent, unfair competition, trade secret, and other laws to protect our intellectual property. However, these methods afford only limited protection and may not be adequate. For example, technological advancements have facilitated the unauthorized duplication and wide dissemination of content, making enforcement of our intellectual property rights in content more challenging. Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies may be necessary to enforce our intellectual property rights. Our efforts to enforce or protect our rights may be ineffective and could result in substantial costs and diversion of resources.

In addition, third parties might claim that the conduct of our businesses or use of intellectual property infringes upon their intellectual property rights. Any intellectual property litigation or claims brought against us, whether or not meritorious, could result in substantial costs and diversion of our resources, and we may not achieve favorable outcomes in all cases. The terms of any settlement or judgment may require us to pay substantial amounts to the other party or cease exercising our rights in the intellectual property. We might have to seek a license to continue practices found to be in violation of a third party's rights, which may not be available on reasonable terms, or at all.

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Labor strikes, lockouts and protracted negotiations could lead to business interruptions and increased operating costs, either for our businesses, or for our suppliers.    

As of December 31, 2017, union employees comprised approximately 14% of our workforce. We are required to negotiate collective bargaining agreements on an ongoing basis. If we, or our suppliers, are unable to renew expiring collective bargaining agreements, affected unions or others could implement strikes, lockouts, work stoppages, or other business interruptions. A significant labor dispute could materially adversely affect our operating revenues, cash flows, or operating income by, among other matters, disrupting our ability to provide customers with our products or services. In addition, even if labor negotiations are resolved successfully, they may lead to greater overall employee costs.

Risks Relating to Our ReachLocal Segment

Weak economic conditions may adversely affect demand for our digital marketing solutions, which may adversely affect business and operating results of our ReachLocal segment.

The revenues generated by our ReachLocal segment also are sensitive to economic fluctuations. Many small and medium-sized businesses (SMBs) have modest advertising budgets. To the extent that economic conditions worsen, our existing and potential clients may no longer consider investment in our online marketing solutions a necessity, or may elect to reduce advertising budgets. Historically, economic downturns have resulted in overall reductions in advertising spending. In particular, online marketing advertising solutions may be viewed by some of our existing and potential clients as a lower priority and may be among the first expenditures reduced as a result of unfavorable economic conditions. These developments could cause us to respond by temporarily reducing hiring or taking other measures and could have an adverse effect on our business, operating results and financial condition.

Our ReachLocal segment's future revenues depend substantially on our ability to successfully develop and launch new products and services, acquire complimentary products and services, and market those products and services in our local markets.

ReachLocal's ability to stay competitive and generate future revenue depends substantially on its successful development and launch of new products and services on a timely basis. ReachLocal may be unable to develop new solutions due to employee turnover, failure to sustain the required level of investment in product and technology development, or difficulties of designing complex software products, achieving desired functionality and integrating the new products with its existing technology. In addition, we intend to supplement ReachLocal’s offerings through acquisitions of businesses offering complimentary products and services, such as our acquisition of SweetIQ Analytics Corp. in 2017. ReachLocal may be unsuccessful in integrating acquired products and services with its existing offerings, or may be unable to devote sufficient resources to the further development of the acquired products and services.

Even after developing or acquiring new solutions, ReachLocal may be unable to launch them successfully. The sale of new or additional features, products and services, the value of which may be different from ReachLocal's current solutions or less easily understood by clients, may require increasingly sophisticated sales efforts, as well as additional salesforce training and client education, any of which could increase operating expenses. Further, the future revenues of the ReachLocal segment depend substantially on Gannett's ability to market the ReachLocal digital marketing solutions product suite, including acquired offerings such as SweetIQ’s, in our local markets. If we are unsuccessful in selling ReachLocal's products and services in our local markets, ReachLocal's results of operations may be adversely affected.

The market in which our ReachLocal segment operates is intensely competitive, which may adversely impact our margins. If we do not compete effectively, ReachLocal's operating results could be adversely affected.

Our ReachLocal segment operates in a highly competitive market. The market for online marketing solutions is rapidly changing and with the emergence of new technologies and market entrants, we expect competition to intensify in the future. Some of ReachLocal's competitors offer products similar to ours at a lower price, putting pressure on us to lower our prices (thereby reducing margins) or lose clients. ReachLocal's competitors include online publishers, traditional media companies, local SMB marketing providers, SMB marketing technology providers, and new competitors that ReachLocal may face as it launches new products or enters new markets. Many of ReachLocal's current and potential competitors enjoy substantial competitive advantages such as greater name recognition, longer operating histories, and substantially greater financial, technical, and other resources. If ReachLocal fails to compete successfully against its current and potential competitors, its operating results could be adversely affected.

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Our ReachLocal segment purchases most of its media from Google, and its business could be adversely affected if Google takes actions that are adverse to our interests or if we fail to meet advertiser or spend targets necessary for receiving rebates from Google. Similar actions from Yahoo!, Microsoft, and other media providers also could adversely affect the segment's business.

Most of ReachLocal's cost of revenue relates to the purchase of media, and a substantial majority of the media it purchases is from Google. Google accounts for a large majority of all U.S. searches, and Google's share in foreign markets is often even greater. As a result, we expect our ReachLocal segment will depend upon media purchases from Google for the foreseeable future. This dependence makes that business vulnerable to actions Google may take to change the manner in which it sells AdWords or conducts its business. In addition, any new developments or rumors of developments regarding Google's business practices that affect the local online advertising industry may adversely affect our ReachLocal products or create perceptions with clients that our ability to compete in the online marketing industry has been impaired. These risks also apply to other publishers from whom we purchase media, including Yahoo! and Microsoft, though to a lesser degree.
    
Our business or results of operations could suffer if we fail to protect ReachLocal's intellectual property and other proprietary rights.

Our ReachLocal segment's business is heavily dependent on intellectual property, including proprietary technology. As with our publishing segment, we rely on a combination of intellectual property rights, including contractual provisions, confidentiality procedures and agreements, and trademark, copyright, patent, unfair competition, trade secret, and other laws to protect our intellectual property. However, these methods afford only limited protection and may not be adequate. In addition, because ReachLocal sells its solutions internationally, we may need to enforce our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United States. As a result, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our online marketing and reporting solutions, technology, software and functionality or obtain and use information that we consider proprietary. Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies may be necessary to enforce our intellectual property rights. Our efforts to enforce or protect our rights may be ineffective and could result in substantial costs and diversion of resources. In addition, as with our publishing segment, third parties might claim that the conduct of our businesses or use of intellectual property infringes upon their intellectual property rights. Any such claims could result in substantial costs or diversion of resources, and could adversely affect our business and operating results.
 
Risks Related to Our Business Generally

Our business, reputation and results of operations could be negatively affected if our information technology systems fail to perform adequately or if we become subject to significant data security breaches or other security threats or disruptions.

Our information technology systems are critically important to operating our business efficiently and effectively. We rely on our information technology systems to manage our business data, communications, news and advertising content, digital products, order entry, fulfillment, and other business processes. We also use third-party technology and systems for many operations including encryption and authentication, employee e-mail, domain name registration, content delivery to customers, and back-office support. Our information technology systems and any third-party systems on which we rely could fail to perform as anticipated or could be disrupted or damaged by natural disasters, fires, power outages, acts of terrorism, or other similar events. Any such failures or disruptions could result in transaction errors, processing inefficiencies, late or missed publications, and loss of sales and customers, any of which could negatively affect our business or results of operations.

In addition, attempts to compromise information technology systems occur regularly across many industries and sectors, and the techniques used to perpetrate such compromises (e.g., viruses, worms, or other malware, denial of service attacks, malicious social engineering, and employee malfeasance) are constantly changing. Maintaining the security of our systems is critically important both due to our reliance on those systems and because they store and process confidential subscriber, employee, and other sensitive personal data. Although we and our third-party service providers have implemented security measures and other controls designed to prevent breaches, these precautions might fail to defend against future cyber-attacks or prevent breaches or other disruptions to our systems or those of our third-party providers. Because cyber-attacks evolve quickly and often are not recognized until after they are launched, we may be unable to anticipate them or implement adequate measures to prevent a breach. A significant breach could result in, among other things:

Improper disclosures of personal data or confidential information;
Expenditures of significant resources to remedy the breach and defend against further attacks;

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Diversion of management's attention and resources; and
Liability under laws that protect personal data.

The foregoing consequences could result in increased operating costs, loss of revenue, and harm to our reputation. Though we maintain cyber risk insurance, this insurance may not be sufficient to cover all losses from any future breaches of our systems.

Recent and future strategic acquisitions, investments, and partnerships may expose us to a variety of risks that might disrupt our business and adversely affect our results of operations.

Our strategic plan involves targeted acquisitions of high-quality publishing businesses that we believe offer strong synergies with our existing portfolio, as well as strategic acquisitions of digital businesses. Any such acquisitions may involve significant new risks that could adversely affect our results of operations or cash flows, such as:

Distraction of management attention from our current business operations;
Strain on our human resources;
Insufficient new revenue to offset expenses;
Integration challenges arising from combining company cultures and facilities;
Failure to achieve expected synergies or implement effective cost controls;
Inability to integrate acquired digital products, services or technologies into our existing business's offerings;
Inability to retain key employees of acquired businesses;
Applicability of new regulatory or foreign law requirements; and
Liabilities and other exposures not discovered in our due diligence process.

We could fail to execute effectively our acquisition strategy if we cannot identify suitable acquisition targets or obtain regulatory approvals required to complete or realize the anticipated benefits of potential acquisitions. In addition, in order to consummate acquisitions or other strategic transactions, we may need to obtain additional financing from banks or through public or private offerings of debt or equity securities, which financing might not be available on attractive terms or at all.

Our strategic plan also involves investments in or partnerships with other companies, which may involve risks such as:

Our inability to control the operations of our investee or partner;
Our investee or partner's failure to achieve its business or financial goals or otherwise successfully implement its business plan; or
Our inability to monetize an investment due to transfer restrictions and our lack of control over the timing or process for any potential disposition of our equity interest.

Each of the foregoing risks could decrease the benefits we realize from an investment or partnership. We may receive little or no return on these investments, and we may be required to record charges to earnings if the companies in which we have invested decrease in value.

We may be unsuccessful in managing or growing our international operations.

