Attached files

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EX-32.2 - EX-32.2 - MCCLATCHY COmni-20180701ex3223c7dec.htm
EX-32.1 - EX-32.1 - MCCLATCHY COmni-20180701ex3211bb5eb.htm
EX-31.2 - EX-31.2 - MCCLATCHY COmni-20180701ex312e0182a.htm
EX-31.1 - EX-31.1 - MCCLATCHY COmni-20180701ex3113b661f.htm
EX-10.6 - EX-10.6 - MCCLATCHY COmni-20180701ex106571966.htm
EX-10.4 - EX-10.4 - MCCLATCHY COmni-20180701ex1046f0090.htm
EX-10.3 - EX-10.3 - MCCLATCHY COmni-20180701ex1036f4686.htm
EX-10.2 - EX-10.2 - MCCLATCHY COmni-20180701ex1024fb5dd.htm
EX-10.1 - EX-10.1 - MCCLATCHY COmni-20180701ex10194a07b.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended:  July 1, 2018

 

or

 

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

 

For the transition period from                      to                     

 

Commission file number: 1-9824

 

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

 

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

52-2080478

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

2100 “Q” Street, Sacramento, CA

 

95816

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

 

916-321-1844

 

 

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒  No ◻

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒  No ◻

 

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

 

 

 

 

 

 

Large accelerated filer ◻

Accelerated filer ☒

 

 

 

 

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

Smaller reporting company ◻

Emerging growth company ◻

 

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

 

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

 

Yes ◻  No ☒

 

As of August 3, 2018, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

5,347,337

Class B Common Stock

2,428,191

 

 

 


 

 

THE MCCLATCHY COMPANY

 

TABLE OF CONTENTS

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Six Months Ended

 

 

 

July 1,

 

June 25,

 

July 1,

 

June 25,

 

 

    

2018

    

2017

 

2018

 

2017

 

REVENUES — NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

106,953

 

$

125,239

 

$

206,840

 

$

245,128

 

Audience

 

 

84,825

 

 

89,915

 

 

171,103

 

 

181,331

 

Other

 

 

12,570

 

 

9,966

 

 

25,263

 

 

19,873

 

 

 

 

204,348

 

 

225,120

 

 

403,206

 

 

446,332

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

77,937

 

 

86,823

 

 

157,149

 

 

178,231

 

Newsprint, supplements and printing expenses

 

 

13,761

 

 

16,459

 

 

27,420

 

 

34,304

 

Depreciation and amortization

 

 

19,222

 

 

19,624

 

 

38,455

 

 

39,428

 

Other operating expenses

 

 

91,817

 

 

90,104

 

 

181,466

 

 

184,821

 

Other asset write-downs

 

 

 —

 

 

 —

 

 

59

 

 

1,957

 

 

 

 

202,737

 

 

213,010

 

 

404,549

 

 

438,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

1,611

 

 

12,110

 

 

(1,343)

 

 

7,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(17,939)

 

 

(20,292)

 

 

(36,835)

 

 

(40,746)

 

Interest income

 

 

169

 

 

136

 

 

306

 

 

289

 

Equity income (loss) in unconsolidated companies, net

 

 

2,314

 

 

(159)

 

 

1,046

 

 

(96)

 

Impairments related to equity investments, net

 

 

 —

 

 

(46,147)

 

 

 —

 

 

(169,147)

 

Loss on extinguishment of debt, net

 

 

(19)

 

 

(869)

 

 

(5,368)

 

 

(869)

 

Retirement benefit expense

 

 

(2,779)

 

 

(3,328)

 

 

(5,557)

 

 

(6,655)

 

Other — net

 

 

(104)

 

 

23

 

 

(65)

 

 

83

 

 

 

 

(18,358)

 

 

(70,636)

 

 

(46,473)

 

 

(217,141)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(16,747)

 

 

(58,526)

 

 

(47,816)

 

 

(209,550)

 

Income tax (benefit) expense

 

 

3,618

 

 

(21,080)

 

 

11,490

 

 

(76,529)

 

NET LOSS

 

$

(20,365)

 

$

(37,446)

 

$

(59,306)

 

$

(133,021)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.62)

 

$

(4.91)

 

$

(7.66)

 

$

(17.49)

 

Diluted

 

$

(2.62)

 

$

(4.91)

 

$

(7.66)

 

$

(17.49)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,761

 

 

7,622

 

 

7,741

 

 

7,605

 

Diluted

 

 

7,761

 

 

7,622

 

 

7,741

 

 

7,605

 

 

See notes to the condensed consolidated financial statements.

