10-Q 1 mni-20150628x10q.htm 10-Q mni_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 28, 2015

 

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

 

GRAPHIC

 

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

52-2080478

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

2100 “Q” Street, Sacramento, CA

 

95816

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

 

916-321-1844

 

 

(Registrant’s telephone number, including area code)

 

 

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

 

Yes   No 

 

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

 

Yes   No 

 

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

 

 

 

Large accelerated filer 

Accelerated filer 

 

 

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

Smaller reporting company 

 

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

 

Yes   No 

 

As of August 3, 2015, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

62,515,695

Class B Common Stock

24,476,962

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Six Months Ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

    

2015

    

2014

 

2015

 

2014

 

REVENUES — NET:

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

158,520

 

$

184,649

 

$

309,767

 

$

360,251

 

Audience

 

 

90,842

 

 

90,817

 

 

184,051

 

 

179,770

 

Other

 

 

12,998

 

 

11,925

 

 

25,720

 

 

23,541

 

 

 

 

262,360

 

 

287,391

 

 

519,538

 

 

563,562

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

101,091

 

 

103,481

 

 

207,763

 

 

212,033

 

Newsprint, supplements and printing expenses

 

 

24,523

 

 

29,083

 

 

49,299

 

 

56,360

 

Depreciation and amortization

 

 

24,934

 

 

25,926

 

 

48,597

 

 

66,221

 

Other operating expenses

 

 

100,349

 

 

101,456

 

 

203,574

 

 

205,315

 

Goodwill and other asset impairments (see Notes 1 and 2)

 

 

300,429

 

 

138

 

 

300,429

 

 

1,024

 

 

 

 

551,326

 

 

260,084

 

 

809,662

 

 

540,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

(288,966)

 

 

27,307

 

 

(290,124)

 

 

22,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(22,172)

 

 

(33,475)

 

 

(44,510)

 

 

(66,887)

 

Interest income

 

 

70

 

 

46

 

 

133

 

 

50

 

Equity income in unconsolidated companies, net

 

 

4,676

 

 

7,410

 

 

8,543

 

 

16,968

 

Gains related to equity investments

 

 

7,460

 

 

145,893

 

 

8,093

 

 

145,893

 

Loss on extinguishment of debt, net

 

 

(883)

 

 

 —

 

 

(883)

 

 

 —

 

Other — net

 

 

(182)

 

 

82

 

 

(248)

 

 

144

 

 

 

 

(11,031)

 

 

119,956

 

 

(28,872)

 

 

96,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(299,997)

 

 

147,263

 

 

(318,996)

 

 

118,777

 

Income tax provision (benefit)

 

 

(3,500)

 

 

55,615

 

 

(11,153)

 

 

43,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(296,497)

 

 

91,648

 

 

(307,843)

 

 

75,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES

 

 

 —

 

 

(1,699)

 

 

 —

 

 

(1,479)

 

NET INCOME (LOSS)

 

$

(296,497)

 

$

89,949

 

$

(307,843)

 

$

74,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(3.39)

 

$

1.06

 

$

(3.52)

 

$

0.87

 

Loss from discontinued operations

 

 

 —

 

 

(0.02)

 

 

 —

 

 

(0.01)

 

Net income (loss) per share

 

$

(3.39)

 

$

1.04

 

$

(3.52)

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(3.39)

 

$

1.03

 

$

(3.52)

 

$

0.85

 

Loss from discontinued operations

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

 

Net income (loss) per share

 

$

(3.39)

 

$

1.02

 

$

(3.52)

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used

 

 

 

 

 

 

 

 

 

 

 

 

 

to calculate basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

87,441

 

 

86,734

 

 

87,324

 

 

86,604

 

Diluted

 

 

87,441

 

 

88,593

 

 

87,324

 

 

88,513

 

See notes to the condensed consolidated financial statements.