Newsquest operates in the U.K., and ReachLocal has international sales operations in Australia, Canada, Germany, the Netherlands, Japan, Brazil, Austria, and Mexico, and campaign support services in India. Revenue from Newsquest accounted for 10% of our publishing segment's total revenue for the year ended December 31, 2017. Revenue from international operations outside North America accounted for 23% of ReachLocal's total revenue for the year ended December 31, 2017. Our ability to manage these international operations successfully is subject to numerous risks inherent in foreign operations, including:

Challenges or uncertainties arising from unexpected legal, political, or systemic events;
Difficulties or delays in developing a network of clients in international markets;
Restrictions on the ability of U.S. companies to do business in foreign countries;

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Different legal or regulatory requirements, including with respect to internet services, privacy and data protection, censorship, banking and money transmitting, and selling, which may limit or prevent the offering of our products in some jurisdictions or otherwise harm our business;
International intellectual property laws that may be insufficient to protect our intellectual property or permit us to successfully defend our intellectual property in international lawsuits;
Different employee/employer relationships and the existence of workers' councils and labor unions, which could make it more difficult to terminate underperforming salespeople;
Difficulties in staffing and managing foreign operations;
Difficulties in accounts receivable collection;
Currency fluctuations and price controls or other restrictions on foreign currency;
Potential adverse tax consequences including difficulties in repatriating earnings generated abroad; and
Lack of infrastructure to adequately conduct electronic commerce transactions.

Any of the foregoing factors could adversely impact our international operations, which could harm our overall business, operating results, and financial condition.

Foreign exchange variability could materially and adversely affect our consolidated operating results.

Our financial statements are denominated in U.S. dollars. Newsquest operates in the U.K., and its operations are conducted in foreign currency, primarily the British pound sterling. Newsquest's 2017 results were translated from pounds to U.S. dollars at the average rate of 1.29. Continued weakness or further weakening in the British pound sterling to U.S. dollar exchange rate could further diminish Newsquest's contributions to our results of operations. In addition, our ReachLocal segment conducts operations in several foreign jurisdictions. If the value of currency in any of those jurisdictions weakens as compared with the U.S. dollar, ReachLocal's operations in those jurisdictions similarly will contribute less to our results. Though the contributions of ReachLocal's foreign operations to our results of operations have not been material to date, they may increase in the future. If so, we will be subject to greater risk from fluctuations in the exchange rates for currencies in the foreign jurisdictions where ReachLocal operates.

The value of our existing goodwill and intangible assets may become impaired, depending upon future operating results.

Goodwill and other intangible assets were approximately $877.4 million as of December 31, 2017, representing approximately 34% of our total assets. As required under U.S. GAAP, we periodically evaluate our goodwill and other intangible assets to determine whether all or a portion of their carrying values may no longer be recoverable. Erosion of general economic, market, or business conditions could negatively affect our business and stock price, which may require us to record impairment charges to goodwill or other intangible assets when we perform such evaluations. Any such charges would adversely affect future reported results of operations and stockholders' equity but would not affect our cash flow.

Our ability to operate effectively could be impaired if we fail to attract and retain key personnel.

Our success depends substantially upon the continuing contributions of our senior management team and other key employees. Qualified individuals are in high demand, and our senior management and other key employees possess knowledge of our business and industry that may be difficult to replace. Our loss of members of senior management or key employees, or our failure to attract and retain highly-skilled personnel for key positions, could materially adversely affect our business. We therefore may incur significant costs to retain our key employees and to recruit new employees in the future. These risks may be exacerbated by the implementation of our recently announced reorganization, changes in our senior management team, acquisitions and other initiatives.


19


Our pension plans are underfunded, and we must use a portion of our cash flows to make required contributions.

We, along with our subsidiaries, sponsor various defined benefit retirement plans, including plans established under collective bargaining agreements. Our retirement plans include the Gannett Retirement Plan (GRP), the Gannett 2015 Supplemental Retirement Plan, the Newsquest Pension Scheme in the U.K., the Newspaper Guild of Detroit Pension Plan and a supplemental retirement plan we assumed pursuant to our acquisition of JMG. Our retirement plans were underfunded as of December 31, 2017 by $437.3 million on a U.S. GAAP basis. The excess of pension benefit obligations over assets is expected to give rise to required pension contributions over the next several years. Various factors, including future investment returns, interest rates, and potential pension legislative changes, may impact the timing and amount of future pension contributions. We have committed to make a contribution of $25.0 million to the GRP in each fiscal year from 2018 through 2020, as well as a $15.0 million contribution in 2021. We expect to make a contribution of approximately £15.0 million to the Newsquest Pension Scheme and aggregate contributions of $17.2 million to our other underfunded plans in fiscal year 2018 and expect to make additional contributions thereafter. Our ability to make contribution payments will depend on our future cash flows, which are subject to general economic, financial, competitive, business, legislative, regulatory, and other factors beyond our control.

Adverse results from litigation or governmental investigations or changes in the regulatory environment could force us to change our business practices, impede our efforts to transform our business, or negatively affect our operating results.

From time to time, we are a party to litigation and regulatory, environmental, and other proceedings with governmental authorities and administrative agencies. Adverse outcomes in lawsuits or investigations could result in significant monetary damages or injunctive relief that could adversely affect our operating results or financial condition as well as our ability to conduct our businesses as they presently are conducted. In addition, new laws or regulations or changes in existing laws or regulations could result in penalties for non-compliance or reduction in revenues and could limit our ability to transform our businesses in accordance with our strategic plan.

Our historical financial information for periods prior to our separation from our former parent may not be indicative of our future results.

The historical financial information included in this report for periods prior to our separation from our former parent may not reflect what our results of operations, financial position, and cash flows would have been had we been a separate public company during those periods or indicate what our results of operations, financial position, and cash flows may be in the future. The historical financial information for the periods prior to the separation does not reflect the increased costs associated with being a separate public company, including changes in our cost structure, personnel needs, financing, and operations of our business as a result of the separation. Our historical financial information for the periods prior to the separation reflects allocations for services historically provided by our former parent, and those allocated costs are different from the actual costs we have incurred since the separation. In some instances, such costs have been higher than the costs allocated to our business prior to the separation, and we expect such costs to remain higher in future periods.

We could incur significant liability if the separation were determined to be a taxable transaction.

In connection with the separation, our former parent received an opinion from outside tax counsel to the effect that the requirements for tax-free treatment under Section 355 of the Code would be satisfied. The opinion relied on certain facts, assumptions, representations, and undertakings from our former parent and us regarding the past and future conduct of the companies' respective businesses and other matters. If any of these facts, assumptions, representations, or undertakings were incorrect or not satisfied, we and our stockholders may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. Further, notwithstanding the opinion of tax counsel, the IRS could determine upon audit that the separation is taxable if it determines that any of these facts, assumptions, representations, or undertakings were incorrect or violated, if it disagrees with the conclusions in the opinion, or for other reasons, including as a result of certain significant changes in the share ownership of our company or our former parent after the separation. If the separation were determined to be taxable for U.S. federal income tax purposes, our former parent and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities.

Due to provisions of agreements we entered into with our former parent in connection with the separation, we may be restricted from entering into certain transactions or may be required to indemnify our former parent in certain circumstances.

In connection with the separation, we entered into a number of agreements with our former parent, including the separation and distribution agreement, tax matters agreement, employee matters agreement, and transition services agreement. These agreements contain indemnification or other provisions that could inhibit or restrict us from undertaking certain transactions

20


that we believe are in the best interests of our stockholders or that might increase the value of our business. In addition, we entered into a modified affiliation agreement with Cars.com, which at the time was an affiliate of our former parent. The agreement was intended to permit our local markets to continue to earn advertising revenues from Cars.com for up to five years after the separation, although the agreement may be terminated earlier in certain circumstances, including if we fail to achieve specified performance standards. To the extent such an agreement contains exclusivity or non-compete provisions, including any that restrict our ability to use a competing service or to compete with our counterparty, it could limit our ability to maximize our performance in the provision of services such as digital marketing services, online career services, or online automobile sales services.

The Internal Revenue Service may disallow all or part of a worthless stock loss and bad debt deduction.

During 2017, we made an election to treat one of our ReachLocal international subsidiaries as a disregarded entity for U.S. federal income tax purposes. This election resulted in worthless stock and bad debt deductions of $99.3 million, yielding a tax benefit of $36.6 million. These tax deductions are subject to audit and possible adjustment by the IRS, which could result in the reversal of all or part of the income tax benefit. To account for this uncertainty, a reserve of $15.6 million has been established to reduce the benefit to an estimated realizable value of $21.0 million. While we believe this represents our best estimate of the benefit to be realized upon final acceptance of our tax return, the IRS could reject or reduce the amount of tax benefit related to these deductions. If the IRS rejects or reduces the amount of this income tax benefit, we may have to pay additional cash income taxes, which could adversely affect our results of operations, financial condition, and cash flows. We cannot guarantee what the ultimate outcome or amount of the benefit we receive, if any, will be.

Ongoing analysis of effects of the Tax Cuts and Jobs Act (the Tax Act) may impact future results.

The Tax Act, which was enacted on December 22, 2017, introduced significant changes to U.S. tax law that have a meaningful impact on our income taxes. Due to the timing of the enactment of the Tax Act, we made reasonable estimates of the effect of the Tax Act on our deferred tax assets. Continued analysis of these impacts and additional guidance on the application of the changes may result in the recognition of income tax expense or benefit in subsequent periods. These adjustments could have a material impact on our financial position, results of operations, and the effective income tax rate for the period in which the adjustments are made.

Risks Relating to our Stock and our Debt Arrangements

We cannot guarantee the timing, declaration, amount, or payment of dividends on our common stock.

The timing, declaration, amount, and payment of future dividends to stockholders falls within the discretion of our Board of Directors. The Board's decisions regarding the payment of dividends will depend on many factors such as our financial condition, earnings, capital requirements, any future debt service obligations, covenants under our existing or future debt agreements, industry practice, legal requirements, regulatory constraints, and other factors the board deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our debt agreements contain various covenants that limit our flexibility in operating our businesses, including our ability to engage in specified types of transactions. Subject to certain exceptions, these covenants restrict our ability and the ability of our subsidiaries to, among other things:

Permit certain liens on current or future assets;
Enter into certain corporate transactions;
Incur additional indebtedness;
Make certain payments or declare certain dividends or distributions;
Dispose of certain property;
Prepay or amend the terms of other indebtedness; and
Enter into certain transactions with affiliates.

21


Certain provisions of our certificate of incorporation and by-laws and Delaware law may discourage a takeover of our company.

Our amended and restated certificate of incorporation and amended and restated by-laws contain certain provisions that may discourage, delay, or prevent a change in our management or control over us. For example, our amended and restated certificate of incorporation and amended and restated by-laws, collectively:

Authorize the issuance of preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;
Provide that vacancies on our Board of Directors, including vacancies resulting from an enlargement of our Board, may be filled only by a majority vote of directors then in office;
Place limits on which stockholders may call special meetings of stockholders and limit the actions that may be taken at such stockholder-called special meetings;
Prohibit stockholder action by written consent; and
Establish advance notice requirements for nominations of candidates for elections as directors or to bring other business before an annual meeting of our stockholders.

