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EX-32 - EXHIBIT 32 - tronc, Inc.a2017q310qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - tronc, Inc.a2017q310qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - tronc, Inc.a2017q310qexhibit311.htm
EX-10.1 - EXHIBIT 10.1 - tronc, Inc.a2017q310qexhibit101.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[ X ]
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
 

Commission File No. 001-36230
TRONC, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
38-3919441
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. employer
identification no.)
 
 
 
435 North Michigan Avenue
 
 
Chicago Illinois
 
60611
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (312) 222-9100
 
Former name, former address and former fiscal year, if changed since last report.
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X   No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  X   No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” an “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ____
 
Accelerated filer   X   
Non-accelerated filer ____
 
Smaller reporting company ____
 
 
Emerging growth company ____
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes __  No  X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2017
Common Stock, $0.01 par value
 
33,598,450






 
 
TRONC INC.
 
 
 
 
FORM 10-Q
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
PART I
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 

1




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q, as well as the information contained in the notes to our Consolidated Financial Statements, include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based largely on our current expectations and reflect various estimates and assumptions by us. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in such forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond our control, include: changes in advertising demand, circulation levels and audience shares; competition and other economic conditions; our ability to develop and grow our online businesses; changes in newsprint price; our ability to maintain effective internal control over financial reporting; concentration of stock ownership among our principal stockholders whose interest may differ from those of other stockholders; and other events beyond our control that may result in unexpected adverse operating results. For more information about these and other risks, see “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2017, and in our other filings with the SEC.
The words “believe,” “expect,” “anticipate,” “estimate,” “could,” “should,” “intend,” “may,” “will,” “plan,” “seek” and similar expressions generally identify forward-looking statements. However, such words are not the exclusive means for identifying forward-looking statements, and their absence does not mean that the statement is not forward looking. Whether or not any such forward-looking statements, in fact occur will depend on future events, some of which are beyond our control. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

2




PART I.
Item 1.    Financial Statements
TRONC, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
 
 
 
 
 
 
 
 
Operating revenues
$
353,091

 
$
378,236

 
$
1,088,998

 
$
1,180,956

Operating expenses:
 
 
 
 
 
 
 
Compensation
135,045

 
140,760

 
394,659

 
453,353

Newsprint and ink
20,941

 
25,101

 
67,313

 
77,174

Outside services
111,109

 
118,060

 
340,298

 
368,733

Other operating expenses
65,584

 
79,104

 
207,512

 
227,634

Depreciation and amortization
14,158

 
14,375

 
41,996

 
42,799

Total operating expenses
346,837

 
377,400

 
1,051,778

 
1,169,693

Income from operations
6,254

 
836

 
37,220

 
11,263

Interest expense, net
(6,544
)
 
(6,673
)
 
(19,425
)
 
(20,116
)
Premium on stock buyback

 

 
(6,031
)
 

Gain (loss) on equity investments, net
4,993

 
(190
)
 
3,721

 
(487
)
Reorganization items, net

 
(93
)
 

 
(236
)
Income (loss) before income taxes
4,703

 
(6,120
)
 
15,485

 
(9,576
)
Income tax expense
2,647

 
4,352

 
9,577

 
3,303

Net income (loss)
$
2,056

 
$
(10,472
)
 
$
5,908

 
$
(12,879
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.29
)
 
$
0.17

 
$
(0.39
)
Diluted
$
0.06

 
$
(0.29
)
 
$
0.17

 
$
(0.39
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
33,242

 
36,415

 
34,124

 
32,908

Diluted
33,412

 
36,415

 
34,333

 
32,908



The accompanying notes are an integral part of these unaudited consolidated financial statements.

3




TRONC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
Net income (loss)
$
2,056

 
$
(10,472
)
 
$
5,908

 
$
(12,879
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of actuarial (gains) losses and prior service costs to periodic pension cost during the period, net of taxes of ($119), ($173), ($371) and $82, respectively
(194
)
 
(266
)
 
(569
)
 
126

Foreign currency translation

 
2

 
1

 
3

Other comprehensive income (loss), net of taxes
(194
)
 
(264
)
 
(568
)
 
129

Comprehensive income (loss)
$
1,862

 
$
(10,736
)
 
$
5,340

 
$
(12,750
)



The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



TRONC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 
 
September 24,
2017
 
December 25, 2016
Assets
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
185,152

 
$
198,349

Accounts receivable (net of allowances of $19,419 and $17,230)
 
169,791

 
195,519

Inventories
 
9,167

 
10,950

Prepaid expenses and other
 
29,457

 
18,863

Total current assets
 
393,567

 
423,681


 
 
 
 
Property, plant and equipment
 
 
 
 
Machinery, equipment and furniture
 
127,446

 
123,530

Buildings and leasehold improvements
 
44,391

 
13,388

 
 
171,837

 
136,918

Accumulated depreciation
 
(69,921
)
 
(70,082
)
 
 
101,916

 
66,836

Advance payments on property, plant and equipment
 
2,745

 
1,030

Property, plant and equipment, net
 
104,661

 
67,866

 
 
 
 
 
Other assets
 
 
 
 
Goodwill
 
122,640

 
122,469

Intangible assets, net
 
126,738

 
132,161

Software, net
 
46,825

 
54,565

Deferred income taxes
 
51,635

 
63,977

Other long-term assets
 
22,468

 
24,047

Total other assets
 
370,306

 
397,219

 
 
 
 
 
Total assets
 
$
868,534

 
$
888,766

 
 
 
 
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5



TRONC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
(In thousands, except per share data)
(Unaudited)


 
 
September 24,
2017
 
December 25, 2016
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
21,708

 
$
21,617

Accounts payable
 
70,393

 
70,148

Employee compensation and benefits
 
63,854

 
72,311

Deferred revenue
 
76,539

 
82,778

Other current liabilities
 
18,079

 
18,033

Total current liabilities
 
250,573

 
264,887

 
 
 
 
 
Non-current liabilities
 
 
 
 
Long-term debt
 
340,501

 
349,128

Deferred revenue
 
3,508

 
4,938

Pension and postretirement benefits payable
 
115,367

 
101,674

Other obligations
 
90,172

 
60,258

Total non-current liabilities
 
549,548

 
515,998

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value. Authorized 30,000 shares; no shares issued or outstanding at September 24, 2017 and December 25, 2016
 

 

Common stock, $.01 par value. Authorized 300,000 shares, 37,417 shares issued and 33,550 shares outstanding at September 24, 2017; 36,549 shares issued and 36,428 shares outstanding at December 25, 2016
 
374

 
365

Additional paid-in capital
 
144,964

 
139,623

Accumulated deficit
 
(16,017
)
 
(21,925
)
Accumulated other comprehensive loss
 
(9,382
)
 
(8,814
)
Treasury stock, at cost - 3,867 and 121 shares at September 24, 2017 and December 25, 2016
 
(51,526
)
 
(1,368
)
Total stockholders’ equity
 
68,413

 
107,881

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
868,534

 
$
888,766


The accompanying notes are an integral part of these unaudited consolidated financial statements.

6




TRONC, INC.
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(In thousands)
(Unaudited)

 
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Total Equity (Deficit)
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 25, 2016
 
36,549

 
$
365

 
$
139,623

 
$
(21,925
)
 
$
(8,814
)
 
(1,368
)
 
$
107,881

Comprehensive income (loss)
 

 

 

 
5,908

 
(568
)
 
 
 
5,340

Issuance of stock from restricted stock and restricted stock unit conversions
 
861

 
9

 
(9
)
 

 

 

 

Exercise of stock options
 
7

 

 
95

 

 

 

 
95

Stock-based compensation
 

 

 
7,332

 

 

 

 
7,332

Withholding for taxes on restricted stock unit conversions
 

 

 
(2,077
)
 

 

 

 
(2,077
)
Purchase of treasury stock
 

 

 

 

 

 
(50,158
)
 
(50,158
)
Balance at September 24, 2017
 
37,417

 
$
374

 
$
144,964

 
$
(16,017
)
 
$
(9,382
)
 
$
(51,526
)
 
$
68,413




The accompanying notes are an integral part of these unaudited consolidated financial statements.

