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EX-31.2 - EX-31.2 - MCCLATCHY COmni-20160327ex3120a540e.htm
EX-31.1 - EX-31.1 - MCCLATCHY COmni-20160327ex311fbf45d.htm
EX-32.1 - EX-32.1 - MCCLATCHY COmni-20160327ex32183ea37.htm
EX-32.2 - EX-32.2 - MCCLATCHY COmni-20160327ex32220cec4.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:  March 27, 2016

 

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

 

G:\SHARED\CONTROL\Financial Reporting\2016\Q1 2016 10Q\Working Copy\Vertical_White (1).JPG

 

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 April 27, 2016, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

54,217,961

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 27,

 

March 29,

 

 

    

2016

 

2015

 

REVENUES — NET:

 

 

 

 

 

 

 

Advertising

 

$

136,256

 

$

151,247

 

Audience

 

 

90,662

 

 

93,209

 

Other

 

 

11,061

 

 

12,722

 

 

 

 

237,979

 

 

257,178

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Compensation

 

 

102,774

 

 

106,672

 

Newsprint, supplements and printing expenses

 

 

19,032

 

 

24,776

 

Depreciation and amortization

 

 

24,562

 

 

23,663

 

Other operating expenses

 

 

97,658

 

 

103,225

 

 

 

 

244,026

 

 

258,336

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(6,047)

 

 

(1,158)

 

 

 

 

 

 

 

 

 

NON-OPERATING (EXPENSE) INCOME:

 

 

 

 

 

 

 

Interest expense

 

 

(20,247)

 

 

(22,338)

 

Interest income

 

 

96

 

 

63

 

Equity income in unconsolidated companies, net

 

 

1,849

 

 

3,867

 

Gains related to equity investments

 

 

 —

 

 

633

 

Gain on extinguishment of debt, net

 

 

1,535

 

 

 —

 

Other — net

 

 

(42)

 

 

(66)

 

 

 

 

(16,809)

 

 

(17,841)

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(22,856)

 

 

(18,999)

 

Income tax benefit

 

 

(10,115)

 

 

(7,653)

 

NET LOSS

 

$

(12,741)

 

$

(11,346)

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

 

$

(0.16)

 

$

(0.13)

 

Diluted

 

$

(0.16)

 

$

(0.13)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used

 

 

 

 

 

 

 

to calculate basic and diluted earnings per share:

 

 

 

 

 

 

 

Basic

 

 

80,580

 

 

87,207

 

Diluted

 

 

80,580

 

 

87,207

 

See notes to the condensed consolidated financial statements.

 

 

1


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; In thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 27,

 

March 29,

 

 

    

2016

 

2015

 

NET LOSS

 

$

(12,741)

 

$

(11,346)

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

Pension and post retirement plans:

 

 

 

 

 

 

 

Change in pension and post-retirement benefit plans, net of taxes of $(1,535) and $(1,921)    

 

 

2,302

 

 

2,881

 

Investment in unconsolidated companies:

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes of $330 and $165

 

 

(495)

 

 

(247)

 

Other comprehensive income

 

 

1,807

 

 

2,634

 

Comprehensive loss

 

$

(10,934)

 

$

(8,712)

 

 

See notes to the condensed consolidated financial statements.

 

 

2


 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

March 27,

    

December 27,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,587

 

$

9,332

 

Trade receivables (net of allowances of $4,497 in 2016 and $4,451 in 2015)

 

 

101,763

 

 

138,153

 

Other receivables

 

 

10,827

 

 

16,367

 

Newsprint, ink and other inventories

 

 

19,134

 

 

16,659

 

Assets held for sale

 

 

5,357

 

 

5,357

 

Other current assets

 

 

21,730

 

 

19,194

 

 

 

 

176,398

 

 

205,062

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

355,495

 

 

364,219

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

336,653

 

 

348,651

 

Goodwill

 

 

705,174

 

 

705,174

 

 

 

 

1,041,827

 

 

1,053,825

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

235,217

 

 

233,538

 

Deferred income taxes

 

 

11,536

 

 

1,312

 

Other assets

 

 

65,952

 

 

65,078

 

 

 

 

312,705

 

 

299,928

 

 

 

$

1,886,425

 

$

1,923,034

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

38,812

 

$

41,751

 

Accrued pension liabilities

 

 

8,450

 

 

8,450

 

Accrued compensation

 

 

27,544

 

 

29,410

 

Income taxes payable

 

 

717

 

 

687

 

Unearned revenue

 

 

64,819

 

 

60,811

 

Accrued interest

 