 

 

1


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; In thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Six Months Ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

    

2015

    

2014

 

2015

 

2014

 

NET INCOME (LOSS)

 

$

(296,497)

 

$

89,949

 

$

(307,843)

 

$

74,107

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and post retirement plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain and other components of benefit plans, net of taxes of $(1,922), $(1,254), $(3,842) and $(2,508) 

 

 

2,883

 

 

1,881

 

 

5,764

 

 

3,763

 

Investment in unconsolidated companies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes of $89, $(19), $254 and $(503)

 

 

(133)

 

 

29

 

 

(380)

 

 

754

 

Other comprehensive income

 

 

2,750

 

 

1,910

 

 

5,384

 

 

4,517

 

Comprehensive income (loss)

 

$

(293,747)

 

$

91,859

 

$

(302,459)

 

$

78,624

 

 

See notes to the condensed consolidated financial statements.

 

 

2


 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

June 28,

    

December 28,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,120

 

$

220,861

 

Trade receivables (net of allowances of $4,244  in 2015 and $5,900 in 2014)

 

 

109,494

 

 

144,565

 

Other receivables

 

 

36,111

 

 

36,780

 

Newsprint, ink and other inventories

 

 

18,599

 

 

19,491

 

Deferred income taxes

 

 

1,054

 

 

1,054

 

Assets held for sale

 

 

11,876

 

 

173

 

Other current assets

 

 

16,812

 

 

14,945

 

 

 

 

226,066

 

 

437,869

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

375,338

 

 

404,238

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

377,212

 

 

410,915

 

Goodwill

 

 

705,174

 

 

996,115

 

 

 

 

1,082,386

 

 

1,407,030

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

239,453

 

 

230,473

 

Other assets

 

 

63,778

 

 

62,160

 

 

 

 

303,231

 

 

292,633

 

 

 

$

1,987,021

 

$

2,541,770

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

37,940

 

$

49,095

 

Accrued pension liabilities

 

 

8,529

 

 

8,529

 

Accrued compensation

 

 

30,839

 

 

32,912

 

Income taxes payable

 

 

9,685

 

 

186,805

 

Unearned revenue

 

 

64,419

 

 

62,035

 

Accrued interest

 

 

9,835

 

 

10,592

 

Other accrued liabilities

 

 

16,866

 

 

14,957

 

 

 

 

178,113

 

 

364,925

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

956,486

 

 

994,812

 

Deferred income taxes

 

 

8,435

 

 

26,162

 

Pension and postretirement obligations

 

 

564,232

 

 

574,024

 

Financing obligations

 

 

33,438

 

 

34,551

 

Other long-term obligations

 

 

44,409

 

 

43,911

 

 

 

 

1,607,000

 

 

1,673,460

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 63,473,026  in 2015 and 62,600,676 in 2014)

 

 

635

 

 

626

 

Class B (authorized 60,000,000 shares, issued 24,476,962 in 2015 and 24,585,962 in 2014)

 

 

245

 

 

246

 

Additional paid-in-capital

 

 

2,224,919

 

 

2,222,675

 

Accumulated deficit

 

 

(1,611,227)

 

 

(1,303,384)

 

Treasury stock at cost, 957,331 shares in 2015 and 45,374  shares in 2014

 

 

(1,445)

 

 

(175)

 

Accumulated other comprehensive loss

 

 

(411,219)

 

 

(416,603)

 

 

 

 

201,908

 

 

503,385

 

 

 

$

1,987,021

 

$

2,541,770

 

 

See notes to the condensed consolidated financial statements.

 

3


 

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 28,

 

June 29,

 

 

    

2015

    

2014

    

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net income (loss)

 

$

(307,843)

 

$

74,107

 

Less loss from discontinued operations, net of tax

 

 

 —

 

 

(1,479)

 

Income (loss) from continuing operations

 

 

(307,843)

 

 

75,586

 

 

 

 

 

 

 

 

 

Reconciliation to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

48,597

 

 

66,221

 

(Gains) loss on disposal of equipment (excluding asset impairments)

 

 

(40)

 

 

374

 

Contribution to qualified defined benefit pension plan

 

 

 —

 

 

(25,000)

 

Retirement benefit expense

 

 

4,986

 

 

2,315

 

Stock-based compensation expense

 

 

2,252

 

 

1,574

 

Equity income in unconsolidated companies

 

 

(8,543)

 

 

(16,968)

 

Gains related to equity investments

 