 

 

1


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited; amounts in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Six Months Ended

 

 

 

July 1,

 

June 25,

 

July 1,

 

June 25,

 

 

    

2018

    

2017

 

2018

 

2017

 

NET LOSS

 

$

(20,365)

 

$

(37,446)

 

$

(59,306)

 

$

(133,021)

 

OTHER COMPREHENSIVE INCOME (LOSS): 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and post retirement plans: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in pension and post-retirement benefit plans, net of taxes of $0,  $(1,714),  $0 and $(3,428)    

 

 

5,549

 

 

2,570

 

 

11,099

 

 

5,141

 

Investment in unconsolidated companies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes of $0,  $(2,649),  $0 and $(2,697)

 

 

 —

 

 

3,974

 

 

 —

 

 

4,046

 

Other comprehensive income

 

 

5,549

 

 

6,544

 

 

11,099

 

 

9,187

 

Comprehensive loss

 

$

(14,816)

 

$

(30,902)

 

$

(48,207)

 

$

(123,834)

 

_____________________

(1) There is no income tax benefit associated with the quarter and six months ended July 1, 2018, due to the recognition of a valuation allowance.    

 

See notes to the condensed consolidated financial statements.

 

 

2


 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

July 1,

    

December 31,

 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,128

 

$

99,387

 

Trade receivables (net of allowances of $2,919 and $3,225) 

 

 

71,939

 

 

101,081

 

Other receivables

 

 

10,319

 

 

11,556

 

Newsprint, ink and other inventories

 

 

9,164

 

 

7,918

 

Assets held for sale

 

 

6,050

 

 

6,332

 

Other current assets

 

 

19,532

 

 

19,000

 

 

 

 

137,132

 

 

245,274

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

246,520

 

 

257,639

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

204,259

 

 

228,222

 

Goodwill

 

 

705,174

 

 

705,174

 

 

 

 

909,433

 

 

933,396

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

7,371

 

 

7,172

 

Other assets

 

 

64,551

 

 

62,437

 

 

 

 

71,922

 

 

69,609

 

 

 

$

1,365,007

 

$

1,505,918

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 —

 

$

74,140

 

Accounts payable

 

 

35,387

 

 

31,856

 

Accrued pension liabilities

 

 

8,941

 

 

8,941

 

Accrued compensation

 

 

21,893

 

 

24,050

 

Income taxes payable

 

 

12,715

 

 

10,133

 

Unearned revenue

 

 

62,058

 

 

60,436

 

Accrued interest

 

 

7,624

 

 

7,954

 

Other accrued liabilities

 

 

16,127

 

 

18,832

 

 

 

 

164,745

 

 

236,342

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

688,359

 

 

707,252

 

Deferred income taxes

 

 

26,237

 

 

28,062

 

Pension and postretirement obligations

 

 

589,238

 

 

599,763

 

Financing obligations

 

 

105,401

 

 

91,905

 

Other long-term obligations

 

 

45,544

 

 

46,926

 

 

 

 

1,454,779

 

 

1,473,908

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 5,385,339 shares and 5,256,325 shares)

 

 

54

 

 

52

 

Class B (authorized 60,000,000 shares, issued 2,428,191 shares and 2,443,191 shares)

 

 

24

 

 

24

 

Additional paid-in-capital

 

 

2,216,168

 

 

2,215,109

 

Accumulated deficit

 

 

(2,032,071)

 

 

(1,970,097)

 

Treasury stock at cost, 43,155 shares and 3,157 shares

 

 

(422)

 

 

(51)

 

Accumulated other comprehensive loss

 

 

(438,270)

 

 

(449,369)

 

 

 

 

(254,517)

 

 

(204,332)

 

 

 

$

1,365,007

 

$

1,505,918

 

 

See notes to the condensed consolidated financial statements.

