10-K 1 mni-20171231x10k.htm 10-K mni_Current folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

 

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

For the fiscal year ended: December 31, 2017

or

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

 

For the transition period from        to       

 

Commission file number: 1‑9824

G:\SHARED\CONTROL\Financial Reporting\2015\2015 10K\Cover page\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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Class A Common Stock, par value $.01 per share

 

NYSE American LLC

 

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐ Yes ☒ No

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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

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. (Check one):

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer (Do not check if a 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 12b‑2 of the Exchange Act).  ☐ Yes ☒ No

Based on the closing price of the registrant’s Class A Common Stock on the New York Stock Exchange on June 23, 2017, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the voting and non‑voting common equity held by non‑affiliates was approximately $63.6 million. For purposes of the foregoing calculation only, as required by Form 10‑K, the Registrant has included in the shares owned by affiliates, the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.

Shares outstanding as of March 2, 2018:

 

 

Class A Common Stock

5,264,080

Class B Common Stock

2,443,191

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year end of December 31, 2017, are incorporated by reference in Part III of this Annual Report on Form 10‑K.

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

    

    

    

    

Item 1. 

 

Business

 

2

Item 1A. 

 

Risk Factors

 

9

Item 1B. 

 

Unresolved Staff Comments

 

16

Item 2. 

 

Properties

 

16

Item 3. 

 

Legal Proceedings

 

16

Item 4. 

 

Mine Safety Disclosures

 

16

PART II 

 

 

 

 

Item 5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

17

Item 6. 

 

Selected Financial Data

 

19

Item 7. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 8. 

 

Financial Statements and Supplementary Data

 

37

Item 9. 

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

75

Item 9A. 

 

Controls and Procedures

 

75

Item 9B. 

 

Other Information

 

75

PART III 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

76

Item 11. 

 

Executive Compensation

 

76

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

76

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

76

Item 14. 

 

Principal Accounting Fees and Services

 

76

PART IV 

 

 

 

 

Item 15. 

 

Exhibits, Financial Statement Schedules

 

77

Item 16. 

 

Form 10-K Summary

 

80

SIGNATURES 

 

81

 

 

 

 


 

PART I

Forward‑Looking Statements:

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

ITEM 1.  BUSINESS

Overview

The McClatchy Company (the “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 well-respected brands such as the Miami HeraldThe Kansas City Star, The Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the (Fort Worth) Star-Telegram. Incorporated in Delaware, we are headquartered in Sacramento, California, and our Class A Common Stock is listed on the NYSE American under the symbol MNI.

Our businesses are comprised of websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, daily newspapers, niche publications,  other print and digital direct marketing services and community newspapers. Our media companies range from large daily newspapers and news websites serving metropolitan areas to non‑daily newspapers with news websites and online platforms serving small communities. We had 71.2 million average monthly unique visitors to our online platforms and 3.9 billion page views of our digital products for the full year ended December 31, 2017.  Our local websites, e-editions of the printed newspaper and mobile applications in each of our markets now provide us fully developed but rapidly evolving channels to extend our journalism and advertising products to our audience in each market. In 2017, we continued to expand our full-service digital agency, excelerateTM, which provides digital marketing tools designed to customize digital marketing plans for our customers. For the year ended December 31, 2017, we had an average aggregate paid daily print circulation of 1.3 million and Sunday print circulation of 1.9 million.

Our business is roughly divided between those media companies operated west of the Mississippi River and those that are east of it, but includes four operating regions: the West, Midwest,  Carolinas and East regions. For the year ended December 31, 2017, no single media company represented more than 12.0% of our total revenues.

On July 31, 2017, we sold a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which reduced our ownership interest in CareerBuilder from 15.0% to approximately 3.0%.

Our fiscal year ends on the last Sunday in December. Fiscal year ended December 31, 2017, consisted of a 53-week period. Fiscal years ended December 25, 2016, and December 26, 2015, consisted of 52‑week periods.

Strategy

Our mission is to deliver high-quality journalism and information. To accomplish this goal, we are committed to a three‑pronged strategy to grow our businesses and total revenues as a leading local media company:

·

First, to maintain our position as the leading local media company in each of our markets by providing high-quality journalism and advertising information essential to our communities throughout the day on digital platforms and in our printed newspapers; and to grow these audiences for the benefit of our

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advertisers;

·

Second, to grow digital revenues as we transition to a digitally focused, digitally driven media company. This strategy includes being a leader of local digital businesses in each of our markets, including websites, e-editions of the printed newspaper, mobile applications, e‑mail products, mobile services, video products and other electronic media; and

·

Third, to extend these franchises by supplementing the reach of the printed newspaper and digital businesses with direct marketing, niche publications and events and direct mail products so advertisers can capture both mass and targeted audiences with one‑stop shopping.

To assist us with these strategies, we continually improve existing digital products and develop new ones,  reengineer our operations to reduce legacy costs and strengthen areas driving performance in news, audience, advertising and digital growth. As a result of our efforts, we saw growth in total digital-only revenues in 2017, and we continued our focus on driving results in direct marketing and audience revenues, while continuing to drive operating expenses down.

Business Initiatives

Our local media companies continue to undergo tremendous structural and cyclical change. In order to strengthen our position as a leading local media company and implement our strategies, we are focused on the following five major business initiatives:

Increasing and Broadening Total Revenues

Revenue initiatives in 2017 included aligning us for digital growth by revamping and centralizing certain departments and focusing on digital marketing; digital subscription growth through new audiences and subscribers; organizing our technology groups to help us better serve our customers; growing our video market share and developing innovation teams that help us implement additional customer-focused approaches to running our businesses. In 2017, we expanded our full-service digital agency, excelerateTM, which provides customized digital marketing plans for our customers. We also continued to expand our video efforts to improve storytelling and generate additional advertising revenues.

Revenues exclusive of print newspaper advertising continue to grow as a percentage of total revenues and represented 75.2%, 70.6% and 66.7%  of total revenues in 2017,  2016 and 2015, respectively. Our strategy has been to focus on growing revenue sources that include digital and direct marketing advertising, audience and other non-traditional revenues. Management expects newspaper print advertising to continue to be a smaller share of total revenues in the future, due in part to expected strong growth in digital-only advertising revenues and certain areas of direct marketing advertising, and more stable performance in audience revenues. However, we continue to look for opportunities to expand our advertiser base, including advertisers outside of our markets using our excelerateTM agency services.

Currently, advertising revenues comprise a majority of our total revenues, making the quality of our sales force and sales tools critically important to this revenue source. Advertising revenues were approximately 55.2% of total revenues in 2017, 58.2%  in 2016 and 60.3% in 2015.  In 2017, we had a local sales force in each of our markets, which we believe was the largest local sales force as compared to other local media companies and websites in those markets. Our sales force is responsible for delivering to advertisers a broad array of advertising products, including print, direct marketing and digital marketing solutions. Our advertisers range from large national retail chains to regional automobile dealerships and grocers to small local businesses and even individuals.

Increasingly, our emphasis has been on growing the breadth of products offered to advertisers, particularly our digital and direct marketing products, while expanding our relationships with current advertisers and growing new accounts. For 2017, total digital and direct marketing advertising revenues combined represented 55.1% of total advertising revenues compared to 49.5% and 44.9% in 2016 and 2015, respectively. Our digital products are discussed in more detail below.

In 2017, we continued to sponsor special events in our markets, designed for advertisers to connect with their customers, and we expect this type of advertising to grow in 2018.  

Audience revenues were approximately 40.2%, 37.3% and 34.8% of consolidated total revenues in 2017, 2016 and 2015,  

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respectively. Our subscription packages have helped diversify our revenues while continuing to drive growth in digital audience revenues. 

Expanding Our Digital Business

We continue to be a leader in digital advertising revenues generated in part on our media companies’ websites and mobile platforms as a percent of total advertising. In 2017, 34.7%  of advertising revenues came from digital products compared to 30.6%  in 2016.  In 2017,  77.2% of our digital advertising revenues came from digital-only advertisements where the online buy was not bundled with a print buy, compared to 69.9% in 2016.  Digital-only advertising revenues grew 9.8%, to $133.7 million in 2017 from $121.7 million in 2016. We believe this independent advertising revenue stream positions us well for the future of our digital business. During 2017, total digital advertising revenues decreased 0.6% compared to an increase of 4.3% in 2016,  reflecting the negative impact of lower print advertising revenues on bundled sales.  

Our media companies’ websites and mobile applications, e‑mail products,  video and mobile services and other electronic media enable us to engage our readers with real‑time news and information that matters to them. As discussed below in Maintaining Our Commitment to Public Service Journalism, our storytelling capability is not only contributing to our growth in digital subscribers, but also to our digital advertising revenue growth. During 2017, our websites attracted an average of approximately 71.2 million unique visitors per month, up 18.3%, compared to 2016. Increasing our number of unique visitors brings additional digital advertising revenue opportunities to our sales teams. We had 3.9 billion page views of our digital products for the full year of 2017, up 9.0% from 2016.  In addition, our average mobile traffic was up 45.3% as compared to 2016, and accounted for 61.3% of all digital traffic we received on a monthly basis.

In 2016, we, along with Gannett Co., Inc., Hearst, and tronc, Inc., launched Nucleus Marketing Solutions, LLC (“Nucleus”). This marketing solutions provider connects national advertisers with the top 30 U.S. local publishers’ highly engaged audiences across existing and emerging digital platforms. We expect Nucleus to improve our reach with national advertisers in 2018 and beyond.

We continue to pursue additional new digital products and offerings. In  2017, we continued to expand our concept of comprehensive digital marketing solutions for local businesses via our digital marketing agency called excelerateTM. We also expanded the footprint of excelerateTM to markets beyond those served by our media companies. By offering advertisers integrated packages including website customization, search engine marketing and optimization, social media presence and marketing services, and other multi‑platform advertising opportunities, excelerateTM helps businesses improve the effectiveness of their marketing efforts.

In 2017, we continued to expand our advertising efforts on advertising exchanges. Our real-time, programmatic buying and selling of digital advertising inventory – often targeting very specific audiences at very specific times – grew 32.3% in 2017 compared to 2016.  Our growth continues to be strengthened by our participation in the Local Media Consortium (“LMC”) and its more than 75 member companies representing more than 1,700 daily newspapers and broadcast members. The LMC created a private advertising exchange that includes high-quality, brand friendly advertising inventory from member publishers. The LMC’s goal is to provide advertisers with efficient access to high-quality advertising impressions. In total, LMC members serve more than 13 billion impressions monthly. 