 

(8,093)

 

 

(145,893)

 

Distributions of income from equity investments

 

 

 —

 

 

147,730

 

Loss on extinguishment of debt

 

 

883

 

 

 —

 

Goodwill and other asset impairments

 

 

300,429

 

 

1,024

 

Other

 

 

(3,043)

 

 

(2,646)

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

35,071

 

 

42,754

 

Inventories

 

 

892

 

 

826

 

Other assets

 

 

(3,201)

 

 

(305)

 

Accounts payable

 

 

(11,155)

 

 

(8,546)

 

Accrued compensation

 

 

(2,073)

 

 

(3,539)

 

Income taxes

 

 

(198,051)

 

 

31,320

 

Accrued interest

 

 

(757)

 

 

21

 

Other liabilities

 

 

4,584

 

 

(366)

 

Net cash provided by (used in) continuing operations

 

 

(145,105)

 

 

166,482

 

Net cash provided by discontinued operations

 

 

 —

 

 

126

 

Net cash provided by (used in) operating activities

 

 

(145,105)

 

 

166,608

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(7,192)

 

 

(14,189)

 

Proceeds from sale of property, plant and equipment and other

 

 

183

 

 

564

 

Distributions from equity investments

 

 

7,460

 

 

 —

 

Contributions to equity investments

 

 

(1,000)

 

 

(1,500)

 

Equity investments and other-net

 

 

633

 

 

1,691

 

Net cash provided by (used in) continuing operations

 

 

84

 

 

(13,434)

 

Net cash provided by discontinued operations

 

 

 —

 

 

33,369

 

Net cash provided by investing activities

 

 

84

 

 

19,935

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repurchase of public notes and related expense

 

 

(41,337)

 

 

 —

 

Other

 

 

(2,383)

 

 

(2,024)

 

Net cash used in financing activities

 

 

(43,720)

 

 

(2,024)

 

Increase (decrease) in cash and cash equivalents

 

 

(188,741)

 

 

184,519

 

Cash and cash equivalents at beginning of period

 

 

220,861

 

 

80,811

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD 

 

$

32,120

 

$

265,330

 

 

See notes to the condensed consolidated financial statements

 

 

4


 

 

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

 

1.  SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

The McClatchy Company (the “Company,” “we,” “us” or “our”) is a 21st century news and information publisher of well-respected publications such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News and Observer, and the (Fort Worth) Star-Telegram. We operate media companies in 28 U.S. markets in 14 states, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We are headquartered in Sacramento, California, and our Class A Common Stock is listed on the New York Stock Exchange under the symbol MNI.

 

We also own 15.0% of CareerBuilder LLC, which operates the nation’s largest online jobs website, CareerBuilder.com, and 33.3% of HomeFinder.com, LLC, which operates the online real estate website HomeFinder.com. 

 

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

 

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature (except as described under Reclassifications and Corrections below), that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented.  The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2014 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the second-quarter periods and 26 weeks for the six-month periods.  

 

Reclassifications and Corrections

 

Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements related to: (i) the presentation of the Anchorage Daily News, Inc. (“Anchorage”) as a discontinued operation (see Note 3,  Divestiture),  (ii) a correction of reporting wholesale fees associated with sales of certain third-party digital advertising products and services on a net basis, as a reduction of associated digital classified advertising revenues, rather than in other operating expenses, and (iii) the early retrospective adoption of Accounting Standards Update (“ASU”) No. 2015-03 relating to the classification of unamortized debt issuance costs, as described below. For the quarter and six months ended June 29, 2014, net revenues and other operating expenses included within operating loss were reduced by $4.6 million and $9.1 million, respectively, to correct the presentation of advertising sales related to certain third-party digital advertising products and services previously reported on a gross basis to a net basis, with wholesale fees reported as a reduction of the associated digital classified advertising revenues instead of other operating expenses. As of December 28, 2014, we reclassified unamortized debt issuance costs of $12.1 million from other assets to a reduction in long-term debt on the condensed consolidated balance sheet as a result of the retrospective adoption of ASU No. 2015-03. There were no other changes to the prior periods’ condensed consolidated financial statements.