7




TRONC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
Nine Months Ended
 
 
September 24,
2017
 
September 25,
2016
Operating Activities
 
 
 
 
Net income (loss)
 
$
5,908

 
$
(12,879
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
41,996

 
42,799

Allowance for bad debt
 
8,914

 
8,278

Stock compensation expense
 
7,279

 
6,000

Excess tax benefits (expense) realized from exercise of stock-based awards
 

 
(653
)
Gain on sale of investments
 
(6,035
)
 

Loss on equity investments, net
 
2,314

 
377

Deferred income taxes
 
12,593

 
16,708

Non-current deferred revenue
 
(1,430
)
 
(1,629
)
Premium on stock buyback
 
6,031

 

Other non-cash items
 
5,565

 
2,403

Pension contribution
 
(11,827
)
 
(8,856
)
Postretirement medical, life and other benefits
 
(1,785
)
 
(1,974
)
Changes in working capital items, excluding acquisitions:
 
 
 
 
Accounts receivable, net
 
32,211

 
47,279

Prepaid expenses, inventories and other current assets
 
(7,674
)
 
(1,043
)
Accounts payable, employee compensation and benefits, deferred revenue and other current liabilities
 
(26,975
)
 
(39,367
)
Other, net
 
(2,028
)
 
(1,801
)
Net cash provided by operating activities
 
65,057

 
55,642

 
 
 
 
 
Investing Activities
 
 
 
 
Capital expenditures
 
(13,446
)
 
(15,893
)
Proceeds from sale of equity investments
 
7,890

 

Acquisition of business, net of cash acquired
 
3,305

 

Distributions from equity investments
 
238

 

Restricted cash
 

 
17,003

Other, net
 
(1,832
)
 
(1,826
)
Net cash used for investing activities
 
$
(3,845
)
 
$
(716
)
 
 
 
 
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8




TRONC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
(Unaudited)

 
 
Nine Months Ended
 
 
September 24,
2017
 
September 25,
2016
Financing Activities
 
 
 
 
Purchase of treasury stock
 
(56,189
)
 

Proceeds from issuance of common stock
 

 
113,318

Repayment of long-term debt
 
(15,817
)
 
(15,817
)
Dividends paid to common stockholders
 
(145
)
 
(4,851
)
Proceeds from exercise of stock options
 
95

 
205

Repayments of capital lease obligations
 
(276
)
 
(667
)
Withholding for taxes on RSU vesting
 
(2,077
)
 
(821
)
Net cash provided by (used for) financing activities
 
(74,409
)
 
91,367

 
 
 
 
 
Net increase (decrease) in cash
 
(13,197
)
 
146,293

Cash, beginning of period
 
198,349

 
40,832

Cash, end of period
 
$
185,152

 
$
187,125


The accompanying notes are an integral part of these unaudited consolidated financial statements.

9


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1: DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business—tronc, Inc., and its subsidiaries (collectively, the “Company” or “tronc”) is a media company rooted in award-winning journalism. Headquartered in Chicago, tronc operates newsrooms in ten markets with titles including Chicago Tribune, Los Angeles Times, The Baltimore Sun, Orlando Sentinel, South Florida’s Sun Sentinel, Newport News, Virginia’s Daily Press, Allentown, Pennsylvania’s The Morning Call, Hartford Courant, and The San Diego Union Tribune. On September 3, 2017, the Company completed the purchase of the New York Daily News, New York City’s “Hometown Newspaper”. tronc’s legacy of brands, including the New York Daily News, has earned a combined 105 Pulitzer Prizes and is committed to informing, inspiring and engaging local communities.
tronc’s brands create and distribute content across its media portfolio, offering integrated marketing, media, and business services to consumers and advertisers, including digital solutions and advertising opportunities.
Fiscal Periods—The Company’s fiscal year ends on the last Sunday in December. Fiscal year 2017 ends on December 31, 2017 and fiscal year 2016 ended on December 25, 2016. Fiscal year 2017 is a 53-week year with 13 weeks in the first through third quarters and 14 weeks in the fourth quarter. Fiscal year 2016 was a 52-week year with 13 weeks in each quarter.
Basis of Presentation—The accompanying unaudited Consolidated Financial Statements and notes of the Company have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of tronc as of September 24, 2017 and December 25, 2016 and the results of operations for the three and nine months ended September 24, 2017 and September 25, 2016, and the cash flows for the nine months ended September 24, 2017. This includes all normal and recurring adjustments and elimination of intercompany transactions. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform to current period’s presentation. The year-end Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The Company assesses its operating segments in accordance with ASC Topic 280, “Segment Reporting.” The Company is managed by its chief operating decision maker, as defined by ASC Topic 280, in two reportable segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, Tribune Content Agency (“TCA”), and forsalebyowner.com. See Note 14 for additional segment information.
New Accounting Standards—In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Topic 715, Compensation - Retirement Benefits; Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires the disaggregation of the service cost component from other components of net periodic benefit cost, clarifies how to present the service cost component and other components of net benefit costs in the financial statements and allows only the service cost component of net benefit costs to be eligible for capitalization. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Topic 350, Intangibles-Goodwill and Other; Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test standardizing the impairment assessment to measure a reporting unit’s carrying value against its fair value and eliminate the calculation of an implied fair value of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.

10


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


In January 2017, the FASB issued ASU 2017-01, Topic 805, Clarifying the Definition of a Business, which establishes criteria to determine when an integrated set of assets and activities is not a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017 and should be applied prospectively. The Company plans to adopt this standard as of the first quarter of 2018 and is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Topic 230, Statement of Cash Flows, which clarifies how companies present and classify restricted cash in the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Topic 230, Statement of Cash Flows, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Topic 718, Compensation—Stock Compensation; Improvements to Employee Share-Based Payment Accounting, which makes several modifications to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The Company adopted this ASU as of the beginning of fiscal 2017. As part of the adoption, the Company made an accounting policy election to recognize forfeitures as they occur which had no effect on the Company’s financial statements. The Company has elected to present the cash flow statement changes retrospectively and the prior period has been adjusted to present excess tax benefits of $0.7 million as part of cash flows from operating activities and the cash paid by the Company for withholding shares from stock awards of $0.8 million as part of cash flows from financing activities. The other portions of ASU 2016-09 either were not applicable or had no effect on the financial statements.
In February 2016, the FASB issued ASU 2016-02, Topic 842, Leases, which requires lessees to recognize lease assets and lease liabilities for operating leases. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Topic 606, Revenue from Contracts with Customers and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The new standard supersedes a majority of existing revenue recognition guidance under U.S. GAAP, and requires a company to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. ASU 2014-09 allows for either a “full retrospective” adoption or a “modified retrospective” adoption. The amended effective date of ASU 2014-09 is for reporting periods beginning after December 15, 2017. Companies are permitted to voluntarily adopt the new standard as of the original effective date which was reporting periods beginning after December 15, 2016.
The Company expects to adopt this standard on January 1, 2018 utilizing the modified retrospective method. During 2016, the Company initiated efforts to assess the impact of this new standard on the Company’s future reported results, operating and accounting processes and systems. The Company has continued these efforts in 2017. The Company expects adoption of the standard will not significantly impact reported results for print advertising, print circulation and digital circulation. The new standard is expected to result in the Company recording digital advertising revenue placed on non-tronc websites net of the cost of the third-party website as the Company may be acting as an agent as defined under the new standard. Currently, such revenues are generally recorded gross. The expected impact of such a change would be to decrease revenues and the related costs by $50.0 million to $60.0 million annually compared to the current year. The new standard is not expected to significantly impact revenues related to commercial printing and delivery services provided to other newspapers, direct mail advertising and services and other related activities.

11


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 2: CHANGES IN OPERATIONS
Employee Reductions—In the fourth quarter of 2015, the Company offered an Employee Voluntary Separation Program (EVSP), which provided enhanced separation benefits to eligible non-union employees with more than one year of service.  The Company is funding the EVSP ratably over the payout period through salary continuation instead of lump sum severance payments. The salary continuation payments started in the fourth quarter of 2015 and continue through the first half of 2018. The Company recorded a charge of $0.3 million for the nine months ended September 24, 2017 for related severance, benefits and taxes in connection with the EVSP compared to $0.8 million and $9.7 million recorded for the three and nine months ended September 25, 2016, respectively. The charge for the three months ended September 24, 2017 was not material.
During the first quarter of 2016, the Company began the process to outsource its information technology function (“ITO”), which was substantially completed by the end of 2016. The related salary continuation payments started in the first quarter of 2016 and continue through the third quarter of 2018. The Company recorded a pretax charge of $0.1 million for the nine months ended September 24, 2017 for severance, benefits and taxes in connection with the ITO, compared to a charge of $1.5 million and $4.4 million for the three and nine months ended September 25, 2016, respectively. The charge for the three months ended September 24, 2017 was not material.
During the second quarter of 2017, the Company contracted with a third party to outsource the printing, packaging and delivery of the Orlando Sentinel. The services were fully transitioned to the third party by September 24, 2017. The change in operations resulted in staff reductions of 112 positions and a pretax charge related to those reductions of $2.2 million which was recorded in the second quarter of 2017. The related salary continuation payments began in the third quarter of 2017 and are expected to continue through the third quarter of 2018.
Additionally, during the second quarter of 2017, the Company offered enhanced severance benefits to certain eligible non-union employees of the Los Angeles Times with a length of service with the organization of over 15 years. This offering resulted in net staff reductions of 25 positions with a total charge of $2.6 million recognized in the third quarter of 2017. The related salary continuation payments began in the third quarter of 2017 and are expected to continue through the fourth quarter of 2018.
In addition to the actions listed above, the Company implemented additional reductions of 78 and 200 positions in the three and nine months ended September 24, 2017, respectively, and recorded pretax charges related to these reductions and executive separations of $5.4 million and $8.6 million, respectively. For the three and nine months ended September 25, 2016, the Company implemented additional reductions of 56 and 168 positions, respectively, and recorded a pretax charge related to these reductions and executive separations of $1.5 million and $10.4 million, respectively.
A summary of the activity with respect to the Company’s severance accrual for the nine months ended September 24, 2017 is as follows (in thousands):
Balance at December 25, 2016
 
$
11,640

Provision
 
13,844

Payments
 
(12,710
)
Balance at September 24, 2017
 
$
12,774

Charges for severance and related expenses are included in compensation expense in the accompanying Consolidated Statements of Income (Loss).
Lease Abandonment—In the first quarter of 2017, the Company permanently vacated approximately 15,000 sq. ft. of office space in San Diego and took a charge of $2.0 million related to the abandonment. In the second quarter of 2017, the Company permanently vacated approximately 33,629 sq. ft. of office space in the Chicago area, 30,000 sq. ft. of office space in South Florida, and 11,614 sq. ft. of office space in Los Angeles and took a charge of $1.4 million, $0.6 million, and $0.3 million, respectively, related to the abandonments. In the third quarter of 2016, the Company permanently vacated approximately 200,000 sq. ft. of office space in the Chicago Tribune and Los Angeles Times buildings and took a charge of $8.5 million related to the abandonment.

