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EX-31.1 - EX-31.1 - MCCLATCHY COmni-20150927ex311c5f7a9.htm
EX-32.1 - EX-32.1 - MCCLATCHY COmni-20150927ex32180c3a2.htm
EX-31.2 - EX-31.2 - MCCLATCHY COmni-20150927ex312a3f262.htm
EX-32.2 - EX-32.2 - MCCLATCHY COmni-20150927ex322e30d62.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended:  September 27, 2015

 

or

 

                  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: 1-9824

 

GRAPHIC

 

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

52-2080478

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

2100 “Q” Street, Sacramento, CA

 

95816

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

 

916-321-1844

 

 

(Registrant’s telephone number, including area code)

 

 

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   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   No 

 

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

 

 

 

Large accelerated filer 

Accelerated filer 

 

 

Non-accelerated filer (Do not check if smaller reporting company) 

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).

 

Yes   No 

 

As of October 26, 2015, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

61,427,325

Class B Common Stock

24,431,962

 

 

 

 


 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

    

2015

    

2014

 

2015

 

2014

 

REVENUES — NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

149,860

 

$

169,843

 

$

459,627

 

$

530,094

 

Audience

 

 

89,310

 

 

91,344

 

 

273,361

 

 

271,114

 

Other

 

 

12,041

 

 

11,712

 

 

37,761

 

 

35,253

 

 

 

 

251,211

 

 

272,899

 

 

770,749

 

 

836,461

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

95,015

 

 

100,595

 

 

302,778

 

 

312,628

 

Newsprint, supplements and printing expenses

 

 

22,583

 

 

27,649

 

 

71,882

 

 

84,009

 

Depreciation and amortization

 

 

27,295

 

 

23,804

 

 

75,892

 

 

90,025

 

Other operating expenses

 

 

97,929

 

 

102,301

 

 

301,503

 

 

307,616

 

Goodwill and other asset impairments (see Notes 1 and 2)

 

 

 —

 

 

 —

 

 

300,429

 

 

1,024

 

 

 

 

242,822

 

 

254,349

 

 

1,052,484

 

 

795,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

8,389

 

 

18,550

 

 

(281,735)

 

 

41,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(21,230)

 

 

(33,126)

 

 

(65,740)

 

 

(100,013)

 

Interest income

 

 

64

 

 

14

 

 

197

 

 

64

 

Equity income in unconsolidated companies, net

 

 

5,158

 

 

7,398

 

 

13,701

 

 

24,366

 

Gains related to equity investments

 

 

 —

 

 

11

 

 

8,093

 

 

145,904

 

Gain on extinguishment of debt, net

 

 

1,632

 

 

 —

 

 

749

 

 

 —

 

Other — net

 

 

(44)

 

 

374

 

 

(292)

 

 

518

 

 

 

 

(14,420)

 

 

(25,329)

 

 

(43,292)

 

 

70,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(6,031)

 

 

(6,779)

 

 

(325,027)

 

 

111,998

 

Income tax provision (benefit)

 

 

(4,882)

 

 

(4,160)

 

 

(16,035)

 

 

39,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(1,149)

 

 

(2,619)

 

 

(308,992)

 

 

72,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES

 

 

 —

 

 

(141)

 

 

 —

 

 

(1,620)

 

NET INCOME (LOSS)

 

$

(1,149)

 

$

(2,760)

 

$

(308,992)

 

$

71,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.01)

 

$

(0.03)

 

$

(3.54)

 

$

0.84

 

Loss from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(0.02)

 

Net income (loss) per share

 

$

(0.01)

 

$

(0.03)

 

$

(3.54)

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.01)

 

$

(0.03)

 

$

(3.54)

 

$

0.83

 

Loss from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(0.02)

 

Net income (loss) per share

 

$

(0.01)

 

$

(0.03)

 

$

(3.54)

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used

 

 

 

 

 

 

 

 

 

 

 

 

 

to calculate basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

87,168

 

 

86,868

 

 

87,277

 

 

86,692

 

Diluted

 

 

87,168

 

 

86,868

 

 

87,277

 

 

88,441

 

See notes to the condensed consolidated financial statements.