Video revenue increased 57.0% in 2017 compared to 2016, due to our focus on the use of video in our digital products to both enhance the content that we bring to readers and viewers and also to compete for a growing advertising stream. During 2017, more than 366 million video views were recorded across all of our digital platforms, including those on social media platforms and distribution partners, up from 225 million video views in 2016.

All of our markets offer audience subscription packages for digital content. The packages include a combined digital and print subscription and a digital‑only subscription. Digital‑only subscriptions grew to approximately 102,900, an increase of 23.8% in 2017 compared to 83,100 subscriptions in 2016.

Maintaining Our Commitment to Public Service Journalism 

We believe that independent journalism in the public interest is critical to our democracy. It is also the underpinning of our success as a business.

4


 

We are committed to producing best‑in‑class journalism and local content in every community we serve. Each of our newsrooms is expected to improve annually, whether measured by growth in readership, loyalty of readers, our own assessments of journalistic strengths or recognition by peers and others. And each of our newsrooms is expected to serve our core public service mission – holding leaders and institutions accountable and making our communities better places in which to live.

During the digital transition that has reshaped the industry over the past decade, we have moved quickly to expand our digital reach and deliver news to readers when they want it and where they want it. Through an initiative called “Newsroom Reinvention,” we have placed an intense focus on what our readers want and need from us in a fast-changing news landscape. We continue to produce ground-breaking accountability journalism – from The Kansas City Star’s expose on secrecy in state government to the Miami Herald’s in-depth report on abuses in the juvenile justice system in Florida to numerous reports that have held politicians accountable for misbehavior in office. Meanwhile, we have intensified our efforts on breaking news and real-time news, and we have restructured our Washington, D.C., bureau to work more closely with our local newsrooms while also becoming a significant force on the national stage. 

Our heritage of public service journalism is the cornerstone of our business, and the work of our journalists received significant recognition in 2017.  Journalists from our Washington bureau and the Miami Herald teamed up with the International Consortium of Investigative Journalists to win the 2017 Pulitzer Prize for explanatory reporting.  A journalist at the Miami Herald won the 2017 Pulitzer Prize for editorial cartooning. With these honors we extend our Pulitzer Prize wins to 54 and our impressive streak of being a Pulitzer winner or finalist every year for more than a decade.

 

Our video journalists continued to produce ambitious stories around breaking news, projects and series that have gained industry recognition. Titletown, TX, the collaborative effort between our Video Lab and the Star-Telegram on a high school football powerhouse in Texas, won three Emmys and is the only show produced by a local media company that is part of Facebook's new 'Watch' platform. The Video Lab also contributed to our Pulitzer Prize in explanatory reporting through an animation that illustrated the complex world of offshore corporations.

 

These are just a few of the hundreds of examples of our powerful journalism published across the company. We intend to build on our legacy in the years ahead, propelled by the success of our ongoing digital transformation. For instance, our replica edition of each of our daily newspapers, found on our websites and mobile applications, includes stories from our 30 newsrooms and other journalistic organizations that on many days more than doubles the news that could be found in the daily newspaper delivered to subscribers’ doorsteps. This additional content, known as “Extra Extra” and “SportsXtra,” has been well received by readers of our digital products.

 

Broadening Our Audience in Our Local Markets

Each of our media companies has the largest print circulation of any news media source serving its respective community, and coupled with its local website and other digital platforms in each community, reaches a broad audience in each market. We believe that our broad reach in each market is of primary importance in attracting advertising, which is currently our largest source of revenues. 

Our digital audience continues to grow, which is partially driven by traffic on our websites and other digital platforms. During 2017, average monthly unique visitors to our digital sites grew 18.3% as a result of continued focus and initiatives to improve our total revenues. As discussed above, we realigned and improved delivery of our content on all platforms, from websites to mobile applications in nearly every market. Due to our investment in technology and behind the scenes improvements, our websites, including the news content and advertising, are responsive or formatted to fit the screen of whatever device the content is viewed on for a seamless reading or viewing experience.  

As noted earlier, in 2017 our monthly mobile traffic was up 45.3% as compared to 2016 and accounted for 61.3% of all monthly digital traffic we received. We work hard to appeal to our mobile audience. We have invested in new digital publishing systems to better serve these mobile readers, and we have rebuilt all of our news websites to be responsive – that is, to automatically resize to best fit a user’s screen, be it a smartphone or a tablet or desktop computer, and provide the optimal viewing experience.

Our news and information follows readers throughout their day. To start their day, we reach our readers who can check out our latest headlines and stories on their mobile phones or with the morning newspaper. Our news websites, updated frequently throughout the day, are available to readers via their desktop computers and optimized for all of their different

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mobile devices.

Daily newspapers paid circulation volumes for 2017 were down 12.4% compared to 2016. The declines in daily circulation reflect the fragmentation of audiences faced by all media, including our own digital‑only subscriptions, as available media outlets proliferate and readership trends change. Our Sunday circulation volumes were down 12.1% in 2017 compared to 2016.

We also reach audiences through our direct marketing products. In 2017, we distributed approximately 641,000 Sunday Select packages per week, which are packages of preprinted advertisements generally delivered on Sunday to non‑newspaper subscribers who have interest in circulars. We also distribute thousands of e-mail messages each day, including editorial and advertising content, as well as other alerts to subscribers and non‑subscribers in our markets which supplement the reach of our print and digital subscriptions. 

To remain the leading local media company for the communities we serve and a must‑buy for advertisers, we are focused on maintaining a broad reach of print and digital audiences in each of our markets. We will continue to refine and strengthen our print platform, but our growth increasingly comes from our digital products and the beneficial impact those products have on the total audience we deliver for our advertisers.

Focusing on Cost Efficiencies While Investing for the Future

While continuing to maintain our core business in news, advertising sales and digital media, we are also focused on cost efficiencies. Our cost initiatives in 2017 were focused on continuing to reduce legacy costs from our traditional print business, and we have realized significant savings from these efforts, primarily in production and distribution, including substantial savings in newsprint costs. In addition, in 2017, we made additional reductions in costs to help protect our profitability in a period of declining print advertising. Total expenses, excluding depreciation, amortization and non-cash impairment charges, declined $82.9 million in 2017 compared to 2016.  This decline was net of investments made in 2017 intended to generate future savings or that were necessary to invest in revenue generating strategies. The ongoing structural and cyclical changes in our markets demand that we respond by reengineering our operations, as needed, to achieve an efficient and sustainable cost structure. Over the past several years, we have substantially lowered our cost structure through reducing our workforce, optimizing technology and maximizing printing, distribution and content efficiencies, all while maintaining operating profitability at each of our media companies.

In 2017,  in order to ensure a more collaborative enterprise, we began the process of regionalizing certain areas of our operations, including publisher and editorial leadership, and we completed reorganizing our technology, marketing, innovation and other certain finance functions. We will continue to outsource, regionalize and consolidate operations to achieve a more streamlined and efficient cost structure. These changes will result in cost savings in future years,  while giving our operating executives, regionally and in each market, the ability to focus more of their time on our growing digital and direct marketing media businesses.

As of the end of 2017, we have outsourced printing operations at 20 of our 30 media companies, which are printed through arrangements with nearby newspapers owned by us or third-party companies. In markets where we own printing presses we in‑source the printing of nearby newspapers for other companies. This allows us to maximize the use of our existing press capacity and generate additional revenues. Five markets  (Charlotte, Columbia, Kansas City, Miami and Sacramento) have become hubs for in-sourcing printing in their areas.

Other Operational Information

Historically, each of our media companies was largely autonomous in their local advertising and editorial operations in order to meet the needs of the particular community it served. However, as discussed above, we continue to regionalize or centralize certain operations across our local markets to strengthen the local media company's ability to increase its performance in news, audience, advertising and digital growth.

We have two operating segments that are aggregated into a single reportable segment. Each operating segment consists primarily of a group of local media companies with similar economic characteristics, products, customers and distribution methods. Both operating segments report to one segment manager. One of our operating segments (“Western Segment”) consists of our media operations in the West and Midwest, while the other operating segment (“Eastern Segment”) consists primarily of media operations in the Carolinas and East. Regional or local publishers of the media companies make day‑to‑day decisions and report to the segment manager, who is responsible for implementing the operating and financial plans at each operation within the respective operating segment. The corporate managers, including executive officers, set the basic business, accounting, financial and reporting policies.

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As noted previously, our media companies also work together to consolidate functions and share resources regionally and across operating segments that lend themselves to such efficiencies, such as certain regional or national sales efforts, certain editorial functions,  accounting functions, digital publishing systems and products, information technology functions and others. These efforts are often coordinated through the vice president of operations and corporate personnel.

Our business is somewhat seasonal, with peak revenues and profits generally occurring in the fourth quarter of each year, reflecting the Thanksgiving and Christmas holidays.  The other quarters, when holidays are not as prevalent, are historically the slower quarters for revenues and operating profits.