12


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


A summary of the activity with respect to the Company’s lease abandonment accrual for the nine months ended September 24, 2017 is as follows (in thousands):
Balance at December 25, 2016
 
$
6,694

Provision
 
4,458

Payments and other
 
(4,272
)
Balance at September 24, 2017
 
$
6,880

These charges are included in other operating expenses in the accompanying Consolidated Statements of Income (Loss).
Other ChargesAdditionally, as a result of the printing, packaging and delivery outsourcing in Orlando discussed above, certain assets required to print and package the Orlando Sentinel will no longer be used as of the transition date. The first piece of equipment was idled June 12, 2017. As a result, the company recognized $1.9 million in accelerated depreciation in the second quarter of 2017. These charges are included in depreciation and amortization expenses in the accompanying Consolidated Statements of Income (Loss).
NOTE 3: RELATED PARTY TRANSACTIONS
Aircraft Dry Sublease
In 2016, one of the Company’s subsidiaries, Tribune Publishing Company, LLC (“TPC”), entered into an Aircraft Dry Sublease Agreement with Merrick Ventures, LLC (“Merrick Ventures”). Michael W. Ferro, Jr., the non-executive Chairman of the Company’s Board of Directors, is chairman and chief executive officer of Merrick Ventures. Under the agreement, TPC has subleased on a non-exclusive basis, a Bombardier aircraft leased by Merrick Ventures, at a cost, including TPC’s proportionate share of the insurance premiums and maintenance expenses, of $8,500 per flight hour flown. TPC also is responsible for charges attributable to the operation of the aircraft by TPC during the lease term. The initial term of the sublease is one year, which term automatically will be renewed on an annual basis. Either party may terminate the agreement upon 30 days written notice to the other. During the three and nine months ended September 24, 2017, the Company incurred $0.7 million and $2.0 million, respectively, related to the aircraft sublease. During the three months ended September 24, 2017, the Company paid $0.6 million to Merrick Ventures and $0.1 million to an outside party for pilot services. During the nine months ended September 24, 2017, the Company paid $1.6 million to Merrick Ventures and $0.3 million to an outside party for pilot services. During the three and nine months ended September 25, 2016, the Company incurred $0.8 million and $2.1 million, respectively, related to the aircraft sublease. For both the three and nine months ended September 25, 2016, the Company paid $1.1 million to Merrick Ventures and $0.2 million to an outside party for pilot services.
Event tickets
In April 2017, the Company acquired Merrick Ventures’ interest and obligations in connection with the license of a suite and tickets to certain sporting events. The aggregate cost of the suite and regular season tickets is expected to approximate $0.3 million annually. During the first quarter of 2017, the Company paid Merrick Ventures $0.2 million for the face value of the suite and tickets for events in the fourth quarter of 2016 and the first and second quarters of 2017. The suite and tickets are utilized in the Company’s sales and marketing efforts and for other corporate purposes.
CIPS Marketing Group Inc.
The Company utilizes the services of CIPS Marketing Group, Inc. (“CIPS”) for local marketing efforts such as distribution, door-to-door marketing and total market coverage. Prior to July, 2017, the Company owned 50% of CIPS, which was recorded as an equity investment. In July 2017, the Company sold its interest in CIPS for approximately $7.5 million, resulting in a gain of $5.6 million which is recorded in Gain (Loss) on Equity Investments in the Consolidated Statement of Income, and entered into a long-term agreement with the buyer to utilize CIPS for certain distribution efforts.

13


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


During the three and nine months ended September 24, 2017, the Company recorded $0.1 million and $0.6 million, respectively, in revenue from CIPS and $0.4 million and $4.2 million, respectively, in other operating expenses related to such marketing services. During the three and nine months ended September 25, 2016, the Company recorded $0.3 million and $0.8 million, respectively, in revenue from CIPS and $2.7 million and $8.5 million, respectively, in other operating expenses related to such marketing services.
Nucleus Marketing Solutions, LLC
In April 2016, tronc, along with other leading media companies McClatchy, Gannett and Hearst, formed Nucleus Marketing Solutions, LLC (“Nucleus”). This network connects national advertisers to audiences across existing and emerging print and digital platforms. Nucleus works with its marketing partners to address their goals by offering integrated services across all platforms. The Company owned 25% of Nucleus as of September 24, 2017. The Company’s interest in Nucleus is recorded as an equity method investment. During the three and nine months ended September 24, 2017, the Company recorded $2.5 million and $6.1 million, respectively, on a net basis for revenue related to the Nucleus agreement.
NOTE 4: ACQUISITIONS
New York Daily News Acquisition
On September 3, 2017, the Company completed the acquisition of 100% of the partnership interests in Daily News, L. P. (“DNLP”), the owner of the New York Daily News in New York City, pursuant to the Partnership Interest Purchase Agreement dated September 3, 2017, for a cash purchase price of $1, subject to a post-closing working capital adjustment. Following of the acquisition, DNLP’s assets and liabilities are in the process of being valued at fair value. These values could vary significantly from the assets and liabilities as recorded in DNLP’s historical records. DNLP’s assets include, among others, (1) the assets associated with the New York Daily News brand (including resources, technology and archives), (2) net working capital, (3) plant and equipment assets and (4) certain real property rights (as described below). DNLP’s liabilities that remain with the acquired entity include, among others, (1) an existing single employer defined benefit pension obligation that provides benefits to certain current and former employees of the New York Daily News (2) certain multi-employer pension obligations, (3) workers’ compensation and automobile insurance liabilities and (4) various outstanding letters of credit in the aggregate amount of approximately $18.7 million (the majority of which relates to DNLP’s workers’ compensation and auto liabilities).
DNLP retained its lease with the New Jersey Economic Development Authority with respect to approximately 18 acres of real property on which its printing facilities are located (the “New Jersey Lease”). Under the New Jersey Lease, DNLP is required to purchase the real property at the end of the lease term in 2021 (and may acquire it prior to such date at any time) for up to $6.9 million. The real property purchase price was established in 1994. Sellers may, at any time, require DNLP to exercise the real property purchase option. Upon the exercise of the real property purchase option , the real property will be held by a partnership (the “Real Estate Partnership”) owned 49.9% by DNLP and 50.1% by New DN Company, an affiliate of the seller. New DN Company will control the management of the partnership. Due to the ownership structure of the Real Estate Partnership, DNLP’s net portion of the real property purchase price is approximately 49.9% (or up to $3.5 million), after reimbursement from New DN Company of its 50.1% portion of the real property purchase price. After the exercise of the real property purchase option and transfer of such property to the Real Estate Partnership, DNLP: (1) will have the option to lease it for one dollar per year, compared to the current lease rate of $100,000 per year under the New Jersey Lease, for up to 15 years and (2) may at any time, at its option, require sellers to acquire DNLP’s interest in the property based on its then-current fair market value. Should the Company discontinue printing operations on the property, the rent for the property would increase to a fair market rate and the sellers could purchase the Company’s 49.9% share of the Real Estate Partnership based on it’s then-current fair market value.
Additionally, DNLP owns approximately four acres of real property, currently used as parking facilities. Prior to or concurrent with exercise of the real property purchase option, DNLP will transfer ownership of that land to the Real Estate Partnership.
The allocation of the purchase price presented below is based upon management’s preliminary estimates using all information available to us at the present time and is subject to a working capital adjustment and the completion of a fair

14


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


market valuation of the assets acquired and liabilities assumed, particularly, intangible assets and property, plant and equipment.
As of the filing date of this report, the determination of the fair value of the assets acquired and liabilities assumed has not been completed.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is as follows (in thousands):
Allocated Fair Value of Acquired Assets and Assumed Liabilities
 

Cash acquired as part of the purchase
 
$
3,305

Accounts receivable and other current assets
 
20,220

Property, plant and equipment, including assets under capital leases
 
48,347

Mastheads and intangible assets not subject to amortization
 
1,910

Other long-term assets
 
1,222

Accounts payable and other current liabilities
 
(17,203
)
Pension and postemployment benefits liability
 
(25,445
)
Workers compensation and auto insurance liability
 
(18,838
)
Other long-term liabilities
 
(13,518
)
Total identifiable net assets (liabilities)
 

The results of operations of DNLP have been included in the Consolidated Financial Statements beginning on the closing date of the acquisition and allocated to the Company’s two operating segments consistent with the Company’s other media groups as discussed in Note 14. For the three and nine months ended September 24, 2017, reported revenues from DNLP were approximately $7.6 million and reported operating expenses were approximately $9.3 million. DNLP has not historically prepared GAAP financial statements. The Company is currently preparing audited and proforma financial statements for NYDN for the periods specified in Rule 3-05(b) of Regulation S-X.  These financial statements are not complete as of the filing date therefore the proforma information has not been included.  The Company expects to file the financial statements in the fourth quarter of 2017 and will include the proforma information in subsequent filings.
NOTE 5: INVENTORIES
Inventories consisted of the following (in thousands):
 
 
As of
 
 
September 24, 2017
 
December 25, 2016
Newsprint
 
$
8,902

 
$
10,462

Supplies and other
 
265

 
488

Total inventories
 
$
9,167

 
$
10,950

Inventories are stated at the lower of cost or net realizable value determined using the first-in, first-out (“FIFO”) basis for all inventories.