These provisions could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of stockholders may consider such proposal, if effected, desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors. Moreover, these provisions may inhibit increases in the trading price of our common stock that may result from takeover attempts or speculation.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters are in McLean, VA, where we lease approximately 196,116 square feet. The lease provides for an initial term of 15 years with two five-year renewal options.

Our publishing domestic facilities occupy approximately 12.8 million square feet in the aggregate, of which approximately 3.5 million square feet is leased from third parties. Many of our local media organizations have outside news bureaus, sales offices, and distribution centers that are leased from third parties.

A listing of publishing centers and key locations may be found in the Major Publications and Markets We Serve section of Item 1. Business. We own many of the plants that house most aspects of the publication process but in certain locations have outsourced printing or combined the printing of multiple publications.

Newsquest, our subsidiary headquartered in London, occupies approximately 1.1 million square feet in the U.K. spread over 94 locations. Of this, 0.4 million square feet (or 60 locations) are leased from third parties. Newsquest's owned premises include four printing facilities. A fifth printing facility is leased.

ReachLocal, our subsidiary headquartered in Woodland Hills, CA, has sales and other offices in 28 locations in 17 states - Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. In addition, ReachLocal has 21 locations in nine additional countries - Australia, Brazil, Canada, Germany, India, Japan, Mexico, Netherlands, and New Zealand. These properties, which total approximately 388,000 square feet, include leased buildings and data centers. Excluded from total square footage but included in location counts are serviced office spaces.

All of our material real properties owned by our material domestic subsidiaries are mortgaged as collateral for our revolving credit facility.

We believe that our current facilities, including the terms and conditions of the relevant lease agreements, are adequate to operate our businesses as currently conducted.


22



ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings may be found in Note 12 — Commitments, contingencies and other matters of the notes to consolidated and combined financial statements.

Environmental

From time to time, some of our current and former subsidiaries have been included among potentially responsible parties in connection with sites that have been identified as possibly requiring environmental remediation. These environmental proceedings are highly complex, and require a variety of issues to be resolved, including the extent of contamination, the nature and extent of investigation and remedial action that may ultimately be required, and the number of parties that will be required to contribute to such investigation and remediation costs, before our liability for them, if any, will be known.

In March 2011, the Advertiser Company (Advertiser), a subsidiary that publishes the Montgomery Advertiser, was notified by the U.S. Environmental Protection Agency (EPA) that it had been identified as a potentially responsible party (PRP) for the investigation and remediation of groundwater contamination in downtown Montgomery, Alabama. The Advertiser is a member of the Downtown Environmental Alliance, which has agreed to jointly fund and conduct all required investigation and remediation. In 2015, the Advertiser and other members of the Downtown Environmental Alliance reached a settlement with the U.S. EPA regarding the costs the U.S. EPA spent to investigate the site. The U.S. EPA has transferred responsibility for oversight of the site to the Alabama Department of Environmental Management, which has approved the work plan for the additional site investigation that is currently underway. The Advertiser's final costs cannot be determined until the investigation is complete, a determination is made on whether any remediation is necessary, and contributions from other PRPs are finalized.

Other Matters

In January 2014, a class action lawsuit was filed against Gannett in the U.S. District Court for the District of New Jersey (Casagrand et al v. Gannett Co., Inc., et al). The suit claims various violations of the Telephone Consumer Protection Act (TCPA) arising from allegedly improper telemarketing calls made to consumers by one of our vendors. The plaintiffs sought to certify a class that would include all telemarketing calls made by the vendor or us. The TCPA provides for statutory damages of $500 per violation ($1,500 for willful violations). In April 2016, we agreed to settle all claims raised. The settlements are reflected in our financial statements as of December 31, 2017 and were not material to our results of operations, financial position, or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


23


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our shares are traded on the New York Stock Exchange under the symbol GCI. Information regarding outstanding shares, shareholders, and dividends may be found in Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Gannett common stock prices

The following table sets forth the high and low intra-day trading prices of our common stock as reported on the NYSE for the past two years:

Year
Quarter
Low
 
High
2016
First
$
13.27

 
$
16.77

 
Second
$
14.10

 
$
17.72

 
Third
$
11.25

 
$
14.42

 
Fourth
$
7.30

 
$
12.39

2017
First
$
7.91

 
$
10.03

 
Second
$
7.42

 
$
8.96

 
Third
$
7.95

 
$
9.26

 
Fourth
$
8.38

 
$
12.02

2018
First (a)
$
9.97

 
$
12.23

(a) 
Through February 23, 2018.

Purchases of equity securities

In July 2015, our Board of Directors approved a share repurchase program authorizing us to repurchase shares with an aggregate value of up to $150 million over a three-year period. Shares may be repurchased at management's discretion, either in the open market or in privately negotiated block transactions. Management's decision to repurchase shares will depend on share price and other corporate liquidity requirements. We expect share repurchases may occur from time to time over the three years.

The following table sets forth information regarding our repurchases of common stock pursuant to our share repurchase program during 2017:
Period
Number of Shares Repurchased
 
Weighted Average Cost per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar Value
of Shares that May Yet
Be Repurchased
Under the Program
Repurchases from August 28, 2017 through September 24, 2017
2,000,000

 
$
8.67

 
2,000,000

 
$
99,954,336


Comparison of shareholder return – 2017

The following graph compares the performance of our common stock from the date of our separation from our former parent company on June 29, 2015 to December 31, 2017 compared to the S&P 500 Index and an index made up of peer companies. Our peer group includes the following entities:

A.H. Belo Corporation
Lee Enterprises, Inc.
The McClatchy Company
Meredith Corporation
New Media Investment Group, Inc.
The New York Times Company

 

News Corporation
tronc, Inc.
Yelp Inc.
Harte-Hanks, Inc.
Time, Inc.


24


These entities are collectively known as the "Peer Group". The following changes have occurred within the Peer Group since the date of our separation from our former parent:

ReachLocal, Inc. was included in the Peer Group until we acquired 100% of its outstanding common stock in August 2016. Refer to Note 3 — Acquisitions to the accompanying combined and consolidated financial statements for additional details on the acquisition of ReachLocal.
Constant Contact, Inc. was included in the Peer Group until Endurance International Group acquired 100% of its outstanding common stock in November 2015.
Angie's List, Inc. was included in the Peer Group until InterActive Corp. completed the acquisition of 100% of its outstanding common stock in October 2017.

The S&P 500 Index includes 500 U.S. companies in the industrial, utilities, and financial sectors and is weighted by market capitalization. The total returns of the Peer Group also are weighted by market capitalization.

The following graph depicts representative results of investing $100 in our common stock, the S&P 500 Index, and the Peer Group index at closing on June 29, 2015. It assumes dividends were reinvested monthly with respect to our common stock, daily with respect to the S&P 500 Index, and monthly with respect to each Peer Group company.

a2017cumulativetschart.jpg

 
June 2015
September 2015
December 2015
March 2016
June 2016
September 2016
December 2016
March 2017
June 2017
September 2017
December 2017
Gannett Co., Inc.
$
100.00

$
105.51

$
117.16

$
112.38

$
104.76

$
87.86

$
75.08

$
63.47

$
67.85

$
64.90

$
94.78

S&P 500 Index
$
100.00

$
93.82

$
101.23

$
100.57

$
101.19

$
108.07

$
113.66

$
120.55

$
124.27

$
129.84

$
138.47

Peer Group
$
100.00

$
81.02

$
86.80

$
79.25

$
80.73

$
94.98

$
91.00

$
93.28

$
93.92

$
97.89

$
113.83




25



ITEM 6. SELECTED FINANCIAL DATA

Selected financial data for the years 2013 through 2017 is contained in the table below and is derived from our audited financial statements for those years. The information in this section is not necessarily indicative of the results of operations to be expected for future years and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated and combined financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. The financial information included herein for periods prior to our separation from our former parent on June 29, 2015 may not necessarily reflect what our financial position, results of operations, and cash flows would have been had we been an independent publicly-traded company during the periods presented.

Fiscal year 2017 comprises 53 weeks, and all other fiscal years presented in the table below comprise 52 weeks.

In thousands, except per share amounts
 
 
 
 
 
 
 
 
 
2017
 
2016
 
2015
 
2014
 
2013
Total operating revenue
$
3,146,480

 
$
3,047,474

 
$
2,885,012

 
$
3,171,878

 
$
3,324,939

Operating income
$
67,571

 
$
89,370

 
$
164,505

 
$
262,331

 
$
325,073

Net income
$
6,887

 
$
52,710

 
$
146,091

 
$
210,705

 
$
274,461

Net income per share - basic
$
0.06

 
$
0.45

 
$
1.27

 
$
1.83

 
$
2.39

Net income per share - diluted
$
0.06

 
$
0.44

 
$
1.25

 
$
1.83

 
$
2.39

Other selected financial data
 
 
 
 
 
 
 
 
 
Dividends declared per share
$
0.64

 
$
0.64

 
$
0.32

 
$

 
$

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
113,047

 
116,018

 
115,165

 
114,959

 
114,959

Diluted
115,610

 
118,625

 
116,695

 
114,959

 
114,959

Financial position and cash flow
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
120,589

 
$
114,324

 
$
196,696

 
$
71,947

 
$
78,596

Long-term debt, excluding current maturities
$
355,000

 
$
400,000

 
$

 
$

 
$

Total assets
$
2,569,977

 
$
2,844,681

 
$
2,427,799

 
$
2,384,460

 
$
2,494,736


NOTES TO SELECTED FINANCIAL DATA

We, along with our subsidiaries, made the significant acquisitions listed below during the period. There were no significant dispositions. The results of operations of these acquired businesses are included in the accompanying selected financial information from the date of acquisition.