 

 

1


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; In thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

    

2015

    

2014

 

2015

 

2014

 

NET INCOME (LOSS)

 

$

(1,149)

 

$

(2,760)

 

$

(308,992)

 

$

71,347

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and post retirement plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain and other components of benefit plans, net of taxes of $(1,921),  $(1,255),  $(5,763) and $(3,763)    

 

 

2,881

 

 

1,882

 

 

8,645

 

 

5,645

 

Investment in unconsolidated companies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes of $128,  $98,  $382 and $(405)

 

 

(192)

 

 

(147)

 

 

(572)

 

 

607

 

Other comprehensive income

 

 

2,689

 

 

1,735

 

 

8,073

 

 

6,252

 

Comprehensive income (loss)

 

$

1,540

 

$

(1,025)

 

$

(300,919)

 

$

77,599

 

 

See notes to the condensed consolidated financial statements.

 

 

2


 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

September 27,

    

December 28,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,610

 

$

220,861

 

Trade receivables (net of allowances of $3,924 in 2015 and $5,900 in 2014)

 

 

112,893

 

 

144,565

 

Other receivables

 

 

36,212

 

 

36,780

 

Newsprint, ink and other inventories

 

 

18,845

 

 

19,491

 

Deferred income taxes

 

 

1,054

 

 

1,054

 

Assets held for sale

 

 

11,876

 

 

173

 

Other current assets

 

 

15,922

 

 

14,945

 

 

 

 

216,412

 

 

437,869

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

363,775

 

 

404,238

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

365,141

 

 

410,915

 

Goodwill

 

 

705,174

 

 

996,115

 

 

 

 

1,070,315

 

 

1,407,030

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

237,118

 

 

230,473

 

Other assets

 

 

64,008

 

 

62,160

 

 

 

 

301,126

 

 

292,633

 

 

 

$

1,951,628

 

$

2,541,770

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

38,198

 

$

49,095

 

Accrued pension liabilities

 

 

8,529

 

 

8,529

 

Accrued compensation

 

 

30,916

 

 

32,912

 

Income taxes payable

 

 

5,352

 

 

186,805

 

Unearned revenue

 

 

61,731

 

 

62,035

 

Accrued interest

 

 

17,747

 

 

10,592

 

Other accrued liabilities

 

 

17,941

 

 

14,957

 

 

 

 

180,414

 

 

364,925

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

932,880

 

 

994,812

 

Deferred income taxes

 

 

1,938

 

 

26,162

 

Pension and postretirement obligations

 

 

559,606

 

 

574,024

 

Financing obligations

 

 

32,924

 

 

34,551

 

Other long-term obligations

 

 

41,411

 

 

43,911

 

 

 

 

1,568,759

 

 

1,673,460

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 63,518,026 in 2015 and 62,600,676 in 2014)

 

 

635

 

 

626

 

Class B (authorized 60,000,000 shares, issued 24,431,962 in 2015 and 24,585,962 in 2014)

 

 

244

 

 

246

 

Additional paid-in-capital

 

 

2,225,418

 

 

2,222,675

 

Accumulated deficit

 

 

(1,612,376)

 

 

(1,303,384)

 

Treasury stock at cost, 2,308,155 shares in 2015 and 45,374 shares in 2014

 

 

(2,936)

 

 

(175)

 

Accumulated other comprehensive loss

 

 

(408,530)

 

 

(416,603)

 

 

 

 

202,455

 

 

503,385

 

 

 

$

1,951,628

 

$

2,541,770

 

 

See notes to the condensed consolidated financial statements.

 

3


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

 

    

2015

    

2014

    

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net income (loss)

 

$

(308,992)

 

$

71,347

 

Less loss from discontinued operations, net of tax

 

 

 —

 

 

(1,620)

 

Income (loss) from continuing operations

 

 

(308,992)

 

 

72,967

 

 

 

 

 

 

 

 

 

Reconciliation to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

75,892

 

 

90,025

 

(Gains) loss on disposal of equipment (excluding asset impairments)

 

 

(83)

 

 

270

 

Contribution to qualified defined benefit pension plan

 

 

 —

 

 

(25,000)

 

Retirement benefit expense

 

 

7,478

 

 

3,474

 

Stock-based compensation expense

 

 

2,750

 

 

2,682

 

Equity income in unconsolidated companies

 

 

(13,701)

 

 

(24,366)

 

Gains related to equity investments

 

 

(8,093)

 

 

(145,904)

 

Distributions of income from equity investments

 

 

7,500

 

 

148,176

 

Gain on extinguishment of debt, net

 

 

(749)

 

 

 —

 

Goodwill and other asset impairments

 

 

300,429

 

 