15


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets at September 24, 2017 and December 25, 2016 consisted of the following (in thousands):
 
 
September 24, 2017
 
December 25, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Intangible assets subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
Subscribers (useful life of 2 to 10 years)
 
$
24,632

 
$
(8,272
)
 
$
16,360

 
$
25,814

 
$
(7,229
)
 
$
18,585

Advertiser relationships (useful life of 2 to 13 years)
 
42,587

 
(14,421
)
 
28,166

 
44,271

 
(11,883
)
 
32,388

Tradenames (useful life of 20 years)
 
15,100

 
(2,380
)
 
12,720

 
15,100

 
(1,816
)
 
13,284

Other (useful life of 1 to 20 years)
 
5,379

 
(2,126
)
 
3,253

 
5,540

 
(1,940
)
 
3,600

Total intangible assets subject to amortization
 
$
87,698

 
$
(27,199
)
 
60,499

 
$
90,725

 
$
(22,868
)
 
67,857

 
 
 
 
 
 
 
 
 
 
 
 
 
Software (useful life of 2 to 10 years)
 
$
132,172

 
$
(85,347
)
 
46,825

 
$
125,780

 
$
(71,215
)
 
54,565

 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets not subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
122,640

 
 
 
 
 
122,469

Newspaper mastheads and other intangible assets not subject to amortization
 
 
 
 
 
66,239

 
 
 
 
 
64,304

Total goodwill and other intangible assets
 
 
 
 
 
$
296,203

 
 
 
 
 
$
309,195

NOTE 7: DEBT
At September 24, 2017, the Company had $363.8 million in variable-rate debt outstanding under the Term Loan Credit Agreement, as defined below. The weighted average interest rate for the variable-rate debt is 5.89%. At September 24, 2017, the fair value of borrowings outstanding under the Term Loan Credit Agreement was estimated to be $364.3 million based on Level 2 inputs, because the fair value for these instruments is determined using observable inputs in non-active markets. Level 2 inputs include quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.
Senior Term Facility
On August 4, 2014, the Company entered into a credit agreement (as amended, amended and restated or supplemented, the “Term Loan Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Term Collateral Agent”), and the lenders party thereto (the “Senior Term Facility”). The Senior Term Facility originally provided for secured loans (the “Term Loans”) in the aggregate principal amount of $350.0 million. The Senior Term Facility initially provided that it could be expanded by an amount up to (i) the greater of $100.0 million and an amount as will not cause the net senior secured leverage ratio after giving effect to such incurrence to exceed 2:1 plus (ii) an amount equal to all voluntary prepayments of the term loans borrowed under the Senior Term Facility, subject to certain conditions. In 2015, $70 million of the expansion was drawn for the acquisition of The San Diego Union-Tribune. As of September 24, 2017, total principal outstanding under the Term Loans was $363.8 million. The Term Loans bear interest at a variable interest rate based on either LIBOR or a base rate, in either case plus an applicable margin. The Term Loans amortize in equal quarterly installments equal to 1.25% of principal amounts borrowed against the Senior Term Facility with the balance payable on the maturity date, August 4, 2021. The Company is the borrower under the Senior Term Facility and each of the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions (the “Subsidiary Guarantors”), guarantee the payment obligations under the Senior Term Facility. The Senior Term Facility contains a number of covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; and certain other usual and

16


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


customary covenants. As of September 24, 2017, $21.1 million of the principal balance is included in current liabilities, the unamortized balance of the discount was $2.6 million and the unamortized balance of the fees associated with the Term Loans was $6.3 million. As of September 24, 2017, the Company was in compliance with the covenants of the Senior Term Facility.
Senior ABL Facility
On August 4, 2014, the Company and the Subsidiary Guarantors entered into a credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent (in such capacity, the “ABL Collateral Agent”), swing line lender and letter of credit issuer and the lenders party thereto (the “Senior ABL Facility”). The Senior ABL Facility will mature on August 4, 2019. The Senior ABL Facility provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $140.0 million. Up to $75.0 million of availability under the Senior ABL Facility is available for letters of credit and up to $15.0 million of availability under the Senior ABL Facility is available for swing line loans. The Senior ABL Facility also permits the Company to increase the commitments under the Senior ABL Facility by up to $75.0 million. The Senior ABL Facility bears interest at a variable interest rate based on either LIBOR or a base rate, in either case plus an applicable margin. tronc, Inc. and the Subsidiary Guarantors are the borrowers under the Senior ABL Facility. tronc, Inc. and the Subsidiary Guarantors guarantee the payment obligations under the Senior ABL Facility. The Senior ABL Facility contains a number of covenants that, among other things, limit the ability of tronc and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; and certain other usual and customary covenants. Customary fees are payable in respect of the Senior ABL Facility, including commitment fees of 0.25% and letter of credit fees. As of September 24, 2017, there were no borrowings under the Senior ABL Facility and $34.5 million of the Senior ABL Facility availability supported outstanding undrawn letters of credit in the same amount. The amount of the Senior ABL Facility availability supporting undrawn letters of credit will increase by $18.7 million in the fourth quarter once the NDLP letters of credit are transferred to the facility.
Capital Leases
The Company has capital leases on technology licenses and trucks. The total balance outstanding as of September 24, 2017 for capital leases was $7.3 million, of which $0.6 million is in short-term debt.
NOTE 8: INCOME TAXES
For the three and nine months ended September 24, 2017, the Company recorded income tax expense of $2.6 million and $9.6 million, respectively. The effective tax rate on pretax income was 56.3% and 61.8% in the three and nine months ended September 24, 2017, respectively. For the three months ended September 24, 2017, the rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit, and nondeductible expenses and the domestic production activities deduction. For the nine months ended September 24, 2017, the rate differs from the U.S. federal statutory rate of 35% primarily due to the fact that the $6.0 million premium on stock buyback described in Note 11 is a nondeductible permanent difference for the calculation of income taxes. The rate also differs due to state income taxes, net of federal benefit, and nondeductible expenses and the domestic production activities deduction.
For the three and nine months ended September 25, 2016, the Company recorded income tax expense of $4.4 million and $3.3 million, respectively. The effective tax rate on pretax income was (71.1)% and (34.5)% in the three and nine months ended September 25, 2016, respectively. For the three and nine months ended September 25, 2016, the rate differs from the U.S. federal statutory rate of 35% primarily due to a $7.1 million charge to adjust the Company’s deferred taxes, as described below, state income taxes, net of federal benefit and nondeductible expenses.
During September 2016, Tribune Media Company, formerly Tribune Company (“TCO”) reached a resolution with the Internal Revenue Service (“IRS”) regarding a pre-spin tax issue. In connection with the resolution and in conjunction with the tax rules applicable to emergence from bankruptcy, TCO has adjusted the previously determined tax basis of its assets as of December 31, 2012. This adjustment affected the tax basis of the assets and liabilities, including the deferred tax liability, transferred to the Company as part of TCO’s August 4, 2014 spin-off of its publishing operations. As a result of the IRS resolution, the Company recorded a reduction in tax basis of the shares in the Company transferred from TCO against the basis in TPC stock, a subsidiary of the Company, by $17.7 million, which resulted in an additional $7.1 million deferred tax liability and a $7.1 million charge to tax expense during the quarter ended September 25, 2016.

17


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 9: PENSION AND OTHER POSTRETIREMENT BENEFITS
Multiemployer Pension Plans
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees.
Defined Benefit Plans
The Company is the sponsor of a single-employer defined benefit plan, The San Diego Union-Tribune, LLC Retirement Plan (the “San Diego Pension Plan”). The San Diego Pension Plan provides benefits to certain current and former employees of The San Diego Union-Tribune. Future benefits under the San Diego Pension Plan have been frozen since January 1, 2009. The Company contributed $10.6 million to the San Diego Pension Plan in the first nine months of 2017 and expects to contribute an additional $2.6 million to the San Diego Pension Plan during the remainder of 2017. The components of net periodic benefit credit for the Company’s defined benefit plan were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
Interest cost
$
2,200

 
$
1,875

 
$
6,600

 
$
5,625

Expected return on assets
(2,375
)
 
(2,450
)
 
(7,125
)
 
(7,350
)
Amortization of actuarial loss
$
25

 
$

 
$
75

 
$

Net periodic benefit
$
(150
)
 
$
(575
)
 
$
(450
)
 
$
(1,725
)
As part of the acquisition of the New York Daily News, the Company became the sponsor of the Daily News Retirement Plan (the “NYDN Pension Plan”), a single-employer defined benefit plan. The NYDN Pension Plan provides benefits to certain current and former employees of the New York Daily News. The unfunded status of the NYDN Pension Plan is $25.4 million, as actuarially determined as of September 3, 2017, the closing date for the New York Daily News acquisition. The Company made a $1.0 million contribution to the NYDN Pension Plan in the third quarter of 2017. The net periodic benefit cost recorded subsequent to the acquisition was not material.
Postretirement Benefits Other Than Pensions
The Company provides postretirement health care to retirees pursuant to a number of benefit plans. The plans are frozen for new non-union employees. There is some variation in the provisions of these plans, including different provisions for lifetime maximums, prescription drug coverage and certain other benefits. The components of net periodic benefit credit for the Company’s postretirement health care and life insurance plans were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
Service cost
$
3

 
$
9

 
$
9

 
$
28

Interest cost
55

 
70

 
165

 
211

Amortization of prior service credits
(291
)
 
(439
)
 
(875
)
 
208

Amortization of gain
(47
)
 

 
(140
)
 

Net periodic (benefit) expense
$
(280
)
 
$
(360
)
 
$
(841
)
 
$
447

NOTE 10: EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income attributable to tronc common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of common shares under equity-based compensation plans, except where the inclusion of such common shares would have an anti-dilutive impact.