Acquisitions 2013 - 2017
Year
Name
Location
Description
2015
Texas-New Mexico
Newspapers Partnership
Texas, New Mexico, Pennsylvania
Media company with print and digital publishing operations
 
Romanes Media Group
Scotland, Berkshire, Northern Ireland
Media company with print and digital publishing operations
2016
Journal Media Group
Milwaukee, Wisconsin
Media company with print and digital publishing operations
 
North Jersey Media Group
Woodland Park, New Jersey
Media company with print and digital publishing operations
 
ReachLocal
Woodland Hills, California
Digital marketing solutions firm
2017
SweetIQ
Montreal, Canada
Digital marketing solutions firm



26


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain factors affecting forward-looking statements

Certain statements in this Annual Report on Form 10-K contain certain forward-looking statements regarding business strategies, market potential, future financial performance, and other matters. Forward-looking statements include all statements that are not historical facts. The words "believe," "expect," "estimate," "could," "should," "intend," "may," "plan," "seek," "anticipate," "project," and similar expressions, among others, generally identify "forward-looking statements" which speak only as of the date the statements were made and are not guarantees of future performance. The matters discussed in these forward-looking statements are subject to many risks, trends, uncertainties, and other factors that could cause actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management, is expressed in good faith, and is believed to have a reasonable basis. However, there can be no assurance the expectation or belief will result, be achieved, or be accomplished. Whether or not any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect new information, events, or circumstances occurring after the date of this report. Factors, risks, trends, and uncertainties that could cause actual results or events to differ materially from those projected, anticipated, or implied include the matters described above under "Management's Discussion and Analysis of Financial Condition and Results of Operations," the statements made under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the following other factors, risks, trends and uncertainties:

Our ability to achieve our strategic transformation;
An accelerated decline in general print readership and/or advertiser patterns as a result of competitive alternative media or other factors;
An inability to adapt to technological changes or grow our digital businesses;
Risks associated with the operation of an increasingly digital business, such as rapid technological changes, frequent new product introductions, declines in web traffic levels, technical failures and proliferation of ad blocking technologies;
Macroeconomic trends and conditions;
Competitive pressures in the markets in which we operate;
Increases in newsprint costs over the levels anticipated or declines in newsprint supply;
Potential disruption or interruption of our IT systems due to accidents, extraordinary weather events, civil unrest, political events, terrorism or cyber security attacks;
Variability in the exchange rate relative to the U.S. dollar of currencies in foreign jurisdictions in which we operate;
Risks and uncertainties related to strategic acquisitions or investments, including distraction of management attention, incurrence of additional debt, integration challenges, and failure to realize expected benefits or synergies or to operate businesses effectively following acquisitions;
Risks and uncertainties associated with our ReachLocal segment, including its significant reliance on Google for media purchases, its international operations and its ability to develop and gain market acceptance for new products or services;
Our ability to protect our intellectual property or defend successfully against infringement claims;
Our ability to attract and retain talent;
Labor relations, including, but not limited to, labor disputes which may cause business interruptions, revenue declines or increased labor costs;
Risks associated with our underfunded pension plans;
Adverse outcomes in litigation or proceedings with governmental authorities or administrative agencies, or changes in the regulatory environment, any of which could encumber or impede our efforts to improve operating results or the value of assets;
Volatility in financial and credit markets which could affect the value of retirement plan assets and our ability to raise funds through debt or equity issuances and otherwise affect our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms; and
Other uncertainties relating to general economic, political, business, industry, regulatory and market conditions.

27



Executive summary

Our operations comprise 130 daily publications and digital platforms in the U.S. and the U.K., 435 non-daily publications in the U.S., and 159 such titles in the U.K. Our 110 U.S. daily publications include USA TODAY, which is currently the nation's number one newspaper in consolidated print and digital circulation. Together with 20 daily paid-for publications our Newsquest division operates in the U.K., the total average daily print and digital circulation of our 130 domestic and U.K. daily publications was approximately 7.2 million for 2017. In the markets we serve, we also operate desktop, smartphone and tablet products which are tightly integrated with publishing operations. Our operations also include commercial printing, marketing, and data services operations.

With our acquisition of ReachLocal in the third quarter of 2016, Gannett is also a leader in offering products and solutions in the online marketing, digital advertising, software-as-a-service, and web presence spaces to small and medium sized businesses. We believe Gannett is well-positioned to deliver a suite of products and solutions to local businesses through a combination of a proprietary technology platform, its sales force, and select third-party agencies and resellers.

As part of our vision is to become the daily destination for consumers and marketers seeking meaningful connections with their communities across print, digital, and other channels, we announced in late 2017 a management reorganization designed to align our operations under two main areas: Marketing Solutions and Consumer. We believe this reorganization will align more definitively with our business strategy going forward.

Separation from former parent

On June 29, 2015, we completed our separation from our former parent via a spin-off. Through the date of the spin-off, the accompanying consolidated and combined financial statements were derived from the consolidated and combined financial statements and accounting records of our former parent and present our combined financial position, results of operations, and cash flows as of and for the periods presented as if we were a separate entity. These consolidated and combined financial statements include allocations between us and our former parent. We believe the assumptions and methodologies used in these allocations are reasonable; however, such allocated costs, net of cost recoveries, may not be indicative of the actual level of expense that would have been incurred had we been operating on a stand-alone basis, and, accordingly, may not necessarily reflect our combined financial position, results of operations and cash flows had we operated as a stand-alone entity during the periods presented.

Basis of reporting

The following is a discussion of the key factors that have affected our accounting for or reporting on the business over the last three fiscal years. This commentary should be read in conjunction with our financial statements, selected financial data, and the remainder of this Form 10-K.

Fiscal year: Our fiscal year ends on the last Sunday of the calendar year. Our fiscal year 2017 ended on December 31, 2017 and was a 53-week year. Fiscal year 2016 ended on December 25, 2016, and fiscal year 2015 ended on December 27, 2015, both of which were 52-week years. Starting in 2018, our fiscal year will coincide with the Gregorian calendar.

Foreign currency translation impacts: Our U.K. publishing operations are conducted through our Newsquest subsidiary. In addition, ReachLocal has foreign operations in regions such as Europe, Asia-Pacific, and South America. Our earnings from operations in foreign regions are translated into U.S. dollars at average exchange rates prevailing during the period, and assets and liabilities are translated at exchange rates in effect at the balance sheet date.

The average exchange rate used to translate U.K. results was 1.29 for 2017, 1.36 for 2016, and 1.53 for 2015. Translation fluctuations impact our U.K. revenue, expense, and operating income results. Impacts stemming from foreign currency translation gains and losses for ReachLocal are immaterial to date.

Certain matters affecting current and future operating results

The following developments affect period-over-period comparisons and will affect period-over-period comparisons for future results:


28


Acquisitions

SweetIQ Analytics Corp. (SweetIQ) – In April 2017, we completed the acquisition of SweetIQ, a location and customer engagement software provider, for approximately $31.8 million, net of cash acquired. SweetIQ's customers include businesses with multi-location brands and agencies that target local marketing.

ReachLocal, Inc. (ReachLocal) – In August 2016, we completed the acquisition of 100% of the outstanding common stock of ReachLocal for approximately $162.5 million, net of cash acquired. ReachLocal offers online marketing, digital advertising, software-as-a-service, and web presence products and solutions to local businesses.

Certain assets of North Jersey Media Group (NJMG) – In July 2016, we completed the acquisition of certain assets of NJMG for approximately $38.6 million. NJMG is a media company with print and digital publishing operations serving
primarily the northern New Jersey market.

Journal Media Group (JMG) – In April 2016, we completed the acquisition of 100% of the outstanding common stock of JMG for approximately $260.6 million, net of cash acquired. JMG is a media company with print and digital publishing operations serving 15 U.S. markets in nine states.

Texas-New Mexico Newspaper Partnership (TNP) and Romanes Media Group (RMG) – In June 2015, we completed the acquisition of the remaining 59.4% interest in TNP that we did not own from Digital First Media. In May 2015, Newsquest acquired RMG, one of the leading regional media groups in the U.K. RMG publishes local newspapers in Scotland, Berkshire, and Northern Ireland, and its portfolio is comprised of one daily newspaper and 28 weekly newspapers and their associated websites.

We completed other immaterial acquisitions during the periods presented.

In the discussion of the publishing segment under Results of Operations below, JMG and NJMG are considered 2016 publishing acquisitions, and TNP and RMG are considered 2015 publishing acquisitions.

Restructuring and asset impairment costs

Over the past several years, we have engaged in a series of individual restructuring programs designed to right size our employee base and improve operations, including those of recently acquired entities. In addition, we have engaged in facility consolidation initiatives which include the disposition of older, under-utilized buildings, relocations to more efficient, flexible, digitally-oriented office spaces, efforts to reconfigure spaces to take advantage of leasing and subleasing opportunities, and the combination of production and distribution operations where possible. These facility consolidation and other cost savings plans led us to recognize severance charges, asset impairment charges, shutdown costs, and charges associated with reducing the useful lives of certain assets. As part of our plans, we are selling certain assets which we have classified as held-for-sale and reduced carrying values to equal fair value less costs to dispose. In addition, we had impairments of intangible assets which were principally a result of cash flow projections which were lower than expected.

In conjunction with these programs, we incurred restructuring costs of $44.3 million in 2017, $45.8 million in 2016, and $77.4 million in 2015. Included in these restructuring costs are severance costs of $37.0 million in 2017, $43.5 million in 2016, and $72.3 million in 2015.

We recorded asset impairment charges of $46.8 million in 2017, $55.9 million in 2016, and $29.1 million in 2015. We also recorded accelerated depreciation of $44.0 million in 2017 and $3.2 million in 2016. No accelerated depreciation was recorded in 2015.

Other

Foreign currency – In 2017, there was a weakening in the British pound sterling to the U.S. dollar. With respect to Newsquest, results for the year ended December 31, 2017 were translated from the British pound sterling to U.S. dollars at an average rate of 1.29 compared to 1.36 for the year ended December 25, 2016. This 5% decline in the exchange rate unfavorably impacted 2017 revenue comparisons by approximately $16.1 million.

Outlook for 2018: As we move into 2018, we remain focused on executing against our strategic vision of becoming a “daily destination” for consumers and marketers seeking meaningful community connections across print, digital, and other channels. To further capitalize on this vision, we announced an organizational realignment at the end of 2017 that will more

29


clearly align our company with our two core customers: marketing clients and consumers. In our Marketing Solutions business, we are focused on enhancing the way we serve local and national marketers by developing a more comprehensive suite of marketing products and services. While print advertising will remained challenged due to market pressures, we anticipate some of that decline will be offset by growth in digital advertising and marketing service revenues. Our consumer organization is focused on growing our audiences and deepening engagement, in part by expanding our spectrum of content beyond traditional news. We will continue to focus on operational excellence by working to maximize the efficiency of our print, sales, administrative, and distribution functions to reduce costs. We also intend to continue to pursue our strategy of growing our business through selective acquisitions and investments in new technology initiatives.