 

5


 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer.  The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

Cash and cash equivalents, accounts receivable and accounts payable.  The carrying amount of these items approximates fair value.

 

Long-term debt.  The fair value of our long-term debt is determined using quoted market prices and other inputs that were derived from available market information, including the current market activity of our publicly-traded notes and bank debt, trends in investor demand for debt and market values of comparable publicly-traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance, and may not be representative of actual value. At June 28, 2015, the estimated fair value and carrying value of our long-term debt was $851.4 million and $956.5 million, respectively.

 

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non-financial assets measured at fair value on a nonrecurring basis are assets held for sale, goodwill, intangible assets not subject to amortization and equity method investments. All of these were measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Property, plant and equipment

 

During the six months ended June 29, 2014, we sold Anchorage, including the associated property, plant and equipment, which are presented as a discontinued operation. See Note 3,  Divestiture, below for further discussion of the transaction.  During the six months ended June 29, 2014,  we also completed the acquisition of a new production facility, which was valued at $6.5 million and we incurred $13.5 million in accelerated depreciation (i) related to the production equipment associated with outsourcing our printing process at one newspaper and (ii) resulting from moving the printing operations for another newspaper to the new production facility. No similar transactions were recorded during the six months ended June 28, 2015.  

 

6


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

    

June 28,

    

June 29,

 

June 28,

 

June 29,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Depreciation expense

 

$

12,859

 

$

11,567

 

$

24,382

 

$

37,549

 

 

Assets held for sale

 

During the six months ended June 28, 2015, we identified and began to actively market for sale a production facility at one of our newspapers and a parking structure at another newspaper. These assets consist primarily of land and buildings. No impairment charges were incurred during the quarter and six months ended June 28, 2015, as a result of placing these assets into assets held for sale during the periods. During the six months ended June 29, 2014, we identified and began to actively market for sale one of our production facilities for a newspaper at which we outsourced our printing to a third-party. These assets consist primarily of undeveloped land and buildings. In connection with classifying these assets as assets held for sale, the carrying values of the land and buildings were reduced to their estimated fair value less selling costs, as determined based on the current market conditions and the selling prices. As a result, an impairment charge of $0.1 million and $1.0 million was recorded in the quarter and six months ended June 29, 2014,  respectively, and is included in other operating expenses on the condensed consolidated statements of operations.    

 

Intangible Assets and Goodwill

 

We test for impairment of goodwill annually, at year‑end, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two‑step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. We perform this testing on operating segments, which are also considered our reporting units. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of our reporting units is determined using a combination of a discounted cash flow model and market based approaches. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, newsprint prices, compensation levels, discount rate and private and public market trading multiples for newspaper assets for the market based approach. We consider current market capitalization, based upon the recent stock market prices, plus an estimated control premium in determining the reasonableness of the aggregate fair value of the reporting units. See Note 2 for discussion of our goodwill impairment testing results.

 

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, at year‑end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief from royalty approach which utilizes a discounted cash flow model, as discussed above, to determine the fair value of each newspaper masthead. See Note 2 for discussion of our intangible assets impairment testing results.

 

Long‑lived assets such as intangible assets (primarily advertiser and subscriber lists) are amortized and tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. We had no impairment of long‑lived assets subject to amortization during the quarters or six months ended June 28, 2015, or June 29, 2014.

 

7


 

Accumulated Other Comprehensive Loss

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Other

    

 

 

 

 

 

Minimum

 

Comprehensive

 

 

 

 

 

 

Pension and

 

Loss

 

 

 

 

 

 

Post-

 

Related to

 

 

 

 

 

 

Retirement

 

Equity

 

 

 

 

(in thousands)

 

Liability

 

Investments

 

Total

 

Balance at December 28, 2014

 

$

(407,552)

 

$

(9,051)

 

$

(416,603)

 

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(380)

 

 

(380)

 

Amounts reclassified from AOCL

 

 

5,764

 

 

 

 

5,764

 

Other comprehensive income (loss)

 

 

5,764

 

 

(380)

 

 

5,384

 

Balance at June 28, 2015

 

$

(401,788)

 

$

(9,431)

 