18


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


For the three and nine months ended September 24, 2017 and September 25, 2016, basic and diluted earnings per common share were as follows (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
Income (Loss) - Numerator:
 
 
 
 
 
 
 
Net income (loss) available to tronc stockholders plus assumed conversions
$
2,056

 
$
(10,472
)
 
$
5,908

 
$
(12,879
)
 
 
 
 
 
 
 
 
Shares - Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding (basic)
33,242

 
36,415

 
34,124

 
32,908

Dilutive effect of employee stock options and RSUs
170

 

 
209

 

Adjusted weighted average shares outstanding (diluted)
33,412

 
36,415

 
34,333

 
32,908

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.29
)
 
$
0.17

 
$
(0.39
)
Diluted
$
0.06

 
$
(0.29
)
 
$
0.17

 
$
(0.39
)
Potential dilutive common shares were anti-dilutive as a result of the Company’s net loss for the three and nine months ended September 25, 2016. As a result, basic weighted average shares were used in the calculations of basic net earnings per share and diluted earnings per share for that period.
The number of stock options that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 755,234 and 866,292 for the three and nine months ended September 24, 2017, respectively. The number of RSUs that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 210,329 and 333,360 for the three and nine months ended September 24, 2017, respectively.
The number of stock options that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 1,339,604 for the three and nine months ended September 25, 2016, respectively. The number of RSUs that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 1,375,501 for the three and nine months ended September 25, 2016, respectively.
NOTE 11: STOCKHOLDERS’ EQUITY
Stock Purchases
On March 23, 2017, the Company entered into a purchase agreement with investment funds associated with Oaktree Capital Management, L.P. (“Oaktree”), pursuant to which the Company acquired 3,745,947 shares of the Company’s common stock for $15.00 per share or a total purchase price of $56.2 million. In the event that the Company undergoes a change of control on or before March 23, 2018, or enters into a definitive agreement concerning a change of control on or before March 23, 2018, whereby the transaction is ultimately consummated and the consideration per share payable to stockholders is greater than $15.00 per share, the Company will pay Oaktree additional consideration per share equal to the difference between the consideration per share payable to the Company’s stockholders in such change of control transaction and $15.00. The purchase agreement contains a “standstill” covenant prohibiting Oaktree from acquiring, directly or indirectly, any of the Company’s common stock, soliciting proxies to vote shares of the Company’s common stock or taking certain actions with respect to any business combination, asset acquisition or disposition or similar transaction involving the Company through March 22, 2019 (the “Standstill Period”). The parties also agreed to a mutual non-disparagement covenant applicable during the Standstill Period and to a mutual release of claims. On March 22, 2017, the Company’s stock price

19


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


closed at $13.39. The $6.0 million difference between the aggregate purchase price and the fair value of the acquired stock at the transaction date was expensed as a premium on stock buyback in the Consolidated Statements of Income (Loss).
The Company has not recorded any amount associated with its agreement to pay Oaktree additional consideration because management concluded the fair value of such obligation is not material. ln the event the fair value of the Company's obligation becomes material in a future period, the Company would record additional premium on stock buyback in the Consolidated Statement of Income (Loss).
Significant Shareholders
Merrick Media, LLC
On March 23, 2017, the Company entered into Amendment No. 1 (the “Amendment”) to the Securities Purchase Agreement dated February 3, 2016 among the Company, Merrick Media, LLC (“Merrick Media”) and Michael W. Ferro, Jr., the Company’s non-executive Chairman of the Board. The Amendment increases from 25% to 30% the maximum percentage of the Company’s outstanding shares of common stock that Merrick Media and its affiliates may acquire.
Mr. Ferro is the manager of Merrick Venture Management, LLC, which is the sole manager of Merrick Media. Because Merrick Venture Management, LLC serves as the sole manager of Merrick Media, Mr. Ferro may be deemed to indirectly control all of the shares of the Company’s common stock owned by Merrick Media. Mr. Ferro, together with his affiliated entities, beneficially owned 9,497,788 shares of tronc common stock, which represented 28.3% of tronc common stock, as of September 24, 2017.
Nant Capital, LLC
Dr. Patrick Soon-Shiong, a former director of the Company, together with Nant Capital, LLC (“Nant Capital”), beneficially own 8,743,619 shares of tronc common stock, which represented 26.1% of the outstanding shares of tronc common stock as of September 24, 2017. California Capital Equity, LLC (“CalCap”) directly owns all of the equity interests of Nant Capital, and CalCap may be deemed to have beneficial ownership of the shares held by Nant Capital. Dr. Soon-Shiong directly owns all of the equity interests of CalCap and may be deemed to beneficially own, and share voting power and investment power with Nant Capital over all shares of tronc common stock beneficially owned by Nant Capital. Under the purchase agreement dated May 22, 2016, among the Company, Nant Capital and Dr. Patrick Soon-Shiong, Nant Capital and Dr. Soon-Shiong and their respective affiliates are prohibited, without the prior written approval of the Board of Directors, from acquiring additional equity of the Company if the acquisition could result in their beneficial ownership of more than 25% of the Company’s then-outstanding shares of common stock. Nant Capital, Dr. Soon-Shiong and their respective affiliates reached this maximum percentage and therefore any additional purchases of the Company’s common stock will require prior written approval of the Board.

20


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 12: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):    
 
 
Foreign Currency
 
OPEB
 
Pension
 
Total
Balance at December 25, 2016
 
$
(32
)
 
$
6,374

 
$
(15,156
)
 
$
(8,814
)
  Other comprehensive income before reclassifications
 
1

 

 
$

 
1

  Amounts reclassified from AOCI
 

 
(569
)
 
$

 
(569
)
Balance at September 24, 2017
 
(31
)
 
5,805

 
(15,156
)
 
(9,382
)
The following table presents the amounts and line items in the Consolidated Statements of Income (Loss) where adjustments reclassified from accumulated other comprehensive income (loss) were recorded during the three and nine months ended September 24, 2017 and September 25, 2016 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
 
Accumulated Other Comprehensive Income (Loss) Components
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
 
Affected Line Items in the Consolidated Statements of Income (Loss)
Pension and postretirement benefit adjustments:
 
 
 
 
 
 
 
 
 
Prior service cost recognized
$
(291
)
 
$
(439
)
 
$
(875
)
 
$
208

 
Compensation
Amortization of actuarial losses
(22
)
 

 
(65
)
 

 
Compensation
Total before taxes
(313
)
 
(439
)
 
(940
)
 
208

 
 
Tax effect
(119
)
 
(173
)
 
(371
)
 
82

 
Income tax expense (benefit)
Total reclassifications for the period
$
(194
)
 
$
(266
)
 
$
(569
)
 
$
126

 
 
NOTE 13: CONTINGENCIES
Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business. The legal entities comprising our operations are defendants from time to time in actions for matters arising out of their business operations. In addition, the legal entities comprising our operations are involved from time to time as parties in various regulatory, environmental and other proceedings with governmental authorities and administrative agencies.
Stockholder Derivative Lawsuits
On June 1, 2016, Capital Structures Realty Advisors LLC, which purported to be a stockholder in the Company, filed a derivative lawsuit in the Delaware Court of Chancery against the members of the Company’s Board of Directors as of June 1, 2016, Dr. Patrick Soon-Shiong and Nant Capital (together with Dr. Soon-Shiong, the “Nant Defendants”).  The complaint had named the Company as a nominal defendant (together with the Company’s Board of Directors, the “Tronc Defendants”). The complaint alleged in relevant part that the Board breached its fiduciary duties by “refusing to negotiate with Gannett in good faith” and by “going forward with the stock sale” to the Nant Defendants.  The complaint further alleged that the Nant Defendants aided and abetted the Board’s breaches of fiduciary duty.  On June 6, 2016, a second derivative complaint was filed in the Delaware Court of Chancery by Monroe County Employees Retirement System, which purported to be a stockholder in the Company.  On June 15, 2016, a third, mirror image, derivative complaint was filed in the Delaware Court of Chancery on behalf of an individual named John Solak, who purported to be a stockholder in the Company.  All three cases were consolidated on June 17, 2016, under the caption In re Tribune Publishing Co. Stockholder Litigation, Consolidated C.A. No. 12401-VCS.  On June 20, 2016, a fourth, mirror image derivative complaint was filed in the Delaware Court of Chancery on behalf of an individual named B.W. Tomasino, who purported to be a stockholder in the Company.  That case was consolidated with the other three derivative cases on July 7, 2016.  The plaintiffs sought equitable