RESULTS OF OPERATIONS

Consolidated summary

A summary of our segment results is presented below:
In thousands, except per share amounts
 
 
 
 
 
 
 
 
 
 
2017 (1)
 
2016 (1)
 
Change
 
2015 (1)
 
Change
Operating revenues:
 
 
 
 
 
 
 
 

Publishing
$
2,812,243

 
$
2,933,095

 
(4
%)
 
$
2,881,218

 
2
%
ReachLocal
358,728

 
110,144

 
***

 

 
***

Corporate and other
4,835

 
4,235

 
14
%
 
3,794

 
12
%
Intersegment eliminations
(29,326
)
 

 
***

 

 
***

Total operating revenues
3,146,480

 
3,047,474

 
3
%
 
2,885,012

 
6
%
Operating expenses:
 
 
 
 
 
 
 
 
 
Publishing
2,592,566

 
2,697,697

 
(4
%)
 
2,624,626

 
3
%
ReachLocal
377,667

 
128,872

 
***

 

 
***

Corporate and other
138,002

 
131,535

 
5
%
 
95,881

 
37
%
Intersegment eliminations
(29,326
)
 

 
***

 

 
***

Total operating expenses
3,078,909

 
2,958,104

 
4
%
 
2,720,507

 
9
%
Operating income
67,571

 
89,370

 
(24
%)
 
164,505

 
(46
%)
Non-operating income (expense), net
(26,830
)
 
(22,942
)
 
17
%
 
29,470

 
***

Income before income taxes
40,741

 
66,428

 
(39
%)
 
193,975

 
(66
%)
Provision for income taxes
33,854

 
13,718

 
***

 
47,884

 
(71
%)
Net income
$
6,887

 
$
52,710

 
(87
%)
 
$
146,091

 
(64
%)
Diluted earnings per share
$
0.06

 
$
0.44

 
(86
%)
 
$
1.25

 
(65
%)
*** Indicates an absolute value percentage change greater than 100.
(1) Fiscal year 2017 comprises 53 weeks while fiscal years 2016 and 2015 comprise 52 weeks.

To facilitate a comparison of our publishing results without the impact of acquisitions, the 53rd week of revenues and expenses, and foreign currency translation fluctuations, we are also providing explanations for 2017 revenues and expenses for our publishing segment on a "same store" basis which are calculated as follows:

Reported revenues or expenses
Less: revenues or expenses for our 2017 publishing acquisitions from the date of the acquisition through the end of the year
Less: revenues or expenses for our 2016 publishing acquisitions from the beginning of fiscal year 2017 through the first year anniversary of their applicable acquisition date
Less: 53rd week revenue or expenses
Less: operations exited in 2016
Add (less): decreases (increases) in foreign currency translation impacts based on a constant currency calculation


30


Similarly, 2016 same store revenues and expenses for purposes of comparison to 2015 are calculated as follows:

Reported revenues or expenses
Less: revenues or expenses for our 2016 publishing acquisitions from the date of the acquisition through the end of the year
Less: revenues or expenses for our 2015 publishing acquisitions from the beginning of fiscal year 2016 through the first year anniversary of their applicable acquisition date
Less: operations exited in 2015
Add (less): decreases (increases) in foreign currency translation impacts based on a constant currency calculation

In the discussion of year-over-year variances for publishing operating revenues and expenses for the year ended December 31, 2017 versus for the year ended December 25, 2016 that follow, amounts specifically attributed to our 2016 publishing acquisitions reflect only those revenues or expenses from the beginning of fiscal year 2017 through the first year anniversary of their applicable acquisition date. In the discussion of year-over-year variances for publishing operating revenues and expenses for the year ended December 25, 2016 versus for the year ended December 26, 2015 that follow, amounts specifically attributed to our 2015 publishing acquisitions reflect only those revenues or expenses from the beginning of fiscal year 2016 through the first year anniversary of their applicable acquisition date. All of these amounts are excluded from our calculations of "same store" publishing results for the comparable fiscal years.

As we continue to integrate our acquisitions, allocations of certain expenses related to acquired businesses may change. These adjustments may impact the comparability of same store expense numbers across periods; however, such impacts are expected to be immaterial.

Operating revenues:

Our publishing segment generates revenue primarily through advertising and subscriptions to our print and digital publications. Our advertising teams sell retail, classified, and national advertising across multiple platforms including print, online, mobile, and tablet as well as niche publications. Circulation revenues are derived principally from distributing our publications on our digital platforms and from home delivery and single copy sales of our publications. Other revenues are derived mainly from commercial printing and distribution arrangements.

Our ReachLocal segment generates advertising revenue through multiple services including search and display, search optimization, social media, and website development. Other revenues are attributable to web presence and software-as-a-service solutions.

Revenue comparisons 2017 - 2016:

Total operating revenues were $3.1 billion in 2017, an increase of 3% from 2016 primarily attributable to revenue growth of $248.6 million from ReachLocal, which was acquired in August 2016. Publishing revenues decreased 4% from 2016 which was primarily attributable to the continued softness in publishing segment same store advertising revenues of $211.6 million, reflecting decreased demand for print advertising, as well as declining trends in same store circulation revenues of $84.3 million due to lower circulation volumes partially offset by revenues from our 2016 publishing acquisitions of $157.5 million and 53rd week revenues of $49.1 million. Additionally, foreign currency rate fluctuations negatively impacted publishing revenues by $16.1 million.

Revenue comparisons 2016 - 2015:

Total operating revenues were $3.0 billion in 2016, an increase of 6% from 2015. Publishing revenues increased 2%, which was attributable to revenues from our 2016 publishing acquisitions of $341.8 million and revenues from our 2015 publishing acquisitions of $40.0 million. Partially offsetting the impact of the acquisitions were decreases related to the continued softness in same store advertising revenues of $206.8 million, which is primarily related to print advertising, and in same store circulation revenues of $44.9 million. Additionally, foreign currency rate fluctuations negatively affected publishing revenues by $41.8 million. ReachLocal revenues were $110.1 million from the acquisition date in August 2016 through the end of the year.


31


Operating expenses:

Payroll and benefits are the largest components of our operating expenses. Other significant operating expenses include production and distribution costs.

Operating expense comparisons 2017 - 2016:

During 2017, total operating expenses increased 4% to $3.1 billion compared to 2016. Contributing to the increase were operating expenses associated with our 2016 publishing acquisitions of $158.0 million, expense increases of $248.8 million from ReachLocal, which was acquired in August 2016, and 53rd week expenses of $45.5 million. These additional expenses were partially offset by the continued company-wide cost efficiency efforts and lower newsprint expenses. Foreign currency rate fluctuations also reduced expenses by $13.5 million.

Impacting 2017 operating expenses, and included in the numbers above, were asset impairment charges of $46.8 million, accelerated depreciation of $44.0 million, severance-related charges of $37.0 million, facility consolidation charges of $7.3 million and acquisition costs of $5.2 million. See items impacting 2016 operating expenses below.

Operating expense comparisons 2016 - 2015:

During 2016, total operating expenses increased 9% to $3.0 billion compared to 2015. Publishing operating expenses increased 3%. Contributing to the increase were operating expenses associated with our 2016 publishing acquisitions of $333.7 million and our 2015 publishing acquisitions of $36.3 million. These additional expenses were partially offset by the continued company-wide cost efficiency efforts, lower newsprint expenses, and the reporting of sales of certain third party digital advertising products on a net basis. Foreign currency rate fluctuations also reduced expenses by $33.5 million. ReachLocal operating expenses were $128.9 million from the acquisition date through year end.

Impacting 2016 were asset impairment charges of $55.9 million, severance-related charges of $43.5 million, acquisition costs of $31.9 million, and facility consolidation charges of $2.3 million. Impacting 2015 were severance-related charges of $72.3 million, asset impairment charges of $29.1 million, facility consolidation charges of $5.1 million, and acquisition-related items of $3.8 million.

Publishing segment

A summary of our publishing segment results is presented below:
In thousands
 
 
 
 
 
 
 
 
 
 
2017 (1)
 
2016 (1)
 
Change
 
2015 (1)
 
Change
Operating revenues:
 
 
 
 
 
 
 
 
 
Advertising
$
1,498,273

 
$
1,603,515

 
(7
%)
 
$
1,611,445

 
(0
%)
Circulation
1,120,739

 
1,133,676

 
(1
%)
 
1,060,118

 
7
%
Other
193,231

 
195,904

 
(1
%)
 
209,655

 
(7
%)
Total operating revenues
2,812,243

 
2,933,095

 
(4
%)
 
2,881,218

 
2
%
Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
1,767,226

 
1,850,230

 
(4
%)
 
1,810,134

 
2
%
Selling, general, and administrative expenses
605,954

 
641,394

 
(6
%)
 
610,073

 
5
%
Depreciation and amortization
135,214

 
105,102

 
29
%
 
103,184

 
2
%
Asset impairment charges
46,796

 
55,940

 
(16
%)
 
29,130

 
92
%
Restructuring costs
37,376

 
45,031

 
(17
%)
 
72,105

 
(38
%)
Total operating expenses
2,592,566

 
2,697,697

 
(4
%)
 
2,624,626

 
3
%
Operating income
$
219,677

 
$
235,398

 
(7
%)
 
$
256,592

 
(8
%)
(1) Fiscal year 2017 comprises 53 weeks while fiscal years 2016 and 2015 comprise 52 weeks.


32


Operating revenues:

Revenue comparisons 2017 - 2016:

Advertising revenues for 2017 were $1.5 billion, a decrease of 7% compared to 2016. This decrease is attributable to the decline in same store advertising revenues of 13% due to lower print advertising demand consistent with general trends adversely impacting the publishing industry. This decline was partially offset by advertising revenues associated with our 2016 publishing acquisitions of $90.4 million and 53rd week advertising revenues of $20.7 million. Foreign currency exchange rates negatively affected advertising revenues by $10.3 million.

Digital advertising revenues were $415.9 million in 2017, an increase of 5% compared to 2016. This increase is attributable to digital advertising revenues associated with our 2016 publishing acquisitions of $11.2 million and 53rd week digital advertising revenues of $5.0 million. Digital advertising revenues on a same store basis increased 1% as a result of increases in digital marketing services, audience extension, and mobile and branded content offset partially by weaknesses in digital classified and local desktop display. Foreign currency exchange rates negatively affected digital advertising revenues by $2.8 million.

Retail, national, and classified advertising revenues consist of both print and digital advertising.

Retail advertising revenues were $811.0 million for 2017, a decrease of 7% compared to 2016. This decrease is primarily attributable to the decline in same store advertising revenues of 15% primarily due to a decrease in retail print revenues of $113.7 million stemming from reduced demand. This decline was partially offset by retail advertising revenues associated with our publishing acquisitions of $59.3 million and 53rd week retail advertising revenues of $11.7 million. Foreign currency exchange rates negatively affected retail advertising revenues by $4.4 million.

National advertising revenues were $216.3 million for 2017, a decrease of 2% compared to 2016. This decrease is primarily attributable to the decline in same store advertising revenues of 6% due to lower national print advertising revenues of $18.4 million. This decline was partially offset by national advertising revenues associated with our publishing acquisitions of $4.3 million and 53rd week national advertising revenues of $3.8 million. In addition, national digital revenues on a same store basis increased 12% as a result of programmatic advertising. Foreign currency exchange rates negatively affected national advertising revenues by $1.1 million.

Classified advertising revenues were $470.9 million for 2017, a decrease of 8% compared to 2016. This decrease is primarily attributable to the decline in same store advertising revenues of 14%, reflecting a decline in real estate, automotive, and employment advertising revenues of $11.8 million, $18.5 million, and $20.0 million, respectively. This decline was partially offset by classified advertising revenues associated with our publishing acquisitions of $26.8 million and 53rd week classified advertising revenues of $5.2 million. Foreign currency exchange rates negatively affected classified advertising revenues by $4.8 million.