 

16,735

 

 

9,423

 

Other accrued liabilities

 

 

20,144

 

 

15,195

 

 

 

 

177,221

 

 

165,727

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

875,989

 

 

905,425

 

Pension and postretirement obligations

 

 

531,985

 

 

581,852

 

Financing obligations

 

 

74,829

 

 

32,398

 

Other long-term obligations

 

 

47,137

 

 

44,869

 

 

 

 

1,529,940

 

 

1,564,544

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 59,467,435 in 2016 and 58,782,535 in 2015)

 

 

595

 

 

588

 

Class B (authorized 60,000,000 shares, issued 24,431,962 in 2016 and 2015) 

 

 

244

 

 

244

 

Additional paid-in-capital

 

 

2,220,848

 

 

2,219,481

 

Accumulated deficit

 

 

(1,616,287)

 

 

(1,603,546)

 

Treasury stock at cost, 5,249,454 shares in 2016 and 1,652,165 shares in 2015

 

 

(6,135)

 

 

(2,196)

 

Accumulated other comprehensive loss

 

 

(420,001)

 

 

(421,808)

 

 

 

 

179,264

 

 

192,763

 

 

 

$

1,886,425

 

$

1,923,034

 

 

See notes to the condensed consolidated financial statements.

3


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited; In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

 

    

2016

    

2015

    

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net loss

 

$

(12,741)

 

$

(11,346)

 

 

 

 

 

 

 

 

 

Reconciliation to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,562

 

 

23,663

 

(Gain) loss on disposal of equipment

 

 

(73)

 

 

70

 

Retirement benefit expense

 

 

3,694

 

 

2,493

 

Stock-based compensation expense

 

 

1,374

 

 

1,714

 

Equity income in unconsolidated companies

 

 

(1,849)

 

 

(3,867)

 

Gains related to equity investments

 

 

 —

 

 

(633)

 

Gain on extinguishment of debt, net

 

 

(1,535)

 

 

 —

 

Other

 

 

(1,691)

 

 

(1,706)

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

36,390

 

 

31,313

 

Inventories

 

 

(2,475)

 

 

(1,359)

 

Other assets

 

 

1,072

 

 

(3,413)

 

Accounts payable

 

 

(2,939)

 

 

(5,856)

 

Accrued compensation

 

 

(1,866)

 

 

(2,244)

 

Income taxes

 

 

(10,341)

 

 

(186,231)

 

Accrued interest

 

 

7,312

 

 

7,770

 

Other liabilities

 

 

6,867

 

 

5,185

 

Net cash provided by (used in) operating activities

 

 

45,761

 

 

(144,447)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(3,314)

 

 

(2,575)

 

Contributions to equity investments

 

 

(500)

 

 

 —

 

Other-net

 

 

111

 

 

639

 

Net cash used in investing activities

 

 

(3,703)

 

 

(1,936)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repurchase of public notes

 

 

(28,804)

 

 

 —

 

Purchase of treasury shares

 

 

(3,939)

 

 

 —

 

Other

 

 

(1,060)

 

 

(936)

 

Net cash used in financing activities

 

 

(33,803)

 

 

(936)

 

Increase (decrease) in cash and cash equivalents

 

 

8,255

 

 

(147,319)

 

Cash and cash equivalents at beginning of period

 

 

9,332

 

 

220,861

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD 

 

$

17,587

 

$

73,542

 

 

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 29 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, as well as certain other digital company investments. 

 

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, 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 27, 2015 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the first-quarter periods.

 

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:

5


 

 

Cash and cash equivalents, accounts receivable and accounts payable.  As of March 27, 2016, and December 27, 2015,  the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.

 

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 March 27, 2016, and December 27, 2015,  the estimated fair value of long-term debt was $693.1 million and $729.8 million, respectively. At March 27, 2016, and December 27, 2015, the carrying value of our long-term debt was $876.0 million and $905.4 million, respectively.

 

Pension plan. As of March 27, 2016, and December 27, 2015, we had assets related to our qualified defined benefit pension plan measured at fair value.

 

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 are 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. The significant unobservable inputs include our expected cash flows and discount rates that we estimate market participants would seek for bearing the risk associated with such assets.

 

Property, plant and equipment

 

During the three months ended March 27, 2016, we incurred $2.8 million in accelerated depreciation related to the production equipment associated with outsourcing our printing process at two of our media companies.  No similar transactions were recorded during the three months ended March 29, 2015.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

(in thousands)

 

2016

 

2015

 

Depreciation expense

 

$

12,564

 

$

11,523

 

 

Assets held for sale

 

Assets held for sale includes land and buildings that we began to actively market for sale during 2015 at one of our media companies and a parking structure at another media company. No similar transactions were recorded during the three months ended March 27, 2016.    