$

(411,219)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCL (in thousands)

 

Amount Reclassified from AOCL (in thousands)

 

 

 

    

Quarters Ended

 

Six Months Ended

    

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

Affected Line in the Condensed

AOCL Component

    

2015

    

2014

    

2015

 

2014

 

Consolidated Statements of 

Operations

Minimum pension and post-retirement liability

 

$

4,805

 

$

3,135

 

$

9,606

 

$

6,271

 

Compensation

 

 

 

(1,922)

 

 

(1,254)

 

 

(3,842)

 

 

(2,508)

 

Benefit for income taxes

 

 

$

2,883

 

$

1,881

 

$

5,764

 

$

3,763

 

Net of tax

 

Income Taxes

 

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

 

We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

 

Earnings Per Share (EPS)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

(shares in thousands)

 

2015

 

2014

 

2015

 

2014

 

Anti-dilutive stock options

    

5,749

    

1,612

    

5,304

 

1,659

 

 

8


 

Cash Flow Information

 

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

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 28,

 

June 29,

 

(in thousands)

 

2015

 

2014

 

Interest paid (net of amount capitalized)

    

$

41,515

    

$

61,198

 

Income taxes paid (net of refunds)

 

 

186,916

 

 

11,381

 

 

The income tax payments in the six months ended June 28, 2015, were primarily related to the gain on the sale of Classified Ventures, LLC (previous owned equity investment) in the fourth quarter of 2014, offset by the net of tax losses on bond repurchases in the fourth quarter of 2014.

 

Other non-cash investing activities from continuing operations, related to the recognition of an intangible asset for the six months ended June 29, 2014, were $3.1 million. Other non-cash investing activities from continuing operations as of June 28, 2015, and June 29, 2014, related to purchases of property, plant and equipment (“PP&E”) on credit, were $0.1 million and $0.4 million, respectively.

 

Recently Issued Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. It is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnotes disclosures in certain circumstances. It is effective for annual and interim periods beginning on or after December 15, 2016, with early adoption permitted. We do not believe the adoption of this guidance will have an impact on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-04, "Compensation – Retirement Benefits: Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets." ASU 2015-04 provides practical expedient, which permits a reporting entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. It is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. We do not believe the adoption of this guidance will have an impact on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement."  ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for service contracts. It is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

9


 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” It is effective for interim and annual reporting periods beginning after December 15, 2016. Amendment to the ASC should be applied prospectively with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

Effective December 29, 2014, we adopted the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” that was issued in April 2014.  ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective for annual and interim periods beginning on or after December 15, 2014. There were no other changes to the condensed consolidated financial statements.

 

Effective December 29, 2014, we adopted the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” that was issued in April 2015. ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of deferred charges.  It was effective for annual and interim periods beginning on or after December 15, 2015, however early adoption was permitted. As of June 28, 2015, and December 28, 2014, we reclassified unamortized debt issuance costs of $11.3 million and $12.1 million, respectively, from other assets to a reduction in long-term debt on the condensed consolidated balance sheet. There were no other changes to the condensed consolidated financial statements.

 

2.  INTANGIBLE ASSETS AND GOODWILL

 

As of June 28, 2015, intangible assets (primarily advertiser lists, subscriber lists and developed technology), mastheads and goodwill consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28,

 

Impairment

 

Amortization

 

June 28,

 

(in thousands)

    

2014

    

Charges

    

Expense

    

2015

 

Intangible assets subject to amortization

 

$

833,254

 

$

 -

 

$

 -

 

$

833,254

 

Accumulated amortization

 

 

(615,378)

 

 

 -

 

 

(24,215)

 

 

(639,593)

 

 

 

 

217,876

 

 

 -

 

 

(24,215)

 

 

193,661

 

Mastheads

 

 

193,039

 

 

(9,488)

 

 

 -

 

 

183,551

 

Goodwill

 

 

996,115

 

 

(290,941)

 

 

 -

 

 

705,174

 

Total

 

$

1,407,030

 

$

(300,429)

 

$

(24,215)

 

$

1,082,386

 

 

Impairment of Goodwill and Intangible Assets

 