3


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited; amounts in thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

July 1,

 

June 25,

 

    

2018

    

2017

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

Net loss

 

$

(59,306)

 

$

(133,021)

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

38,455

 

 

39,428

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

 

 

(2,820)

 

 

(3,694)

Retirement benefit expense

 

 

5,557

 

 

6,655

Stock-based compensation expense

 

 

1,061

 

 

1,461

Equity (income) loss in unconsolidated companies

 

 

(1,046)

 

 

96

Impairments related to equity investments, net

 

 

 —

 

 

169,147

Distributions of income from equity investments

 

 

2,876

 

 

 —

Loss on extinguishment of debt, net

 

 

5,368

 

 

869

Other asset write-downs

 

 

59

 

 

1,957

Other

 

 

(1,942)

 

 

(3,371)

Changes in certain assets and liabilities:

 

 

 

 

 

 

Trade receivables

 

 

26,474

 

 

24,634

Inventories

 

 

(1,246)

 

 

1,097

Other assets

 

 

(1,141)

 

 

280

Accounts payable

 

 

3,531

 

 

(4,135)

Accrued compensation

 

 

(2,157)

 

 

2,189

Income taxes

 

 

789

 

 

(85,517)

Accrued interest

 

 

(330)

 

 

(204)

Other liabilities

 

 

(4,890)

 

 

(2,105)

Net cash provided by operating activities

 

 

9,292

 

 

15,766

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(5,872)

 

 

(4,626)

Proceeds from sale of property, plant and equipment and other

 

 

4,025

 

 

8,932

Contributions to cost and equity investments

 

 

(1,925)

 

 

(2,683)

Other-net

 

 

 —

 

 

(11)

Net cash provided by (used in) investing activities

 

 

(3,772)

 

 

1,612

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Repurchase of public notes

 

 

(99,826)

 

 

(15,675)

Proceeds from sale-leaseback financial obligations

 

 

15,749

 

 

 —

Purchase of treasury shares

 

 

(371)

 

 

(287)

Other

 

 

(331)

 

 

716

Net cash provided by (used in) financing activities

 

 

(84,779)

 

 

(15,246)

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(79,259)

 

 

2,132

Cash, cash equivalents and restricted cash at beginning of period

 

 

131,354

 

 

36,248

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD 

 

$

52,095

 

$

38,380

 

See notes to the condensed consolidated financial statements

4


 

 

 

 

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

 

1.  SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

The McClatchy Company (“Company,” “we,” “us” or “our”) operates 30 media companies in 14 states, providing each of its communities with high-quality news and advertising services in a wide array of digital and print formats. We are a publisher of brands such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the (Fort Worth) Star-Telegram. We are headquartered in Sacramento, California, and our Class A Common Stock is listed on the NYSE American under the symbol MNI.

 

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

 

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the second-quarter periods and 26 weeks for the six-month periods. See Note 9, Subsequent Events, for a discussion of recent refinancing transactions subsequent to the end of our second quarter of 2018.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer. 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

5


 

Cash and cash equivalents, accounts receivable and accounts payable.  As of July 1, 2018, and December 31, 2017, the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.

 

Long-term debt.  The fair value of our long-term debt is determined using quoted market prices and other inputs that were derived from available market information, including the current market activity of our publicly-traded notes and bank debt, trends in investor demand for debt and market values of comparable publicly-traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance and may not be representative of actual value. At July 1, 2018 and December 31, 2017, the estimated fair value of long-term debt, including the current portion of long-term debt, was $639.2 million and $810.7 million, respectively. At July 1, 2018, and December 31, 2017, the carrying value of our long-term debt, including the current portion of long-term debt, if any, was $688.4 million and $781.4 million, respectively.

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non-financial assets that may be measured at fair value on a nonrecurring basis are assets held for sale, goodwill, intangible assets not subject to amortization and equity method investments. All of these are measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs. The significant unobservable inputs include the expected cash flows and the discount rates that we estimate market participants would seek for bearing the risk associated with such assets.

 

Newsprint, ink and other inventories

 

Newsprint, ink and other inventories are stated at the lower of cost (based principally on the first‑in, first‑out method) and net realizable value. During the six months ended June 25, 2017, we recorded a $2.0 million write‑down of non-newsprint inventory, which is reflected in the other asset write-downs line on our condensed consolidated statement of operations. There were no similar write-downs of newsprint, ink or other inventories during the quarter and six months ended July 1, 2018.