Circulation revenues were $1.1 billion for 2017, a decrease of 1% compared to 2016. This decrease is primarily attributable to the decline in same store circulation revenues of 7%. The decrease was partially offset by circulation revenues associated with our publishing acquisitions of $55.3 million and 53rd week circulation revenues of $19.3 million. Print circulation revenues on a same store basis were $842.3 million for 2017, a 5% decrease from the same period in 2016 due to a reduction in volume, reflecting general industry trends, offset by increases from our strategic pricing programs. Digital circulation revenues on a same store basis were $207.1 million for 2017, a 17% decrease from the same period in 2016 due to a reduction in volume and changes in fair value pricing used to allocate full access subscription revenues between print and digital circulation. Foreign currency exchange rates negatively affected circulation revenues by $4.5 million.

Commercial printing and other revenues were $193.2 million for 2017, a decrease of 1% compared to 2016. Commercial printing and other revenues accounted for 7% of total publishing revenues for 2017.

Revenue comparisons 2016 - 2015:

Advertising revenues for 2016 were $1.6 billion, which were relatively flat compared to 2015. Advertising revenues associated with our 2016 publishing acquisitions were $200.0 million and with our 2015 publishing acquisitions were $26.0 million. Advertising revenues on a same store basis decreased 13%, primarily due to lower print advertising demand consistent with general trends adversely impacting the publishing industry. Foreign currency exchange rates negatively affected advertising revenues by $27.2 million.


33


Digital advertising revenues were $395.9 million in 2016, a decrease of 2% compared to 2015. Digital advertising revenues on a same store basis decreased 7%, primarily due to unfavorable post-spin changes to the CareerBuilder affiliate agreement and the shift to reporting of third-party digital revenues on a net basis in conjunction with the execution of new agreements of $58.1 million. Without the impact of these changes, digital advertising revenue on a same store basis would have increased 7% year over year, primarily as a result of increases in video and mobile display revenues. Additionally, positively impacting digital advertising revenues were revenues associated with our 2016 publishing acquisitions of $22.4 million and our 2015 publishing acquisitions of $4.2 million whereas foreign currency exchange rates negatively affected digital advertising revenues by $6.4 million.

Retail, national, and classified advertising revenues consist of both print and digital advertising.

Retail advertising revenues totaled $869.4 million in 2016, an increase of 7% when compared to 2015. The increase was attributable to retail advertising revenues associated with our 2016 publishing acquisitions of $141.0 million and our 2015 publishing acquisitions of $14.0 million. Retail advertising revenues on a same store basis decreased 11% due to lower advertising demand in print publications. Foreign currency exchange rates negatively affected retail advertising revenues by $11.2 million.

National advertising revenues were $220.2 million in 2016, a decrease of 2% compared to 2015. National advertising revenues on a same store basis decreased 4% due to lower advertising demand in print publications. The decrease was partially offset by national advertising revenues associated with our 2016 publishing acquisitions of $4.7 million and our 2015 publishing acquisitions of $1.2 million as well as continued growth in national digital advertising revenues. Foreign currency exchange rates negatively affected national advertising revenues by $2.8 million.

Classified advertising revenues for the year ended December 25, 2016 of $513.9 million decreased 10% compared to 2015. Classified advertising revenues on a same store basis decreased 20% attributable primarily to declines in automotive and employment advertising revenues of $37.7 million and $53.1 million, respectively, reflecting general trends in the newspaper industry. The decrease was partially offset by classified advertising revenues associated with our 2016 publishing acquisitions of $54.3 million and our 2015 publishing acquisitions of $10.8 million. Foreign currency exchange rates negatively affected classified advertising revenues by $13.2 million.

Circulation revenues were $1.1 billion in 2016, an increase of 7% compared to 2015. This increase was primarily attributable to circulation revenues associated with our 2016 publishing acquisitions of $116.7 million and our 2015 publishing acquisitions of $12.8 million. Circulation revenues on a same store basis decreased 4% attributable to a reduction in volume, reflecting general industry trends. Print circulation revenues on a same store basis were $797.5 million in 2016, relatively flat year over year. Additionally, digital circulation revenues on a same store basis were $217.7 million in 2016, a 14% decrease year over year, due to changes in fair value pricing used to allocate full access subscription revenues between print and digital circulation. Foreign currency exchange rates negatively affected circulation revenues by $11.0 million.

Commercial printing and other revenues for 2016 were $195.9 million, a decrease of 7% compared to the prior year. Commercial printing and other revenues accounted for approximately 7% of total publishing revenues for the year.

Operating expenses:

Operating expense comparisons 2017 - 2016:

Cost of sales for 2017 decreased 4% from 2016 to $1.8 billion. Cost of sales on a same store basis decreased 12%, driven primarily by a decrease in newsprint costs, an overall decline in circulation volumes that reduced production and distribution costs, and fewer severance-related expenses. Newsprint costs on a same store basis of $127.0 million decreased 17% primarily due to lower consumption. Foreign currency rate fluctuations also reduced expenses by $8.1 million. Partially offsetting the decrease in cost of sales was the inclusion of costs associated with our 2016 publishing acquisitions of $116.3 million.

Total selling, general, and administrative expenses for 2017 decreased 6% from 2016 to $606.0 million. Selling, general, and administrative expenses on a same store basis decreased 12%, primarily attributable to continued company-wide cost efficiency efforts. Foreign currency exchange rate fluctuations also reduced selling, general, and administrative expenses by $4.8 million. Partially offsetting the decrease in selling, general, and administrative expenses was the inclusion of costs associated with our 2016 publishing acquisitions of $31.9 million.

Depreciation and amortization expense for 2017 was 29% higher compared to 2016 primarily due to $44.0 million of accelerated depreciation expense incurred in 2017 associated with our facility consolidation efforts compared to $3.2 million of

34


accelerated deprecation incurred in same period in 2016. Depreciation and amortization expenses associated with our 2016 publishing acquisitions were $9.8 million. Foreign currency exchange fluctuations reduced depreciation expense by $0.6 million.

Our individual restructuring programs and space consolidation initiatives continued in 2017, including the right sizing of our employee base, disposition of older, underutilized buildings, relocations to more efficient, flexible, digitally-oriented office spaces, efforts to reconfigure spaces to take advantage of leasing and subleasing opportunities, and the combination of operations where possible. As a result, we recognized restructuring and asset impairment charges during all periods presented. These charges are discussed in Note 4 — Restructuring activities and asset impairment charges to the consolidated and combined financial statements.

Operating expense comparisons 2016 - 2015:

Cost of sales for 2016 increased 2% to $1.9 billion from 2015. Cost of sales associated with our 2016 publishing acquisitions were $232.9 million and our 2015 publishing acquisitions were $24.8 million. Foreign currency exchange rate fluctuations partially offset the increase in cost of sales by $20.6 million. Cost of sales on a same store basis decreased 11%, which was driven by the decrease in newsprint costs, an overall decline in circulation volumes that reduced production and distribution costs, and fewer severance-related expenses. Newsprint costs on a same store basis of $127.5 million decreased 25% primarily due to lower consumption.

Total selling, general, and administrative expenses for 2016 increased by 5% to $641.4 million from 2015. Selling, general, and administrative expenses associated with our 2016 publishing acquisitions were $76.7 million and our 2015 publishing acquisitions were $8.9 million. Foreign currency exchange rate fluctuations partially offset the increase in selling, general, and administrative expenses by $11.6 million. Selling, general, and administrative expenses on a same store basis decreased 10%, primarily attributable to continued company-wide cost efficiency efforts.

Depreciation and amortization expense for 2016 was 2% higher compared to 2015. Depreciation and amortization expenses associated with our 2016 publishing acquisitions were $18.7 million and our 2015 publishing acquisitions were $2.6 million. Foreign currency exchange fluctuations reduced depreciation expense by $1.3 million. Depreciation and amortization expense on a same store basis decreased 15% primarily due to a decrease in amortization as a result of impairment charges from the fourth quarter of 2015 that reduced the amount of future amortization recognized as well as older intangible assets that became fully amortized during 2016.

As discussed above, we recognized restructuring and asset impairment charges during all periods presented. These charges are discussed in Note 4 — Restructuring activities and asset impairment charges to the consolidated and combined financial statements.

Adjusted EBITDA
In thousands
 
2017
 
Change
 
2016
 
Change
 
2015
Operating income (GAAP basis)
$
219,677

 
(7
%)
 
$
235,398

 
(8
%)
 
$
256,592

Depreciation and amortization
135,214

 
29
%
 
105,102

 
2
%
 
103,184

Asset impairment charges
46,796

 
(16
%)
 
55,940

 
92
%
 
29,130

Restructuring costs
37,376

 
(17
%)
 
45,031

 
(38
%)
 
72,105

Acquisition-related items
375

 
(52
%)
 
777

 
***

 

Other items
(7,018
)
 
***

 
1,860

 
(77
%)
 
7,988

Adjusted EBITDA (non-GAAP basis)
$
432,420

 
(3
%)
 
$
444,108

 
(5
%)
 
$
468,999

*** Indicates an absolute value percentage change greater than 100.

Adjusted EBITDA for our publishing segment decreased 3% from 2016 to 2017 and decreased 5% from 2015 to 2016. These decreases were primarily attributable to declines in same store publishing revenues due to the continued softness in print advertising revenues and declining circulation trends. In addition, there was an unfavorable foreign exchange rate impact of $3.3 million in 2017 compared to 2016 and $9.2 million in 2016 compared to 2015. Partially offsetting these decreases were the contributions from our 2016 and 2015 acquisitions.


35


ReachLocal segment

ReachLocal was acquired and became a new operating segment in August 2016.
In thousands
 
 
 
 
2017 (1)
 
2016 (1)
Operating revenues:
 
 
 
   Advertising
$
319,346

 
$
100,280

   Other
39,382

 
9,864

Total operating revenues
358,728

 
110,144

Operating expenses:
 
 
 
Cost of sales
207,289

 
67,414

Selling, general, and administrative expenses
135,496

 
48,582

Depreciation and amortization
33,902

 
12,236

Restructuring charges
980

 
640

Total operating expenses
377,667

 
128,872

Operating loss
$
(18,939
)
 
$
(18,728
)
 
 
 
 
Active Clients (a)
19,000

 
15,300

Active Product Units (b)
37,500

 
27,900

(1) Fiscal year 2017 comprises 53 weeks while fiscal year 2016 comprises 20 weeks.
(a) Active Clients is a number calculated to approximate the number of clients served. Active Clients is calculated by adjusting the number of Active Product Units to combine clients with more than one Active Product Unit as a single Active Client. Clients with more than one location are generally reflected as multiple Active Clients with the exception of SweetIQ clients. SweetIQ clients are generally reflected as single clients regardless of the number of locations served. Because this number includes clients served through ReachLocal's reseller channel, Active Clients includes entities with which ReachLocal does not have a direct contractual relationship. Numbers are rounded to the nearest hundred.
(b) Active Product Units is a number we calculate to approximate the number of individual products, licenses, or services we are providing under contract for Active Clients. For example, if we were performing both ReachSearch and ReachDisplay campaigns for a client that also licenses ReachEdge, we consider that three Active Product Units. Similarly, if a client purchases ReachSearch campaigns for two different products or purposes, we consider that two Active Product Units. Numbers are rounded to the nearest hundred.

