NOTE 2: DISCONTINUED OPERATIONS

Sale of Digital and Data Businesses—On December 19, 2016, the Company entered into a definitive share purchase agreement (the “Gracenote SPA”) with Nielsen Holding and Finance B.V. (“Nielsen”) to sell equity interests in substantially all of the Digital and Data business operations which includes Gracenote Inc., Gracenote Canada, Inc., Gracenote Netherlands Holdings B.V., Tribune Digital Ventures LLC and Tribune International Holdco, LLC (the “Gracenote Companies”) for $560 million in cash, subject to certain purchase price adjustments (the “Gracenote Sale”). The Company retained its ownership of Covers, which was previously included in the Digital and Data reportable segment, and reclassified Covers’ previously reported amounts into the Television and Entertainment reportable segment to conform to the current segment presentation; the impact of this reclassification was immaterial. The Gracenote Sale transaction was completed on January 31, 2017. The Company received gross proceeds of $581 million and expects to recognize a pretax gain as a result of the sale in the first quarter of 2017. On February 1, 2017, the Company used $400 million of proceeds from the Gracenote Sale to pay down a portion of its Term Loan Facility (as defined and described in Note 9).

As of December 31, 2016 and December 31, 2015, the assets and liabilities of the businesses included in the Gracenote Sale are classified as held for sale in the Company’s Consolidated Balance Sheets, and the operating results are presented as discontinued operations in the Company’s Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for all periods presented.

The Company entered into a transition services agreement (the “Nielsen TSA”) and certain other agreements with Nielsen that govern the relationships between Nielsen and the Company following the Gracenote Sale. Pursuant to the Nielsen TSA, the Company provides Nielsen with certain specified services on a transitional basis for a period of up to six months following the Gracenote Sale, including support in areas such as human resources, treasury, technology, legal and finance. In addition, the Nielsen TSA outlines the services that Nielsen provides to the Company on a transitional basis for a period of up to six months following the Gracenote Sale, including in areas such as human resources, technology, and finance and other areas where the Company may need assistance and information following the Gracenote Sale. The transition services agreements may be extended, in certain circumstances and for certain services, upon mutual agreement between the Company and Nielsen. The charges for the transition services generally allow the providing company to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the services, plus, in some cases, the allocated direct costs of providing the services, generally without profit. Based on the Company’s assessment of the specific factors identified in ASC Topic 205, “Presentation of Financial Statements,” the Company concluded that it will not have significant continuing involvement in the Gracenote Companies.

The following table represents the components of the results from discontinued operations associated with the Gracenote Sale as reflected in the Company’s Consolidated Statements of Operations (in thousands):



	Year Ended
	December 31, 2016			December 31, 2015			December 28, 2014
Operating revenues	$	225,903		$	209,964		$	168,734
Direct operating expenses	75,457			59,789			56,566
Selling, general and administrative	110,713			104,968			86,833
Depreciation	13,584			9,735			7,744
Amortization	29,999			28,826			21,233
Operating (loss) profit	(3,850		)	6,646			(3,642		)
Interest income	96			109			104
Interest expense (1)	(15,317		)	(15,843		)	(16,237		)
Gain on investment transaction	—			—			700
Other non-operating gain, net	—			912			—
Loss before income taxes	(19,071		)	(8,176		)	(19,075		)
Income tax expense (benefit) (2)	53,723			(3,595		)	(5,567		)
Loss from discontinued operations, net of taxes	$	(72,794	)	$	(4,581	)	$	(13,508	)

(1)

The Company used $400 million of proceeds from the Gracenote Sale to pay down a portion of its outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 9). Interest expense associated with the Company’s outstanding Term Loan Facility was allocated to discontinued operations based on the ratio of the $400 million prepayment to the total outstanding indebtedness under the Term Loan Facility in effect in each respective period.

(2) In the fourth quarter of 2016, as a result of meeting all criteria under ASC Topic 205 to classify Gracenote Companies as discontinued operations, the Company recorded tax expense of $62 million to increase the Company’s deferred tax liability for the outside basis difference related to the Gracenote Companies included in the Gracenote Sale. This charge was required to be recorded in the period the Company signed a definitive agreement to divest the business. Exclusive of this $62 million charge, the effective tax rates on pretax income from discontinued operations was 45.0%, 44.0%, and 29.2% for the years ended December 31, 2016, December 31, 2015, and December 28, 2014, respectively. These rates differ from the U.S. federal statutory rate of 35% primarily due to state income taxes (net of federal benefit), foreign tax rate differences, and the impact of certain nondeductible transaction costs and other adjustments.

