mni_Current_Folio_10Q

Table of Contents

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:  March 31, 2019

 

or

 

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

 

 

For the transition period from                      to                     

 Commission file number: 1-9824

 

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

 

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

52-2080478

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

2100 “Q” Street, Sacramento, CA

 

95816

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

 

(916)  321-1844

 

 

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑  No ◻

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes ☑  No ◻

 

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

 

 

 

 

 

 

 

 

Large accelerated filer ◻

Accelerated filer ☑

Non-accelerated filer ◻

 

Smaller reporting company ☑

Emerging growth company ◻

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).    Yes ◻  No ☑

 

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

 

 

 

 

 

Title of each class

 

Ticker Symbol

 

Name of each exchange on which registered

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

 

MNI

 

NYSE American LLC

 

As of May 3, 2019, the registrant had shares of common stock as listed below outstanding:

 

 

 

Class A Common Stock

5,496,942

Class B Common Stock

2,428,191

 

 

 


 

Table of Contents

 

THE MCCLATCHY COMPANY

 

TABLE OF CONTENTS

 

 

 

 

 

PART I – FINANCIAL INFORMATION 

1

 

 

 

Item 1. 

Financial Statements

1

 

 

 

Item 2. 

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

23

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4. 

Controls and Procedures

31

 

 

 

 

 

 

PART II – OTHER INFORMATION 

32

 

 

 

Item 1. 

Legal Proceedings

32

 

 

 

Item 1A. 

Risk Factors

32

 

 

 

Item 6. 

Exhibits

32

 

 

 

 

 

 

SIGNATURES 

33

 

 

 

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31,

 

April 1,

 

 

    

2019

 

2018

 

REVENUES — NET:

 

 

 

 

 

 

 

Advertising

 

$

85,195

 

$

99,887

 

Audience

 

 

83,112

 

 

86,278

 

Other

 

 

12,017

 

 

12,693

 

 

 

 

180,324

 

 

198,858

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Compensation

 

 

69,435

 

 

79,212

 

Newsprint, supplements and printing expenses

 

 

11,696

 

 

13,659

 

Depreciation and amortization

 

 

17,518

 

 

19,233

 

Other operating expenses

 

 

88,204

 

 

89,649

 

Other asset write-downs

 

 

739

 

 

59

 

 

 

 

187,592

 

 

201,812

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(7,268)

 

 

(2,954)

 

 

 

 

 

 

 

 

 

NON-OPERATING INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest expense

 

 

(20,044)

 

 

(18,896)

 

Equity loss in unconsolidated companies, net

 

 

(629)

 

 

(1,268)

 

Loss on extinguishment of debt, net

 

 

 —

 

 

(5,349)

 

Retirement benefit expense

 

 

(10,727)

 

 

(2,778)

 

Other — net

 

 

150

 

 

176

 

 

 

 

(31,250)

 

 

(28,115)

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(38,518)

 

 

(31,069)

 

Income tax expense

 

 

3,438

 

 

7,872

 

NET LOSS

 

$

(41,956)

 

$

(38,941)

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

 

$

(5.34)

 

$

(5.04)

 

Diluted

 

$

(5.34)

 

$

(5.04)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

Basic

 

 

7,858

 

 

7,721

 

Diluted

 

 

7,858

 

 

7,721

 

 

See notes to the condensed consolidated financial statements.

 

 

1


 

Table of Contents

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited; amounts in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31,

 

April 1,

 

 

    

2019

 

2018

 

NET LOSS

 

$

(41,956)

 

$

(38,941)

 

OTHER COMPREHENSIVE INCOME (LOSS): 

 

 

 

 

 

 

 

Pension and post retirement plans: (1)

 

 

 

 

 

 

 

Change in pension and post-retirement benefit plans

 

 

22,552

 

 

5,550

 

Other comprehensive income

 

 

22,552

 

 

5,550

 

Comprehensive loss

 

$

(19,404)

 

$

(33,391)

 

_____________________

(1) There is no income tax benefit associated with the three months ended March 31, 2019, or April 1, 2018, due to the recognition of a valuation allowance.    

 

See notes to the condensed consolidated financial statements.