Property, Plant and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

    

July 1,

    

June 25,

 

July 1,

 

June 25,

(in thousands)

 

2018

 

2017

 

2018

 

2017

Depreciation expense

 

$

7,295

 

$

7,531

 

$

14,492

 

$

15,252

 

Assets Held for Sale

 

During the six months ended July 1, 2018, we began to actively market for sale the land and buildings at two of our media companies. In connection with classifying these assets as assets held for sale, the carrying value of the land and building at one of the properties was reduced to its estimated fair value less selling costs, as determined based on the current market conditions and the estimated selling price. As a result, an impairment charge of $0.1 million was recorded during the six months ended July 1, 2018, and is included in other asset write-downs on our condensed consolidated statement of operations. The land and building at this property were sold during the quarter ended July 1, 2018, with no gain or additional loss. The assets at the second property remain classified as assets held for sale.

 

Intangible Assets and Goodwill

 

We test for impairment of goodwill annually at year‑end, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. We perform this testing on our operating segments, which are also considered our reporting units. An impairment loss is

6


 

recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of our reporting units is determined using a combination of a discounted cash flow model and market based approaches. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, newsprint prices, compensation levels, discount rate, hypothetical transaction structures, and for the market based approach, private and public market trading multiples for newspaper assets. We consider current market capitalization, based upon the recent stock market prices plus an estimated control premium, in determining the reasonableness of the aggregate fair value of the reporting units. We had no impairment of goodwill during the quarter and six months ended July 1, 2018 or June 25, 2017.

 

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually at year‑end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief-from-royalty approach, which utilizes the discounted cash flow model to determine the fair value of each newspaper masthead. We had no impairment of newspaper mastheads during the quarter and six months ended July 1, 2018, or June 25, 2017. 

 

Long‑lived assets such as intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. We had no impairment of long‑lived assets subject to amortization during the quarter and six months ended July 1, 2018, or June 25, 2017.  

 

Financial Obligations

 

Financial obligations consist of contributions of real properties to the Pension Plan in 2016 and 2011, and real property previously owned by The Sacramento Bee that was sold and leased back during the third quarter of 2017. In April 2018, we sold and leased back real property owned by The State in Columbia, SC, and as a result, our long-term financial obligations increased by approximately $14.6 million during the second quarter of 2018.

 

Segment Reporting

 

We operate 30 media companies, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We have two operating segments that we aggregate into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. Our operating segments are based on how our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), makes decisions about allocating resources and assessing performance. The CODM is provided discrete financial information for the two operating segments. Each operating segment consists of a group of media companies and both operating segments report to the same segment manager. One of our operating segments (“Western Segment”) consists of our media companies’ operations in the West and Midwest, while the other operating segment (“Eastern Segment”) consists primarily of media operations in the Carolinas and East.

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Other

    

 

 

 

 

 

Minimum

 

Comprehensive

 

 

 

 

 

 

Pension and

 

Loss

 

 

 

 

 

 

Post-

 

Related to

 

 

 

 

 

 

Retirement

 

Equity

 

 

 

 

(in thousands)

 

Liability

 

Investments

 

Total

 

Balance at December 31, 2017

 

$

(442,406)

 

$

(6,963)

 

$

(449,369)

 

Amounts reclassified from AOCL

 

 

11,099

 

 

 

 

11,099

 

Other comprehensive income

 

 

11,099

 

 

 —

 

 

11,099

 

Balance at July 1, 2018

 

$

(431,307)

 

$

(6,963)

 

$

(438,270)

 

 

7


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCL

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

(in thousands)

 

July 1,

 

June 25,

 

July 1,

 

June 25,

 

Affected Line in the Condensed

AOCL Component

 

2018

 

2017

 

2018

 

2017

 

Consolidated Statements of Operations

Minimum pension and post-retirement liability

 

$

5,549

 

$

4,284

 

$

11,099

   

$

8,569

 

Retirement benefit expense

 

 

 

 —

 

 

(1,714)

 

 

 —

 

 

(3,428)

 

Benefit for income taxes (1) 

 

 

$

5,549

 

$

2,570

 

$

11,099

 

$

5,141

 

Net of tax

_____________________

(1) There is no income tax benefit associated with the quarter and six months ended July 1, 2018, due to the recognition of a valuation allowance. 

 

Income Taxes

 

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

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal corporate rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (iii) creating a new limitation on deductible interest expense; (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (v) bonus depreciation that will allow for full expensing of qualified property; and (vi) limitations on the deductibility of certain executive compensation.