The results of discontinued operations also include transactions costs, including legal and professional fees incurred by the Company to complete the Gracenote Sale, of $3 million for each of years ended December 31, 2016 and December 31, 2015 and $6 million for year ended December 28, 2014. The Company expects to incur additional transaction costs in the first quarter of 2017.

The following is a summary of the assets and liabilities classified as held for sale in connection with the Gracenote Sale (in thousands):



	December 31, 2016		December 31, 2015
Carrying Amounts of Major Classes of Current Assets Included as Part of Discontinued Operations
Cash and cash equivalents	$	12,751	$	14,824
Accounts receivable, net	38,727		49,751
Prepaid expenses and other	11,127		8,123
Total current assets held for sale	62,605		72,698

Carrying Amounts of Major Classes of Non-Current Assets Included as Part of Discontinued Operations
Property, plant and equipment, net	49,348		42,287
Goodwill	333,258		333,588
Other intangible assets, net	219,287		250,197
Other long-term assets	6,260		6,370
Total non-current assets held for sale (1)	608,153		632,442
Total Assets Classified as Held For Sale in the Consolidated Balance Sheets	$	670,758	$	705,140

Carrying Amounts of Major Classes of Current Liabilities Included as Part of Discontinued Operations
Accounts payable	$	6,237	$	6,522
Employee compensation and benefits	17,011		14,973
Deferred revenue	27,113		29,972
Accrued expenses and other current liabilities	3,923		8,495
Total current liabilities held for sale	54,284		59,962

Carrying Amounts of Major Classes of Non-Current Liabilities Included as Part of Discontinued Operations
Deferred income taxes	89,029		93,326
Postretirement, medical, life and other benefits	2,786		2,842
Other obligations	3,499		3,455
Total non-current liabilities held for sale	95,314		99,623
Total Liabilities Classified as Held For Sale in the Consolidated Balance Sheets	$	149,598	$	159,585

Net Assets Classified as Held for Sale	$	521,160	$	545,555


(1)	Excludes $17 million and $206 million as of December 31, 2016 and December 31, 2015, respectively related to real estate assets held for sale. See Note 6 for further details.

The Gracenote SPA provides for indemnification against specified losses and damages which became effective upon completion of the transaction. The Company’s potential future liability under such provisions is uncertain. The Company does not expect to incur material costs in connection with these indemnifications. The Company has no material contingent liabilities relating to the Gracenote Sale as of December 31, 2016.



	2016			2015			2014
Significant operating non-cash items:
Stock-based compensation	$	4,196		$	2,239		$	1,641
Depreciation	13,584			9,735			7,744
Amortization	29,999			28,826			21,233

Significant investing items(1):
Acquisitions, net of cash acquired	—			(58,996		)	(246,051		)
Capital expenditures	23,548			23,626			13,102

Significant financing items(1):
Settlements of contingent consideration, net	(3,636		)	1,174			—


(1)	Non-cash investing and financing activities of Digital and Data businesses included in the Gracenote Sale were immaterial.

Spin-Off of Publishing Businesses—On August 4, 2014, the Company completed the spin-off of its principal publishing operations into an independent company, tronc, Inc. (“tronc”) (formerly Tribune Publishing Company), by distributing 98.5% of the outstanding shares of tronc common stock to holders of the Company’s Common Stock and Warrants (the “Publishing Spin-off”). In the distribution, each holder of the Company’s Class A Common Stock, Class B Common Stock and Warrants received 0.25 of a share of tronc common stock for each share of Common Stock or Warrant (as defined and described in Note 3) held as of the record date of July 28, 2014. Based on the number of shares of Common Stock and Warrants outstanding as of 5:00 P.M. Eastern time on July 28, 2014 and the distribution ratio, 25,042,263 shares of tronc common stock were distributed to the Company stockholders and holders of Warrants and the Company retained 381,354 shares of tronc common stock, representing 1.5% of outstanding common stock of tronc. Subsequent to the distribution, tronc became a separate publicly-traded company with its own board of directors and senior management team. Shares of tronc common stock are listed on the Nasdaq Global Select Market under the symbol “TRNC.” For further information regarding the Publishing Spin-off, see the registration statement on Form 10, as amended, filed by tronc with the SEC on July 21, 2014 and declared effective by the SEC on July 21, 2014.