21


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


and injunctive relief, including, without limitation, rescission of the stock sale to the Nant Defendants, implementation of a special committee to consider Gannett and any other offer for the Company, money damages, and costs and disbursements, and such other relief deemed just and proper.
On September 2, 2016, plaintiffs filed a consolidated complaint. The defendants filed motions to dismiss on October 3, 2016.  On May 15, 2017, the plaintiffs voluntarily dismissed the consolidated complaint without prejudice.
Tribune Company Bankruptcy
On December 31, 2012, Tribune Media Company, formerly Tribune Company, and 110 of its direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) that had filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware on December 8, 2008 (or on October 12, 2009, in the case of Tribune CNLBC, LLC) emerged from Chapter 11. Certain of the legal entities included in the Consolidated Financial Statements of tronc were Debtors or, as a result of the restructuring transactions undertaken at the time of the Debtors’ emergence, are successor legal entities to legal entities that were Debtors (“tronc Debtors”).
Notices of appeal of the Bankruptcy Court’s order confirming the Plan (the “Confirmation Order”) were filed by (i) Aurelius Capital Management L.P. on behalf of its managed entities that were holders of Tribune Company’s senior notes and Exchangeable Subordinated Debentures due 2029 (“PHONES”), (ii) Law Debenture Trust Company of New York (succeeded by “Delaware Trust Company”) and Deutsche Bank Trust Company Americas (“Deutsche Bank”), each successor trustees under the respective indentures for Tribune Company’s senior notes; (iii) Wilmington Trust Company, as successor indenture trustee for the PHONES, and (iv) EGI-TRB, L.L.C., a Delaware limited liability company wholly-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family) (the “Zell Entity”). The appellants sought, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court embodied in the Plan, including the settlement of certain claims and causes of action related to the series of transactions (collectively, the “Leveraged ESOP Transactions”) consummated by Tribune Company, the Tribune Company employee stock ownership plan, the Zell Entity and Samuel Zell in 2007. As of September 24, 2017, each of the Confirmation Order appeals have been dismissed or otherwise resolved by a final order, with the exception of the appeals of Delaware Trust Company and Deutsche Bank, which remain pending before the U. S. District Court for the District of Delaware. There is no stay of the Confirmation Order in place pending resolution of the confirmation related appeals.
As of August 12, 2016, the Bankruptcy Court had entered final decrees collectively closing 106 of the Debtors’ Chapter 11 cases, including the last one of the tronc Debtors’ cases. The remaining Chapter 11 cases relate to Debtors and successor legal entities that are subsidiaries of Tribune Media Company. These cases have not yet been closed by the Bankruptcy Court, and certain claims asserted against various of the Debtors (including certain of the tronc Debtors) in the Chapter 11 cases remain unresolved. The remaining Chapter 11 cases continue to be administered under the caption “In re: Tribune Media Company, et al.,” Case No 08-13141.
NOTE 14: SEGMENT INFORMATION
The Company’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Beginning in the second quarter of fiscal 2016, the operating segments consist of troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, and forsalebyowner.com. Assets are not presented to or used by management at a segment level for making operating and investment decisions and therefore are not reported.
The Company measures segment profit using income from operations, which is defined as income from operations before net interest expense, gain on investment transactions, reorganization items and income taxes.

22


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Operating revenues and income (loss) from operations by operating segment were as follows for the periods indicated (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 24, 2017
 
September 25, 2016

September 24, 2017

September 25, 2016
Operating revenues:
 
 
 
 
 
 
 
troncM
$
297,252

 
$
323,133

 
$
921,202

 
$
1,010,565

troncX
56,545

 
57,153

 
170,226

 
175,944

Corporate and eliminations
(706
)
 
(2,050
)
 
(2,430
)
 
(5,553
)
 
$
353,091

 
$
378,236

 
$
1,088,998

 
$
1,180,956

Income (loss) from operations:
 
 
 
 
 
 
 
troncM
$
14,802

 
$
16,267

 
$
56,312

 
$
64,448

troncX
5,439

 
4,839

 
17,993

 
16,711

Corporate and eliminations
(13,987
)
 
(20,270
)
 
(37,085
)
 
(69,896
)
Income (loss) from operations
$
6,254

 
$
836

 
$
37,220

 
$
11,263

Interest expense, net
(6,544
)
 
(6,673
)
 
(19,425
)
 
(20,116
)
Premium on stock buyback

 

 
(6,031
)
 

Loss on equity investments, net
4,993

 
(190
)
 
3,721

 
(487
)
Reorganization items, net

 
(93
)
 

 
(236
)
Income (loss) before income taxes
$
4,703

 
$
(6,120
)
 
$
15,485

 
$
(9,576
)
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
troncM
$
5,626

 
$
6,175

 
$
18,221

 
$
17,486

troncX
$
4,124

 
$
2,900

 
$
10,940

 
$
8,533

Corporate and eliminations
4,408

 
5,300

 
12,835

 
16,780

 
$
14,158

 
$
14,375

 
$
41,996

 
$
42,799

The above operating revenues and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.
NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for each of the periods presented is as follows (in thousands):
 
 
Nine months ended
 
 
September 24,
2017
 
September 25,
2016
Cash paid during the period for:
 
 
 
 
Interest
 
$
17,063

 
$
17,886

Income taxes, net of refunds
 
142

 
(213
)
Non-cash items in investing activities:
 
 
 
 
Additions to property plant and equipment under capital leases
 
(890
)
 
(722
)
Non-cash items in financing activities:
 
 
 
 
New capital leases
 
890

 
722


23




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q, including the Company’s Consolidated Financial Statements and related Notes filed as part of this Quarterly Report, and “Cautionary Statement Concerning Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this Quarterly Report, as well as the factors described in our Annual Report on Form 10-K as filed with the SEC on March 8, 2017, particularly under Item 1A. “Risk Factors,” and in the Company’s other filings with the SEC.
We believe that the assumptions underlying the Consolidated Financial Statements included in this Quarterly Report are reasonable. However, the Consolidated Financial Statements may not necessarily reflect our results of operations, financial position and cash flows for future periods.
OVERVIEW
tronc, Inc., was formed as a Delaware corporation on November 21, 2013. tronc, Inc., together with its subsidiaries (collectively, “tronc” or the “Company”) is a media company rooted in award-winning journalism. Headquartered in Chicago, tronc operates newsrooms in ten markets with titles including Chicago Tribune, Los Angeles Times, The Baltimore Sun, Orlando Sentinel, South Florida’s Sun Sentinel, Newport News, Virginia’s Daily Press, Allentown, Pennsylvania’s The Morning Call, Hartford Courant and The San Diego Union-Tribune. On September 3, 2017, the Company completed the purchase of the New York Daily News, New York City’s “Hometown Newspaper”. tronc’s legacy of brands has earned a combined 105 Pulitzer Prizes and is committed to informing, inspiring and engaging local communities.
tronc’s brands create and distribute content across its media portfolio, offering integrated marketing, media, and business services to consumers and advertisers, including digital solutions and advertising opportunities.
The Company continually assesses its operations in an effort to identify opportunities to enhance operational efficiencies and reduce expenses. These activities have in the past included, and could include in the future, outsourcing of various functions or operations, additional abandonment of leased space and other activities which may result in changes to employee headcount. See Note 2 to the Consolidated Financial Statements for more information on changes in operations in the third quarter of 2017. The Company expects to continue to take actions deemed appropriate to enhance profitability but does not currently know whether or when any such actions will occur or the potential costs and expected savings. Depending on the actions taken and the timing of any such actions, the anticipated cost savings could be recognized in fiscal periods that do not correspond to the fiscal period(s) in which the charges are recognized. As a result, the Company’s net income trends could be impacted and more difficult to predict.
Significant transactions and recent events
On September 3, 2017, the Company completed the acquisition of Daily News, L. P. (“DNLP”), the owner of the New York Daily News in New York City. The results of operations of DNLP have been included in the Consolidated Financial Statements beginning on the closing date of the acquisition and allocated to the Company’s two operating segments consistent with the Company’s other media groups. For the three and nine months ended September 24, 2017, the revenues from Daily News, L.P. were approximately $7.6 million and the total operating expenses were approximately $9.3 million. See Note 4 to the Consolidated Financial Statements for additional information related to the acquisition.
In July 2017, the Company sold its interest in CIPS for approximately $7.5 million, resulting in a gain of $5.6 million which is recorded in Gain (Loss) on Equity Investments in the Consolidated Statement of Income, and entered into a long-term agreement with the buyer to utilize CIPS for certain distribution efforts.
On March 23, 2017, the Company acquired, in a privately negotiated transaction with investment funds associated with Oaktree Capital Management, L.P. (“Oaktree”), 3,745,947 shares of the Company’s common stock at a purchase price of $15.00 per share for a total of $56.2 million. See Note 11 to the Consolidated Financial Statements for additional information.