The following table summarizes our media companies, their digital platforms, newspaper circulation and total unique visitors: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Circulation (1)

 

Media Company

Website

Location

 

UV (2)

 

Daily

 

Sunday

 

Miami Herald

www.miamiherald.com

Miami, FL

 

14,406,000

 

92,260

    

121,971

 

The Kansas City Star

www.kansascity.com

Kansas City, MO

 

6,854,000

 

114,144

    

155,794

 

The Charlotte Observer

www.charlotteobserver.com

Charlotte, NC

 

6,430,000

 

83,609

    

118,903

 

The Sacramento Bee

www.sacbee.com

Sacramento, CA

 

5,833,000

    

122,600

    

225,343

 

Star-Telegram

www.star-telegram.com

Fort Worth, TX

 

3,618,000

 

188,257

    

194,457

 

The Wichita Eagle

www.kansas.com

Wichita, KS

 

3,267,000

 

37,843

    

86,848

 

El Nuevo Herald

www.elnuevoherald.com

Miami, FL

 

3,091,000

 

30,065

    

40,885

 

The News & Observer

www.newsobserver.com

Raleigh, NC

 

3,084,000

 

84,287

    

113,790

 

The State

www.thestate.com

Columbia, SC

 

2,450,000

 

43,948

    

97,109

 

The Telegraph

www.macon.com

Macon, GA

 

2,187,000

 

21,849

    

27,985

 

Lexington Herald-Leader

www.kentucky.com

Lexington, KY

 

2,024,000

 

49,169

    

79,192

 

The Fresno Bee

www.fresnobee.com

Fresno, CA

 

1,882,000

 

73,529

    

107,136

 

The News Tribune

www.thenewstribune.com

Tacoma, WA

 

1,779,000

 

43,452

    

93,476

 

Belleville News-Democrat

www.bnd.com

Belleville, IL

 

1,722,000

 

23,628

    

56,120

 

Idaho Statesman

www.idahostatesman.com

Boise, ID

 

1,658,000

 

36,006

    

64,723

 

Ledger-Enquirer

www.ledger-enquirer.com

Columbus, GA

 

1,254,000

 

17,444

 

21,434

 

The Tribune

www.sanluisobispo.com

San Luis Obispo, CA

 

1,227,000

 

19,409

    

29,787

 

McClatchy DC Bureau

www.mcclatchydc.com

 

 

1,191,000

 

N/A

    

N/A

 

The Island Packet 

www.islandpacket.com

Hilton Head, SC

 

1,127,000

 

15,639

    

17,038

 

The Bradenton Herald

www.brandenton.com

Bradenton, FL

 

986,000

 

20,235

    

25,139

 

The Modesto Bee

www.modbee.com

Modesto, CA

 

977,000

 

37,792

    

64,477

 

Centre Daily Times

www.centredaily.com

State College, PA

 

927,000

 

11,976

    

15,647

 

Sun Herald

www.sunherald.com

Biloxi, MS

 

815,000

 

21,013

    

31,563

 

The Sun News

www.thesunnews.com

Myrtle Beach, SC

 

743,000

 

23,204

    

30,259

 

The Herald

www.heraldonline.com

Rock Hill, SC

 

710,000

 

10,786

    

13,346

 

The Bellingham Herald

www.bellinghamherald.com

Bellingham, WA

 

675,000

 

11,749

    

15,186

 

Tri-City Herald

www.tri-cityherald.com

Kennewick, WA

 

660,000

 

18,438

    

29,998

 

The Olympian

www.theolympian.com

Olympia, WA

 

625,000

 

13,524

    

29,521

 

Merced Sun-Star

www.mercedsunstar.com

Merced, CA

 

453,000

 

11,089

    

 —

 

The Herald-Sun

www.heraldsun.com

Durham, NC

 

323,000

 

10,676

    

11,156

 

The Beaufort Gazette

www.beaufortgazette.com

Beaufort, SC

(3)

N/A

 

5,066

    

5,442

 

 

 

 

 

72,978,000

 

1,292,686

    

1,923,725

 

(1)

Circulation figures are reported as of the end of our fiscal year and are not meant to reflect Alliance for Audited Media (“AAM”) reported figures.

(2)

Total monthly unique visitors for December 2017 according to Adobe Analytics.

(3)

The Beaufort Gazette unique visitor activity is included in The Island Packet activity.

 

Other Operations

On July 31, 2017, we sold a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which reduced our ownership interest from 15.0% to approximately 3.0%. Our ownership interests and investments in unconsolidated companies and joint ventures including but not limited to CareerBuilder, provided us with $73.9 million of cash distributions in 2017, which includes $7.3 million in normal distributions and $66.6 million of gross proceeds from the sales of assets.   

7


 

We own 49.5% of the voting stock and 70.6% of the nonvoting stock of The Seattle Times Company. The Seattle Times Company owns The Seattle Times newspaper, weekly newspapers in the Puget Sound area and daily newspapers located in Walla Walla and Yakima, Washington, and all of their related websites and mobile applications.

In addition, three of our wholly-owned subsidiaries own a combined 27.0% interest in Ponderay Newsprint Company (“Ponderay”), a general partnership that owns and operates a newsprint mill in the state of Washington. 

We also own a 25.0% interest in Nucleus Marketing Solutions, LLC (“Nucleus”) a marketing solutions provider as described above.

Raw Materials 

During 2017, we consumed approximately 67,000 metric tons of newsprint for all of our operations compared to 84,000 metric tons in 2016. The decrease in tons consumed was primarily due to changes in our print products at numerous media companies, as well as lower print advertising sales and print circulation volumes. We estimate that we will use approximately 54,000 metric tons of newsprint in 2018, depending on the level of print advertising, circulation volumes and other business considerations.

During 2017,  our consumed newsprint was purchased through a third-party intermediary, of which approximately 17,000 metric tons of those purchases were newsprint from Ponderay.

Our earnings are sensitive to changes in newsprint prices. In 2017, 2016 and 2015, newsprint expense accounted for 4.4%,  4.9% and 5.7%, respectively, of total operating expenses, excluding impairments and other asset write-downs.  

Competition

Our newspapers, direct marketing programs, websites and mobile content compete for advertising revenues and readers’ time with television, radio, other media websites, social network sites and mobile applications, direct mail companies, free shoppers, suburban neighborhood and national newspapers and other publications, and billboard companies, among others. In some of our markets, our newspapers also compete with other newspapers published in nearby cities and towns. Competition for advertising is generally based upon digital and print readership levels and demographics, advertising rates, internet usage and advertiser results, while competition for circulation and readership (digital and print) is generally based upon the content, journalistic quality, service, competing news sources and the price of the newspaper or digital service.

Our media companies’ internet sites are generally a leading local website in each of our major daily markets. We have continued to shift advertising to digital advertising to stay current with reader trends. Our media companies are also the largest print circulation of any news media source in each of their respective markets. However, our media companies have experienced difficulty maintaining print circulation levels because of a number of factors. These include increased competition from other publications and other forms of media technologies, including the internet and other new media formats that are often free for users; and a  proliferation of news outlets that fragments audiences. We face greater competition, particularly in the areas of employment, automotive and real estate advertising, from online competitors.

To address the structural shift to digital media, we reengineered our operations to strengthen areas driving performance in news, audience, advertising and digital growth. Our newsrooms also provide editorial content on a wide variety of platforms and formats from our daily newspaper to leading local websites; on social network sites such as Facebook and Twitter; on smartphones and on e‑readers; on websites and blogs; in niche online publications and in e‑mail newsletters; and mobile applications. Upgrades are continually made to our mobile applications and websites.

Employees — Labor

As of December 31, 2017, we had approximately 4,200 full and part‑time employees (equating to approximately 3,900 full‑time equivalent employees), of whom approximately 5.7% were represented by unions. Most of our union‑represented employees are currently working under labor agreements with expiration dates through 2020. We have unions at 5 of our 30 media companies.

While our media companies have not had a strike for decades, and we do not currently anticipate a strike occurring, we cannot preclude the possibility that a strike may occur at one or more of our media companies when future negotiations take place. We believe that in the event of a strike we would be able to continue to publish and deliver to subscribers, a

8


 

capability that is critical to retaining revenues from advertising and audience, although there can be no assurance that we will be able to continue to publish in the event of a strike.

Compliance with Environmental Laws

We use appropriate waste disposal techniques for hazardous materials. As of December 31, 2017, we have $1.0 million in a letter of credit shared among various state environmental agencies and the U.S. Environmental Protection Agency to provide collateral related to existing or previously removed storage tanks. However, we do not believe that we currently have any significant environmental issues and in 2017, 2016 and 2015 had no significant expenses or capital expenditures related to environmental control facilities.

Available Information

Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available, free of charge, on our website at www.mcclatchy.com,  as soon as reasonably practicable after we file or furnish them with the U.S. Securities and Exchange Commission (the “SEC”).

ITEM 1A.  RISK FACTORS

We have significant competition in the market for news and advertising, which may reduce our advertising and audience revenues in the future.

Currently,  our primary source of revenues is advertising, followed by audience. The competition we face in the advertising industry generally results from  an increasing number of digital media options available on the internet, which are expanding advertiser and consumer choices significantly, including social networking tools and mobile and other devices distributing news and other content. Faced with a multitude of media choices and a dramatic increase in accessible information, consumers may place greater value on when, where, how and at what price they consume digital content than they do on the source or reliability of such content. News aggregation websites and customized news feeds (often free to users) may reduce our traffic levels by minimizing the need for the audience to visit our websites or use our digital applications directly. Online traffic is also driven by internet search results and referrals from social media platforms; therefore, such search results and referrals are critical to our ability to compete successfully. Search engines frequently update and change the methods for directing search queries to web pages or change methodologies and metrics for valuing the quality and performance of internet traffic on delivering cost‑per‑click advertisements. Social media platforms may also change their emphasis on what content to highlight for users. The failure to successfully adapt to these changes across our businesses could result in significant decreases in traffic to our various websites, which could result in substantial decreases in conversion rates and repeat business, as well as increased costs if we were to replace free traffic with paid traffic, any or all of which could adversely affect our business, financial condition and results of operations. If traffic levels stagnate or decline, we may not be able to create sufficient advertiser interest in our digital businesses or to maintain or increase the advertising rates of the inventory on our digital platforms. In addition, the proliferation of news sources and advertising platforms has resulted in significant competition and a negative impact on our traditional print business. This increased competition for our advertisers and consumers has had and is expected to continue to have an adverse effect on our business and financial results, including negatively impacting revenues and operating income.

Our advertising revenues may decline due to weak general economic and business conditions.

Our advertising revenues are dependent on general economic and business conditions in our markets or those impacting our customers.  Many traditional retail companies face greater competition from online retailers and have faced uncertainty in their businesses, affecting their advertising spending. These changes in business conditions have had and may continue to have an adverse effect on our advertising revenues. To the extent economic conditions were to worsen, our business and advertising revenues could be further adversely affected, which could negatively impact our operations and cash flows and our ability to meet the covenants in our debt agreements. Our advertising revenues will be particularly adversely affected if advertisers respond to weak and uneven economic conditions or online competition by continuing to reduce their budgets or shift spending patterns or priorities, or if they are forced to consolidate or cease operations. Consolidation across various industries may also reduce our overall advertising revenues. Further, we are subject to fluctuating economic conditions in the local markets we serve. For example, real estate advertising fluctuates

9


 

with the health of the real estate market. In addition, seasonal variations in consumer spending cause our quarterly advertising revenues to fluctuate. Advertising revenues in the fourth quarter, which contain more holidays, are typically higher than in the first three quarters, in which economic activity is generally slower. If general economic conditions and other factors cause a decline in revenues, particularly during the fourth quarter, we may not be able to increase or maintain our revenues for the year, which would have an adverse effect on our business and financial results.