The historical results of operations for the businesses included in the Publishing Spin-off are presented in discontinued operations in the Company’s Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for the year ended December 28, 2014.

The Company received a private letter ruling (“PLR”) from the Internal Revenue Service (“IRS”) which provides that the distribution and certain related transactions qualified as tax-free to the Company, tronc and the Company’s stockholders and warrantholders for U.S. federal income tax purposes. Although a PLR from the IRS generally is binding on the IRS, the PLR does not rule that the distribution satisfies every requirement for a tax-free distribution, and the parties relied on the opinion of the Company’s special tax counsel that such additional requirements have been satisfied.

In connection with the Publishing Spin-off, the Company received a $275 million cash dividend from tronc utilizing borrowings of $350 million under a senior secured credit facility entered into by tronc prior to the Publishing Spin-off. The full amount of the $275 million cash dividend was used to repay $275 million of outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 9). All of the outstanding borrowings under the tronc senior term loan facility were distributed to tronc in connection with the Publishing Spin-off.

The Company entered into a separation and distribution agreement, a tax matters agreement, a transition services agreement (the “TSA”), an employee matters agreement and certain other agreements with tronc that govern the relationships between tronc and the Company following the Publishing Spin-off.

Separation and Distribution Agreement

The separation and distribution agreement with tronc sets forth the key provisions relating to the separation of tronc and its related businesses from those of the Company and the distribution of 98.5% of the shares of tronc common stock to holders of Common Stock and Warrants. The separation and distribution agreement identifies the entities and assets to be transferred to, and the liabilities and contracts to be assumed by, tronc or the Company, as applicable, in the separation, and describes when and how these transfers and assumptions will occur.

The separation and distribution agreement also provides that, subject to certain exceptions, tronc and the Company will indemnify each other and certain related parties, from and against any and all damages, losses, liabilities, and expenses relating to, arising out of, or resulting from, among other things: (i) their respective businesses, their assets and liabilities and their subsidiaries’ assets and liabilities (in the case of tronc, after giving effect to the separation and distribution); (ii) their failure or the failure of certain related persons to discharge any of their, or their subsidiaries’, respective liabilities (in the case of tronc, after giving effect to the separation and distribution or any obligation arising out of the publishing business or its assets); and (iii) a breach by the other party of the separation and distribution agreement or the various ancillary agreements.

Tax Matters Agreement

The Company entered into a tax matters agreement with tronc that governs the respective rights, responsibilities and obligations of the Company and tronc following the distribution with respect to taxes, including the Company’s and tronc’s obligations to file tax returns and remit taxes, control over tax contests and the Company’s and tronc’s obligations to cooperate after the distribution in tax return preparation and record-keeping matters.

The tax matters agreement generally provides that the Company will be responsible for all taxes (other than taxes on the distribution and related transactions) for periods before the distribution that are reportable on any tax return that includes the Company or one of its non-tronc subsidiaries, and tronc or one of its subsidiaries will be responsible for all such taxes reportable on any tax return that includes tronc or its subsidiaries but does not include any non-tronc subsidiaries. The Company retains responsibility for all taxes relating to the formation of and the time during which the Company owned an interest in Newsday Holdings LLC.

The tax matters agreement also provides for certain restrictions on tronc’s ability to pursue strategic or other transactions, or to take certain actions, in order to preserve the tax-free status of the distribution. The tax matters agreement further provides that tronc and certain tronc subsidiaries will indemnify the Company for (i) taxes on the distribution and related transactions resulting from (A) any of their actions (or failures to take certain actions) that disqualify the distribution and related transactions as tax-free or (B) any issuance of stock by tronc or any of its affiliates or change in ownership of any such entities (other than changes in ownership solely caused by the Company) that would cause Section 355(d), Section 355(e) or Section 355(f) of the IRC to apply to the distribution, (ii) taxes on the distribution and related transactions resulting from the disqualification of the distribution due to breaches by tronc of representations and covenants contained in the tax matters agreement and (iii) taxes of tronc attributable to the tronc business for which the Company is not otherwise responsible and that are not related to the distribution or any related transaction. The Company will indemnify tronc for (i) taxes of the Company and (ii) taxes of tronc resulting from the distribution and related transactions unless, in each case, tronc or certain tronc subsidiaries are otherwise responsible for such taxes as described above. However, if the distribution is taxable as a result of certain actions by both parties, the liability for such taxes is shared equally between the Company and tronc.