Operating revenues:

Advertising revenues were $319.3 million for 2017, which included advertising revenues from international operations of $96.2 million. In 2017, $25.9 million of advertising revenues were recognized as a result of the transition of publishing segment customers to the ReachLocal platform. Advertising revenues were $100.3 million for 2016 which included advertising revenues from international entities of $30.6 million. Advertising revenues for 2016 were negatively impacted by $8.9 million from the revaluation of deferred revenue attributable to the purchase price accounting applied at the acquisition date.

Other revenues were $39.4 million for 2017. Other revenues of $3.4 million were recognized for 2017 as a result of the transition of publishing segment customers to the ReachLocal platform. Additionally, SweetIQ was acquired in April 2017, which generated other revenues of $5.2 million since the acquisition date. Other revenues were $9.9 million for 2016.

The increase in Active Clients and Active Product Units as of December 31, 2017 as compared to December 25, 2016 is attributable to a mixture of organic growth from the North America base business, the migration of the publishing segment digital advertising clients to the ReachLocal platform, the acquisition of SweetIQ, and the onboarding of a significant number of new clients in Brazil, partially offset by declines in Europe and Asia Pacific.


36


Operating expenses:

Cost of sales was $207.3 million for 2017, which included online media acquired from third-party publishers totaling $163.3 million. Cost of sales was $67.4 million in 2016, which included online media acquired from third-party publishers totaling $66.3 million. Cost of sales also includes third-party direct costs as well as costs to manage and operate ReachLocal's various solutions and technology infrastructure.

Selling, general, and administrative expenses were $135.5 million for 2017 and $48.6 million for 2016. Selling, general, and administrative expenses consist primarily of personnel and related expenses for selling and marketing staff, product development and engineering professionals, finance, human resources, legal, and executive functions. 2017 totals included salaries, benefits, and other costs related to sales and marketing staff of $43.5 million and commission expense of $32.0 million, while general and administrative expenses were $26.2 million and product and technology expenses were $8.3 million. 2016 totals included salaries, benefits, and other costs of $16.5 million and commission expense of $10.0 million, while general and administrative expenses were $8.7 million and product and technology expenses were $3.0 million.

Depreciation and amortization was $33.9 million for 2017, which included amortization of developed technology intangible assets of $27.9 million. Depreciation and amortization was $12.2 million for 2016, which included amortization of developed technology intangible assets of $6.6 million.

Adjusted EBITDA
In thousands
 
 
 
 
 
 
2017
 
2016
 
Change
Operating loss (GAAP basis)
$
(18,939
)
 
$
(18,728
)
 
1
%
Depreciation and amortization
33,902

 
12,236

 
***

Restructuring costs
980

 
640

 
53
%
Acquisition-related items
43

 

 
***

Other items
567

 

 
***

Adjusted EBITDA (non-GAAP basis)
$
16,553

 
$
(5,852
)
 
***

*** Indicates an absolute value percentage change greater than 100.

Adjusted EBITDA for our ReachLocal segment was $16.6 million in 2017 compared to a $5.9 million loss in 2016. The adjusted EBITDA loss in 2016 is attributable to the exclusion of $8.9 million in revenue due to the purchase price accounting revaluation of deferred revenue applied at the acquisition date.

Corporate and other

Corporate operating revenues were $4.8 million in 2017, $4.2 million in 2016, and $3.8 million in 2015.

Corporate operating expenses were $138.0 million in 2017, an increase of 5% compared to 2016. Increases in expense were primarily driven by increases in depreciation expense of $7.1 million, severance-related charges of $5.8 million, and other business transformation costs, including changes to our expense allocation structure. These increases were offset by a reduction in acquisition-related expenses of $27.1 million.

Corporate operating expenses were $131.5 million in 2016, an increase from $95.9 million in 2015. The increase was primarily driven by acquisition-related expenses of $31.9 million in 2016 along with higher corporate expenses associated with our being a public company since the spin-off in 2015.

Non-operating income (expense)

Interest expense: Interest expense for the year ended December 31, 2017 was $17.1 million compared to expense of $12.8 million in 2016. The increase in interest expense was primarily attributable to the timing of additional borrowings under the Credit Facility.

Other non-operating items, net: Our non-operating items, net, are driven by certain items that fall outside of our normal business operations. Our non-operating items, net, consisted of $9.7 million in expense for 2017, $10.2 million in expense for 2016, and $34.0 million in income for 2015. As a result of our early adoption of new accounting guidance, included in non-operating expenses are certain net periodic pension and postretirement benefit costs of $21.0 million in 2017 and $9.9 million

37


in 2016 and a benefit of $6.2 million in 2015. Other non-operating expense, net, for 2017 also included a $2.8 million gain on investment. In 2015, there was equity income in unconsolidated investees, net, of $12.0 million primarily attributed to the equity income from TNP prior to Gannett's acquisition of the remaining interests in June 2015. In 2015, there was a $21.8 million gain recognized upon completing the acquisition of our remaining interest in TNP and the assignment of our interest in California Newspapers Partnership.

Income tax expense

In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act contains significant changes to corporate taxation, including a reduction of the corporate tax rate from 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings, limitation of the deduction for net operating losses (generated after 2017) to 80% of current year taxable income, elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. The Tax Act also includes certain provisions that will offset the benefits of rate reduction such as repeal of domestic production deduction and disallowance of performance based officers’ compensation in excess of $1 million.

Under U.S. generally accepted accounting principles, we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The reduction in the federal income tax rate from 35% to 21% resulted in a reduction in the value of our deferred tax assets. We have made a reasonable estimate of the reduction in deferred tax assets and recorded $42.8 million as additional income tax expense in the fourth quarter of 2017

Our deferred tax assets were further reduced by $11.1 million through the establishment of valuation allowances related to two of our publishing properties of $7.7 million and state net operating losses of $3.4 million, which were recorded as additional income tax expense in 2017

During 2017, we made an election to treat one of our ReachLocal international subsidiaries as a disregarded entity for U.S. federal income tax purposes, which resulted in worthless stock and bad debt deductions. As a result of this election, we incurred a tax loss that resulted in a $21.0 million tax benefit, which is net of a reserve of $15.6 million for uncertain tax positions. We expect our domestic operations to generate sufficient taxable income to fully utilize the tax benefit of the loss. This tax loss may be subject to audit and future adjustment by the IRS, which could result in a reversal of none, part, or all of the income tax benefit or could result in a benefit higher than the net amount recorded. If the IRS rejects or reduces the amount of the income tax benefit related to the worthless stock and bad debt deduction, we may have to pay additional cash income taxes, which could adversely affect our results of operations, financial condition, and cash flows. We cannot guarantee what the ultimate outcome or amount of the benefit we receive, if any, will be.

Our effective income tax rate for the year ended December 31, 2017 was impacted by the events discussed above. Excluding both incremental expenses and benefits stemming from the items discussed above, our effective tax rate would have been 10.7% for the year ended December 31, 2017, which is lower than the statutory tax rate due to return to provision adjustments, release of income tax contingencies upon close of statutes and income from lower tax jurisdictions.

For 2017 and 2016, net income generated in foreign jurisdictions was 90% and 71%, respectively, where the income tax rate is lower than in the U.S., whereas 34% of our 2015 net income was generated in foreign jurisdictions. The lower domestic net income is attributable to higher expenses domestically for corporate expenses related to restructuring charges, asset impairments, and public company costs as compared with foreign jurisdictions. The recent changes in the mix of income generated from lower tax rate foreign jurisdictions relative to U.S. net domestic income have had the effect of decreasing our tax expense.
 
Net income and earnings per share

Net income: Net income was $6.9 million for 2017 compared to net income of $52.7 million for 2016. The decrease in net income is primarily attributable to the decline in operating income of $21.8 million and the increase in the provision for income taxes of $20.1 million.


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Net income was $52.7 million for 2016 compared to $146.1 million for 2015. The decrease in net income is primarily attributable to the decline in operating income of $75.1 million, the decline in other non-operating items, net, of $44.2 million, and the increase in interest expense of $8.2 million.

Diluted earnings per share: Diluted earnings per share were $0.06 for 2017 compared to earnings per share of $0.44 for 2016. The decrease in diluted earnings per share for 2017 compared to 2016 was primarily attributable to the decline in net income discussed above along with a decrease in the weighted average diluted shares to 115.6 million in 2017 from 118.6 million in 2016.

Diluted earnings per share were $0.44 for 2016 compared to $1.25 for 2015. The decrease in diluted earnings per share for 2016 compared to 2015 was primarily attributable to the decline in net income discussed above along with the increase in the weighted average diluted shares to 118.6 million in 2016 from 116.7 million in 2015.

Liquidity and Capital Resources

Our operations, which have historically generated strong positive cash flow, along with our Credit Facility described below, are expected to provide sufficient liquidity to meet our requirements, including those for investments and expected dividends or share repurchases. For strategic acquisitions, we will consider financing options as appropriate.

Details of our cash flows are included in the table below:
In thousands
 
2017
 
2016
 
2015
Net cash flow from operating activities
$
236,468

 
$
165,555

 
$
231,020

Net cash flow used for investing activities
(87,569
)
 
(519,073
)
 
(43,312
)
Net cash flow from (used for) financing activities
(141,786
)
 
271,418

 
(62,766
)
Effect of currency exchange rate change
(848
)
 
(272
)
 
(193
)
Net increase (decrease) in cash
$
6,265

 
$
(82,372
)
 
$
124,749


Operating cash flows

Our cash flow from operating activities was $236.5 million for 2017 compared to $165.6 million of net cash flow from operating activities for 2016. The increase in net cash flow from operating activities was primarily attributable to tax refunds, net of payments, in 2017 of $18.9 million compared to tax payments, net of refunds, in 2016 of $25.7 million. In addition, pension and other postretirement contributions decreased by $34.8 million. Partially offsetting these increases in cash flows from operating activities was a decrease in working capital of $1.1 million.