We performed an interim testing of impairment of goodwill and intangible newspaper mastheads as of June 28, 2015, due to the continuing challenging business conditions and the resulting weakness in our stock price as of the end of our second quarter of 2015. The fair values of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the present value of expected future cash flows, using estimates, judgments and assumptions (see Note 1) that we believe were appropriate in the circumstances. As a result, we recorded a preliminary impairment charge in our “Southeast, Florida and the Midwest” reporting unit related to goodwill of $290.9 million and a preliminary intangible newspaper masthead impairment charge of $9.5 million in the quarter ended June 28, 2015, which are recorded in the goodwill and other asset impairments line item on our condensed consolidated statements of operations. The step 2 goodwill and the intangible asset impairment tests are not final, due to the significant amount of work required to calculate the implied fair value of goodwill and to value the intangible newspaper masthead assets. The significant judgments and estimates that are in process in the step 2 test include but are not limited to the valuation of property, plant and equipment and the valuation of other intangible assets. The preliminary analysis is subject to finalization, and will be completed in

10


 

the quarter ending September 27, 2015. We believe that the preliminary amounts computed under analysis of goodwill and intangible newspaper mastheads resulted in impairment charges that represent our best estimates; however, it is possible that material adjustments to the preliminary estimates may be required as the calculations are finalized.

 

Amortization expense with respect to intangible assets is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Six Months Ended

 

 

    

June 28,

    

June 29,

 

June 28,

 

June 29,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Amortization expense

 

 $

12,075

 

 $

14,359

 

 $

24,215

 

 $

28,672

 

 

The estimated amortization expense for the remainder of fiscal year 2015 and the five succeeding fiscal years is as follows: 

 

 

 

 

 

 

Amortization

 

 

Expense

Year

    

(in thousands)

2015 (Remainder)

    

 $

24,174

2016

 

 

47,986

2017

 

 

48,907

2018

 

 

47,275

2019

 

 

23,769

2020

 

 

418

 

3.  DIVESTITURE

 

On May 5, 2014, we completed the sale of the outstanding capital stock of Anchorage to an assignee of Alaska Dispatch Publishing, LLC for $34.0 million in cash. The financial results of Anchorage have been reported as discontinued operations on our condensed consolidated financial statements for all periods presented herein.

 

The following table summarizes the financial information for the Anchorage’s operations for the quarter and six months ended June 29, 2014:

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 29,

 

June 29,

 

(in thousands)

    

2014

 

2014

 

Revenues

 

$

2,622

 

$

9,071

 

Income from discontinued operations, before taxes

 

$

(446)

 

$

(48)

 

Income tax provision

 

 

(198)

 

 

(20)

 

Income from discontinued operations, net of tax, before loss on sale

 

$

(248)

 

$

(28)

 

 

 

 

 

 

 

 

 

Gain on sale of discontinued operations

 

$

5,474

 

$

5,474

 

Income tax provision

 

 

6,925

 

 

6,925

 

Loss on sale of discontinued operations, net of tax

 

 

(1,451)

 

 

(1,451)

 

Income from discontinued operations, net of tax

 

$

(1,699)

 

$

(1,479)

 

 

11


 

4.  INVESTMENTS IN UNCONSOLIDATED COMPANIES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

% Ownership

    

June 28,

    

December 28,

 

Company

    

Interest

    

2015

    

2014

 

CareerBuilder, LLC

 

15.0

 

$

235,543

 

$

226,965

 

Other

 

Various

 

 

3,910

 

 

3,508

 

 

 

 

 

$

239,453

 

$

230,473

 

 

During the six months ended June 28, 2015, our proportionate share of net income from certain investments listed in the table above was greater than 20% of our condensed consolidated net income (loss) before taxes. Summarized condensed financial information, as provided to us by these certain investees, is as follows:

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 28,

 

June 29,

(in thousands)

    

2015

    

2014

Net revenues

    

$

351,189

    

$

348,149

Gross profit

 

 

325,238

 

 

308,174

Operating income

 

 

64,065

 

 

55,634

Net income

 

 

61,416

 

 

55,256

 

Classified Ventures, LLC

 

On April 1, 2014, Classified Ventures, LLC sold its Apartments.com business for $585 million. Accordingly, during the second quarter ended June 29, 2014, we recorded our share of the net gain of $144.2 million, before taxes, as gains related to equity investments in condensed consolidated statements of operations. On April 1, 2014, we received a cash distribution of approximately $146.9 million from Classified Ventures, LLC, which is equal to our share of the net proceeds.