 

 

2


 

Table of Contents

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 30,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,378

 

$

21,906

 

Trade receivables (net of allowances of $2,542 and $3,008) 

 

 

57,747

 

 

81,709

 

Other receivables

 

 

10,093

 

 

12,198

 

Newsprint, ink and other inventories

 

 

9,648

 

 

9,115

 

Assets held for sale

 

 

17,591

 

 

9,920

 

Other current assets

 

 

20,092

 

 

15,505

 

 

 

 

132,549

 

 

150,353

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

221,008

 

 

233,692

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

131,546

 

 

143,347

 

Goodwill

 

 

705,174

 

 

705,174

 

 

 

 

836,720

 

 

848,521

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

3,384

 

 

3,888

 

Operating lease right-of-use assets

 

 

49,579

 

 

 —

 

Other assets

 

 

57,496

 

 

58,847

 

 

 

 

110,459

 

 

62,735

 

 

 

$

1,300,736

 

$

1,295,301

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

4,321

 

$

4,312

 

Accounts payable

 

 

30,724

 

 

37,521

 

Accrued pension liabilities

 

 

11,510

 

 

11,510

 

Accrued compensation

 

 

23,201

 

 

20,481

 

Income taxes payable

 

 

9,795

 

 

6,535

 

Unearned revenue

 

 

58,693

 

 

58,340

 

Accrued interest

 

 

12,506

 

 

26,037

 

Financing obligation

 

 

10,484

 

 

10,417

 

Current portion of operating lease liabilities

 

 

8,359

 

 

 —

 

Other accrued liabilities

 

 

4,203

 

 

5,385

 

 

 

 

173,796

 

 

180,538

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

635,819

 

 

633,383

 

Deferred income taxes

 

 

20,907

 

 

20,775

 

Pension and postretirement obligations

 

 

641,055

 

 

655,310

 

Financing obligations

 

 

107,139

 

 

108,252

 

Operating lease liabilities

 

 

50,798

 

 

 —

 

Other long-term obligations

 

 

31,873

 

 

38,708

 

 

 

 

1,487,591

 

 

1,456,428

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 5,552,913 shares and 5,384,303 shares)

 

 

55

 

 

53

 

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

 

 

24

 

 

24

 

Additional paid-in-capital

 

 

2,217,342

 

 

2,216,681

 

Accumulated deficit

 

 

(1,996,065)

 

 

(1,954,132)

 

Treasury stock at cost, 58,889 shares and 252 shares

 

 

(270)

 

 

(2)

 

Accumulated other comprehensive loss

 

 

(581,737)

 

 

(604,289)

 

 

 

 

(360,651)

 

 

(341,665)

 

 

 

$

1,300,736

 

$

1,295,301

 

 

See notes to the condensed consolidated financial statements.

 

 

 

 

3


 

Table of Contents

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited; amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

April 1,

 

 

    

2019

    

2018

    

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

 

    

 

 

 

Net loss

 

$

(41,956)

 

$

(38,941)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,518

 

 

19,233

 

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

 

 

(43)

 

 

(3,016)

 

Retirement benefit expense

 

 

10,727

 

 

2,778

 

Stock-based compensation expense

 

 

663

 

 

741

 

Deferred income taxes

 

 

132

 

 

 —

 

Equity loss in unconsolidated companies

 

 

629

 

 

1,268

 

Distributions of income from investments in unconsolidated companies

 

 

 —

 

 

56

 

Loss on extinguishment of debt, net

 

 

 —

 

 

5,349

 

Other asset write-downs

 

 

739

 

 

59

 

Bond fees and other debt-related items

 

 

2,547

 

 

725

 

Other

 

 

(2,410)

 

 

(2,494)

 

Changes in certain assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

23,962

 

 

23,458

 

Inventories

 

 

(533)

 

 

(1,077)

 

Other assets

 

 

(1,492)

 

 

(1,713)

 

Accounts payable

 

 

(6,671)

 

 

(1,485)

 

Accrued compensation

 

 

2,720

 

 

994

 

Income taxes

 

 

3,260

 

 

7,784

 

Accrued interest

 

 

(13,531)

 

 

4,272

 

Other liabilities

 

 

(1,973)

 

 

221

 

Net cash provided by (used in) operating activities

 

 

(5,712)

 

 

18,212

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(259)

 

 

(2,088)

 

Proceeds from sale of property, plant and equipment and other

 

 

147

 

 

3,708

 

Contributions to cost and equity investments

 

 

(125)

 

 

(500)

 

Net cash provided by (used in) investing activities

 

 

(237)

 

 

1,120

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repurchase of notes and related expenses

 

 

 —

 

 

(99,284)

 

Payment of financing costs

 

 

(28)

 

 

 —

 

Purchase of treasury shares

 