1,024

 

Other

 

 

(4,389)

 

 

(3,251)

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

31,672

 

 

44,303

 

Inventories

 

 

646

 

 

2,369

 

Other assets

 

 

(1,693)

 

 

826

 

Accounts payable

 

 

(10,897)

 

 

(7,927)

 

Accrued compensation

 

 

(1,996)

 

 

(5,828)

 

Income taxes

 

 

(211,623)

 

 

(27,989)

 

Accrued interest

 

 

7,155

 

 

13,654

 

Other liabilities

 

 

(189)

 

 

502

 

Net cash provided by (used in) continuing operations

 

 

(128,883)

 

 

140,007

 

Net cash used in discontinued operations

 

 

 —

 

 

(37)

 

Net cash provided by (used in) operating activities

 

 

(128,883)

 

 

139,970

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(10,766)

 

 

(20,005)

 

Proceeds from sale of property, plant and equipment and other

 

 

224

 

 

676

 

Purchase of insurance-related deposits

 

 

 —

 

 

(6,770)

 

Distributions from equity investments

 

 

7,460

 

 

1,444

 

Contributions to equity investments

 

 

(1,250)

 

 

(2,500)

 

Equity investments and other-net

 

 

633

 

 

1,686

 

Net cash used in continuing operations

 

 

(3,699)

 

 

(25,469)

 

Net cash provided by discontinued operations

 

 

 —

 

 

32,953

 

Net cash provided by (used in) investing activities

 

 

(3,699)

 

 

7,484

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repurchase of public notes and related expense

 

 

(64,281)

 

 

 —

 

Other

 

 

(4,388)

 

 

(3,181)

 

Net cash used in financing activities

 

 

(68,669)

 

 

(3,181)

 

Increase (decrease) in cash and cash equivalents

 

 

(201,251)

 

 

144,273

 

Cash and cash equivalents at beginning of period

 

 

220,861

 

 

80,811

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD 

 

$

19,610

 

$

225,084

 

 

See notes to the condensed consolidated financial statements

 

 

4


 

 

THE MCCLATCHY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

 

1.  SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

The McClatchy Company (the “Company,” “we,” “us” or “our”) is a 21st century news and information publisher of well-respected publications such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News and Observer, and the (Fort Worth) Star-Telegram. We operate media companies in 28 U.S. markets in 14 states, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We are headquartered in Sacramento, California, and our Class A Common Stock is listed on the New York Stock Exchange under the symbol MNI.

 

We also own 15.0% of CareerBuilder LLC, which operates the nation’s largest online jobs website, CareerBuilder.com, and 33.3% of HomeFinder.com, LLC, which operates the online real estate website HomeFinder.com. 

 

Preparation of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulation of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated financial statements include the Company and our subsidiaries. Intercompany items and transactions are eliminated. 

 

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature (except as described under Reclassifications and Corrections below), that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented.  The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2014 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the third-quarter periods and 39 weeks for the nine-month periods.  

 

Reclassifications and Corrections

 

Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements related to: (i) the presentation of the Anchorage Daily News, Inc. (“Anchorage”) as a discontinued operation (see Note 3,  Divestiture),  (ii) a correction of reporting wholesale fees associated with sales of certain third-party digital advertising products and services on a net basis, as a reduction of associated digital classified advertising revenues, rather than in other operating expenses, and (iii) the early retrospective adoption of Accounting Standards Update (“ASU”) No. 2015-03 relating to the classification of unamortized debt issuance costs, as described below. For the quarter and nine months ended September 28, 2014, net revenues and other operating expenses included within operating loss were reduced by $4.7 million and $13.8 million, respectively, to correct the presentation of advertising sales related to certain third-party digital advertising products and services previously reported on a gross basis to a net basis, with wholesale fees reported as a reduction of the associated digital classified advertising revenues instead of other operating expenses. As of December 28, 2014, we reclassified unamortized debt issuance costs of $12.1 million from other assets to a reduction in long-term debt on the condensed consolidated balance sheet as a result of the retrospective adoption of ASU No. 2015-03. There were no other changes to the prior periods’ condensed consolidated financial statements.

 

5


 

Fair Value of Financial Instruments

 

We account for certain assets and liabilities at fair value.  The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:

 

Level 1 – Unadjusted quoted prices available in active markets for identical investments as of the reporting date.