Employee Matters Agreement

The Company and tronc entered into an employee matters agreement that addresses the treatment of employees and former employees of each of the Company and tronc with respect to their participation in employee benefit plans that existed prior to the distribution or that tronc established in connection with or following the distribution, as well as certain other human resources matters relating to employee programs and labor contracts. In general, except for certain pension matters, tronc retained all liabilities with respect to the employment of all their employees and former employees (other than employees of discontinued businesses) and the Company retained all liabilities pertaining to other current or former employees, including liabilities arising with respect to benefit plans prior to the distribution. Notwithstanding the foregoing, the Company retained all liabilities relating to Company-sponsored defined benefit pension plans but did not retain any liabilities relating to tronc’s employees’ participation in multiemployer pension plans. The employee matters agreement also addresses the treatment of equity compensation for employees of both companies in connection with the distribution. See Note 16 for further information on the impact of the Publishing Spin-off on the Company’s equity incentive plan.

The results of discontinued operations for the year ended December 28, 2014 includes the historical results of tronc prior to the Publishing Spin-off on August 4, 2014. Summarized results of the Company’s discontinued operations and the impact of associated Publishing Spin-off adjustments are as follows (in thousands):



	2014 (1)
Operating revenues	$	970,501
Operating profit	38,712
Loss on equity investments, net	(626		)
Interest expense (2)	(6,837		)
Gain on investment transactions	1,484
Reorganization items, net	(9		)
Income before income taxes	32,724
Income tax expense (3)	19,172
Income from discontinued operations, net of taxes	$	13,552


(1)	Results of operations for the tronc businesses are reflected through August 4, 2014, the date of the Publishing Spin-off.

(2)

In connection with the Publishing Spin-off, the Company received a $275 million cash dividend from tronc utilizing borrowings of $350 million under a senior secured credit facility entered into by tronc prior to the Publishing Spin-off. The full amount of the $275 million cash dividend was used to repay $275 million of outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 9). Interest expense associated with the Company’s outstanding debt was allocated to discontinued operations based on the ratio of the $275 million cash dividend received from tronc to the total outstanding indebtedness under the outstanding credit facilities in effect in each respective period prior to the Publishing Spin-off and totaled $7 million for the year ended December 28, 2014.


(3)	The effective tax rate on pretax income from discontinued operations was 58.6% for the year ended December 28, 2014. This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes (net of federal benefit) and the impact of certain nondeductible transaction costs.

The results of discontinued operations for the year ended December 28, 2014 also includes $23 million of transaction costs, including legal and professional fees, incurred by the Company to complete the Publishing Spin-off.

In conjunction with the Company’s emergence from bankruptcy, the Company consummated an internal restructuring pursuant to the terms of the Plan (as defined and described in Note 3). These restructuring transactions included, among other things, establishing a number of real estate holding companies. On December 21, 2012, the majority of the land and buildings owned by tronc were transferred to these newly established real estate holding companies. In 2013, tronc entered into lease agreements with the real estate holding companies to lease back certain land and buildings that were transferred. The initial term of these lease agreements was either five or ten years, with two optional renewal terms. Prior to the Publishing Spin-off, the revenues and expenses related to these lease agreements were treated as intercompany transactions and were not separately reflected in the Company’s consolidated financial statements. The real estate holding companies were not included in the Publishing Spin-off. Subsequent to the Publishing Spin-off, the Company has reclassified the historical intercompany rental revenues related to these leases for 2014 totaling $24 million into other revenues as an increase to income (loss) from continuing operations in the Company’s Consolidated Statements of Operations due to the continuing lease arrangements between the Company and tronc following the Publishing Spin-off. Similarly, the historical intercompany rental costs incurred by tronc in 2014 under these leases have been reclassified as a reduction of (loss) income from discontinued operations, net of taxes in the Company’s Consolidated Statements of Operations. Subsequent to the Publishing Spin-off, all rental revenues earned by the Company under these leases with tronc are reflected as other revenues in the Company’s Consolidated Statements of Operations. As of the date of the Publishing Spin-off, the Company allocated approximately $2 million of accumulated other comprehensive loss to tronc, relating primarily to post-retirement medical and life insurance benefits. The Company has no material contingent liabilities relating to the discontinued operations subsequent to the date of the Publishing Spin-off.