 

(268)

 

 

(307)

 

Other

 

 

(283)

 

 

848

 

Net cash used in financing activities

 

 

(579)

 

 

(98,743)

 

Decrease in cash, cash equivalents and restricted cash

 

 

(6,528)

 

 

(79,411)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

50,555

 

 

131,354

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD 

 

$

44,027

 

$

51,943

 

 

See notes to the condensed consolidated financial statements

4


 

Table of Contents

 

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) 

(Unaudited; amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

$.01 par

 

$.01 par

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury

 

 

 

 

 

 

value

 

value

 

Capital

 

Deficit

 

Income (Loss)

 

Stock

 

Total

 

Balance at December 30, 2018

 

$

53

 

$

24

 

$

2,216,681

 

$

(1,954,132)

 

$

(604,289)

 

$

(2)

 

$

(341,665)

 

Net loss

 

 

 

 

 

 

 

 

(41,956)

 

 

 

 

 

 

(41,956)

 

Cumulative effect adjustment of Topic 842

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

23

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

22,552

 

 

 

 

22,552

 

Issuance of 168,610 Class A shares under stock plans

 

 

 2

 

 

 

 

(2)

 

 

 

 

 

 

 

 

 —

 

Stock compensation expense

 

 

 

 

 

 

663

 

 

 

 

 

 

 

 

663

 

Purchase of 58,637 shares of treasury stock

 

 

 —

 

 

 

 

 —

 

 

 

 

 

 

(268)

 

 

(268)

 

Balance at March 31, 2019

 

$

55

 

$

24

 

$

2,217,342

 

$

(1,996,065)

 

$

(581,737)

 

$

(270)

 

$

(360,651)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

$.01 par

 

$.01 par

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury

 

 

 

 

 

value

 

value

 

Capital

 

Deficit

 

Income (Loss)

 

Stock

 

Total

Balance at December 31, 2017

 

$

52

 

$

24

 

$

2,215,109

 

$

(1,970,097)

 

$

(449,369)

 

$

(51)

 

$

(204,332)

Cumulative effect adjustment of Topic 606

 

 

 

 

 

 

 

 

(2,668)

 

 

 

 

 

 

(2,668)

Net loss

 

 

 

 

 

 

 

 

(38,941)

 

 

 

 

 

 

(38,941)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

5,550

 

 

 

 

5,550

Issuance of 94,184 Class A shares under stock plans

 

 

 1

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 —

Stock compensation expense

 

 

 

 

 

 

741

 

 

 

 

 

 

 

 

741

Purchase of 33,805 shares of treasury stock

 

 

 —

 

 

 

 

 —

 

 

 

 

 

 

(307)

 

 

(307)

Balance at April 1, 2018

 

$

53

 

$

24

 

$

2,215,849

 

$

(2,011,706)

 

$

(443,819)

 

$

(358)

 

$

(239,957)

 

See notes to the condensed consolidated financial statements

 

 

 

5


 

Table of Contents

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

 

1.  BUSINESS AND BASIS OF ACCOUNTING

 

The McClatchy Company (“Company,” “we,” “us” or “our”) provides strong, independent local journalism to 30 communities with operations in 14 states, as well as selected national news coverage through our Washington D.C. based bureau. We also provide a full suite of digital marketing services, both through our local sales teams based in the communities we serve, as well as through excelerate®, our national digital marketing agency. We are a publisher of brands such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the Fort Worth Star-Telegram

 

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

 

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2018 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the first-quarter periods.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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. 

 

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Table of Contents

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.  As of March 31, 2019, and December 30, 2018, the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.

 

Long-term debt.  At March 31, 2019, the carrying value and the estimated fair value of our 2026 Notes (as defined in Note 6) was $287.8 million and $303.9 million, respectively. As of December 30, 2018, the carrying value and the estimated fair value of the 2026 Notes, including the current portion of long-term debt, was $287.2 million and $302.4 million, respectively. The fair value of our long-term debt described above was determined using quoted market prices. 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 March 31, 2019, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes (as defined in Note 6), was $352.3 million and $324.7 million, respectively. At December 30, 2018, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes, was $350.4 million and $296.5 million, respectively. Market evidence was not available or reliable to value our Debentures, Junior Term Loan and 2031 Notes. The fair value was based on the net present value of the future cash flows using interest rates derived from market inputs and a Treasury yield curve in effect at March 31, 2019. These are considered to be Level 3 inputs under the fair value measurements and disclosure guidance and may not be representative of actual value.