 

Level 2 – Observable inputs to the valuation methodology are other than Level 1 inputs and are either directly or indirectly observable as of the reporting date and fair value can be determined through the use of models or other valuation methodologies.

 

Level 3 – Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.

 

Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer.  The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

Cash and cash equivalents, accounts receivable and accounts payable.  The carrying amount of these items approximates fair value.

 

Long-term debt.  The fair value of our long-term debt is determined using quoted market prices and other inputs that were derived from available market information, including the current market activity of our publicly-traded notes and bank debt, trends in investor demand for debt and market values of comparable publicly-traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance, and may not be representative of actual value. At September 27, 2015,  the estimated fair value and carrying value of our long-term debt was $770.3 million and $932.9 million, respectively.

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non-financial assets measured at fair value on a nonrecurring basis are assets held for sale, goodwill, intangible assets not subject to amortization and equity method investments. All of these were measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Property, plant and equipment

 

During the nine months ended September 27, 2015, we incurred $6.7 million in accelerated depreciation related to the production equipment associated with outsourcing our printing process at a few of our newspapers. During the nine months ended September 28, 2014, we sold Anchorage, including the associated property, plant and equipment, which are presented as a discontinued operation. See Note 3,  Divestiture, below for further discussion of the transaction.  During the nine months ended September 28, 2014,  we also completed the acquisition of a new production facility, which was valued at $6.5 million, and we incurred $13.6 million in accelerated depreciation (i) related to the production equipment associated with outsourcing our printing process at one newspaper and (ii) resulting from moving the printing operations for another newspaper to the new production facility.

 

6


 

Depreciation expense with respect to property, plant and equipment is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

    

September 27,

    

September 28,

 

September 27,

 

September 28,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Depreciation expense

 

$

15,224

 

$

11,667

 

$

39,606

 

$

49,216

 

 

Assets held for sale

 

During the nine months ended September 27, 2015, we began to actively market for sale land and buildings at one of our newspapers and a parking structure at another newspaper. No impairment charges were incurred during the quarter and nine months ended September 27, 2015, as a result of placing these assets into assets held for sale during the periods. During the nine months ended September 28, 2014, we identified and began to actively market for sale one of our production facilities for a newspaper at which we outsourced our printing to a third-party. These assets consist primarily of undeveloped land and buildings. In connection with classifying these assets as assets held for sale, the carrying values of the land and buildings were reduced to their estimated fair value less selling costs, as determined based on the current market conditions and the selling prices. As a result, an impairment charge of $1.0 million was recorded in the nine months ended September 28, 2014, and is included in other operating expenses on the condensed consolidated statements of operations.    

 

Intangible Assets and Goodwill

 

We test for impairment of goodwill annually, at year‑end, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two‑step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. We perform this testing on operating segments, which are also considered our reporting units. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of our reporting units is determined using a combination of a discounted cash flow model and market based approaches. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, newsprint prices, compensation levels, discount rate, and for the market based approach, private and public market trading multiples for newspaper assets. We consider current market capitalization, based upon the recent stock market prices, plus an estimated control premium in determining the reasonableness of the aggregate fair value of the reporting units. See Note 2 for discussion of our goodwill impairment testing results.

 

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, at year‑end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief-from-royalty approach that utilizes a discounted cash flow model, as discussed above, to determine the fair value of each newspaper masthead. See Note 2 for discussion of our intangible assets impairment testing results.

 

Long‑lived assets such as intangible assets (primarily advertiser and subscriber lists) are amortized and tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. We had no impairment of long‑lived assets subject to amortization during the quarters and nine months ended months ended September 27, 2015, or September 28, 2014.

 

Segment Reporting

 

Our primary business is the publication of newspapers and related digital and direct marketing products. We have two operating segments that we aggregate into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. Each operating segment consists of a group of newspapers and,  effective July 1, 2015, following the retirement of a segment manager, both operating segments report to the same segment manager.

7


 

There was no change to our single reportable segment as a result of the changes to our operating segments. Effective July 1, 2015, one of our operating segments (“Western Segment”) consists of our newspaper operations in California, the Northwest, Midwest and Texas, while the other operating segment (“Eastern Segment”) consists primarily of newspaper operations in the Southeast and Florida.