 

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

6


 

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. We had no impairment of goodwill during the three months ended March 27, 2016, or March 29, 2015.

 

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. We had no impairment of newspaper mastheads during the three months ended March 27, 2016, or March 29, 2015.

 

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 three months ended March 27, 2016, or March 29, 2015.

 

Segment Reporting

 

We operate 29 media companies, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We have two operating segments that we aggregate into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. Our operating segments are based on how our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), makes decisions about allocating resources and assessing performance. The CODM is provided discrete financial information for the two operating segments. Each operating segment consists of a group of media companies and both operating segments report to the same segment manager. As of March 27, 2016, one of our operating segments (“Western Segment”) consists of our media operations in California, the Northwest, and the Midwest, while the other operating segment (“Eastern Segment”) consists primarily of media 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 27, 2015

 

$

(411,956)

 

$

(9,852)

 

$

(421,808)

 

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(495)

 

 

(495)

 

Amounts reclassified from AOCL

 

 

2,302

 

 

 

 

2,302

 

Other comprehensive income (loss)

 

 

2,302

 

 

(495)

 

 

1,807

 

Balance at March 27, 2016

 

$

(409,654)

 

$

(10,347)

 

$

(420,001)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCL

 

 

 

 

Three Months Ended

    

 

 

 

March 27,

 

March 29,

 

Affected Line in the Condensed

AOCL Component

    

2016

 

2015

 

Consolidated Statements of Operations

Minimum pension and post-retirement liability

 

$

3,837

 

$

4,802

 

Compensation

 

 

 

(1,535)

 

 

(1,921)

 

Benefit for income taxes

 

 

$

2,302

 

$

2,881

 

Net of tax

 

7


 

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 appreciation rights, 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 common stock equivalents that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

(shares in thousands)

 

2016

 

2015

 

Anti-dilutive common stock equivalents

    

4,487

 

4,565

 

 

Cash Flow Information

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 27,

 

March 29,

(in thousands)

 

2016

 

2015

Interest paid (net of amount capitalized)

    

$

11,087

    

$

12,695

Income taxes paid (net of refunds)

 

 

(5,850)

 

 

178,581

 

 

 

 

 

 

 

Other-non cash financing activities:

 

 

 

 

 

 

Financing obligation for contribution of real property to pension plan

 

$

47,130

 

 

 

Reduction of pension obligation

 

 

(47,130)

 

 

 

 

The income tax payments in the three months ended March 29, 2015, were primarily related to the gain on the sale of a  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 financing activities relate to the contribution of real property to the Pension Plan. See Note 5 for further discussion.

 

Recently Issued Accounting Pronouncements 

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 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 us 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.

8


 

 

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 us 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 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 us for interim and annual reporting periods beginning after December 15, 2016. The standard 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.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for us for interim and annual reporting periods beginning after December 15, 2017. We do not believe the adoption of this guidance will have an impact on our condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Accounting Standards Codification 842 (“ASC 842”)) and it replaces the existing guidance in ASC 840, “Leases.” ASC 842 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. It is effective for us for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net).” ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09, as described above.  We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements of Employee Share-Based Payment Accounting.” ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This guidance also clarifies the statement of cash flows presentation of certain components of share-based awards. ASU 2016-09 is effective for us for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 does not change the core principle of the guidance stated in ASU 2014-09, instead, the amendments in this ASU are intended to clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09, as described above. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements. 

 

9


 

Recently Adopted Accounting Pronouncements

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810); Amendments to the Consolidated Analysis,” which changed the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance was effective for us at the beginning of 2016. The adoption of this guidance did not have an impact on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provided 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. This guidance was effective for us at the beginning of 2016. The adoption of this guidance did not have an impact on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323).” ASU 2016-07 eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings. ASU 2016-07 is effective for us for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We early adopted this standard and it did not have an impact on our condensed consolidated financial statements.  