 

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

 

Newsprint, ink and other inventories

 

Newsprint, ink and other inventories are stated at the lower of cost (based principally on the first‑in, first‑out method) and net realizable value.

Assets Held for Sale

 

As of March 31, 2019, six of our properties are classified as assets held for sale. During the three months ended March 31, 2019, we began to actively market for sale the land and buildings at three of our media companies. In connection with classifying these assets as assets held for sale, the carrying value of the land and building at one of the properties was reduced to its estimated fair value less selling costs, as determined based on the current market conditions and the estimated selling price. As a result, an impairment charge of $0.7 million was recorded during the three months ended March 31, 2019, and is included in other asset write-downs on our condensed consolidated statement of operations.

 

Property, Plant and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

April 1,

(in thousands)

 

2019

 

2018

Depreciation expense

 

$

5,717

 

$

7,197

 

 

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Goodwill and Intangible Assets

 

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. We perform this testing on our operating segments, which are also considered our reporting units. An impairment loss 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 an equal weighting of a market approach and an income approach. We use market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a reporting unit (market approach). We also estimate fair value using discounted projected cash flow analysis (income approach). This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, the long‑term rate of growth for our business, and the determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

 

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

 

Long‑lived assets such as intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group.

 

We considered the estimates and assumptions used to test goodwill as of December 30, 2018, and determined that there were no material changes that would require an interim test of goodwill, masthead or long-lived assets. We had no impairment of goodwill, newspaper mastheads or long-lived assets during the three months ended March 31, 2019 or April 1, 2018. In 2018, we recorded intangible newspaper masthead impairment charges of $14.1 million in the third quarter of 2018 and $37.2 million for the full year ending December 30, 2018.

 

Investments in Unconsolidated Companies

 

We acquire equity investments that have the potential to promote business and strategic objectives. We account for non-marketable equity and other equity investments for which we do not have control over the investees as:

 

·

Equity method investments when we have the ability to exercise significant influence, but not control, over the equity investment.

·

Non-marketable cost method investments when the equity method does not apply.

 

Under the cost method, our share of earnings or losses of such investee companies is not included in the condensed consolidated balance sheet and statements of operations. However, impairment charges are recognized in the condensed consolidated statement of operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded. There was no impairment of our investments in unconsolidated companies at March 31, 2019, or April 1, 2018.

 

Financing Obligations

 

Financing obligations consist of contributions of real properties to the qualified pension plan (“Pension Plan”) in 2016 and 2011, real property previously owned by The Sacramento Bee in Sacramento, California that was sold and leased back during the third quarter of 2017, and real property previously owned by The State in Columbia, South Carolina that we sold and leased back during the second quarter of 2018.

 

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Segment Reporting

 

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

 

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.

 

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

 

We perform our assessment of the deferred tax assets quarterly, weighing the positive and negative evidence as outlined in ASC 740-10, Income Taxes. As we have incurred three years of cumulative pre-tax losses, such objective negative evidence limits our ability to give significant weight to other positive subjective evidence, such as projections for future growth and profitability. As of December 30, 2018, our valuation allowance against a majority of our deferred tax assets was $143.8 million. For the three months ended March 31, 2019, we recorded a valuation allowance charge of $9.2 million, which is recorded in income tax expense on our condensed consolidated statements of operations. Our valuation allowance as of March 31, 2019, was $153.0 million.

 

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

 

Current generally accepted accounting principles prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. We also evaluate any uncertain tax positions and recognize a liability for the tax benefit associated with an uncertain tax position if it is more likely than not that the tax position will not be sustained on examination by the taxing authorities upon consideration of the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We record a liability for uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs.  We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (“Topic 842”) which replaces the existing guidance in ASC 840, “Leases.” Topic 842 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous

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guidance. The original Topic 842 guidance required application on a modified retrospective basis with the earliest period being presented in accordance with Topic 842. In August 2018, the FASB issued ASU 2018-11, “Targeted Improvements to ASC 842”, which included an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application of transition, which we elected. We adopted Topic 842 as of December 31, 2018, without restating periods prior to the adoption date using a modified retrospective transition method.

 

As a result of the adoption of Topic 842, on December 31, 2018, we recorded operating lease right-of-use (“ROU”) assets of $51.6 million and lease liabilities of $61.2 million. Finance leases were not impacted by the adoption of Topic 842, as capital lease liabilities and the corresponding assets were already recorded in the balance sheet under the ASC 840 guidance. The adoption of Topic 842 had an inconsequential impact on our condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three-month period ended March 31, 2019.