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss (“AOCL”) and reclassifications from AOCL, net of tax, consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Other

    

 

 

 

 

 

Minimum

 

Comprehensive

 

 

 

 

 

 

Pension and

 

Loss

 

 

 

 

 

 

Post-

 

Related to

 

 

 

 

 

 

Retirement

 

Equity

 

 

 

 

(in thousands)

 

Liability

 

Investments

 

Total

 

Balance at December 28, 2014

 

$

(407,552)

 

$

(9,051)

 

$

(416,603)

 

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(572)

 

 

(572)

 

Amounts reclassified from AOCL

 

 

8,645

 

 

 

 

8,645

 

Other comprehensive income (loss)

 

 

8,645

 

 

(572)

 

 

8,073

 

Balance at September 27, 2015

 

$

(398,907)

 

$

(9,623)

 

$

(408,530)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCL (in thousands)

 

Amount Reclassified from AOCL (in thousands)

 

 

 

    

Quarters Ended

 

Nine Months Ended

    

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

Affected Line in the Condensed

AOCL Component

    

2015

    

2014

    

2015

 

2014

 

Consolidated Statements of 

Operations

Minimum pension and post-retirement liability

 

$

4,802

 

$

3,137

 

$

14,408

 

$

9,408

 

Compensation

 

 

 

(1,921)

 

 

(1,255)

 

 

(5,763)

 

 

(3,763)

 

Benefit for income taxes

 

 

$

2,881

 

$

1,882

 

$

8,645

 

$

5,645

 

Net of tax

 

Income Taxes

 

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

 

We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

 

Earnings Per Share (EPS)

 

Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period.  Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period.  Common stock equivalents arise from dilutive stock options, restricted stock units and restricted stock and are computed using the treasury stock method.  Anti-dilutive common stock equivalents are excluded from diluted EPS.  The weighted average anti-dilutive stock options that

8


 

could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(shares in thousands)

 

2015

 

2014

 

2015

 

2014

 

Anti-dilutive stock options

   

5,238

   

2,874

   

5,441

 

1,581

 

 

Cash Flow Information

 

Cash paid for interest and income taxes consisted of the following:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

(in thousands)

 

2015

 

2014

 

Interest paid (net of amount capitalized)

    

$

53,241

    

$

77,995

 

Income taxes paid (net of refunds)

 

 

197,718

 

 

67,233

 

 

The income tax payments in the nine months ended September 27, 2015, were primarily related to the gain on the sale of Classified Ventures, LLC (previous owned equity investment) in the fourth quarter of 2014, offset by the net of tax losses on bond repurchases in the fourth quarter of 2014.

 

Other non-cash investing activities from continuing operations, related to the recognition of an intangible asset for the nine months ended September 28, 2014, were $3.1 million. Other non-cash investing activities from continuing operations as of September 27, 2015,  and September 28, 2014, related to purchases of property, plant and equipment (“PP&E”) on credit, were $0.2 million and $0.9 million, respectively.

 

Recently Issued Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. It is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnotes disclosures in certain circumstances. It is effective for annual and interim periods beginning on or after December 15, 2016, with early adoption permitted. We do not believe the adoption of this guidance will have an impact on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-04, "Compensation – Retirement Benefits: Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets." ASU 2015-04 provides practical expedient, which permits a reporting entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. It is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements.

 

9


 

In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement."  ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for service contracts. It is effective for interim and annual reporting periods beginning after December 15, 2015. We do not believe the adoption of this guidance will have an impact on our condensed consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” It is effective for interim and annual reporting periods beginning after December 15, 2016. Amendment to the ASC should be applied prospectively with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

Effective December 29, 2014, we adopted the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” that was issued in April 2014.  ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective for annual and interim periods beginning on or after December 15, 2014.

 

Effective December 29, 2014, we adopted the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” that was issued in April 2015. ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of deferred charges.  It was effective for annual and interim periods beginning on or after December 15, 2015, however early adoption was permitted. In August 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting,” to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. We have elected to present the debt issuance costs related to our line-of credit arrangement, combined with the other debt issuance costs on our term loan debt, as a reduction in long-term debt. As of September 27, 2015, and December 28, 2014, we reclassified unamortized debt issuance costs of $10.6 million and $12.1 million, respectively, from other assets to a reduction in long-term debt on the condensed consolidated balance sheet.