24




Segments
The Company manages its business as two distinct segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, Tribune Content Agency (“TCA”), and forsalebyowner.com.
troncM
troncM’s media groups include the Chicago Tribune Media Group, the Los Angeles Times Media Group, the San Diego Media Group, the Sun Sentinel Media Group, the Orlando Sentinel Media Group, The Baltimore Sun Media Group, the Hartford Courant Media Group, the Morning Call Media Group, the Daily Press Media Group and the New York Daily News Group.
In the nine months ended September 24, 2017, 44.6% of troncM’s operating revenues were derived from advertising. These revenues were generated from the sale of advertising space in published issues of the newspapers and from the delivery of preprinted advertising supplements. Approximately 39.3% of operating revenues for the nine months ended September 24, 2017 were generated from the sale of newspapers and other publications to individual subscribers or to sales outlets that re-sell the newspapers. The remaining 16.1% of operating revenues for the nine months ended September 24, 2017 were generated from the provision of commercial printing and delivery services to other newspapers, direct mail advertising and services, and other related activities.
Newspaper print advertising is typically in the form of display, classified or preprint advertising. Advertising and marketing services revenues are comprised of three basic categories: retail, national and classified. Retail is a category of customers who tend to do business directly with the general public. National is a category of customers who tend to do business directly with other businesses. Classified is a type of advertising which is other than display or preprint.
Circulation revenue results from the sale of print editions of newspapers to individual subscribers and the sale of print editions of newspapers to sales outlets that re-sell the newspapers.
Other revenues are derived from commercial printing and delivery services provided to other newspapers, direct mail advertising and services and other related activities. The Company contracts with a number of national and local newspapers to both print and distribute their respective publications in local markets where it is a newspaper publisher. In some instances where it prints publications, it also manages and procures newsprint, ink and plates on their behalf. These arrangements allow the Company to leverage its investment in infrastructure in those markets that support its own publications. As a result, these arrangements tend to contribute incremental profitability and revenues. The Company currently distributes national newspapers (including The New York Times, USA Today, and The Wall Street Journal) in its local markets under multiple agreements. Additionally, in Los Angeles, Chicago and South Florida the Company provides some or all of these services to other local publications.
Products and Services
Our product mix consists of three publication types: (i) daily newspapers, (ii) weekly newspapers and (iii) niche publications and direct mail. The key characteristics of each of these types of publications are summarized in the table below.
 
Daily Newspapers
Weekly Newspapers
Niche Publications
Cost:
Paid
Paid and free
Paid and free
Distribution:
Distributed four to seven days per week
Distributed one to three days per week
Distributed weekly, monthly or on an annual basis
Income:
Revenue from advertisers, subscribers, rack/box sales
Paid: Revenue from advertising, subscribers, rack/box sales
Paid: Revenue from advertising, rack/box sales
 
 
Free: Advertising revenue only
Free: Advertising revenue only

25




As of September 24, 2017, the Company’s prominent print publications include:
Media Group
 
City
 
Masthead
 
Circulation Type
 
Paid or Free
Chicago Tribune Media Group
 
 
 
 
 
 
Chicago, IL
 
Chicago Tribune
 
Daily
 
Paid
 
 
Chicago, IL
 
Chicago Magazine
 
Monthly
 
Paid
 
 
Chicago, IL
 
Hoy
 
Weekly
 
Free
 
 
Chicago, IL
 
RedEye
 
Weekly
 
Free
Los Angeles Times Media Group
 
 
 
 
 
 
Los Angeles, CA
 
Los Angeles Times
 
Daily
 
Paid
 
 
Los Angeles, CA
 
Hoy Los Angeles
 
Weekly
 
Free
San Diego Media Group
 
 
 
 
 
 
San Diego, CA
 
The San Diego Union-Tribune
 
Daily
 
Paid
 
 
San Diego, CA
 
Hoy San Diego
 
Weekly
 
Free
Sun Sentinel Media Group
 
 
 
 
 
 
Broward County, FL, Palm Beach County, FL
 
Sun Sentinel
 
Daily
 
Paid
 
 
Broward County, FL, Palm Beach County, FL
 
el Sentinel
 
Weekly
 
Free
Orlando Sentinel Media Group
 
 
 
 
 
 
Orlando, FL
 
Orlando Sentinel
 
Daily
 
Paid
 
 
Orlando, FL
 
el Sentinel
 
Weekly
 
Free
The Baltimore Sun Media Group
 
 
 
 
 
 
Baltimore, MD
 
The Baltimore Sun
 
Daily
 
Paid
 
 
Annapolis, MD
 
The Capital
 
Daily
 
Paid
 
 
Westminster, MD
 
Carroll County Times
 
Daily
 
Paid
Hartford Courant Media Group
 
 
 
 
 
 
Hartford County, CT, Middlesex County, CT, Tolland County, CT
 
The Hartford Courant
 
Daily
 
Paid
Daily Press Media Group
 
 
 
 
 
 
Newport News, VA (Peninsula)
 
Daily Press
 
Daily
 
Paid
The Morning Call Media Group
 
 
 
 
 
 
Lehigh Valley, PA
 
The Morning Call
 
Daily
 
Paid
The New York Daily News Group
 
 
 
 
 
 
New York, NY
 
New York Daily News
 
Daily
 
Paid
troncX
troncX comprises the Company’s digital operations, and includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, and forsalebyowner.com.
TCA is a syndication and licensing business providing content solutions for publishers around the globe.  Working with a vast collection of the world’s news and information sources, TCA delivers a daily news service and syndicated premium content to over 1,700 media and digital information publishers in more than 70 countries. Tribune News Service delivers material from 70 leading publications, including Los Angeles Times, Chicago Tribune, Bloomberg News, Miami Herald, The Dallas Morning News, Seattle Times and The Philadelphia Inquirer. Tribune Premium Content syndicates columnists such as Leonard Pitts, Cal Thomas, Clarence Page, Ask Amy, Mario Batali and Rick Steves. TCA manages the

26




licensing of premium content from publications such as Rolling Stone, The Atlantic, Fast Company, Mayo Clinic, Variety and many more. TCA traces its roots to 1918.
forsalebyowner.com is a national consumer-to-consumer focused real estate website. The majority of the revenue generated by forsalebyowner.com is e-commerce, but approximately one-third is generated through a call center and strategic partnerships with service providers in the real estate industry. The business generates the majority of its revenue by selling listing packages directly to home sellers who receive online advertising, home pricing tools, marketing advice, yard signs and technical support. forsalebyowner.com also sells packages that allow home sellers to syndicate to other national websites such as Zillow and Realtor.com as well as their local multiple listing service (“MLS”).
In the nine months ended September 24, 2017, 80.9% of troncX’s operating revenues were derived from advertising. These revenues were generated from the sale of advertising space on interactive websites and digital marketing services. The remaining 19.1% of operating revenues for the nine months ended September 24, 2017 were generated from the sale of digital content and other related activities.
Digital advertising can be in the form of display, banner ads, coupon ads, video, search advertising and linear ads placed on tronc and affiliated websites. Advertising services include development of mobile websites, search engine marketing and optimization, social media account management and content marketing for its customers’ web presence for small to medium size businesses.
Products and Services
As of September 24, 2017, the Company’s prominent websites include:
Websites
www.tronc.com
www.orlandosentinel/elsentinel.com
www.chicagotribune.com
www.baltimoresun.com
www.chicagomag.com
www.capitalgazette.com
www.vivelohoy.com
www.carrollcountytimes.com
www.redeyechicago.com
www.courant.com
www.latimes.com
www.dailypress.com
www.la.com
www.themorningcall.com
www.hoylosangeles.com
www.forsalebyowner.com
www.sandiegouniontribune.com
www.TheDailyMeal.com
www.sun-sentinel.com
www.TheActiveTimes.com
www.sun-sentinel/elsentinel.com
www.TheCube.com
www.orlandosentinel.com
www.NYDailyNews.com
The Company’s results of operations, when examined on a quarterly basis, reflect the seasonality of tronc’s revenues. Second and fourth quarter advertising revenues are typically higher than first and third quarter revenues. Results for the second quarter reflect spring advertising revenues, while the fourth quarter includes advertising revenues related to the holiday season.

27




Results of Operations
Consolidated
Operating results for the three and nine months ended September 24, 2017 and September 25, 2016 are shown in the table below (in thousands).
 