Our cash flow from operating activities was $165.6 million in 2016 compared to $231.0 million of net cash flow from operating activities in 2015. This decrease was primarily the result of a decrease in net income from 2015 to 2016 of $93.4 million as well as decreased pension and other postretirement contributions of $40.7 million.

In addition to any other contributions that may be required, we expect to contribute approximately $25.0 million to the GRP in each of the fiscal years 2018 through 2020 and $15.0 million in 2021. We also expect to contribute approximately £15.0 million per year to the U.K. Pension Plans from 2017 through 2022. In 2018, we also expect to make aggregate contributions of $17.2 million to our other underfunded plans and expect to make additional contributions thereafter.

Investing cash flows

Cash flows used for investing activities totaled $87.6 million for 2017 primarily driven by capital expenditures of $72.3 million and payments of $44.3 million for acquisitions, primarily related to the SweetIQ acquisition, partially offset by proceeds from sales of certain assets of $28.4 million.

Cash flows used by investing activities totaled $519.1 million for 2016 primarily driven by payments of $464.1 million for our 2016 acquisitions, capital expenditures of $60.0 million, and investments of $12.4 million, partially offset by proceeds from sales of certain assets of $17.4 million.


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Cash flows used by investing activities totaled $43.3 million for 2015 primarily due to payments of $28.7 million for our 2015 acquisitions, capital expenditures of $54.0 million, partially offset by proceeds from sales of certain assets and proceeds from other investments of $29.7 million and $12.4 million, respectively.

Financing cash flows

Cash flows used for financing activities totaled $141.8 million for 2017, primarily consisting of payment of dividends of $72.3 million, net repayments of borrowings under our Credit Facility of $45.0 million, and share repurchases of $17.4 million.

Cash flows from financing activities totaled $271.4 million for 2016, primarily as a result of net proceeds from borrowings under our Credit Facility of $400.0 million to fund our 2016 acquisitions, partially offset by the payment of dividends of $92.5 million, and share repurchases of $32.7 million.

Cash flows used for financing activities were $62.8 million for 2015, primarily consisting of $49.7 million in transactions with our former parent and the payment of dividends of $18.5 million.

Revolving credit facility

We maintain a secured revolving credit facility pursuant to which we may borrow up to an aggregate principal amount of $500 million (Credit Facility). Under the Credit Facility, we may borrow at an applicable margin above the Eurodollar base rate (LIBOR loan) or the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50%, or the one month LIBOR rate plus 1.00% (ABR loan). The applicable margin is determined based on our total leverage ratio but differs between LIBOR loans and ABR loans. For LIBOR-based borrowing, the margin varies from 2.00% to 2.50%. For ABR-based borrowing, the margin varies from 1.00% to 1.50%. Up to $50 million of the Credit Facility is available for issuance of letters of credit. The Credit Facility matures on June 29, 2020.

Customary fees related to the Credit Facility, including commitment fees on the undrawn commitments of between 0.30% and 0.40% per annum, are payable quarterly in arrears and are based on our total leverage ratio. Borrowings under the Credit Facility are guaranteed by our wholly-owned material domestic subsidiaries. All obligations of Gannett and each subsidiary guarantor under the Credit Facility are or will be secured by first priority security interests in our equipment, inventory, accounts receivable, fixtures, general intangibles and other personal property, mortgages on certain material real property, and pledges of the capital stock of each subsidiary guarantor.

Under the Credit Facility, our consolidated interest coverage ratio cannot be less than 3.00:1.00, and our total leverage ratio cannot exceed 3.00:1.00 as of the last day of the test period consisting of the last four fiscal quarters. We were in compliance with these financial covenants as of December 31, 2017.

The Credit Facility also contains a number of covenants that, among other things, limit or restrict our ability, subject to certain exceptions, to: (i) permit certain liens on current or future assets, (ii) enter into certain corporate transactions, (iii) incur additional indebtedness, (iv) make certain payments or declare certain dividends or distributions, (v) dispose of certain property, (vi) make certain investments, (vii) prepay or amend the terms of other indebtedness, or (viii) enter into certain transactions with our affiliates. We were in compliance with these covenants as of December 31, 2017.

As of December 31, 2017, we had $355.0 million in outstanding borrowings under the Credit Facility and $15.0 million of letters of credit outstanding, leaving $130.0 million of availability. Subsequent to December 31, 2017, we repaid $50.0 million of the outstanding balance.

Share repurchase program

In July 2015, our Board of Directors approved a share repurchase program authorizing us to repurchase shares with an aggregate value of up to $150 million over a three-year period. Shares may be repurchased at management's discretion, either in the open market or in privately negotiated block transactions. Management's decision to repurchase shares depends on several factors, including share price and other corporate liquidity requirements.

During the year ended December 31, 2017, we repurchased two million shares at a cost of $17.4 million. As of December 31, 2017, there was $100.0 million in availability to repurchase shares under the share repurchase program.


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Operating results non-GAAP information

Presentation of non-GAAP information: We use non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation from or as a substitute for the related GAAP measures and should be read together with financial information presented on a GAAP basis.

In this report, we present adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share (EPS), which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of workforce restructuring charges, facility consolidation costs, and non-cash asset impairment charges. We believe such expenses, charges, and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years and with peer group companies. In the future, however, we are likely to incur expenses, charges, and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual.

We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:

Adjusted EBITDA is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our businesses. Adjusted EBITDA is defined as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) restructuring costs (6) acquisition-related expenses (including certain integration expenses), (7) asset impairment charges, (8) other items (including certain business transformation costs, litigation expenses, multi-employer pension withdrawals, and gains or losses on certain investments), (9) depreciation, and (10) amortization. When adjusted EBITDA is discussed in this report, the most directly comparable GAAP financial measure is net income.

Adjusted net income is a non-GAAP financial performance measure we use for the purpose of calculating adjusted EPS. Adjusted net income is defined as net income before the adjustments we apply in calculating adjusted EPS as described below. We believe presenting adjusted net income is useful to enable investors to understand how we calculate adjusted EPS, which provides a useful view of the overall operation of our business. When adjusted net income is described in this report, the most directly comparable GAAP financial measure is net income.

Adjusted EPS is a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our business. We define adjusted EPS as EPS before tax-effected (1) restructuring costs, (2) asset impairment charges, (3) acquisition-related expenses (including certain integration expenses), (4) non-operating (gains) losses, and (5) other items (including certain business transformation expenses, litigation expenses, multi-employer pension withdrawals, and gains or losses on certain investments). The tax impact on these non-GAAP tax deductible adjustments is based on the estimated statutory tax rates for the U.K. of 19.25% and the U.S. of 38.7%. In addition, tax is adjusted for the impact of non-deductible acquisition costs, a tax benefit related to a worthless stock and bad debt deduction, and effects related to the passage of the Tax Cuts and Jobs Act. When adjusted EPS is discussed in this report, the most directly comparable GAAP financial measure is diluted EPS.

Free cash flow is a non-GAAP liquidity measure that adjusts our reported GAAP results for items we believe are critical to the ongoing success of our business. We define free cash flow as cash flow from operating activities less capital expenditures, which results in a figure representing free cash flow available for use in operations, additional investments, debt obligations, and returns to shareholders. The most directly comparable GAAP financial measure is net cash from operating activities.

We use non-GAAP financial measures for purposes of evaluating our performance and liquidity. Therefore, we believe each of the non-GAAP measures presented provides useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance of our business. Many of our peer group companies present similar non-GAAP measures to better facilitate industry comparisons.

Discussion of non-GAAP measures: The following is a discussion of our as adjusted non-GAAP financial results.


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Adjusted EBITDA

Reconciliations of adjusted EBITDA from net income presented in accordance with GAAP on our Consolidated and combined statements of income are presented below:

In thousands
 
2017
 
Change
 
2016
 
Change
 
2015
Net income (GAAP basis)
$
6,887

 
(87
%)
 
$
52,710

 
(64
%)
 
$
146,091

Provision for income taxes
33,854

 
***

 
13,718

 
(71
%)
 
47,884

Interest expense
17,142

 
34
%
 
12,791

 
***

 
4,562

Other non-operating items
9,688

 
(5
%)
 
10,151

 
***

 
(34,032
)
Operating income (GAAP basis)
$
67,571

 
(24
%)
 
$
89,370

 
(46
%)
 
$
164,505

Depreciation and amortization
191,885

 
44
%
 
132,964

 
24
%
 
107,552

Asset impairment charges
46,796

 
(16
%)
 
55,940

 
92
%
 
29,130

Restructuring costs
44,284

 
(3
%)
 
45,757

 
(41
%)
 
77,414

Acquisition-related items
5,202

 
(84
%)
 
32,683

 
***

 

Other items
4,195

 
32
%
 
3,181

 
(60
%)
 
7,988

Adjusted EBITDA (non-GAAP basis)
$
359,933

 
0
%
 
$
359,895

 
(7
%)
 
$
386,589

*** Indicates an absolute value percentage change greater than 100.

Adjusted EBITDA in 2017 was flat compared to 2016. This was primarily due to the contributions from our acquisitions as well as additional EBITDA from the 53rd week of operations in 2017, offset by the continued softness in print advertising revenues and declining circulation trends. Also impacting adjusted EBITDA was an unfavorable foreign exchange rate impact of $3.3 million in 2017 compared to 2016.

Adjusted EBITDA decreased 7% from 2015 to 2016 primarily due to the continued softness in print advertising revenues, declining circulation trends, and higher corporate costs related to being a stand-alone public company. Also impacting adjusted EBITDA was an unfavorable foreign exchange rate impact of $9.2 million in 2016 compared to 2015. Partially offsetting these decreases were the contributions from our acquisitions.

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Adjusted diluted EPS

Reconciliations of adjusted diluted earnings per share from net income presented in accordance with GAAP on our Consolidated and combined statements of income are presented below:
In thousands, except per share amounts
 
2017
 
Change
 
2016
 
Change
 
2015
Asset impairment charges
46,796

 
(16
%)
 
55,940

 
92
%
 
29,130

Restructuring costs (including accelerated depreciation)
88,331

 
80
%
 
48,975

 
(37
%)
 
77,414

Acquisition-related items
5,202

 
(84
%)
 
32,683

 
***

 
(17,971
)
Non-operating (gains) losses
(4,710
)
 
***

 
3,115

 
***

 
1,008

Other items
(3,276
)
 
***

 
1,860

 
(77
%)
 
7,988

Pretax impact
132,343

 
(7
%)
 
142,573

 
46
%
 
97,569

Income tax impact of above items
(50,826
)
 
0
%
 
(50,609
)
 
46
%
 
(34,573
)
Estimated effect of U.S. statutory tax rate change
42,776

 
***

 

 
***

 

Other tax-related items
(12,169
)
 
***

 

 
***

 

Impact of items affecting comparability
on net income (loss)
$
112,124

 
22
%
 
$
91,964