 

On October 1, 2014, we, along with Tribune Media Company, Graham Holdings Company and A.H. Belo Corporation (the “Selling Partners”) sold all of the Selling Partners’ ownership interests in Classified Ventures, LLC to Gannett Co., Inc. for a price that valued Classified Ventures, LLC at $2.5 billion. We recorded a gain on the sale of our ownership interest in Classified Ventures, LLC of $559.3 million, before taxes, during fourth quarter of fiscal year 2014. Our portion of the cash proceeds, net of transaction costs, was $631.8 million. Pursuant to the sale agreement, $25.6 million of net proceeds is being held in escrow until October 1, 2015. On October 1, 2014, we received our portion of the net cash proceeds, less the escrow, of $606.2 million. Upon the closing of the transaction, we entered into a new, five-year affiliate agreement with Cars.com that will allow us to continue to sell Cars.com products and services exclusively in our local markets.

 

Prior to the closing of the transaction, Classified Ventures, LLC distributed approximately $6.0 million to us, representing our portion of the related cash accumulated from earnings of Classified Ventures, LLC. In April 2015, we received a final cash distribution of $7.5 million pursuant to the sale agreement, representing cash accumulated from earnings from Classified Ventures, LLC, the payment for which was dependent on their collection of a contingent receivable. The amount was recorded as gains related to equity investments during the quarter ended June 28, 2015.

 

12


 

McClatchy-Tribune Information Services

 

On May 7, 2014, we transferred our partnership interest in McClatchy-Tribune Information Services (“MCT”) to TCA News Service, LLC (“TCA”) for cash and future newswire content. Concurrently with this transfer, we entered into a contributor agreement with MCT pursuant to which we both continue to be a contributor of newswire content to MCT for an agreed upon rate, and we will receive newswire content from MCT or its successor at no cost for approximately 10 years. During the second quarter of 2014, we recognized a $3.1 million intangible asset in the condensed consolidated balance sheets with respect to the value of the content we will receive from MCT at no cost under these agreements and a $1.7 million gain on sale of the equity investment in the gains related to equity investments in the condensed consolidated statements of operations.

 

CareerBuilder, LLC

On August 3, 2015, we received a cash distribution of $7.5 million from CareerBuilder, LLC. The amount will be recorded as a reduction to our carrying value on our condensed consolidated balance sheet during the quarter ended September 27, 2015.

 

 

5.  LONG-TERM DEBT

 

Our long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face Value at

 

Carrying Value

 

 

 

June 28,

 

June 28,

 

December 28,

 

(in thousands)

 

2015

 

2015

 

2014

 

Notes:

    

 

    

    

 

    

    

 

    

 

9.00% senior secured notes due in 2022

 

$

555,785

 

$

544,475

 

$

543,640

 

5.750% notes due in 2017

 

 

69,963

 

 

68,517

 

 

108,489

 

7.150% debentures due in 2027

 

 

89,188

 

 

84,273

 

 

84,076

 

6.875% debentures due in 2029

 

 

276,230

 

 

259,221

 

 

258,607

 

Long-term debt

 

$

991,166

 

$

956,486

 

$

994,812

 

 

Our outstanding notes are stated net of unamortized debt issuance costs and unamortized discounts, if applicable, totaling $34.7  million and $37.6  million as of June 28, 2015, and December 28, 2014, respectively.

 

Debt Repurchases and Loss on Extinguishment of Debt

 

During the quarter ended June 28, 2015, we repurchased $41.3 million of our 5.75% notes due in 2017 through a  privately negotiated transaction. We recorded a loss on extinguishment of debt of $0.9 million during the quarter and six months ended June 28, 2015. We repurchased these notes at par value and wrote off historical discounts. We had no debt repurchases during the quarter or six months ended June 29, 2014.