To remain competitive, we must be able to respond to and exploit changes in technology, services and standards and changes in consumer behavior. Significant capital investments may be required.

Technology in the media industry continues to evolve rapidly. Advances in technology have led to an increasing number of methods for delivery of news and other content and have resulted in a wide variety of consumer demands and expectations, which are also rapidly evolving. For example, the number of people who access online services through devices other than personal computers, including smartphones, handheld tablets and other mobile devices has increased dramatically in the past several years and is projected to continue to increase. If we are unable to exploit new and existing technologies to distinguish our products and services from those of our competitors or adapt to new distribution methods that provide optimal user experiences, our business and financial results may be adversely affected.

Technological developments also pose other challenges that could adversely affect our revenues and competitive position. New delivery platforms may lead to pricing restrictions, the loss of distribution control and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites proliferates.

Technological developments and any changes we make to our business model may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. Some of our existing competitors and new entrants may have greater operational, financial and other resources or may otherwise be better positioned to compete for opportunities and as a result, our digital businesses may be less successful, which could adversely affect our business and financial results.

If we are not successful in growing and managing our digital businesses, our business, financial condition will be adversely affected.

Our future growth depends to a significant degree upon the development and management of our digital businesses. The growth of our digital businesses over the long term depends on various factors, including, among other things, the ability to:

·

continue to increase digital audiences;

·

attract advertisers to our digital products;

·

tailor our product for mobile devices;

·

maintain or increase the advertising rates on our digital products;

·

improve our ability to increase the relevance of advertisements shown to users;

·

manage the impact of new technologies that could block or obscure the display of advertisements;

·

exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services; and

·

invest funds and resources in digital opportunities.

In addition, we expect that our digital business will continue to increase as a percentage of our total revenues in future periods. For 2017, digital advertising revenues comprised 34.7%  of total advertising revenues compared to 30.6% in 2016.  Digital‑only advertising revenues increased 9.8% in 2017 compared to 14.8% in 2016. Total digital‑only, which

10


 

includes digital‑only revenues from advertising and audience, was up 9.4% in 2017 compared to 14.3% in 2016. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited to, the following:

·

structuring our sales force to effectively sell advertising in the digital advertising arena versus our historical print advertising business;

·

attracting and retaining employees with the skill sets and knowledge base needed to successfully operate in digital business; and

·

managing the transition to a digital business from a historical print-focused business and the need to concurrently reduce the physical infrastructure, distribution infrastructure and related fixed costs associated with the historical print business.

If we are unable to execute cost‑control measures successfully, our total operating costs may be greater than expected, which may adversely affect our profitability.

As a result of adverse general business conditions in our industry and our operating results, we have taken steps to lower operating costs by reducing workforce, consolidating or regionalizing operations and implementing general cost‑control measures. If we do not achieve expected savings from these initiatives, or if our operating costs increase as a result of these initiatives, our total operating costs may be greater than anticipated. These cost‑control measures may also affect our business and our ability to generate future revenue. Because portions of our expenses are fixed costs that neither increase nor decrease proportionately with revenues, we may be limited in our ability to reduce costs in the short term to offset any declines in revenues. If these cost‑control efforts do not reduce costs sufficiently or otherwise adversely affect our business, income may decline.

Difficult business conditions in the economy generally and in our industry specifically, or changes to our business and operations may result in goodwill and masthead impairment charges.

Due to business conditions, including lower revenues and operating cash flow, we recorded masthead impairment charges of $21.5 million and $9.2 million in 2017 and 2016, respectively.  We also recorded goodwill impairment charges of $290.9 million in 2015 and masthead impairment charges of $13.9 million, $5.2 million and $5.3 million in 2015, 2014 and 2013, respectively. As of December 31, 2017, we have goodwill of $705.2 million and mastheads of $150.0 million. Further erosion of general economic, market or business conditions (nationally and in our local markets) could have a negative impact on our business and stock price, which may require that we record additional impairment charges in the future, which negatively affects our results of operations.

Our business, reputation and results of operations could be negatively impacted by data security breaches and other security threats and disruptions. 

Certain network and information systems are critical to our business activities. Network and information systems may be affected by cybersecurity incidents that can result from deliberate attacks or system failures. Threats include, but are not limited to, computer hackings, computer viruses, denial of service attacks, worms or other destructive or disruptive software, or other malicious activities.

Our security measures may also be breached due to employee error, malfeasance, or otherwise. As a result of these breaches, an unauthorized party may obtain access to our data or our users’ data or our systems may be compromised. These events evolve quickly and often are not recognized until after an attack is launched, so we may be unable to anticipate these attacks or to implement adequate preventative measures. Our network and information systems may also be compromised by power outages, fire, natural disasters, terrorist attacks, war or other similar events. There can be no assurance that the actions, measures and controls we have implemented will be sufficient to prevent disruptions to mission-critical systems, the unauthorized release of confidential information or corruption of data.

Although we have experienced cybersecurity incidents, to date none has had a material impact on our financial condition, results of operations or liquidity. Nonetheless, these types of events are likely to occur in the future and such events could disrupt our operations or other third-party information technology systems in which we are involved. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or

11


 

infrastructure by employees, others with authorized access to our systems, or unauthorized persons could result in legal or financial liability or otherwise negatively impact our operations. They also could require significant management attention and resources, and could negatively impact our reputation among our customers, advertisers and the public, which could have a negative impact on our financial condition, results of operations or liquidity.

We are subject to significant financial risk as a result of our $710  million in total consolidated debt.

As of December 31, 2017, we had approximately $805.0  million in total principal indebtedness outstanding, including the current portion of long-term debt of $75.0 million in 9.00% senior secured notes due in 2022 (“9.00% Notes”), resulting from our commitment to redeem such portion of the 9.00% Notes by January 25, 2018.  We redeemed the 9.00% Notes as of January 25, 2018 and in February 2018, we repurchased an additional $20.0 million of our 9.00% Notes. As a result of the redemption and repurchase, we reduced our total consolidated debt to $710.0 million as of the filing of this annual report on Form 10-K. Despite these repurchases, this level of debt increases our vulnerability to general adverse economic and industry conditions and we may need to refinance our debt prior to its scheduled maturity. Higher leverage ratios, our credit ratings, our economic performance, adverse financial markets or other factors could adversely affect our future ability to refinance maturing debt on commercially acceptable terms, or at all, or the ultimate structure of such refinancing.

Covenants in the indenture governing the notes and our other existing debt agreements will restrict our business.

The indenture governing our 9.00% Notes and our secured credit agreement contain various covenants that limit, subject to certain exceptions, our ability and/or our restricted subsidiaries’ ability to, among other things:

·

incur or assume liens;

·

incur additional debt or provide guarantees in respect of obligations of other persons;

·

issue redeemable stock and preferred stock;

·

pay dividends or make distributions on capital stock, repurchase, redeem or make payments on capital stock or prepay, repurchase, redeem, retire, defease, acquire or cancel certain of our existing notes or debentures prior to the stated maturity thereof;

·

make loans, investments or acquisitions;

·

create or permit restrictions on the ability of our subsidiaries to pay dividends or make other distributions to us or to guarantee our debt, limit our or any of our subsidiaries’ ability to create liens, or make or pay intercompany loans or advances;

·

enter into certain transactions with affiliates;

·

sell, transfer, license, lease or dispose of our or our subsidiaries’ assets, including the capital stock of our subsidiaries; and

·

dissolve, liquidate, consolidate or merge with or into, or sell substantially all the assets of us and our subsidiaries, taken as a whole, to, another person.

The restrictions contained in the indenture governing the 9.00% Notes and the secured credit agreement could adversely affect our ability to:

·

finance our operations;

·

make needed capital expenditures;

·

dispose of assets;

12


 

·

make strategic acquisitions or investments or enter into alliances;

·

withstand a future downturn in our business or the economy in general;

·

refinance our outstanding indebtedness prior to maturity;

·

engage in business activities, including future opportunities, that may be in our interest; and

·

plan for or react to market conditions or otherwise execute our business strategies.

Our ability to comply with covenants contained in the indenture for the 9.00% Notes and our secured credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us. In addition, our obligations under the 9.00% Notes and the secured credit agreement are secured, subject to permitted liens, on a first‑priority basis, and in the event of default such security interests could be enforced by the collateral agent for the secured credit agreement. In the event of such enforcement, we cannot be assured that the proceeds from the enforcement would be sufficient to pay our obligations under the 9.00% Notes or secured credit agreement.

We have significant financial obligations and in the future we will need cash to repay our existing indebtedness and meet our other obligations. Our inability to generate sufficient cash to pay our obligations would adversely affect our business.

We may not be able to generate sufficient cash internally to repay all of our indebtedness at maturity or to meet our other obligations. As of December 31, 2017, we had approximately $805.0  million of total indebtedness outstanding, which was reduced to $710.0 million by the end of February 2018, with our redemption and repurchase of a portion of the 9.00% Notes. Of the remaining $710.0 million aggregate principal amount, we have approximately $344.6 million of 9.00% Notes due in 2022; approximately $89.2 million of debentures with an interest rate of 7.150% due in 2027 and approximately $276.2 million of debentures with an interest rate of 6.875% due in 2029. As of December 31, 2017, we had approximately $31.7 million in face amount of letters of credit outstanding, which are fully collateralized with certificates of deposits,  under a Collateralized Issuance and Reimbursement Agreement.

As of December 31, 2017, the projected benefit obligations of our qualified defined benefit pension plan (“Pension Plan”) exceeded Pension Plan assets by $476.7 million. Future contributions are subject to numerous assumptions, including, among others, changes in interest rates, returns on assets in the Pension Plan and future government regulations. In addition, we have a limited number of supplemental retirement plans, which provide certain key employees with additional retirement benefits. These plans have no assets; however as of December 31, 2017, our projected benefit obligation of these plans was $125.4 million. These plans are on a pay‑as‑you‑go basis.