 

2.  INTANGIBLE ASSETS AND GOODWILL

 

Intangible assets subject to amortization (primarily advertiser lists, subscriber lists and developed technology), mastheads and goodwill consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27,

 

Amortization

 

March 27,

 

(in thousands)

    

2015

    

Expense

    

2016

 

Intangible assets subject to amortization

 

$

833,254

 

$

 —

 

$

833,254

 

Accumulated amortization

 

 

(663,735)

 

 

(11,998)

 

 

(675,733)

 

 

 

 

169,519

 

 

(11,998)

 

 

157,521

 

Mastheads

 

 

179,132

 

 

 —

 

 

179,132

 

Goodwill

 

 

705,174

 

 

 —

 

 

705,174

 

Total

 

$

1,053,825

 

$

(11,998)

 

$

1,041,827

 

 

Amortization expense with respect to intangible assets is summarized below:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

(in thousands)

 

2016

 

2015

 

Amortization expense

 

 $

11,998

 

 $

12,140

 

 

10


 

The estimated amortization expense for the remainder of fiscal year 2016 and the five succeeding fiscal years is as follows: 

 

 

 

 

 

 

 

Amortization

 

 

Expense

Year

 

(in thousands)

2016 (Remainder)

 

 $

35,988

2017

 

 

48,907

2018

 

 

47,275

2019

 

 

23,769

2020

 

 

418

2021

 

 

296

 

3.  INVESTMENTS IN UNCONSOLIDATED COMPANIES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

% Ownership

    

March 27,

    

December 27,

 

Company

    

Interest

    

2016

    

2015

 

CareerBuilder, LLC

 

15.0

 

$

232,392

 

$

230,170

 

Other

 

Various

 

 

2,825

 

 

3,368

 

 

 

 

 

$

235,217

 

$

233,538

 

 

On February 23, 2016, we, along with Gannett Co. Inc. and Tribune Publishing Co. (the “Selling Partners”) sold all of the assets in HomeFinder LLC to Placester Inc. (“Placester”) in exchange for a small stock ownership in Placester and an affiliate agreement with Placester to continue to allow the Selling Partners to sell Placester and HomeFinder LLC’s products and services. As a result of this transaction, during the quarter ended March 27, 2016, we wrote down $0.9 million of our HomeFinder LLC investment, which is recorded in equity income in unconsolidated companies, net, on our condensed consolidated statements of operations.

 

 

4.  LONG-TERM DEBT

 

Our long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face Value at

 

Carrying Value

 

 

 

March 27,

 

March 27,

 

December 27,

 

(in thousands)

 

2016

 

2016

 

2015

 

Notes:

    

 

    

    

 

    

    

 

    

 

9.00% senior secured notes due in 2022

 

$

506,415

 

$

497,113

 

$

506,571

 

5.750% notes due in 2017

 

 

34,645

 

 

34,168

 

 

54,551

 

7.150% debentures due in 2027

 

 

89,188

 

 

84,567

 

 

84,469

 

6.875% debentures due in 2029

 

 

276,230

 

 

260,141

 

 

259,834

 

Long-term debt

 

$

906,478

 

$

875,989

 

$

905,425

 

 

Our outstanding notes are stated net of unamortized debt issuance costs and unamortized discounts, if applicable, totaling $30.5  million and $31.9  million as of March 27, 2016,  and December 27, 2015, respectively.

 

Debt Repurchases and Loss on Extinguishment of Debt

 

During the three months ended March 27, 2016,  we repurchased a total of $30.8 million of notes through privately negotiated transactions as follows:

 

 

 

 

 

 

(in thousands)

    

Face Value

 

9.00% senior secured notes due in 2022

 

$

10,000

 

5.750% notes due in 2017

 

 

20,797

 

Total notes repurchased

 

$

30,797

 

 

11


 

We recorded a net gain on extinguishment of debt of $1.5 million during the three months ended March 27, 2016.  We repurchased these notes at a discount and wrote off historical discounts and debt issuance costs during the quarter ended March 27, 2016.  We had no debt repurchases during the three months ended March 29, 2015. 

 

Credit Agreement

 

Our Third Amended and Restated Credit Agreement dated December 18, 2012, as amended (“Credit Agreement”), is secured by a first-priority security interest in certain of our assets as described below. The Credit Agreement, among other things, provides for commitments of $65.0 million and a maturity date of December 18, 2019. On October 21, 2014, we entered into a Collateralized Issuance and Reimbursement Agreement (“LC Agreement”). Pursuant to the terms of LC Agreement, we may request letters of credit be issued on our behalf in an aggregate face amount not to exceed $35.0 million. We are required to provide cash collateral equal to 101% of the aggregate undrawn stated amount of each outstanding letter of credit.

 

As of March 27, 2016,  there were standby letters of credit outstanding under the LC Agreement with an aggregate face amount of $31.0 million. There were no borrowings outstanding under the Credit Agreement as of March 27, 2016.

 

Under the Credit Agreement, we may borrow at either the London Interbank Offered Rate plus a spread ranging from 275 basis points to 425 basis points, or at a base rate plus a spread ranging from 175 basis points to 325 basis points, in each case based upon our consolidated total leverage ratio. The Credit Agreement provides for a commitment fee payable on the unused revolving credit ranging from 50 basis points to 62.5 basis points, based upon our consolidated total leverage ratio.

 

Senior Secured Notes and Indenture

 

Substantially all of our subsidiaries guarantee the obligations under the 9.00% Senior Secured Notes due in 2022 (“9.00% Notes”) and the Credit Agreement. We own 100% of each of the guarantor subsidiaries and we have no significant independent assets or operations separate from the subsidiaries that guarantee our 9.00% Notes and the Credit Agreement. The guarantees provided by the guarantor subsidiaries are full and unconditional and joint and several, and the subsidiaries other than the subsidiary guarantors are minor.

 

In addition, we have granted a security interest to the banks that are a party to the Credit Agreement and the trustee under the indenture governing the 9.00% Notes that include, but are not limited to, intangible assets, inventory, receivables and certain minority investments as collateral for the debt. The security interest does not include any PP&E, leasehold interests or improvements with respect to such PP&E which would be reflected on our condensed consolidated balance sheets or shares of stock and indebtedness of our subsidiaries.

 

Covenants under the Senior Debt Agreements

 

The financial covenant under the Credit Agreement requires us to comply with a maximum consolidated total leverage ratio measured quarterly. As of March 27, 2016,  we are required to maintain a consolidated total leverage ratio of not more than 6.00 to 1.00.   For purposes of consolidated total leverage ratio, debt is largely defined as debt, net of cash on hand in excess of $20.0 million. As of March 27, 2016,  we were in compliance with our debt covenants.

 

The Credit Agreement also prohibits the payment of a dividend if a payment would not be permitted under the indenture for the 9.00% Notes (discussed below). Dividends under the indenture for the 9.00% Notes are allowed if the consolidated leverage ratio (as defined in the indenture) is less than 5.25 to 1.00 and we have sufficient amounts under our restricted payments basket (as defined in the indenture).

 

The indenture for the 9.00% Notes and the Credit Agreement include a number of restrictive covenants that are applicable to us and our restricted subsidiaries. The covenants are subject to a number of important exceptions and qualifications set forth in those agreements. These covenants include, among other things, restrictions on our ability to incur additional debt; make investments and other restricted payments; pay dividends on capital stock or redeem or repurchase capital stock or certain of our outstanding notes or debentures prior to stated maturity; sell assets or enter into sale/leaseback transactions; create specified liens; create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make

12


 

other distributions; engage in certain transactions with affiliates; and consolidate or merge with or into other companies or sell all or substantially all of the Company’s and our subsidiaries’ assets, taken as a whole.

 

5.  EMPLOYEE BENEFITS

 

We maintain a noncontributory qualified defined benefit pension plan (“Pension Plan”), which covers certain eligible current and former employees and has been frozen since March 31, 2009No new participants may enter the Pension Plan and no further benefits will accrue. However, years of service continue to count toward early retirement calculations and vesting of benefits previously earned.

 

We also have a limited number of supplemental retirement plans to provide certain key current and former employees with additional retirement benefits.  These plans are funded on a pay-as-you-go basis and the accrued pension obligation is largely included in other long-term obligations.

 

The elements of retirement expense are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

(in thousands)

 

2016

 

2015

 

Pension plans:

    

 

    

 

 

    

 

Service Cost

 

$

4,700

 

$

2,920

 

Interest Cost

 

 

22,167

 

 

21,248

 

Expected return on plan assets

 

 

(27,107)

 

 

(26,571)

 

Actuarial loss

 

 

4,596

 

 

5,549

 

Net pension expense

 

 

4,356

 

 

3,146

 

Net post-retirement benefit credit

 

 

(662)

 

 

(653)

 

Net retirement expenses

 

$

3,694

 

$

2,493

 

 

In February 2016, we contributed certain of our real property appraised at $47.1 million to our Pension Plan and we entered into lease-back arrangements for the contributed facilities.  Our required pension contribution under the Employee Retirement Income Security Act for 2016 is approximately $2.0 million, and the contribution of real property will exceed our required pension contribution for 2016. We leased back the contributed facilities under 11-year leases with initial annual payments totaling approximately $3.5 million. The contribution and leaseback of these properties in 2016 will be treated as a financing transaction and, accordingly, we will continue to depreciate the carrying value of the properties in our financial statements. No gain or loss will be recognized on the contributions until the termination of the individual leases on those properties. At the time of our contribution, our pension obligation was reduced and a financing obligation was recorded. The financing obligation will be reduced by a portion of the lease payments made to the Pension Plan each month. The balance of this obligation at March 27, 2016, and December 27, 2015, was $74.8 million and $32.4 million, respectively, and relates to certain real properties that were contributed to the Pension Plan in 2016 and 2011.