Three Months Ended
 
Nine Months Ended
 
September 24,
2017
 
September 25,
2016
 
% Change
 
September 24,
2017
 
September 25,
2016
 
% Change
Operating revenues
$
353,091

 
$
378,236

 
(6.6
%)
 
$
1,088,998

 
$
1,180,956

 
(7.8
%)
Compensation
135,045

 
140,760

 
(4.1
%)
 
394,659


453,353

 
(12.9
%)
Newsprint and ink
20,941

 
25,101

 
(16.6
%)
 
67,313


77,174

 
(12.8
%)
Outside services
111,109

 
118,060

 
(5.9
%)
 
340,298


368,733

 
(7.7
%)
Other operating expenses
65,584

 
79,104

 
(17.1
%)
 
207,512


227,634

 
(8.8
%)
Depreciation and amortization
14,158

 
14,375

 
(1.5
%)
 
41,996

 
42,799

 
(1.9
%)
Operating expenses
346,837

 
377,400

 
(8.1
%)
 
1,051,778

 
1,169,693

 
(10.1
%)
Income from operations
6,254

 
836

 
*
 
37,220

 
11,263

 
*
Interest expense, net
(6,544
)
 
(6,673
)
 
(1.9
%)
 
(19,425
)
 
(20,116
)
 
(3.4
%)
Premium on stock buyback

 

 
*
 
(6,031
)
 

 
*
Gain (loss) on equity investments, net
4,993

 
(190
)
 
*
 
3,721

 
(487
)
 
*
Reorganization items, net

 
(93
)
 
*
 

 
(236
)
 
*
Income tax expense (benefit)
2,647

 
4,352

 
(39.2
%)
 
9,577

 
3,303

 
*
Net income (loss)
$
2,056

 
$
(10,472
)
 
*
 
$
5,908

 
$
(12,879
)
 
*
* Represents positive or negative change in excess of 100%
Three Months Ended September 24, 2017 compared to the Three Months Ended September 25, 2016
Operating Revenues—Operating revenues decreased 6.6%, or $25.1 million, in the three months ended September 24, 2017 compared to the same period for 2016. The decrease was due primarily to decreases in advertising and other revenue partially offset by an increase in circulation revenue and contributions from the acquisition of DNLP.
Compensation Expense—Compensation expense decreased 4.1%, or $5.7 million, in the three months ended September 24, 2017 due primarily to a decrease in accrued incentive compensation of $5.7 million; a decrease in salary expense of $6.7 million as a result of the reduction in headcount due to the prior periods personnel restructuring; and a decrease in medical claims and workers compensation expenses of $2.2 million. These decreases were partially offset by an increase in severance charges of $4.6 million related to current period personnel restructuring and compensation expenses from the acquisition of DNLP. See Note 2 to the Consolidated Financial Statements for additional information on personnel restructuring.
Newsprint and Ink Expense—Newsprint and ink expense declined 16.6%, or $4.2 million, in the three months ended September 24, 2017 due mainly to a 21.7% decrease in consumption, partially offset by a 3.0% increase in the average cost per ton of newsprint, partially offset by newsprint and ink expenses from the acquisition of DNLP.
Outside Services Expense—Outside services expense decreased 5.9%, or $7.0 million, in the three months ended September 24, 2017 due primarily to decreases in production and distribution expenses of $5.4 million, and professional services expenses of $3.2 million, partially offset by outside services expense from the acquisition of DNLP.

28




Other Operating Expenses—Other expenses decreased 17.1%, or $13.5 million, in the three months ended September 24, 2017 due primarily to a decrease of $9.4 million in occupancy expenses, $3.1 million in general operating expenses, and $1.9 million in promotion and marketing expenses, partially offset by other operating expenses from the acquisition of DNLP.
Depreciation and Amortization Expense—Depreciation and amortization expense was consistent with the prior year.
Gain (Loss) on Equity Investments, Net—Gain (loss) on equity investments, net, increased by $5.2 million for the three months ended September 24, 2017 compared to the same period for 2016 primarily due to a gain of $5.6 million related to the sale of the Company’s interest in CIPS, partially offset by to the Company’s share of operating losses from its equity investment in Nucleus Marketing Solutions, LLC.
Interest Expense, Net—Interest expense was consistent with the prior year.
Income Tax Expense—Income tax expense decreased $1.7 million for the three months ended September 24, 2017 over the prior year period primarily due to a $7.1 million charge in the third quarter of 2016 to adjust the Company’s deferred taxes. This decrease is partially offset by an increase in tax expense due to increased pre-tax income. See Note 8 to the Consolidated Financial Statements for further explanation of the charge.
The effective tax rate on pretax income was 56.3% in the three months ended September 24, 2017 This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit and non-deductible expenses.
The effective tax rate on pretax income was (71.1%) in the three months ended September 25, 2016. This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit, a charge to adjust the Company’s deferred taxes and nondeductible expenses.
Nine Months Ended September 24, 2017 compared to the Nine Months Ended September 25, 2016
Operating Revenues—Operating revenues decreased 7.8%, or $92.0 million, in the nine months ended September 24, 2017 compared to the same period for 2016. The decrease was due primarily to decreases in advertising and other revenue partially offset by an increase in circulation revenue and contributions from the acquisition of DNLP.
Compensation Expense—Compensation expense decreased 12.9%, or $58.7 million, in the nine months ended September 24, 2017 due primarily to a decrease in salary expense of $22.9 million as a result of the reduction in headcount due to the prior periods personnel restructuring; a decrease in accrued incentive compensation of $14.0 million; a decrease in medical claims and workers compensation expenses of $11.6 million; and a decrease in severance charges of $10.3 million related to prior period personnel restructuring. These decreases were partially offset by compensation expenses from the acquisition of DNLP.
Newsprint and Ink Expense—Newsprint and ink expense declined 12.8%, or $9.9 million, in the nine months ended September 24, 2017 due mainly to a 18.1% decrease in consumption, partially offset by a 2.6% increase in the average cost per ton of newsprint partially offset by newsprint and ink expenses from the acquisition of DNLP.
Outside Services Expense—Outside services expense decreased 7.7%, or $28.4 million, in the nine months ended September 24, 2017 due primarily to decreases in production and distribution expenses of $17.6 million, professional services expenses of $9.2 million and outside printing expenses of $4.8 million, partially offset by outside services expense from the acquisition of DNLP.
Other Operating Expenses—Other expenses decreased 8.8%, or $20.1 million, in the nine months ended September 24, 2017 due primarily to a decrease in overall general expenses, partially offset by other operating expenses from the acquisition of DNLP.
Depreciation and Amortization Expense—Depreciation and amortization expense was consistent with the prior year.
Premium on Stock Buyback—On March 23, 2017, the Company purchased 3,745,947 shares of the Company’s stock for $56.2 million, or $15 per common share. The fair value of the stock as of the purchase date was $50.2 million, or $13.39 per common share. The $6.0 million difference between the purchase price and the transaction date fair value was recorded as a

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premium on the stock buyback, a non-operating expense. See Note 11 to the Consolidated Financial Statements for additional information.
(Gain) Loss on Equity Investments, Net—(Gain) Loss on equity investments, net, increased by $4.2 million for the nine months ended September 24, 2017 compared to the same period for 2016 due to a gain of $5.6 million on the sale of the Company’s interest in CIPS, partially offset by the Company’s share of operating losses from its equity investment in Nucleus Marketing Solutions, LLC.
Interest Expense, Net—Interest expense was consistent with the prior year.
Income Tax Expense—Income tax expense increased $6.3 million for the nine months ended September 24, 2017 over the prior year period primarily due to an increase in pre-tax income and the permanent difference on the premium on stock buyback partially offset by a $7.1 million charge in the third quarter 2016 to adjust the Company’s deferred taxes. See Note 8 to the Consolidated Financial Statements for further explanation of the charge.
The effective tax rate on pretax income was 61.8% in the nine months ended September 24, 2017. This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit and non-deductible expenses. For the nine months ended September 24, 2017, the $6.0 million premium on stock buyback, as discussed above, was a nondeductible permanent difference for the calculation of income taxes. For the nine months ended September 25, 2016, the Company recorded income tax expense of $3.3 million. The effective tax rate on pretax income was (34.5)% in the nine months ended September 25, 2016. This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit, nondeductible expenses, the $7.1 million charge to adjust the Company’s deferred taxes and the domestic production activities deduction.
Segments
The Company manages its business as two distinct segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, and forsalebyowner.com.
The Company measures segment profit using income from operations, which is defined as net income before net interest expense, gain on investment transactions, reorganization items and income taxes.
The tables below show the segmentation of income and expenses for the three and nine months ended September 24, 2017 as compared to the three and nine months ended September 25, 2016 (in thousands). Each three-month period consists of 13 weeks.
 
troncM
 
troncX
 
Corporate and Eliminations
 
Consolidated
 
Three months ended
 
Three months ended
 
Three months ended
 
Three months ended
 
Sept 24, 2017
 
Sept 25, 2016
 
Sept 24, 2017
 
Sept 25, 2016
 
Sept 24, 2017
 
Sept 25, 2016
 
Sept 24, 2017
 
Sept 25, 2016
Total revenues
$
297,252

 
$
323,133

 
$
56,545

 
$
57,153

 
$
(706
)
 
$
(2,050
)
 
$
353,091

 
$
378,236

Operating expenses
282,450

 
306,866

 
51,106

 
52,314

 
13,281

 
18,220

 
346,837

 
377,400

Income (loss) from operations
14,802

 
16,267

 
5,439

 
4,839

 
(13,987
)
 
(20,270
)
 
6,254

 
836

Depreciation and amortization
5,626

 
6,175

 
4,124

 
2,900

 
4,408

 
5,300

 
14,158

 
14,375

Adjustments (1)
8,282

 
8,497

 
1,318

 
1,372

 
5,273

 
11,504

 
14,873

 
21,373

Adjusted EBITDA
$
28,710

 
$
30,939

 
$
10,881

 
$
9,111

 
$
(4,306
)
 
$
(3,466
)
 
$
35,285

 
$
36,584

(1) See Non-GAAP Measures for additional information on adjustments.

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