Our ability to make payments on and to refinance our indebtedness, including the 9.00% Notes and our other series of outstanding notes, to make required contributions to the Pension Plan, to fund the supplemental retirement plans and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness, including the 9.00% Notes and our other series of outstanding notes or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations or our ability to refinance our existing debt. The terms of existing or future debt instruments, including the indenture governing the 9.00% Notes and the secured credit agreement, may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on

13


 

commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations with respect to our outstanding debt.

We may be required to make greater contributions to our qualified defined benefit pension plan in the next several years than previously required, placing greater liquidity needs upon our operations.

The projected benefit obligations of the Pension Plan exceeded Pension Plan assets by $476.7 million as of December 31, 2017, a decrease of $10.7 million from December 31, 2016, primarily due to favorable market returns that were partially offset by unfavorable changes in the discount rate. The value of the Pension Plan assets fluctuates based on many factors, including changes in interest rates and market returns.

The excess of benefit obligations over pension assets is expected to give rise to required pension contributions over the next several years. Over the last several years federal legislation has provided for pension funding relief in the form of mandated changes in the discount rates used to calculate the projected benefit obligations for purposes of funding pension plans. Legislation and calculations use historical averages of long‑term highly‑rated corporate bonds (within ranges as defined in the legislation) which have an impact of applying a higher discount rate to determine the projected benefit obligations for funding and current long‑term interest rates, but also mandated increases in fees paid to the Pension Benefit Guaranty Corporation, also known as the PBGC, based in part on the level of underfunding in the company’s qualified defined pension plan. Even with the relief provided by these legislative rules, we expect future contributions to be required. In addition, adverse conditions in the capital markets and/or lower long‑term interest rates may result in greater annual contribution requirements, placing greater liquidity needs upon our operations.

We require newsprint for operations and, therefore, our operating results may be adversely affected if the price of newsprint increases or if we experience disruptions in our newsprint supply chain that reduce the availability of newsprint in our markets.

We require newsprint to deliver our daily and Sunday newspapers and maintain our print subscriber revenues. Newsprint accounted for 4.4% of our operating expenses, excluding impairments, in 2017 compared to 4.9% in 2016. The price of newsprint has historically been volatile. More recently newsprint availability has tightened in the United States. The price and availability of newsprint are affected by various factors, including:

·

declining newsprint supply from mill closures;

·

reduction in newsprint suppliers because of consolidation in the newsprint industry;

·

tariffs on supply from other countries, primarily Canada:

·

paper mills reducing their newsprint supply because of switching their production to other paper grades; and

·

a decline in the financial situation of newsprint suppliers.

We have not attempted to hedge price fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint other than the natural hedge created by our ownership interest in Ponderay. If the price of newsprint increases materially, our operating results could be adversely affected. In addition, we rely on a limited number of suppliers for deliveries of newsprint. If newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect our operating results.

A portion of our employees are members of unions, and if we experience labor unrest, our ability to produce and deliver newspapers could be impaired.

If we experience labor unrest, our ability to produce and deliver newspapers could be impaired in some locations. In addition, the results of future labor negotiations could harm our operating results. Our media companies have not experienced a labor strike for decades. However, we cannot ensure that a strike will not occur at one or more of our

14


 

media companies in the future. As of December 31, 2017,  approximately 5.7% of full‑time and part‑time employees were represented by unions. Most of our union‑represented employees are currently working under labor agreements, with expiration dates through 2020. We face collective bargaining upon the expirations of these labor agreements. Even if our media companies do not suffer a labor strike, our operating results could be harmed if the results of labor negotiations restrict our ability to maximize the efficiency of our newspaper operations. In addition, our ability to make short‑term adjustments to control compensation and benefits costs, rebalance our portfolio of businesses or otherwise adapt to changing business needs may be limited by the terms and duration of our collective bargaining agreements.

We have invested in certain digital or other ventures, but such ventures may not be as successful as expected, which could adversely affect our results of operations.

We continue to evaluate our business and make strategic investments in digital ventures, either alone or with partners, to further our digital growth. We have numerous small “seed” investments in other digital companies. We also own 25.0% of Nucleus, a national marketing agency, and, through three wholly-owned subsidiaries, a combined 27.0% interest in the Ponderay Newsprint Company. We also continue to hold a small interest in CareerBuilder. The success of these ventures is dependent to an extent on the efforts and strategic plans of our partners. Further, our ability to monetize the investments and/or the value we may receive upon any disposition may depend on the actions of our partners. As a result, our ability to control the timing or process relating to a disposition may be limited, which could adversely affect the liquidity of these investments or the value we may ultimately attain upon disposition. If the value of the companies in which we invest declines, we may be required to record a charge to earnings. There can be no assurances that we will receive a return on these investments or that they will result in advertising growth or will produce equity income or capital gains in future years.

Circulation volume declines will adversely affect our print audience and print advertising revenues, and audience price increases could exacerbate declines in circulation volumes.

Print advertising and audience revenues are affected by changes in customer habits, which impact circulation volumes and readership levels of our print newspapers. In recent years, newspaper companies, including us, have experienced difficulty maintaining or increasing print circulation levels because of a number of factors, including:

·

increased competition from other publications and other forms of media technologies available in various markets, including the internet and other new media formats that are often free for users;

·

continued fragmentation of media audiences;

·

a growing preference among some consumers to receive all or a portion of their news online or other than from a traditional printed newspaper; and

·

increases in subscription and newsstand rates.

These factors could also affect our media companies’ ability to institute circulation price increases for print products. Also, print price increases have historically had an initial negative impact on circulation volumes that may not be mitigated with additional marketing and promotion. A prolonged reduction in circulation volumes would have a material adverse effect on print advertising revenues. To maintain our circulation base, we may be required to incur additional costs that we may not be able to recover through audience and advertising revenues.

We rely on third party vendors for various services and if any of those third parties fail to fulfill their obligations to us with quality and timeliness we expect, or if our relationship with such vendors is damaged, our business may be harmed.

We rely on third party vendors to provide various services such as printing, distribution and production, as well as various information technology systems and services. We do not control the operation of these vendors. If any of these third party vendors terminate their relationship with us, or do not provide an adequate level of service, it would be disruptive to our business as we seek to replace the vendor or remedy the inadequate level of service. This disruption may adversely affect our operating results. 

15


 

Developments in the laws and regulations to which we are subject may result in increased costs and lower advertising revenues from our digital businesses.

We are generally subject to government regulation in the jurisdictions in which we operate. In addition, our websites are available worldwide and are subject to laws regulating the internet both within and outside the United States. The adoption of any laws or regulations that limit use of the internet, including laws or practices limiting internet neutrality, could decrease demand for, or the usage of, our products and services, which could adversely affect our operating results. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Advertising revenues from our digital businesses could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to the use of consumer data in digital media.

Adverse results from litigation or governmental investigations can impact our business practices and operating results.

In the ordinary course of business, we and our subsidiaries are parties to litigation and regulatory, environmental and other proceedings with governmental authorities and administrative agencies. For example, we are currently involved in two class action lawsuits that are described further in Part II, Item 8, Note 8,  Commitments and Contingencies to the consolidated financial statements.  Adverse outcomes in lawsuits or investigations could result in significant monetary damages or injunctive relief that could adversely affect our operating results or financial condition as well as our ability to conduct our business as it is presently being conducted.  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

Our corporate headquarters are located at 2100 Q Street, Sacramento, California. At December 31, 2017, we had newspaper production facilities in 10 markets in 9 states. Our facilities vary in size and in total occupy about 4.8 million square feet. Approximately 2.8 million of the total square footage is leased from others, while we own the properties for the remaining square footage. We own substantially all of our production equipment, although certain office equipment is leased.

We maintain our properties in good condition and believe that our current facilities are adequate to meet the present needs of our media companies.

ITEM 3.  LEGAL PROCEEDINGS

See Part II, Item 8, Note 8,  Commitments and Contingencies to the consolidated financial statements included as part of this Annual Report on Form 10-K.

 

 

ITEM 4.  MINE SAFETY DISCLOSURES

None

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Since September 12, 2017, our Class A Common Stock has been listed on the NYSE American under the symbol MNI. Prior to that time, our Class A Common Stock was listed on the New York Stock Exchange under the same symbol. A small amount of Class A Common Stock is also traded on other exchanges. Our Class B Common Stock is not publicly traded. As of March 2, 2018, there were approximately 3,294 and 20 record holders of our Class A and Class B Common Stock, respectively. We believe that the total number of holders of our Class A Common Stock is much higher since many shares are held in street name. The following table lists the high and low prices of our Class A Common Stock as reported by the NYSE American or New York Stock Exchange, as applicable, for each fiscal quarter of 2017 and 2016:

 

 

 

 

 

 

 

 

Fiscal Year 2017 Quarters Ended:

    

High

    

Low

March 26, 2017

 

$

13.92

 

$

9.32

June 25, 2017

 

$

12.99

 

$

8.01

September 24, 2017

 

$

10.48

 

$

5.75

December 31, 2017

 

$

11.04

 

$

6.64

 

 

 

 

 

 

 

 

 

Fiscal Year 2016 Quarters Ended:

    

High

    

Low

March 27, 2016

 

$

14.50

 

$

8.30

June 26, 2016

 

$

17.32

 

$

9.90

September 25, 2016

 

$

19.77

 

$

13.05

December 25, 2016

 

$

19.00

 

$

12.94

Dividends:

In 2009, we suspended our quarterly dividend; therefore, we have not paid any cash dividends since the first quarter of 2009. Our credit agreement prohibits the payment of a dividend if a payment would not be permitted under the indenture for the 9.00% Notes (discussed below). Dividends under the indenture for the 9.00% Notes are allowed if the consolidated leverage ratio (as defined in the indenture) is less than 5.25 to 1.00 and we have sufficient amounts under our restricted payments basket (as determined pursuant to the indenture), or if we use other available exceptions provided for under the indenture. However, the payment and amount of future dividends remain within the discretion of the Board of Directors and will depend upon our future earnings, financial condition, and other factors considered relevant by the Board of Directors.