 

We have a defined contribution plan (“401(k) plan”), which enables qualified employees to voluntarily defer compensation.  The 401(k) plan includes a matching company contribution and a supplemental contribution that is tied to our performance.  We suspended our matching contribution to the 401(k) plan in 2009 and as of March 27, 2016,  we have not reinstated that benefit.

 

6.  COMMITMENTS AND CONTINGENCIES 

 

In December 2008, carriers of The Fresno Bee filed a purported class action lawsuit against us and The Fresno Bee in the Superior Court of the State of California in Fresno County captioned Becerra v. The McClatchy Company (“Fresno case”) alleging that the carriers were misclassified as independent contractors and seeking mileage reimbursement. In February 2009, a substantially similar lawsuit, Sawin v. The McClatchy Company, involving similar allegations was filed by carriers of The Sacramento Bee (“Sacramento case”) in the Superior Court of the State of California in Sacramento County. Both courts have certified the class in these cases. The class consists of roughly 5,000 carriers in the Sacramento case and 3,500 

13


 

carriers in the Fresno case. The plaintiffs in both cases are seeking unspecified restitution for mileage reimbursement. With respect to the Sacramento case, in September 2013, all wage and hour claims were dismissed and the only remaining claim is an equitable claim for mileage reimbursement under the California Civil Code.  In the Fresno case, in March 2014, all wage and hour claims were dismissed and the only remaining claim is an equitable claim for mileage reimbursement under the California Civil Code.

 

The court in the Sacramento case trifurcated the trial into three separate phases: the first phase addressed independent contractor status, the second phase will address liability, if any, and the third phase will address restitution, if any. On September 22, 2014, the court in the Sacramento case issued a tentative decision following the first phase, finding that the carriers that contracted directly with The Sacramento Bee during the period from February 2005 to July 2009 were misclassified as independent contractors. We objected to the tentative decision but the court ultimately adopted it as final. The court has not yet established a date for the second and third phases of trial concerning whether The Sacramento Bee is liable to the carriers in the class for mileage reimbursement or owes any restitution.

 

The court in the Fresno case bifurcated the trial into two separate phases: the first phase addressed independent contractor status and liability for mileage reimbursement and the second phase will address restitution, if any. The first phase of the Fresno case began in the fourth quarter of fiscal year 2014 and concluded in late March 2015. On April 14, 2016, the court in the Fresno case issued a statement of decision granting judgment in favor of us and The Fresno Bee.

 

We continue to defend these actions vigorously and expect that we will ultimately prevail. As a result, we have not established a reserve in connection with the cases. While we believe that a material impact on our condensed consolidated financial position, results of operations or cash flows from these claims is unlikely, given the inherent uncertainty of litigation, a possibility exists that future adverse rulings or unfavorable developments could result in future charges that could have a material impact. We have and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and make appropriate adjustments to such estimates based on experience and developments in litigation.

 

Other than the cases described above, we are subject to a variety of legal proceedings (including libel, employment, wage and hour, independent contractor and other legal actions) and governmental proceedings (including environmental matters) that arise from time to time in the ordinary course of our business. We are unable to estimate the amount or range of reasonably possible losses for these matters. However, we currently believe, after reviewing such actions with counsel, that the expected outcome of pending actions will not have a material effect on our condensed consolidated financial statements. No material amounts for any losses from litigation that may ultimately occur have been recorded in the condensed consolidated financial statements as we believe that any such losses are not probable.

 

We have certain indemnification obligations related to the sale of assets including but not limited to insurance claims and multi-employer pension plans of disposed newspaper operations. We believe the remaining obligations related to disposed assets will not be material to our financial position, results of operations or cash flows.

 

As of March 27, 2016,  we had $31.0 million of standby letters of credit secured under the LC Agreement (see Note 4,  Long-Term Debt, for further discussion).

 

14


 

7.  STOCK PLANS

 

Stock Plans Activity

 

The following table summarizes the restricted stock units (“RSUs”) activity during the three months ended March 27, 2016:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average Grant

 

 

 

 

Date Fair

 

    

 

    

Value

Nonvested — December 27, 2015

 

1,538,800

 

$

2.98

Granted

 

1,234,200

 

$

1.06

Vested

 

(651,300)

 

$

3.09

Forfeited

 

(12,400)

 

$

2.60

Nonvested — March 27, 2016

 

2,109,300

 

$

1.83

 

The total fair value of the RSUs that vested during the three months ended March 27, 2016,  was $0.7  million.

 

The following table summarizes the stock appreciation rights (“SARs”) activity during the three months ended March 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

Average

 

Intrinsic Value

 

 

    

SARs

    

Exercise Price

    

(in thousands)

 

Outstanding December 27, 2015

 

3,201,250

 

$

7.35

 

$

 —

 

Forfeited

 

(500)

 

$

2.76

 

 

 

 

Expired

 

(78,750)

 

$

8.56

 

 

 

 

Outstanding March 27, 2016

 

3,122,000

 

$

7.32

 

$

 —

 

 

Stock-Based Compensation

 

All stock-based payments, including grants of stock appreciation rights, restricted stock units and common stock under equity incentive plans, are recognized in the financial statements based on their grant date fair values. At March 27, 2016,  we had two stock-based compensation plans. Stock-based compensation expenses are reported in the compensation line item in the condensed consolidated statements of operations. Total stock-based compensation expense for the periods presented in this report, are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

(in thousands)

 

2016

 

2015

 

Stock-based compensation expense

    

$

1,374

 

$

1,714

 

 

 

8.   Potential Reverse Stock Split

 

In the first quarter of 2016, our Board of Directors adopted a resolution approving an Amended and Restated Certificate of Incorporation which would allow the Company to effect a reverse stock split of our issued and outstanding Class A and Class B Common Stock at a ratio of not less than one-for-five (1:5) and not more than one-for-twenty five (1:25), with the exact reverse stock split ratio to be determined by the Board of Directors, if they so choose, and publicly announced prior to the filing of the Amended and Restated Certificate of Incorporation. The reverse stock split ratio will be the same for both the Class A and Class B Common Stock. The Amended and Restated Certificate of Incorporation is subject to shareholder approval at our Annual Meeting of Shareholders, scheduled to be held on May 18, 2016. The primary purpose of effecting the reverse stock split, if the Board of Directors so elects, is to increase our trading price on the New York Stock Exchange (“NYSE”) to comply with the NYSE continued listing standard requirements, which require an average closing price of at least $1.00 per share over thirty consecutive trading days. 

 

15


 

On February 16, 2016, we received notification from the NYSE that we were not in compliance with the NYSE’s continued listing standard requirement. However, as of April 1, 2016, we were notified that we are currently in compliance with the standard. If the Amended and Restated Certificate of Incorporation effecting the reverse stock split is adopted by the shareholders, an Amended and Restated Certificate of Incorporation will become effective, if at all, only upon a determination by the Board of Directors within six months after the Annual  Meeting of Shareholders of the reverse stock ratio to be used and that the actions contemplated by the Amended and Restated Certificate of Incorporation containing such reverse stock split ratio are in the best interests of the Company and the shareholders.

16


 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward-Looking Information

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, including statements relating to future financial performance and operations, trends in advertising, uses of cash, the refinancing of our debt and our pension plan obligations. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. For all of those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, trends and uncertainties. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A of our 2015 Annual Report on Form 10-K as well as our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statements except as required under applicable law.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of The McClatchy Company and its consolidated subsidiaries (together, the “Company,” “we,” “us” or “our”). This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements (“Notes”) as of and for the three months ended March 27, 2016, included in Item 1 of this Quarterly Report on Form 10-Q, as well as with our audited consolidated financial statements and accompanying notes to the financial statements and MD&A contained in our 2015 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 8, 2016. All period references are to our fiscal periods unless otherwise indicated.

 

Overview

 

We are 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 29 media companies in 28 U.S. markets in 14 states, providing each of these 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, as well as certain other digital company investments. 

 

The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

 

 

2016

 

2015

 

Revenues:

    

    

    

    

 

Advertising

 

57.3

%  

58.8

%  

Audience

 

38.1

%  

36.2

%  

Other

 

4.6

%  

5.0

%  

Total revenues

 

100.0

%  

100.0

%  

 

Our primary sources of revenues are print and digital advertising and audience subscriptions. All categories (retail, national and classified) of advertising discussed below include both print and digital advertising. Retail advertising revenues include

17


 

advertising carried as a part of newspapers (run of press (“ROP”) advertising), advertising inserts placed in newspapers (“preprint” advertising) and/or advertising delivered digitally. Audience revenues include either print or digital subscriptions, or a combination of both. Our print newspapers are delivered by independent contractors and large distributors. Other revenues include, among others, primarily commercial printing and distribution revenues.

 

See “Results of Operations” below for a discussion of our revenue performance and contribution by category for the three months ended March 27, 2016, and March 29, 2015.

 

Recent Developments

 

Potential Reverse Stock Split

 

In the first quarter of 2016, our Board of Directors adopted a resolution approving an Amended and Restated Certificate of Incorporation which would allow the Company to effect a reverse stock split of our issued and outstanding Class A and Class B Common Stock at a ratio of not less than one-for-five (1:5) and not more than one-for-twenty five (1:25), with the exact reverse stock split ratio to be determined by the Board of Directors, if they so choose, and publicly announced prior to the filing of the Amended and Restated Certificate of Incorporation. The reverse stock split ratio will be the same for both the Class A and Class B Common Stock. The Amended and Restated Certificate of Incorporation is subject to shareholder approval at our Annual Meeting of Shareholders, scheduled to be held on May 18, 2016. The primary purpose of effecting the reverse stock split, if the Board of Directors so elects, is to increase our trading price on the New York Stock Exchange (“NYSE”) to comply with the NYSE continued listing standard requirements, which require an average closing price of at least $1.00 per share over thirty consecutive trading days. 

 

On February 16, 2016, we received notification from the NYSE that we were not in compliance with the NYSE’s continued listing standard requirement. However, as of April 1, 2016, we were notified that we are currently in compliance with the standard. If the Amended and Restated Certificate of Incorporation effecting the reverse stock split is adopted by the shareholders, an Amended and Restated Certificate of Incorporation will become effective, if at all, only upon a determination by the Board of Directors within six months after the Annual Meeting of Shareholders of the reverse stock ratio to be used and that the actions contemplated by the Amended and Restated Certificate of Incorporation containing such reverse stock split ratio are in the best interests of the Company and the shareholders. 

 

Debt Repurchases and Extinguishment of Debt

 

During the three months ended March 27, 2016, we repurchased a total of $30.8 million of notes through privately negotiated transactions and recorded a net gain on extinguishment of debt of $1.5 million during the three months ended March 27, 2016.  

 

Share Repurchase Program

 

In 2015, our Board of Directors authorized a share repurchase program for the repurchase of up to $15.0 million of our Class A Common Stock through December 31, 2016. The shares will be repurchased from time to time depending on prevailing market prices, availability, and market conditions, among other factors. During the quarter ended March 27, 2016, we repurchased approximately 3.3 million shares at a weighted average price of $1.09 per share. As of March 27, 2016, we have repurchased 9.5 million shares or $11.5 million of the total buyback approved.

 

Contribution of Company-Owned Real Property to Pension Plan

 

In February 2016, we contributed certain of our real property appraised at $47.1 million to our Pension Plan, and we entered into lease-back arrangements for the contributed facilities.  Our required pension contribution under the Employee Retirement Income Security Act for 2016 is approximately $2.0 million, and the contribution of real property will exceed our required pension contribution for 2016. We leased back the contributed facilities under 11-year leases with initial annual payments totaling approximately $3.5 million. The contribution and leaseback of these properties in 2016 will be treated as a financing transaction and, accordingly, we will continue to depreciate the carrying value of the properties in our financial statements. No gain or loss will be recognized on the contributions until the termination of the individual

18


 

leases on those properties. At the time of our contribution, our pension obligation was reduced and a financing obligation was recorded. The financing obligation will be reduced by a portion of the lease payments made to the Pension Plan each month. The balance of this obligation at March 27, 2016, and December 27, 2015, was $74.8 million and $32.4 million, respectively, and relates to certain real properties that were contributed to the Pension Plan in 2016 and 2011.

 

Results of Operations

 

The following table reflects our financial results on a consolidated basis for the three months ended March 27, 2016, and March 29, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 27,

 

March 29,

 

 

 

2016

 

2015

 

Net loss

 

 $

(12,741)

 

 $

(11,346)

 

 

 

 

 

 

 

 

 

Net loss per diluted common share

 

 $

(0.16)

 

 $

(0.13)

 

 

The increase in the net loss in the three months ended March 27, 2016, compared to the same period in 2015 was largely due to lower revenues and an increase in accelerated depreciation and other costs incurred to reduce our future overhead, as described more fully below. 

 

Revenues

 

The following table summarizes our revenues by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 27,

 

March 29,

 

 

$

 

%

(in thousands)

 

2016

 

2015

 

 

Change