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) in December 2017, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides that the measurement period for the tax effects of the Tax Act should not extend more than one year from the date the Tax Act was enacted. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Income Taxes, on the basis of the provisions of the tax laws that were in effect immediately before the Tax Act was enacted. We continue to evaluate the tax implications of the changes to the Tax Act for which our accounting was incomplete, including the impact on state taxes, certain compensation arrangements and depreciation. We will record appropriate adjustments, if any, in the periods in which we conclude our analysis.

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

 

We performed our assessment of the deferred tax assets during the third and fourth quarters of 2017, weighing the positive and negative evidence as outlined in ASC 740-10, Income Taxes. As we have incurred three years of cumulative pre-tax losses, such objective negative evidence limits our ability to give significant weight to other positive subjective evidence, such as projections for future growth and profitability. As of December 31, 2017, our valuation allowance against a majority of our deferred tax assets was $109.7 million. For the quarter and six months ended July 1, 2018, we recorded a valuation allowance charge of $10.1 million and $24.4 million, respectively, which is recorded in income tax (benefit) expense on our condensed consolidated statements of operations. Our valuation allowance as of July 1, 2018, was $134.1 million.

 

8


 

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

 

Current generally accepted accounting principles prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

 

Earnings Per Share (EPS)

 

Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period.  Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period.  Common stock equivalents arise from dilutive stock appreciation rights and restricted stock units, and are computed using the treasury stock method. Anti-dilutive common stock equivalents are excluded from diluted EPS. The weighted average anti-dilutive common stock equivalents that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

July 1,

 

June 25,

 

July 1,

 

June 25,

 

(shares in thousands)

 

2018

 

2017

 

2018

 

2017

 

Anti-dilutive common stock equivalents

 

198

 

388

 

201

 

325

 

 

Cash Flow Information

 

Reconciliation of cash, cash equivalents and restricted cash as reported in the condensed consolidated balance sheets to the total of the same such amounts shown above:

 

 

 

 

 

 

 

 

 

July 1,

 

December 31,

(in thousands)

 

2018

 

2017

Cash and equivalents

 

$

20,128

 

$

99,387

Restricted cash included in other assets(1)

 

 

31,967

 

 

31,967

Total cash, cash equivalents and restricted cash

 

$

52,095

 

$

131,354

_____________________

(1) Restricted cash balances are certificates of deposits secured against letters of credit primarily related to contractual agreements with our workers’ compensation insurance carrier and a certain property lease. 

 

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

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

July 1,

 

June 25,

(in thousands)

 

2018

 

2017

Interest paid (net of amount capitalized)

    

$

29,244

    

$

35,127

Income taxes paid (net of refunds)

 

 

12,019

 

 

8,870

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

(2,667)

 

 

 —

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

 

 

(2,854)

 

 

 —

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“Topic 606”), “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 "Revenue Recognition." ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Topic 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the

9


 

consideration a company expects to receive in exchange for those goods or services. In 2016 and 2017, the FASB issued additional updates: ASU No. 2016-08, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-05. These updates provided further guidance and clarification on specific items within the previously issued update. We adopted Topic 606 as of January 1, 2018, using the modified retrospective transition method. See Note 2 for further details.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We adopted ASU 2016-01 as of January 1, 2018, on a prospective basis but it did not have an impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted ASU 2016-15 as of January 1, 2018, retrospectively but it did not have an impact on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 addresses the presentation of restricted cash in the statement of cash flows. The standard requires an entity to include restricted amounts with cash and cash equivalents in the statement of cash flows. An entity will no longer present transfers between cash and cash equivalents and restricted amounts on the statement of cash flows. We adopted ASU 2016-18 as of January 1, 2018, using the retrospective transition method to each period presented. As a result of the adoption, net cash provided by operating activities was adjusted to exclude the changes in restricted cash, resulting in a decrease of $1.0 million in the six months ended June 25, 2017, on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Accounting Standards Codification 842 (“ASC 842”)) and it replaces the existing guidance in ASC 840, “Leases.” ASC 842 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. In 2018, the FASB issued ASU No. 2018-01 that provides further guidance and clarification on specific items within the previously issued update. ASC 842 is effective for us for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are evaluating the impact this standard will have on our condensed consolidated financial statements, but expect an increase in assets and liabilities on our condensed consolidated balance sheet. We plan to finalize our determination of the impact by the end of the fourth quarter of 2018.