Equity Securities:

In 2015 and as amended in 2016, our Board of Directors authorized a share repurchase program for the repurchase of up to $20.0 million of our Class A Common Stock through December 31, 2016. The shares were repurchased from time to time depending on prevailing market prices, availability, and market conditions, among other factors. From inception through December 31, 2016, we repurchased 1.3 million shares at an average price of $12.28 per share. No shares were repurchased during the year ended December 31, 2017, as the plan had expired.

 

During the year ended December 31, 2017, we did not sell any equity securities of the Company that were not registered under the Securities Act of 1933, as amended.

 

Performance Graph:

The following graph compares the cumulative five‑year total return attained by shareholders on The McClatchy Company’s common stock versus the cumulative total returns of the S&P Midcap 400 index and a customized peer group composed of six companies (“Peer Group”).

Our Peer Group is customized to include six companies that are publicly traded with at least 40% of their revenues from print and digital newspaper publishing. This peer group includes: A.H. Belo Corp., Gannett Co. Inc., Lee Enterprises, Inc., New Media Investment Group, Inc., The New York Times Company and tronc, Inc. 

17


 

G:\SHARED\CONTROL\Financial Reporting\2017\2017 10-K\Item 5\Total Return Line Graph 2017\Mni2017.jpg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended:

 

 

 

12/30/2012

 

12/29/2013

 

12/28/2014

 

12/27/2015

 

12/25/2016

 

12/31/2017

 

The McClatchy Company

    

$

100

    

$

111

    

$

116

    

$

40

    

$

45

    

$

30

 

S&P Midcap 400

 

$

100

 

$

134

 

$

147

 

$

143

 

$

173

 

$

201

 

Peer Group

 

$

100

 

$

191

 

$

185

 

$

156

 

$

140

 

$

178

 

 

 

18


 

 

ITEM 6.  SELECTED FINANCIAL DATA 

The selected financial data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and other financial data included elsewhere in this annual report. Historical results are not necessarily indicative of the results to be expected in future periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31,

 

December 25,

 

December 27,

 

December 28,

 

December 29,

 

(in thousands, except per share amounts)

 

2017 (1)

 

2016

 

2015

 

2014

 

2013

 

REVENUES — NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

498,639

 

$

568,735

 

$

637,415

 

$

731,783

 

$

822,128

 

Audience

 

 

363,497

 

 

364,830

 

 

367,858

 

 

366,592

 

 

346,311

 

Other

 

 

41,456

 

 

43,528

 

 

51,301

 

 

48,177

 

 

46,409

 

 

 

 

903,592

 

 

977,093

 

 

1,056,574

 

 

1,146,552

 

 

1,214,848

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses (2)

 

 

757,856

 

 

840,805

 

 

885,499

 

 

937,732

 

 

942,991

 

Depreciation and amortization

 

 

80,129

 

 

89,446

 

 

101,595

 

 

113,638

 

 

121,570

 

Asset impairments

 

 

23,442

 

 

9,526

 

 

304,848

 

 

8,227

 

 

17,181

 

 

 

 

861,427

 

 

939,777

 

 

1,291,942

 

 

1,059,597

 

 

1,081,742

 

OPERATING INCOME (LOSS)

 

 

42,165

 

 

37,316

 

 

(235,368)

 

 

86,955

 

 

133,106

 

NON-OPERATING INCOME (EXPENSE) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(81,501)

 

 

(83,168)

 

 

(85,973)

 

 

(127,503)

 

 

(135,381)

 

Interest income

 

 

558

 

 

463

 

 

331

 

 

254

 

 

53

 

Equity income (loss) in unconsolidated companies, net

 

 

(1,698)

 

 

13,519

 

 

18,252

 

 

26,925

 

 

48,776

 

Impairments related to equity investments, net

 

 

(170,007)

 

 

(1,027)

 

 

(8,166)

 

 

(7,841)

 

 

(3,096)

 

Gains related to equity investments

 

 

 —

 

 

 —

 

 

8,061

 

 

705,247

 

 

 —

 

Gain (loss) on extinguishment of debt

 

 

(2,700)

 

 

431

 

 

1,167

 

 

(72,777)

 

 

(13,643)

 

Retirement benefit expense (2)

 

 

(13,404)

 

 

(14,776)

 

 

(9,971)

 

 

(4,632)

 

 

(12,162)

 

Other — Miami property gain

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,909

 

Other — net

 

 

(312)

 

 

(16)

 

 

(292)

 

 

579

 

 

541

 

 

 

 

(269,064)

 

 

(84,574)

 

 

(76,591)

 

 

520,252

 

 

(105,003)

 

Income (loss) from continuing operations before income taxes

 

 

(226,899)

 

 

(47,258)

 

 

(311,959)

 

 

607,207

 

 

28,103

 

Income tax provision (benefit)

 

 

105,459

 

 

(13,065)

 

 

(11,797)

 

 

231,230

 

 

11,659

 

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(332,358)

 

 

(34,193)

 

 

(300,162)

 

 

375,977

 

 

16,444

 

Income (loss) from discontinued operations, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(1,988)

 

 

2,359

 

NET INCOME (LOSS)

 

$

(332,358)

 

$

(34,193)

 

$

(300,162)

 

$

373,989

 

$

18,803

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(43.55)

 

$

(4.41)

 

$

(34.66)

 

$

43.32

 

$

1.90

 

Discontinued operations, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(0.23)

 

 

0.30

 

Net income (loss) per basic common share

 

$

(43.55)

 

$

(4.41)

 

$

(34.66)

 

$

43.09

 

$

2.20

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(43.55)

 

$

(4.41)

 

$

(34.66)

 

$

42.55

 

$

1.90

 

Discontinued operations, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(0.22)

 

 

0.30

 

Net income (loss) per diluted common share

 

$

(43.55)

 

$

(4.41)

 

$

(34.66)

 

$

42.33

 

$

2.20

 

Dividends per common share:

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

CONSOLIDATED BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,505,918

 

$

1,836,754

 

$

1,923,034

 

$

2,540,716

 

$

2,577,739

 

Long-term debt

 

 

707,252

 

 

829,415

 

 

905,425

 

 

994,812

 

 

1,473,460

 

Financing obligations

 

 

91,905

 

 

51,616

 

 

32,398

 

 

34,551

 

 

40,264

 

Stockholders’ equity (deficit)

 

 

(204,332)

 

 

113,913

 

 

192,763

 

 

503,385

 

 

240,386

 


(1)

Due to our fiscal calendar, the year ended on December 31, 2017 encompassed a 53‑week period as compared to the other fiscal year ends identified in this table, which only have 52‑week periods.

(2)

In 2017, we early adopted FASB issued Accounting Standards Update (“ASU”) No. 2017-07 (see Note 1 to our consolidated financial statements). This standard was applied retrospectively and therefore for fiscal years 2013-2016, we reclassified all of our retirement benefit expenses from compensation in operating income (loss) to non-operating income (expense) on the consolidated statements of operations.

 

19


 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reference is made to Part I, Item 1 “Forward‑Looking Statements” and Item 1A “Risk Factors,” which describes important factors that could cause actual results to differ from expectations and non‑historical information contained herein. In addition, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements (“Notes”) as of and for each of the three years ended December 31, 2017, December 25, 2016, and December 27, 2015, included elsewhere in this Annual Report on Form 10‑K.

Overview

We operate 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 well-respected brands such as the Miami HeraldThe Kansas City Star, The 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.

On July 31, 2017, we closed a transaction to sell a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which reduced our ownership interest in CareerBuilder from 15.0% to approximately 3.0%.  

Our fiscal year ends on the last Sunday in December. Fiscal year ended December 31, 2017, consisted of a 53-week period. Fiscal years ended December 25, 2016, and December 26, 2015, consisted of 52‑week periods.

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

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 31,

 

December 25,

 

December 27,

 

 

 

2017

 

2016

 

2015

 

Revenues:

    

    

    

    

 

    

 

Advertising

 

55.2

%  

58.2

%  

60.3

%  

Audience

 

40.2

%  

37.3

%  

34.8

%  

Other

 

4.6

%  

4.5

%  

4.9

%  

Total revenues

 

100.0

%  

100.0

%  

100.0

%  

Our primary sources of revenues are digital and print advertising and audience subscriptions. All categories (retail, national and classified) of advertising discussed below include both digital and print advertising. Retail advertising revenues (from retail clients) include advertising delivered digitally and/or advertising carried as a part of newspapers (run of press (“ROP”) advertising), advertising inserts placed in newspapers (“preprint advertising”). Audience revenues include either digital-only subscriptions, or bundled subscriptions, which include both digital and print. Our print newspapers are delivered by large distributors and independent contractors. Other revenues include, among others, commercial printing and distribution revenues.

See “Results of Operations” section below for a discussion of our revenue performance and contribution by category for 2017, 2016 and 2015.

Recent Developments

Deferred Tax Valuation Allowance

 

As discussed further in Note  5, as a result of our deferred tax asset valuation assessment, we recorded a valuation allowance charge of $192.3 million in 2017, primarily because we have incurred three years of cumulative pre-tax losses. The amount of the valuation allowance that we recorded represents the deferred taxes for which we determined it is not more-likely-than-not that we will realize the benefits in future periods. We will continue to evaluate the valuation allowance and if actual outcomes differ from our current expectations, we may record additional valuation allowance or reverse the allowance, in whole or in part, through income tax expense in the period such determination is made. Despite having this valuation allowance, for the 2017 tax year, we anticipate being a U.S. taxpayer and benefiting from our deferred taxes as they become realized in our federal tax return.

20


 

CareerBuilder Transaction and Impairment Charge

 

As discussed further in Note 2, in July 2017, we - along with the then existing ownership group of CareerBuilder - sold a majority of the collective ownership interest in CareerBuilder. 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 impairment charges of $168.2 million on our equity investment in CareerBuilder during 2017.

 

Under the terms of the indenture for our 9.00% Notes, we were required to use the after-tax proceeds from the sale of our interest in CareerBuilder to reinvest in the company within 365 days from the date of the sale or to make an offer to the holders of the 9.00% Notes to purchase their notes at par plus accrued and unpaid interest. On August 1, 2017, we announced an offer to purchase up to $65.0 million of the 9.00% Notes using the net cash proceeds from the sale of our interests in CareerBuilder at par plus accrued and unpaid interest. As a result of this offer to purchase the 9.00% Notes, $1.7 million of notes were tendered in the offer and were redeemed by us at par in September 2017.