 

2.  INTANGIBLE ASSETS AND GOODWILL

 

As of September 27, 2015, intangible assets subject to amortization (primarily advertiser lists, subscriber lists and developed technology), mastheads and goodwill consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28,

 

Impairment

 

Amortization

 

September 27,

 

(in thousands)

    

2014

    

Charges

    

Expense

    

2015

 

Intangible assets subject to amortization

 

$

833,254

 

$

 -

 

$

 -

 

$

833,254

 

Accumulated amortization

 

 

(615,378)

 

 

 -

 

 

(36,286)

 

 

(651,664)

 

 

 

 

217,876

 

 

 -

 

 

(36,286)

 

 

181,590

 

Mastheads

 

 

193,039

 

 

(9,488)

 

 

 -

 

 

183,551

 

Goodwill

 

 

996,115

 

 

(290,941)

 

 

 -

 

 

705,174

 

Total

 

$

1,407,030

 

$

(300,429)

 

$

(36,286)

 

$

1,070,315

 

 

10


 

Impairment of Goodwill and Intangible Assets

 

During the quarter ended June 28, 2015, we performed an interim testing of impairment of goodwill and intangible newspaper mastheads due to the continuing challenging business conditions and the resulting weakness in our stock prices. The fair values of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the present value of expected future cash flows, using estimates, judgments and assumptions (see Note 1) that we believe were appropriate in the circumstances. As a result, we recorded an impairment charge in our “Southeast, Florida and the Midwest” reporting unit related to goodwill of $290.9 million and an intangible newspaper masthead impairment charge of $9.5 million in the quarter ended June 28, 2015, which were recorded in the goodwill and other asset impairments line item on our condensed consolidated statements of operations. The step 2 goodwill and the intangible asset impairment tests for the quarter ended June 28, 2015, were not finalized prior to filing the quarterly report for that period, due to the significant amount of work required to calculate the implied fair value of goodwill and to value the intangible newspaper masthead assets. The significant judgments and estimates that were in process in the step 2 test included but were not limited to the valuation of property, plant and equipment and the valuation of other intangible assets. In the quarter ended September 27, 2015, we finalized the measurement of the goodwill and intangible newspaper masthead impairment charges, which were recorded in the quarter ended June 28, 2015, resulting in no additional adjustments to the amounts previously recognized.

 

Amortization expense with respect to intangible assets is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

    

September 27,

  

September 28,

 

September 27,

 

September 28,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Amortization expense

 

 $

12,071

 

 $

12,137

 

 $

36,286

 

 $

40,809

 

 

The estimated amortization expense for the remainder of fiscal year 2015 and the five succeeding fiscal years is as follows: 

 

 

 

 

 

 

Amortization

 

 

Expense

Year

    

(in thousands)

2015 (Remainder)

    

 $

12,103

2016

 

 

47,986

2017

 

 

48,907

2018

 

 

47,275

2019

 

 

23,769

2020

 

 

418

 

3.  DIVESTITURE

 

On May 5, 2014, we completed the sale of the outstanding capital stock of Anchorage to an assignee of Alaska Dispatch Publishing, LLC for $34.0 million in cash. The financial results of Anchorage have been reported as discontinued operations in our condensed consolidated financial statements for all periods presented herein.

 

11


 

The following table summarizes the financial information for the Anchorage’s operations for the quarter and nine months ended September 28, 2014:

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 28,

 

September 28,

 

(in thousands)

    

2014

 

2014

 

Revenues

 

$

 —

 

$

9,071

 

Loss from discontinued operations, before taxes

 

$

(163)

 

$

(211)

 

Income tax benefit

 

 

(105)

 

 

(125)

 

Loss from discontinued operations, net of tax, before loss on sale

 

$

(58)

 

$

(86)

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of discontinued operations

 

$

(83)

 

$

5,391

 

Income tax provision

 

 

 —

 

 

6,925

 

Loss on sale of discontinued operations, net of tax

 

 

(83)

 

 

(1,534)

 

Loss from discontinued operations, net of tax

 

$

(141)

 

$

(1,620)

 

 

4.  INVESTMENTS IN UNCONSOLIDATED COMPANIES

 

The carrying value of investments in unconsolidated companies consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

% Ownership

    

September 27,

    

December 28,

 

Company

    

Interest

    

2015

    

2014

 

CareerBuilder, LLC

 

15.0

 

$

233,192

 

$

226,965

 

Other

 

Various

 

 

3,926

 

 

3,508

 

 

 

 

 

$

237,118

 

$

230,473

 

 

During the nine months ended September 27, 2015, our proportionate share of net income from certain investments listed in the table above was greater than 20% of our condensed consolidated net income (loss) before taxes. Summarized condensed financial information, as provided to us by these certain investees, is as follows: