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EX-32.2 - EX-32.2 - MCCLATCHY COmni-20170924ex3224256da.htm
EX-32.1 - EX-32.1 - MCCLATCHY COmni-20170924ex3216b0e7c.htm
EX-31.2 - EX-31.2 - MCCLATCHY COmni-20170924ex312101f64.htm
EX-31.1 - EX-31.1 - MCCLATCHY COmni-20170924ex311814199.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 24, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ◻

Accelerated filer ☒

 

 

 

 

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

Smaller reporting company ◻

Emerging growth company ◻

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

 

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

 

Yes ◻  No ☒

 

As of October 27, 2017, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

5,241,944

Class B Common Stock

2,443,191

 

 

 


 

 

THE MCCLATCHY COMPANY

 

TABLE OF CONTENTS

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

 

    

2017

    

2016

 

2017

 

2016

 

REVENUES — NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

115,331

 

$

133,212

 

$

360,459

 

$

410,368

 

Audience

 

 

87,142

 

 

91,022

 

 

268,473

 

 

272,163

 

Other

 

 

10,131

 

 

10,467

 

 

30,004

 

 

32,383

 

 

 

 

212,604

 

 

234,701

 

 

658,936

 

 

714,914

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

80,652

 

 

91,351

 

 

258,883

 

 

284,974

 

Newsprint, supplements and printing expenses

 

 

15,075

 

 

19,320

 

 

49,379

 

 

57,917

 

Depreciation and amortization

 

 

19,588

 

 

20,559

 

 

59,016

 

 

69,551

 

Other operating expenses

 

 

83,963

 

 

97,912

 

 

268,784

 

 

298,265

 

Other asset write-downs (see Notes 1 and 2)

 

 

8,715

 

 

330

 

 

10,672

 

 

330

 

 

 

 

207,993

 

 

229,472

 

 

646,734

 

 

711,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

4,611

 

 

5,229

 

 

12,202

 

 

3,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(19,801)

 

 

(20,953)

 

 

(60,547)

 

 

(62,423)

 

Interest income

 

 

121

 

 

110

 

 

410

 

 

318

 

Equity income (loss) in unconsolidated companies, net

 

 

(600)

 

 

3,632

 

 

(696)

 

 

10,637

 

Impairments related to equity investments

 

 

(1,866)

 

 

 —

 

 

(171,013)

 

 

(892)

 

Gain (loss) on extinguishment of debt, net

 

 

(1,831)

 

 

 —

 

 

(2,700)

 

 

1,535

 

Retirement benefit expense

 

 

(3,328)

 

 

(3,694)

 

 

(9,983)

 

 

(11,082)

 

Other — net

 

 

23

 

 

(13)

 

 

106

 

 

20

 

 

 

 

(27,282)

 

 

(20,918)

 

 

(244,423)

 

 

(61,887)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(22,671)

 

 

(15,689)

 

 

(232,221)

 

 

(58,010)

 

Income tax (benefit) expense (see Note 1)

 

 

237,805

 

 

(5,885)

 

 

161,276

 

 

(20,731)

 

NET LOSS

 

$

(260,476)

 

$

(9,804)

 

$

(393,497)

 

$

(37,279)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(34.11)

 

$

(1.30)

 

$

(51.67)

 

$

(4.77)

 

Diluted

 

$

(34.11)

 

$

(1.30)

 

$

(51.67)

 

$

(4.77)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,637

 

 

7,614

 

 

7,616

 

 

7,809

 

Diluted

 

 

7,637

 

 

7,614

 

 

7,616

 

 

7,809

 

 

See notes to the condensed consolidated financial statements.

 

 

1


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Unaudited; amounts in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

 

    

2017

    

2016

 

2017

 

2016

 

NET LOSS

 

$

(260,476)

 

$

(9,804)

 

$

(393,497)

 

$

(37,279)

 

OTHER COMPREHENSIVE INCOME (LOSS): (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and post retirement plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in pension and post-retirement benefit plans, net of taxes of $0,  $(1,535),  $0 and $(4,604)    

 

 

7,712

 

 

2,303

 

 

12,853

 

 

6,907

 

Investment in unconsolidated companies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes of $0,  $547,  $0 and $625

 

 

2,697

 

 

(819)

 

 

6,743

 

 

(937)

 

Other comprehensive income

 

 

10,409

 

 

1,484

 

 

19,596

 

 

5,970

 

Comprehensive loss

 

$

(250,067)

 

$

(8,320)

 

$

(373,901)

 

$

(31,309)

 

_____________________

(1) There is no income tax benefit associated with the quarter or nine months ended September 24, 2017, due to the recognition of a deferred income tax valuation allowance that eliminated all current period benefits. 

 

See notes to the condensed consolidated financial statements.

 

 

2


 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

September 24,

    

December 25,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,040

 

$

5,291

 

Trade receivables (net of allowances of $2,776 in 2017 and $3,254 in 2016)

 

 

88,174

 

 

112,583

 

Other receivables

 

 

10,881

 

 

11,883

 

Newsprint, ink and other inventories

 

 

9,456

 

 

13,939

 

Assets held for sale

 

 

13,399

 

 

9,040

 

Other current assets

 

 

15,728

 

 

14,809

 

 

 

 

221,678

 

 

167,545

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

262,748

 

 

297,506

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

254,014

 

 

298,986

 

Goodwill

 

 

705,174

 

 

705,174

 

 

 

 

959,188

 

 

1,004,160

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

7,040

 

 

242,382

 

Deferred income taxes

 

 

 —

 

 

60,821

 

Other assets

 

 

64,454

 

 

64,340

 

 

 

 

71,494

 

 

367,543

 

 

 

$

1,515,108

 

$

1,836,754

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 —

 

$

16,749

 

Accounts payable

 

 

32,821

 

 

36,822

 

Accrued pension liabilities

 

 

8,647

 

 

8,647

 

Accrued compensation

 

 

22,417

 

 

25,577

 

Income taxes payable

 

 

5,034

 

 

7,930

 

Unearned revenue

 

 

64,667

 

 

64,728

 

Accrued interest

 

 

14,695

 

 

8,602

 

Other accrued liabilities

 

 

21,010

 

 

20,994

 

 

 

 

169,291

 

 

190,049

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

780,706

 

 

829,415

 

Deferred income taxes

 

 

92,904

 

 

 —

 

Pension and postretirement obligations

 

 

594,015

 

 

604,165

 

Financing obligations

 

 

92,034

 

 

51,616

 

Other long-term obligations

 

 

44,814

 

 

47,596

 

 

 

 

1,604,473

 

 

1,532,792

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 5,252,718 in 2017 and 5,132,417 in 2016)

 

 

53

 

 

51

 

Class B (authorized 60,000,000 shares, issued 2,443,191 in 2017 and 2016) 

 

 

24

 

 

24

 

Additional paid-in-capital

 

 

2,214,885

 

 

2,213,098

 

Accumulated deficit

 

 

(2,031,236)

 

 

(1,637,739)

 

Treasury stock at cost, 46,774 shares in 2017 and 34 shares in 2016

 

 

(463)

 

 

(6)

 

Accumulated other comprehensive loss

 

 

(441,919)

 

 

(461,515)

 

 

 

 

(258,656)

 

 

113,913

 

 

 

$

1,515,108

 

$

1,836,754

 

 

See notes to the condensed consolidated financial statements.

3


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited; amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

 

    

2017

    

2016

    

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net loss

 

$

(393,497)

 

$

(37,279)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

59,016

 

 

69,551

 

Gains on disposal of property and equipment (excluding other asset write-downs)

 

 

(10,269)

 

 

(684)

 

Retirement benefit expense

 

 

9,983

 

 

11,082

 

Stock-based compensation expense

 

 

1,786

 

 

2,105

 

Deferred income taxes

 

 

153,725

 

 

 —

 

Equity (income) loss in unconsolidated companies

 

 

696

 

 

(10,637)

 

Impairments related to equity investments

 

 

171,013

 

 

892

 

(Gain) loss on extinguishment of debt, net

 

 

2,700

 

 

(1,535)

 

Other asset write-downs

 

 

10,672

 

 

330

 

Other

 

 

(4,823)

 

 

(4,723)

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

24,409

 

 

41,459

 

Inventories

 

 

2,526

 

 

2,185

 

Other assets

 

 

(662)

 

 

2,671

 

Accounts payable

 

 

(4,001)

 

 

(9,050)

 

Accrued compensation

 

 

(3,160)

 

 

(2,658)

 

Income taxes

 

 

(2,304)

 

 

(25,728)

 

Accrued interest

 

 

6,093

 

 

7,311

 

Other liabilities

 

 

(5,464)

 

 

15,961

 

Net cash provided by operating activities

 

 

18,439

 

 

61,253

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(7,378)

 

 

(10,541)

 

Proceeds from sale of property, plant and equipment and other

 

 

22,656

 

 

3,067

 

Distributions from equity investments

 

 

7,318

 

 

 —

 

Contributions to equity investments

 

 

(2,698)

 

 

(2,917)

 

Proceeds from sale of equity investments and other-net

 

 

66,652

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

86,550

 

 

(10,391)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repurchase of public notes

 

 

(70,615)

 

 

(28,804)

 

Proceeds from sale-leaseback financial obligations

 

 

43,971

 

 

 —

 

Purchase of treasury shares

 

 

(457)

 

 

(8,075)

 

Other

 

 

861

 

 

(136)

 

Net cash used in financing activities

 

 

(26,240)

 

 

(37,015)

 

Increase in cash and cash equivalents

 

 

78,749

 

 

13,847

 

Cash and cash equivalents at beginning of period

 

 

5,291

 

 

9,332

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD 

 

$

84,040

 

$

23,179

 

 

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 news and information publisher of well-respected publications such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the (Fort Worth) Star-Telegram. Each of our publications also has online platforms serving their communities. We operate 30 media companies 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 NYSE American under the symbol MNI.

 

On July 31, 2017, we closed a transaction to sell a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which changed our ownership interest in CareerBuilder from 15.0% to approximately 3.5%. See Note 3 for more information. 

 

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 25, 2016 (“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

 

Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements related to the early retrospective adoption of Accounting Standards Update (“ASU”) No. 2017-07 relating to the classification of net periodic pension expense, as described below. In accordance with the early adoption of ASU No. 2017-07 for the quarter and nine months ended September 25, 2016, we reclassified net periodic pension and postretirement costs of $3.7 million and $11.1 million, respectively, from the compensation line item in operating expenses to the retirement benefit expense line item in non-operating (expense) income on the condensed consolidated statements of operations, which is described further in Note 5. There were no other changes to the prior periods’ condensed consolidated financial statements, except those described in Note 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.

 

5


 

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.  As of September 24, 2017, and December 25, 2016, 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 September 24, 2017 and December 25, 2016, the estimated fair value of long-term debt, including the current portion of long-term debt, was $769.6 million and $844.0 million, respectively. At September 24, 2017, and December 25, 2016, the carrying value of our long-term debt, including the current portion of long-term debt, if any, was $780.7 million and $846.2 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 that may be 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 the discount rates that we estimate market participants would seek for bearing the risk associated with such assets. We incurred impairment charges during the quarter and nine months ended September 24, 2017, on our newspaper masthead intangible assets (see below in Note 1)  and equity method investments (see Note 3), respectively.

 

Newsprint, ink and other inventories

 

Newsprint, ink and other inventories are stated at the lower of cost (based principally on the first‑in, first‑out method) and net realizable value. During the nine months ended September 24, 2017, we recorded a $2.0 million write‑down of non-newsprint inventory, which is reflected in the other asset write-downs line on our condensed consolidated statement of operations.

Property, Plant and Equipment

 

During the quarter and nine months ended September 25, 2016, we incurred $0.3 million and $6.9 million, respectively, in accelerated depreciation related to production equipment no longer needed as a result of either outsourcing our printing process at a few of our media companies or replacing an old printing press at one of our media companies. No similar transactions were recorded during the quarter and nine months ended September 24, 2017.

 

6


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

    

September 24,

    

September 25,

 

September 24,

 

September 25,

 

(in thousands)

 

2017

 

2016

 

2017

 

2016

 

Depreciation expense

 

$

7,496

 

$

8,561

 

$

22,748

 

$

33,559

 

 

Assets Held for Sale

 

During the nine months ended September 24, 2017, we began to actively market for sale the land and buildings at four of our media companies. No impairment charges were incurred during the nine months ended September 24, 2017, as a result of classifying these assets into assets held for sale.

 

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 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 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, hypothetical transaction structures, 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 quarter and nine months ended September 24, 2017 or September 25, 2016.

 

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 the discounted cash flow model discussed above, to determine the fair value of each newspaper masthead. We performed an interim testing of impairment of intangible newspaper mastheads as of September 24, 2017, due to the continuing challenging business conditions and the resulting weakness in our stock price as of the end of our third quarter of 2017. Individual newspaper mastheads were estimated using the present value of expected future cash flows, using estimates, judgments and assumptions discussed above that we believe were appropriate in the circumstances. As a result, we recorded an intangible newspaper masthead impairment charge of $8.7 million in the quarter and nine months ended September 24, 2017, which is recorded in other asset write-downs on our condensed consolidated statements of operations. We had no impairment of newspaper mastheads during the quarter and nine months ended September 25, 2016. 

 

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 quarter and nine months ended September 24, 2017, and September 25, 2016.  

 

Financial Obligations

 

Financial obligations consists of contributions of real properties to the Pension Plan in 2016 and 2011 (see Note 5), and real property previously owned by The Sacramento Bee that was sold and leased back during the third quarter of 2017.

7


 

The long-term balance of financial obligations at September 24, 2017, and December 25, 2016, was $92.0 million and $51.6 million, respectively.

 

Segment Reporting

 

We operate 30 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. 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 25, 2016

 

$

(450,506)

 

$

(11,009)

 

$

(461,515)

 

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

6,743

 

 

6,743

 

Amounts reclassified from AOCL

 

 

12,853

 

 

 

 

12,853

 

Other comprehensive income

 

 

12,853

 

 

6,743

 

 

19,596

 

Balance at September 24, 2017

 

$

(437,653)

 

$

(4,266)

 

$

(441,919)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCL

 

 

 

    

Quarters Ended

 

Nine Months Ended

    

 

(in thousands)

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

Affected Line in the Condensed

AOCL Component

    

2017

    

2016

    

2017

    

2016

 

Consolidated Statements of Operations

Minimum pension and post-retirement liability

 

$

7,712

 

$

3,838

 

$

12,853

   

$

11,511

 

Retirement benefit expense

 

 

 

 —

 

 

(1,535)

 

 

 —

 

 

(4,604)

 

Benefit for income taxes (1) 

 

 

$

7,712

 

$

2,303

 

$

12,853

 

$

6,907

 

Net of tax

_____________________

(1) There is no income tax benefit associated with the quarter or nine months ended September 24, 2017, due to the recognition of a deferred income tax valuation allowance that eliminated all current period benefits. 

 

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.

 

The timing of recording or releasing a valuation allowance requires significant judgment. A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires us to consider all positive and negative evidence and to make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The assessment takes into account expectations of future taxable income or loss, available tax planning strategies and the reversal of temporary differences. The development of these expectations involves the use of estimates such as operating profitability. The weight given to the evidence is commensurate with the extent to which it can be objectively verified.

8


 

 

We performed our assessment of the deferred tax assets during the third quarter of 2017, weighing the positive and negative evidence as outlined in ASC 740-10, Income Taxes. As we have incurred three years of cumulative pre-tax losses, such objective negative evidence limits our ability to give significant weight to other positive subjective evidence, such as projections for future growth and profitability. Accordingly, we recorded a valuation allowance charge of $245.4 million in the quarter and nine months ended September 24, 2017, which is recorded in income tax (benefit) expense on our condensed consolidated statements of operations. This amount represents a $155.0 million valuation allowance against a majority of our deferred tax assets, as well as $90.4 million that represents the current year cumulative impact of establishing the valuation allowance in the nine month period ended September 24, 2017. As such, the tax benefit related to the current quarter losses is not recognized due to the recording of the valuation allowance, resulting in our effective tax rate for the third quarter of 2017 not being comparable to the effective tax rate for the same period in 2016.

 

We will continue to maintain a valuation allowance against our deferred tax assets until we believe it is more-likely-than-not that these assets will be realized in the future. If sufficient positive evidence, such as three-year cumulative pre-tax income, arises in the future that provides an indication that all of or a portion of the deferred tax assets meet the more-likely-than-not standard, the valuation allowance may be reversed, in whole or in part, in the period that such determination is made. 

 

Current generally accepted accounting principles prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. 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 and restricted stock units, 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:

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

(shares in thousands)

 

2017

 

2016

 

2017

 

2016

 

Anti-dilutive common stock equivalents

    

336

    

305

    

385

 

284

 

 

Cash Flow Information

 

Cash paid for interest and income taxes and other non-cash activities consisted of the following:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

(in thousands)

 

2017

 

2016

 

Interest paid (net of amount capitalized)

    

$

45,889

    

$

47,349

 

Income taxes paid (net of refunds)

 

 

9,988

 

 

762

 

 

 

 

 

 

 

 

 

Other non-cash investing and financing activities related to pension plan transactions:

 

 

 

 

 

 

 

Increase of financing obligation for contribution of real property to pension plan

 

 

 —

 

 

47,130

 

Reduction of pension obligation for contribution of real property to pension plan

 

 

 —

 

 

(47,130)

 

Reduction of financing obligation due to sale of real properties by pension plan

 

 

 —

 

 

(25,060)

 

Reduction of PP&E due to sale of real properties by pension plan

 

 

 —

 

 

(26,171)

 

 

9


 

Other non-cash financing activities relate to the contribution of real property to the Pension Plan. See Note 5 for further discussion.

 

Recently Adopted Accounting Pronouncements

 

In July 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 simplified the measurement of inventory by requiring certain inventory to be measured at the “lower of cost and net realizable value” and options that existed for “market value” were eliminated. The ASU defined net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” Effective December 26, 2016, we adopted this standard and applied it prospectively. We did not have a material impact to our primary categories of inventory such as newsprint for our operations or to our condensed consolidated statement of operations from the adoption of this standard.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplified the subsequent measurement of goodwill and eliminated the Step 2 from the goodwill impairment test. This standard was effective for us in fiscal year 2020 with early adoption permitted. We early adopted this standard for any impairment test performed after January 1, 2017, as permitted under the standard. The adoption of this guidance did not impact our condensed consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 required that an employer report the service cost component in the same line items or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost, as defined in the standard, are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. It was effective for us in fiscal year 2018 with early adoption permitted. The amendments in this ASU are required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Effective as of the beginning of fiscal year 2017, we early adopted this standard using the practical expedient. For the quarter and nine months ended September 25, 2016, we reclassified net periodic pension and postretirement costs of $3.7 million and $11.1 million, respectively, from the compensation line item within operating expenses to the retirement benefit expense line item in non-operating (expense) income in the condensed consolidated statement of operations to conform to the current year presentation. There were no other changes to the condensed consolidated financial statements, except those described in Note 5.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard was effective for us in fiscal year 2018 with early adoption permitted. We early adopted this standard in the second quarter of 2017. The adoption of this guidance did not impact our condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

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. In 2016 and 2017, the FASB issued additional updates: ASU No. 2016-08, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-05. These updates provide further guidance and clarification on specific items within the previously issued update. ASU 2014-09, as well as the additional FASB updates noted above, 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

10


 

do not plan to early adopt this guidance. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented ("full retrospective"), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application ("modified retrospective"). We are planning to adopt the standard using the modified retrospective method. We have developed a multi-phase plan to assess the impact of the adoption on our condensed consolidated financial statements. The plan evaluates new disclosure requirements, and identifies and implements appropriate changes to our business processes, systems and controls under the new standard. We are still in the process of finalizing the impact this standard will have on our controls, processes and financial results, but we do not believe this standard will significantly impact revenue recognition associated with our primary advertising, audience and other revenue categories. We plan to conclude on the financial statement impact, as well as our  process and control assessments in the fourth quarter of 2017.

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 in the process of reviewing the impact this standard will have on our existing lease population and the impact the adoption will have on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected credit losses during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. It is effective for us for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2018. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It is effective for us for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

11


 

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 25,

 

Impairment

 

Acquisition

 

Amortization

 

September 24,

 

(in thousands)

    

2016

    

Charges

    

Adjustments

 

Expense

    

2017

 

Intangible assets subject to amortization

 

$

839,273

 

$

 —

 

$

11

 

$

 —

 

$

839,284

 

Accumulated amortization

 

 

(711,723)

 

 

 —

 

 

 —

 

 

(36,268)

 

 

(747,991)

 

 

 

 

127,550

 

 

 —

 

 

11

 

 

(36,268)

 

 

91,293

 

Mastheads

 

 

171,436

 

 

(8,715)

 

 

 —

 

 

 —

 

 

162,721

 

Goodwill

 

 

705,174

 

 

 —

 

 

 —

 

 

 —

 

 

705,174

 

Total

 

$

1,004,160

 

$

(8,715)

 

$

11

 

$

(36,268)

 

$

959,188

 

 

Amortization expense with respect to intangible assets is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

    

September 24,

    

September 25,

 

September 24,

 

September 25,

 

(in thousands)

 

2017

 

2016

 

2017

 

2016

 

Amortization expense

 

 $

12,092

 

 $

11,998

 

 $

36,268

 

 $

35,992

 

 

The estimated amortization expense for the remainder of fiscal year 2017 and the five succeeding fiscal years is as follows: 

 

 

 

 

 

 

 

Amortization

 

 

Expense

Year

 

(in thousands)

2017 (Remainder)

 

 $

13,022

2018