 

The new standard provides a number of optional practical expedients that we adopted. We elected the “package of practical expedients” which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides expedients for our ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualified, we did not recognize ROU assets or liabilities. We also elected the practical expedient allowing us to combine lease and non-lease components for our real estate leases.

 

Additional information and disclosures required by this new standard are contained in Note 4.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based upon a broad set of information to include historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In 2018, the FASB issued additional guidance update 2018-19 which clarifies the scope of the guidance was not meant to include receivables arising from operating leases. ASU 2016-13 and the subsequent update are  effective for us for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2018. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-02 adds, removes and modifies various disclosure requirements within Topic 820. It is effective for us for interim and annual reporting periods beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plan-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU 2018-14 adds, removes or clarifies various disclosure requirements within guidance. It is effective for us for annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal -Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It is effective for us for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

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3. REVENUES

 

Revenue Recognition

 

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

 

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

 

Advertising Revenues

 

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

 

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

 

In addition to the advertising sold on a CPM basis, we also sell monthly marketing campaigns to some of our clients. Monthly marketing campaigns include multiple products some of which are sold on a CPM basis and others – like reputation management and search engine optimization – which are not.  The contracted goods and services offered as part of monthly marketing campaigns are performed over the specific contract terms and the transfer of the performance obligation occurs as the benefits are consumed by the customer. As such, revenue is recognized daily regardless of the performance obligations classification of timing of being point in time or overtime.

 

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

 

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

 

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

 

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

 

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Audience Revenues

 

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

 

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

 

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

 

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

 

Other Revenues

 

The largest revenue streams within other revenues are for commercial printing and distribution. The commercial print agreements are between us and third-party publishers to print and make available for distribution their finished products. Commercial print contracts are for a daily finished product and each day’s product is unique, or a separate performance obligation.  Revenue is recorded at a point in time upon completion of each day’s print project.

 

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

 

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

 

Arrangements with Multiple Performance Obligations

 

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its standalone selling price. We generally determine standalone selling prices for audience revenue contracts based upon observable market values and the adjusted market assessment. For advertising revenue contracts with multiple performance obligations, stand-alone selling price is based on the prices charged to customers or on an adjusted market assessment.

 

Unearned Revenues

 

We record unearned revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the unearned revenue balance for the three months ended March 31, 2019,  reflects cash payments received or due in advance of satisfying our performance obligations, partially offset by $35.9 million of revenues recognized that were included in the unearned revenue balance as of December 30, 2018.  

 

Our payment terms vary for advertising and subscriber customers. Subscribers generally pay in advance of up to one year. Advertiser payments are due within 30 days of invoice issuance and therefore amounts paid in advance are not significant.

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For advertisers that are considered to be at a higher risk of collectability due to payment history or credit processing, we require payment before the products or services are delivered to the customer. 

 

 

4.  LEASES

 

We determine if a contract is a lease at the inception of the arrangement. If an operating lease is identified, it is classified as one of three asset classes: building and land, vehicles or equipment. We lease space under non-cancelable operating leases for general office facilities, distribution centers, a training center and a call center. We also have operating leases for vehicles that consist mainly of tractor trailers and box trucks to transport newspapers from printing facilities to distribution centers, as well as office equipment consisting mostly of copiers.

 

Certain leases have rent holidays or leasehold improvement incentives which account for the difference between the ROU assets and the lease liabilities. Many of our leases include lease components (e.g., fixed rent payments) and non-lease components (e.g., common-area or other maintenance costs, utilities, or other lease costs imposed) which are accounted for as a single lease component, because we have elected the practical expedient to group lease and non-lease components for all leases.

 

None of our leases contain contingent rent provisions or concessions, residual value guarantees or restrictive covenants. Our leases have remaining terms of less than one year to 9 years, except for one parking lot lease with 43 years remaining.

 

Some of our distribution center, vehicle, and equipment leases have a combination of cancelable month-to-month lease terms and non-cancelable lease terms of less than one year. We have elected the practical expedient to exclude these short-term leases from our ROU assets and lease liabilities.