 

Asset sales and leasebacks

 

During 2017, we sold various real estate (“Property Sales”) totaling gross proceeds of approximately  $90.0 million. The largest of these was a sale of land and buildings in Sacramento, California, home of The Sacramento Bee.  We are leasing back the Sacramento property under a  15-year lease with initial annual payments totaling approximately $4.4 million. Accordingly, the lease is treated as financing lease, and we continue to depreciate the carrying value of the property in our financial statements. No gain or loss will be recognized on the sale and leaseback of the property until we no longer have a continuing involvement in the property.

 

Under the terms of the indenture for our 7.150% notes due in 2027 ("7.150% Notes") and 6.875% notes due in 2029 ("6.875% Notes"), we were required to repurchase approximately $32.0 million in publicly traded notes within 90 days following the execution of the lease on the Sacramento property. As discussed below, we repurchased $35.0 million of our 9.00% Notes during September 2017, which satisfied our obligation under the indenture for the 7.150% Notes and the 6.875% Notes to repurchase publicly traded notes.

 

We are also required under the indenture for the 9.00% Notes to use the net after tax proceeds of $44.8 million from the Property Sales to reinvest in the Company within 365 days from the date of the sale or to make an offer to the holders of the 9.00% Notes to purchase their notes at 100% of the principal amount plus accrued and unpaid interest. On September 20, 2017, we announced an offer to purchase up to $40.0 million of the 9.00% Notes using the net after tax proceeds from the Property Sales at par plus accrued and unpaid interest. The offer expired on October 19, 2017, and $0.1 million principal amount of the 9.00% Notes were tendered in the offer and redeemed by us at par.

 

We also have various sales agreements or letters of intent to sell other smaller properties that are expected to close in 2018, including the building and land in Columbia, South Carolina. The Columbia, South Carolina transaction will be structured similar to the Sacramento sale and leaseback transaction. 

 

Debt Repurchase and Extinguishment of Debt

 

During 2017, we (i) retired $16.9 million of the 5.75% Notes due in 2017 (“5.75% Notes”)  that matured on September 1, 2017; (ii) repurchased a total $50.0 million of our 9.00% Senior Secured Notes due in 2022 (“9.00% Notes”) through privately negotiated transactions; and (iii) we redeemed $1.8 million of the 9.00% Notes from the offers to purchase that we announced in 2017. As a result of these transactions, we recorded a loss on the extinguishment of debt of $2.7 million in 2017.

 

On January 25, 2018, pursuant to the terms of the indenture for the 9.00% Notes, we redeemed $75.0 million aggregate principal amount of our 9.00% Notes at a premium and we wrote off the associated debt issuance costs. In addition, in February 2018, we repurchased $20.0 million of our 9.00% Notes. As a result of these transactions, we expect to record a loss on the extinguishment of debt of approximately $5.3 million during the quarter ending April 1, 2018.

 

21


 

Listing on NYSE American

 

Effective September 12, 2017, we voluntarily transferred our Class A Common Stock listing from the NYSE to the NYSE American, which is an enhanced market for small to –mid-cap companies, that more closely reflects our current size and capital structure. We continue to trade under the symbol MNI.

 

Tax Legislation

 

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. See Notes 1 and 5 for more detailed discussion of the Tax Act and the impact to us.

Results of Operations

The following table reflects our financial results on a consolidated basis for 2017, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 31,

 

December 25,

 

December 27,

(in thousands, except per share amounts)

 

2017

 

2016

 

2015

Net loss

 

 $

(332,358)

 

 $

(34,193)

 

 $

(300,162)

 

 

 

 

 

 

 

 

 

 

Net loss per diluted common share

 

 $

(43.55)

 

 $

(4.41)

 

 $

(34.66)

The increase in net loss in 2017 compared to 2016 was primarily due to a pre-tax impairment charges of $193.4 million (see Recent Developments above regarding the $168.2 million CareerBuilder impairment) and a non-cash charge to establish a deferred tax valuation allowance of $192.3 million  (see Recent Developments above). In addition, advertising revenues were lower, which were partially offset by a decrease in expenses, as described more fully below.

The decrease in net loss in 2016 compared to 2015 was largely due to non-cash impairment charges of $9.5 million in 2016 compared to impairment charges of $304.8 million in 2015.

2017 Compared to 2016

Revenues

The following table summarizes our revenues by category, which compares 2017 to 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 31,

 

December 25,

 

$

 

%

(in thousands)

 

2017

 

2016

 

Change

 

Change

Advertising:

    

 

    

    

 

    

    

 

    

    

    

Retail

 

$

236,130

 

$

280,916

 

$

(44,786)

 

(15.9)

National

 

 

40,338

 

 

42,925

 

 

(2,587)

 

(6.0)

Classified

 

 

120,586

 

 

137,347

 

 

(16,761)

 

(12.2)

Direct marketing and other

 

 

101,585

 

 

107,547

 

 

(5,962)

 

(5.5)

Total advertising

 

 

498,639

 

 

568,735

 

 

(70,096)

 

(12.3)

Audience

 

 

363,497

 

 

364,830

 

 

(1,333)

 

(0.4)

Other

 

 

41,456

 

 

43,528

 

 

(2,072)

 

(4.8)

Total revenues

 

$

903,592

 

$

977,093

 

$

(73,501)

 

(7.5)

During 2017, total revenues decreased 7.5% compared to 2016 primarily due to the continued decline in demand for print advertising. Consistent with the end of 2016, the decline in print advertising was primarily a result of large retail advertisers continuing to reduce preprinted insert and in-newspaper ROP advertising. The decline in print advertising revenues is the result of the desire of advertisers to reach customers directly through online advertising, and the secular shift in advertising demand from print to digital products. We expect these trends to continue for the foreseeable future. The decrease in total revenues was partially offset by the 53rd week in 2017 that we estimate provide for an additional $6.6 million in advertising revenues, $6.7 million in audience revenues and $14.0 million in total revenues.

22


 

Advertising Revenues

Total advertising revenues decreased 12.3% during 2017 compared to 2016. While we experienced declines in all of our advertising revenue categories, the decrease in total advertising revenues was primarily related to declines in print retail and print and digital classified advertising revenues. These decreases in advertising revenues were partially offset by increases in several digital revenue categories, as discussed below, as well as the impact of a 53rd week in 2017.  

Digital advertising can come in many forms, including banner ads, video, search advertising and/or liner ads, while print advertising is typically display advertising, or in the case of classified, display and/or liner advertising. Advertising printed directly in the newspaper is considered ROP advertising while preprint advertising consists of preprinted advertising inserts delivered with the newspaper.

The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:

 

 

 

 

 

 

 

 

Years Ended

 

 

 

December 31,

 

December 25,

 

 

 

2017

 

2016

 

Advertising:

    

    

    

    

 

Retail

 

47.4

%  

49.4

%  

National

 

8.1

%  

7.5

%  

Classified

 

24.2

%  

24.2

%  

Direct marketing and other

 

20.4

%  

18.9

%  

Total advertising

 

100.0

%  

100.0

%  

We categorize advertising revenues as follows:

·

Retail – local retailers, local stores of national retailers, department and furniture stores, restaurants and other consumer‑related businesses. Retail advertising also includes revenues from preprinted advertising inserts distributed in the newspaper.

·

National – national and major accounts such as telecommunications companies, financial institutions, movie studios, airlines and other national companies.

·

Classified – local auto dealers, employment, real estate and other classified advertising, which includes remembrances, legal advertisements and other miscellaneous advertising.

·

Direct Marketing and Other – primarily preprint advertisements in direct mail, shared mail and niche publications, events programs, total market coverage publications and other miscellaneous advertising not included in the daily newspaper.

Retail:

During 2017, retail advertising revenues decreased 15.9%, compared to 2016. In 2017, the decrease in retail advertising revenues was primarily due to decreases of 22.9% in print ROP advertising revenues and 25.5% in preprint advertising revenues, compared to 2016. These decreases were partially offset by an increase in digital retail advertising of 2.0% in 2017 compared to 2016. The overall decreases in retail advertising revenues for 2017 were spread among all of the ROP and preprint categories.

National:

National advertising revenues decreased 6.0% during 2017 compared to 2016. While we experienced a 34.0% decrease in print national advertising during 2017 compared to 2016, we recorded an increase of 16.1% in digital national advertising. Overall, the increase in digital national advertising revenues during 2017 was largely led by programmatic digital advertising, including mobile and video revenues.

Classified:

During 2017, classified advertising revenues decreased 12.2% compared to 2016. Automotive, employment and real estate categories combined accounted for 54.9% of our classified advertising revenues during 2017 compared to 58.2%

23


 

in 2016. During 2017, we experienced decreases of 13.1% and 11.1% in print classified advertising and digital classified advertising, respectively, compared to 2016, which were led by automotive and employment advertising. Our decrease in print classified advertising revenues resulted from the continued shift of print advertising to digital platforms, while the decrease in digital classified advertising was primarily due to the large number of competitors in the digital environment. Accordingly, we expect this market will continue to be volatile and highly competitive. The real estate category had similar results, although to a lesser extent, due to similar trends. Other classified advertising revenues, which is our largest classified category and includes legal, remembrance and celebration notices and miscellaneous advertising, also experienced decreases in both print and digital in 2017 compared to 2016.

 

Digital Advertising:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 34.7% of total advertising revenues during 2017 compared to 30.6% during 2016. Total digital advertising includes digital advertising bundled with print and digital-only advertising. Digital-only advertising is defined as digital advertising sold on a stand-alone basis or as the primary advertising buy with print sold as an “up-sell.” Digital-only advertising revenues increased 9.8% to $133.7 million in 2017 compared to 2016. In 2017, total digital advertising revenues decreased 0.6% to $173.1 million compared to 2016 reflecting the negative impact of lower print advertising revenues on bundled sales. Digital advertising revenues bundled with print products declined 24.8% in 2017 compared to 2016 as a result of fewer print advertising sales. The advertising industry continues to experience a secular shift in advertising demand from print to digital products as advertisers look for multiple advertising channels to reach their customers and are increasingly focused on online customers. While our product offerings and collaboration efforts in digital advertising have grown, we expect to continue to face intense competition in the digital advertising space. 

 

Direct Marketing and Other:

Direct marketing and other advertising revenues decreased 5.5% during 2017 compared to 2016. This represents a lower rate of decline from trends in 2016 when these revenues decreased by 9.5% compared to 2015. The lower rate of decline in 2017 versus in 2016 was partially due to the addition of new customers in certain markets in the second half of 2016, which was largely offset by the declines in preprint retail advertising by large retail customers as described above.

Audience Revenues

Audience revenues decreased slightly at 0.4% during 2017 compared to 2016. Overall, digital audience revenues increased 0.9% during 2017 and digital-only audience revenues associated with digital subscriptions increased 9.8% in 2017 compared to 2016. The increase in digital-only audience revenues during 2017 was a result of (i) a  23.8% increase in our digital-only subscribers to 102,900 as of the end of 2017 compared to 2016, (ii) digital subscription rate increases in some markets, and (iii) the revenues received in the 53rd week of 2017. Print audience revenues decreased 0.8% in 2017 compared to 2016, primarily due to pricing adjustments that were implemented and were partially offset by lower print circulation volumes and the 53rd week of 2017. We have a dynamic pricing model for our traditional print subscriptions for which pricing is constantly being adjusted based upon the market’s ability to accept pricing adjustments. Print circulation volumes continue to decline as a result of fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change. To help reduce potential attrition due to the increased pricing, we also increased our subscription related marketing and promotion efforts. 

Operating Expenses

Total operating expenses decreased 8.3% in 2017, compared to 2016. Retirement benefit expenses related to the pension and post-retirement benefits are now recorded as non-operating costs (see Note 1) and therefore, excluded from this discussion in all periods presented. The decreases during 2017 were primarily due to decreases in compensation and other operating expenses compared to 2016, as discussed below. Our total operating expenses reflect our continued effort to reduce costs through streamlining processes to gain efficiencies. These decreases in total operating expenses were partially offset by an increase in impairment charges recorded during 2017, as discussed below. As discussed above, our operating expenses for 2017 also include a 53rd week, which results in higher expenses during the period than the comparable period in 2016.

 

24


 

The following table summarizes our operating expenses, which compares 2017 to 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

December 31,

 

December 25,

 

$

 

%

(in thousands)

2017

 

2016

 

Change

 

Change

Compensation expenses

$

338,588

    

$

368,897

    

$

(30,309)

 

(8.2)

Newsprint, supplements and printing expenses

 

66,438

 

 

78,893

 

 

(12,455)

 

(15.8)

Depreciation and amortization expenses

 

80,129

 

 

89,446

 

 

(9,317)

 

(10.4)

Other operating expenses

 

352,830

 

 

393,015

 

 

(40,185)

 

(10.2)

Goodwill impairment and other asset write-downs

 

23,442

 

 

9,526

 

 

13,916

 

146.1

 

$

861,427

 

$

939,777

 

$

(78,350)

 

(8.3)

 

Compensation expenses, which included both payroll and fringe benefit costs, decreased 8.2% in 2017 compared to 2016. Payroll expenses declined 7.5% during 2017 compared to 2016, reflecting a 13.3% decline in average full-time equivalent employees. Similarly, fringe benefits costs decreased 12.3% in 2017 compared to 2016. These decreases were primarily due to decreases in health benefit costs and other fringe benefit costs, a result of lower headcount.  The decrease in fringe benefit costs is also impacted by the $2.3 million charge we incurred during 2016 when we outsourced the printing production at one of our media companies and exited the multiemployer pension plans that covered the impacted employees that was not repeated in 2017.

 

Newsprint, supplements and printing expenses decreased 15.8% in 2017 compared to 2016. Newsprint expense declined 20.1% during 2017 compared to 2016. The decline in newsprint expense reflects a decrease in newsprint usage of 21.1% in 2017, partially offset by an increase in newsprint prices of 1.3%, in both cases compared to 2016. During this same period, printing expenses, which are primarily outsourced printing costs, decreased $3.0 million or 9.3%.

 

Depreciation and amortization expenses decreased 10.4% in 2017 compared to 2016. Depreciation expense decreased $10.6 million in 2017 compared to 2016, as a result of assets becoming fully depreciated in previous periods and due to $7.0 million in accelerated depreciation charges taken in 2016 compared to only $0.3 million in 2017. The decrease in depreciation expense was partially offset by the 53rd week in 2017. Amortization expense increased $1.3 million in 2017 compared to 2016 due to the intangible assets acquired in December 2016 when we purchased The (Durham, NC) Herald-Sun and due to the 53rd week in 2017.  

 

Other operating expenses decreased 10.2% in 2017 compared to 2016. In 2017, other operating expenses included $23.6 million gain on the disposal of property and equipment compared to $5.8 million in 2016. In addition, as a result of our efforts to reduce operational costs, we had decreases of $8.8 million in circulation delivery costs, $2.6 million in production costs, and $10.5 million in relocation and other costs, which were partially offset by an increase of $4.9 million in professional fees,  $1.3 million in other miscellaneous expenses and the 53rd week in 2017.

 

Other asset write-downs include an impairment charge of $21.5 million related to intangible newspaper mastheads during 2017, and a write down of $2.0 million of non-newsprint inventory during 2017. During 2016, other asset write-downs include $9.2 million write-downs of intangible newspaper mastheads and $0.3 million related to certain assets held for sale. See  Notes 1 and 4  for additional discussion.

 

Non‑Operating Items

Interest Expense:

Total interest expense decreased 2.0% in 2017 compared to 2016. Interest expense related to debt balances decreased by $4.8 million in 2017 as a result of lower overall debt balances reflecting repurchases of debt made during 2016 and in 2017. In 2017, this was offset by a $2.0 million increase of non-cash imputed interest related to our financing obligations that increased due to our contribution of real properties to our Pension Plan and due to the sale and leaseback of our Sacramento property.

Equity Income (Loss) in Unconsolidated Companies, Net:

 

During 2017, we recorded equity losses in unconsolidated companies of $1.7 million as compared to income of $13.4 million in 2016. The decreases during 2017 compared to 2016 are due to lower income from our equity method

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investments. Following the sale of CareerBuilder in the third quarter of 2017, we expect income from unconsolidated equity investments to continue to be lower than historical levels.

 

Impairments Related to Equity Investments, Net:

 

As described more fully in Note 2, during 2017, we recorded $1.8 million in impairment charges related to certain other unconsolidated equity investments and  $168.2 million in impairment charges related to our equity investment in CareerBuilder. During 2016, we recorded a $0.9 million write-down related to our equity investment in HomeFinder, LLC (“HomeFinder”), which was sold in the first quarter of 2016.

 

Extinguishment of Debt:

During 2017, we retired, repurchased or redeemed $68.7 million aggregate principal amount of various series of our outstanding notes. We repurchased some of these notes at a price higher than par value and redeemed some at par value. We wrote off historical debt issuance costs and as a result, we recorded a loss on the extinguishment of debt of $2.7 million during 2017. See Note 2 for further discussion.

During 2016, we repurchased $63.6 million aggregate principal amount of various series of our outstanding notes. We repurchased these notes at a price higher or lower than par value and wrote off historical discounts and unamortized issuance costs related to these notes, as applicable, which resulted in a net gain on extinguishment of debt of $0.4 million in 2016.

Income Taxes:

 

In 2017, we recorded an income tax expense of $105.5 million. As discussed more fully in Note 1(under Income Taxes) and Note 5, during 2017, we recorded a $192.3 million valuation allowance related to our deferred tax assets because we determined that it is not more-likely-than-not that we will realize such deferred tax assets. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, the tax impact of stock compensation, the benefit from the reduced federal tax rate as a result of the Tax Act on our deferred tax liabilities, and certain permanently non-deductible expenses. 

In 2016, we recorded an income tax benefit of $13.1 million. The income tax benefit differs from the expected federal tax amounts primarily due to the inclusion of state income taxes, non-deductible stock related compensation, certain discrete tax items and the impact from a non-deductible loss for tax purposes related to the transfer of real property to our Pension Plan. 

2016 Compared to 2015

Revenues

The following table summarizes our revenues by category, which compares 2016 to 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 25,

 

December 27,

 

 

$

 

%

(in thousands)

 

2016

 

2015

 

 

Change

 

Change

Advertising:

    

 

    

    

 

    

    

 

    

 

    

Retail

 

$

280,916

 

$

318,953

 

$

(38,037)

 

(11.9)

National

 

 

42,925

 

 

45,861

 

 

(2,936)

 

(6.4)

Classified

 

 

137,347

 

 

153,699

 

 

(16,352)

 

(10.6)

Direct marketing and other

 

 

107,547

 

 

118,902

 

 

(11,355)

 

(9.5)

Total advertising

 

 

568,735

 

 

637,415

 

 

(68,680)

 

(10.8)

Audience

 

 

364,830

 

 

367,858

 

 

(3,028)

 

(0.8)

Other

 

 

43,528

 

 

51,301

 

 

(7,773)

 

(15.2)

Total revenues

 

$

977,093

 

$

1,056,574

 

$

(79,481)

 

(7.5)

In 2016, total revenues decreased 7.5% compared to 2015 primarily due to the continued decline in demand for print advertising. The largest impact on print advertising came from large retail advertisers who began reducing preprinted insert and in-newspaper ROP advertising in 2015, which continued in 2016. Other long-term factors contributing to the

26


 

decline in print advertising revenues was the desire of advertisers to reach online customers, and the secular shift in advertising demand from print to digital products. As a result, the print advertising revenues declines were partially offset by growth in digital advertising.

Advertising Revenues

Total advertising revenues decreased 10.8% in 2016 compared to 2015. While we experienced declines in all of our advertising revenue categories, the decrease in total advertising revenues was primarily related to declines in print retail and print and digital classified advertising revenues. These decreases in advertising revenues were partially offset by increases in certain digital revenue categories, as discussed below.

 

The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:

 

 

 

 

 

 

 

 

Years Ended

 

 

 

December 25,

 

December 27,

 

 

 

2016

 

2015

 

Advertising:

    

    

    

    

 

Retail

 

49.4

%  

50.0

%  

National

 

7.5

%  

7.2

%  

Classified

 

24.2

%  

24.1

%  

Direct marketing and other

 

18.9

%  

18.7

%  

Total advertising