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

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows for reclassification of stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. Consequently, the standard eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. However, because the standard only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This standard also requires

10


 

certain disclosures about the stranded tax effects. It is effective for us for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

2. REVENUES

 

Adoption of ASC 2014-09 (Topic 606), “Revenue from Contracts with Customers”

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

We recorded a net increase to opening accumulated deficit of $2.7 million as of January 1, 2018, due to the cumulative impact of adopting Topic 606, with the impact primarily related to our audience revenues. The impact to revenues as a result of applying Topic 606 was an increase of $0.1 million and $0.4 million for the quarter and six months ended July 1, 2018, respectively, compared to applying Topic 605.

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

All revenues recognized on the condensed consolidated statements of operations are the result of contracts with customers, except for revenues associated with lease income where we are the lessor through a sublease arrangement, as these are out of the scope of Topic 606.

 

Advertising Revenues

 

We generate revenues primarily by delivering advertising on our digital media sites, on our partners’ websites and in our newspapers. These advertising revenues are generated through digital and print performance obligations that are included in contracts with customers, which are typically one year or less in duration or commitment. There are no differences in the treatment of digital and print advertising performance obligations or the recognition of revenues for retail, national, classified, and direct marketing revenue categories under Topic 606.  

 

We generate advertising revenues through digital products that are sold on cost-per-thousand impressions (“CPM”) which means that an advertiser pays based upon number of times their ad is displayed on our owned and operated websites and apps, our partners’ websites, ad exchanges, in a video pre-roll or a programmatic bidding exchange. Such revenues are recognized according to the timing outlined in the contract. 

 

There are also monthly marketing campaigns which may include multiple products such as items sold by CPM, reputation management, search engine marketing and search engine optimization. In these arrangements as well as in a CPM sale, the contracted goods and services are performed over the specific contract term and the transfer of the performance obligation occurs as the benefits are consumed by the customer. As such, revenue is recognized daily regardless of the performance obligations classification of timing of being point in time or overtime.

 

Print advertising is advertising that is printed in a publication, inserted into a publication, or physically mailed to a customer. Our performance obligations for print products are directly associated with the inclusion of the advertisement in the final publication and delivery of the product on the contracted distribution day. Revenues are recognized at the point in time that the newspaper publication is delivered and distribution of the advertisement is satisfied.

 

Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected value approach.

 

11


 

For ads placed on our partners’ websites or selling a product hosted or managed by partners, we evaluate whether we are the principal or agent. Generally, we report advertising revenues for ads placed on our partners’ websites or for the resale of their products on a gross basis; that is, the amounts billed to our customers are recorded as revenues, and amounts paid to our partners for their products or advertising space are recorded as operating expenses. Where we are the principal, we are primarily responsible to our customers for fulfillment of the contract goals though, from time to time, the use of third party goods or services. Our control is further supported by our level of discretion in establishing price and in some cases, controlling inventory before it is transferred to the customer. 

 

Most products, including the printed newspaper advertising product, banner ads on our websites and video ads on our owned and operated player are reported on a gross basis. However, there are some third party products and services that we offer to customers, such as Cars.com and various revenue share arrangements such as exchange platforms, that are reported on a net basis. Revenues are earned through being a reseller of a product or participating in an exchange where control over the service provided is limited and costs of the arrangement are net of revenue received.

 

Audience Revenues

 

Audience revenues include digital and print subscriptions or a combination of both at various frequencies of delivery. Our subscribers typically pay us in advance of when their subscriptions start or shortly thereafter. Our performance obligation to subscribers of our digital products is the real-time access to news and information delivered through multiple digital platforms. Our performance obligation to our traditional print subscribers is delivery of the physical newspaper according to their subscription plan. Revenues related to digital and print subscriptions are recognized each day that a product is delivered to the subscriber. 

 

Digital subscriptions may be purchased for a day, month, quarter, or year, and revenue is reported daily over the term of the contract.

 

Traditional print subscriptions may have various frequencies of delivery based upon the subscribers delivery preference. Revenues are recognized based upon each delivery, therefore at a point in time.  

 

Certain subscribers may enter into a grace period (“grace”) after their previous contract term has expired but before payment has be received on the renewal. Grace is granted as a continuation of the subscription contract, in order to not disrupt service, and the extension is accounted for as variable consideration. We estimate these revenue amounts based on the expected amount to be received, taking into account the expected discontinuation of service or nonpayment based on historical experience.