 

Most leases include escalating lease payments and one or more options to renew or terminate the lease. The exercise of lease renewal options is typically at our sole discretion; therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

 

We have one financing lease for office furniture and fixtures located at one of our office facilities. The total financing lease payments are calculated to be approximately $1.1 million as of both March 31, 2019, and December 30, 2018, respectively. As of March 31, 2019, the payments run over the course of the remaining 6.58 years and are not material to the future lease payments schedules presented below. The finance lease asset is recorded within the other assets, line item of the condensed consolidated balance sheet. The finance lease short-term and long-term obligations are recorded within other accrued liabilities and other long-term liabilities line items of the condensed consolidated balance sheet, respectively.

 

As our lease contracts do not provide an implicit interest rate, we used the December 31, 2018, effective yield of our secured debt, that we refinanced in July 2018, as our secured incremental borrowing rate for leases with an 8-year tenure. The secured incremental borrowing rate was adjusted using the treasury yield curve at the transition date to determine the present value of each of the future payments.

 

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The cost components of our operating and financing leases were as follows:

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(in thousands)

 

2019

Financing lease costs:

 

 

 

Amortization of ROU asset

 

$

24

Interest on lease liabilities

 

 

20

Operating lease costs

 

 

3,464

Variable lease cost

 

 

467

Short-term lease cost

 

 

713

Sublease income

 

 

(1,461)

Total lease costs

 

$

3,227

 

Variable lease costs for our leased facilities consist primarily of taxes and insurance, as well as common area maintenance true-up assessments which are paid based on actual costs incurred by the lessor. We also incur variable mileage costs related to our leased vehicles and variable usage costs related to leased equipment. Variable lease costs also include annual changes in monthly rent costs, mainly based on the consumer price index.

 

We sublease office space to other companies under non-cancelable agreements. There are no residual value guarantees or restrictions or covenants imposed as part of these sublease arrangements, except that the subtenant may not transfer the assignment of the sublease without prior permission or permit liens against the office space. Some sublease agreements included options to renew or terminate the lease, but only within the term of the master lease arrangement held by us. 

 

The aggregate future lease payments for operating leases are as follows:

 

 

 

 

 

 

    

Operating

(in thousands)

 

Leases

2019 (remainder)

 

$

10,280

2020

 

 

12,061

2021

 

 

9,898

2022

 

 

10,335

2023

 

 

10,138

2024

 

 

8,915

Thereafter

 

 

21,858

Total undiscounted cash flows

 

 

83,485

Less imputed interest

 

 

(24,328)

Total lease liability

 

$

59,157

 

Our future minimum lease commitments, net of sub-lease rental income, as of December 30, 2018, under ASC 840, the predecessor to Topic 842, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Operating

    

Sublease

    

Net Lease

(in thousands)

 

Leases

 

Income

 

Obligation

2019

 

$

16,408

 

$

(4,044)

 

$

12,364

2020

 

 

11,921

 

 

(1,306)

 

 

10,615

2021

 

 

9,797

 

 

(379)

 

 

9,418

2022

 

 

10,178

 

 

(334)

 

 

9,844

2023

 

 

10,160

 

 

(232)

 

 

9,928

Thereafter

 

 

31,139

 

 

 —

 

 

31,139

Total

 

$

89,603

 

$

(6,295)

 

$

83,308

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The weighted average remaining lease terms and discount rates for all of our operating and financing leases were as follows:

 

 

 

 

 

 

 

 

    

March 31, 2019

    

 

 

Operating

 

Financing

 

 

 

Leases

 

Lease

 

Weighted average remaining lease term (years)

 

7.44

 

6.58

 

Weighted average discount rate

 

9.12

%  

10.50

%  

 

Supplemental cash flow information related to our operating and financing leases was as follows:

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31,

(in thousands)

 

2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash outflow from operating leases

 

 $

3,504

Operating cash outflow from financing lease

 

 

20

Financing cash outflow from financing lease

 

 

17

ROU assets obtained in exchange for new operating lease liabilities

 

 

263

 

As of March 31, 2019, we do not have any new financing leases or significant additional operating leases that have not yet commenced.

 

5.  INTANGIBLE ASSETS AND GOODWILL

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30,

 

Amortization

 

March 31,

(in thousands)

    

2018

    

Expense

    

2019

Intangible assets subject to amortization

 

$

838,336

 

$

 —

 

$

838,336

Accumulated amortization

 

 

(807,725)

 

 

(11,801)

 

 

(819,526)

 

 

 

30,611

 

 

(11,801)

 

 

18,810

Mastheads

 

 

112,736

 

 

 —

 

 

112,736

Goodwill

 

 

705,174

 

 

 —

 

 

705,174

Total

 

$

848,521

 

$