 

Other Revenues

 

Other revenues include primarily commercial printing and distribution revenues. The commercial print agreements are between us and a third party publisher to print and make available for distribution the finished products. Commercial print contracts are for a daily finished product and each day’s product is unique, or a separate performance obligation.  Revenue is recorded at a point in time upon completion of each day’s print project.

 

The performance obligation for distribution revenues is the transportation of third-party published products to their subscribers or stores for resale. Distribution is performed substantially the same over the life of the contract and revenue is recognized at the point in time  each performance obligation is completed.

 

We report distribution revenues from the third-party publishers on a gross basis. That is, the amounts that we bill to third party publishers to deliver their finished product to their customers is recorded as revenues, and the amounts paid to our independent carriers to deliver the third party product is recorded as operating expenses.

 

Arrangements with Multiple Performance Obligations

 

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its standalone selling price. We generally determine standalone selling prices

12


 

for audience revenue contracts based upon observable market values and the adjusted market assessment. For advertising revenue contracts with multiple performance obligations, stand alone selling price is based on the prices charged to customers or on an adjusted market assessment.

 

Unearned Revenues

 

We record unearned revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the unearned revenue balance for the six months ended July 1, 2018, was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $49.1 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2017.

 

Our payment terms vary for advertising and subscriber customers. Subscribers generally pay in advance of up to one year. Advertiser payments are due within 30 days of invoice issuance and therefore amounts paid in advance are not significant. For advertisers that are considered to be at a higher risk of collectability due to payment history or credit processing, we require payment before the products or services are delivered to the customer. 

 

Practical Expedients and Exemptions

 

We expense sales commissions when incurred because the amortization period would have been one year or less if capitalized. These costs are recorded within compensation expenses.

 

We record usage-based royalties promised in exchange for use of our intellectual property, including but not limited to photographs and articles. These royalty revenues are accrued when estimates of usage and recoverability are made. These revenues are recorded within other revenues.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

3.  INTANGIBLE ASSETS AND GOODWILL

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

Amortization

 

July 1,

 

(in thousands)

 

2017

 

Expense

 

2018

 

Intangible assets subject to amortization

 

$

839,284

 

$

 —

 

$

839,284

 

Accumulated amortization

 

 

(761,013)

 

 

(23,963)

 

 

(784,976)

 

 

 

 

78,271

 

 

(23,963)

 

 

54,308

 

Mastheads

 

 

149,951

 

 

 —

 

 

149,951

 

Goodwill

 

 

705,174

 

 

 —

 

 

705,174

 

Total

 

$

933,396

 

$

(23,963)

 

$

909,433

 

 

Amortization expense with respect to intangible assets is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

    

July 1,

    

June 25,

 

July 1,

 

June 25,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Amortization expense

 

 $

11,927

 

 $

12,093

 

 $

23,963

 

 $

24,176

 

 

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The estimated amortization expense for the remainder of fiscal year 2018 and the five succeeding fiscal years is as follows: 

 

 

 

 

 

 

 

Amortization

 

 

Expense

Year

 

(in thousands)

2018 (Remainder)

 

$

23,697

2019

 

 

24,154

2020

 

 

803

2021

 

 

680

2022

 

 

655

2023

 

 

667

 

 

4.  INVESTMENTS IN UNCONSOLIDATED COMPANIES

 

On June 19, 2017, we along with the then-existing ownership group of CareerBuilder, LLC (“CareerBuilder”) announced that we had entered into an agreement to sell a majority of the collective ownership interest in CareerBuilder to an investor group. The transaction closed on July 31, 2017. We received $73.9 million from the closing of the transaction, consisting of approximately $7.3 million in normal distributions and $66.6 million of gross proceeds.

 

As a result of the closing of the transaction, our ownership interest in CareerBuilder was reduced to approximately 3.0% from 15.0%. As a result, we recorded $45.6 million and $168.6 million in pre-tax impairment charges on our equity investment in CareerBuilder during the quarter and six months ended June 25, 2017, respectively.

 

In the quarter and six months ended July 1, 2018, we received distributions totaling approximately $2.8 million from CareerBuilder, which relate to returns of earnings. Our investment in CareerBuilder is accounted for under the cost method (measurement alternative under ASU 2016-01).

 

 

5.  LONG-TERM DEBT

 

Our long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face Value at

 

Carrying Value

 

 

 

July 1,

 

July 1,

 

December 31,

 

(in thousands)

 

2018

 

2018