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EX-32 - EXHIBIT 32 - Tribune Publishing Co | a2015q310qexhibit32.htm |
EX-31.1 - EXHIBIT 31.1 - Tribune Publishing Co | a2015q310qexhibit311.htm |
EX-31.2 - EXHIBIT 31.2 - Tribune Publishing Co | a2015q310qexhibit312.htm |
EX-10.2 - EXHIBIT 10.2 - Tribune Publishing Co | a2015q310qexhibit102.htm |
EX-10.1 - EXHIBIT 10.1 - Tribune Publishing Co | a2015q310qexhibit101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 2015 |
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-36230
Tribune Publishing Company
(Exact name of registrant as specified in its charter)
Delaware | 38-3919441 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |
435 North Michigan Avenue | ||
Chicago Illinois | 60611 | |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (312) 222-9100
Former name, former address and former fiscal year, if changed since last report.
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 X 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 X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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 X | Smaller reporting company ____ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at November 6, 2015 | |
Common Stock, $0.01 par value | 26,232,281 |
TRIBUNE PUBLISHING COMPANY | ||||
FORM 10-Q | ||||
TABLE OF CONTENTS | ||||
Page | ||||
PART I | ||||
Item 1. | Financial Statements (unaudited) | |||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
PART II | ||||
Item 1. | ||||
Item 1A. | ||||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
Item 5. | ||||
Item 6. | ||||
1
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q, as well as the information contained in the notes to our Consolidated and Combined Financial Statements, include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based largely on our current expectations and reflect various estimates and assumptions by us. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in such forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond our control, include: competition and other economic conditions including fragmentation of the media landscape and competition from other media alternatives; changes in advertising demand, circulation levels and audience shares; our ability to develop and grow our online businesses; our reliance on revenue from printing and distributing third-party publications; macroeconomic trends and conditions; our ability to adapt to technological changes; our ability to realize benefits or synergies from acquisitions or divestitures or to operate our businesses effectively following acquisitions or divestitures; our success in implementing expense mitigation efforts; our ability to attract and retain employees; changes in newsprint prices; our reliance on third-party vendors for various services; adverse results from litigation, governmental investigations or tax-related proceedings or audits; our ability to satisfy pension and other postretirement employee benefit obligations; changes in accounting standards; the effect of labor strikes, lockouts and labor negotiations; regulatory and judicial rulings; our indebtedness and ability to comply with debt covenants applicable to our debt facilities; our adoption of fresh-start reporting which has caused our Consolidated and Combined Financial Statements for periods subsequent to December 31, 2012 to not be comparable to prior periods; our ability to satisfy future capital and liquidity requirements; our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms; and other events beyond our control that may result in unexpected adverse operating results. For more information about these and other risks, see “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2015, in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2015, and in our other filings with the Securities and Exchange Commission.
The words “believe,” “expect,” “anticipate,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek” and similar expressions generally identify forward-looking statements. However, such words are not the exclusive means for identifying forward-looking statements, and their absence does not mean that the statement is not forward looking. Whether or not any such forward-looking statements are, in fact, achieved will depend on future events, some of which are beyond our control. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
2
PART I.
Item 1. Financial Statements
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Operating revenues: | ||||||||||||||||
Advertising | $ | 219,772 | $ | 220,842 | $ | 665,142 | $ | 696,008 | ||||||||
Circulation | 119,979 | 107,511 | 344,288 | 323,828 | ||||||||||||
Other | 64,582 | 75,704 | 201,564 | 230,666 | ||||||||||||
Total operating revenues | 404,333 | 404,057 | 1,210,994 | 1,250,502 | ||||||||||||
Operating expenses: | ||||||||||||||||
Compensation | 157,783 | 150,762 | 463,398 | 435,413 | ||||||||||||
Circulation and distribution | 71,197 | 71,408 | 206,545 | 218,340 | ||||||||||||
Newsprint and ink | 29,096 | 32,839 | 91,835 | 103,836 | ||||||||||||
Other operating expenses | 139,522 | 134,386 | 394,110 | 423,608 | ||||||||||||
Depreciation | 11,346 | 8,002 | 33,105 | 13,636 | ||||||||||||
Amortization | 2,957 | 2,143 | 7,056 | 5,370 | ||||||||||||
Total operating expenses | 411,901 | 399,540 | 1,196,049 | 1,200,203 | ||||||||||||
Income from operations | (7,568 | ) | 4,517 | 14,945 | 50,299 | |||||||||||
Loss on equity investments, net | (535 | ) | (201 | ) | (542 | ) | (830 | ) | ||||||||
Gain on investment transaction | — | — | — | 1,484 | ||||||||||||
Interest expense, net | (6,923 | ) | (3,783 | ) | (19,121 | ) | (3,838 | ) | ||||||||
Reorganization items, net | 80 | (205 | ) | (773 | ) | (214 | ) | |||||||||
Income (loss) before income taxes | (14,946 | ) | 328 | (5,491 | ) | 46,901 | ||||||||||
Income tax expense (benefit) | (6,345 | ) | 484 | (2,803 | ) | 20,082 | ||||||||||
Net income (loss) | $ | (8,601 | ) | $ | (156 | ) | $ | (2,688 | ) | $ | 26,819 | |||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | (0.33 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 1.05 | |||||
Diluted | $ | (0.33 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 1.05 | |||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 26,321 | 25,430 | 25,908 | 25,426 | ||||||||||||
Diluted | 26,321 | 25,430 | 25,908 | 25,465 | ||||||||||||
Dividends declared per common share: | $ | 0.175 | $ | — | $ | 0.525 | $ | — |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
3
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Net income (loss) | $ | (8,601 | ) | $ | (156 | ) | $ | (2,688 | ) | $ | 26,819 | |||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||
Unrecognized benefit plan gains (losses): | ||||||||||||||||
Amortization of actuarial gains during the period, net of tax (expense) benefit of $518, ($2,226), $1,323 and ($1,360), respectively | (792 | ) | 3,719 | (2,026 | ) | 2,393 | ||||||||||
Foreign currency translation | 26 | — | (13 | ) | — | |||||||||||
Other comprehensive income (loss), net of taxes | (766 | ) | 3,719 | (2,039 | ) | 2,393 | ||||||||||
Comprehensive income (loss) | $ | (9,367 | ) | $ | 3,563 | $ | (4,727 | ) | $ | 29,212 |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
4
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 27, 2015 | December 28, 2014 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 54,651 | $ | 36,675 | ||||
Accounts receivable (net of allowances of $16,293 and $16,664) | 208,886 | 234,812 | ||||||
Inventories | 13,655 | 16,651 | ||||||
Deferred income taxes | 35,733 | 38,207 | ||||||
Prepaid expenses and other | 18,935 | 26,593 | ||||||
Total current assets | 331,860 | 352,938 | ||||||
Property, plant and equipment | ||||||||
Machinery, equipment and furniture | 236,408 | 210,217 | ||||||
Buildings and leasehold improvements | 7,206 | 6,434 | ||||||
243,614 | 216,651 | |||||||
Accumulated depreciation | (100,357 | ) | (68,076 | ) | ||||
143,257 | 148,575 | |||||||
Advance payments on property, plant and equipment | 7,066 | 13,770 | ||||||
Property, plant and equipment, net | 150,323 | 162,345 | ||||||
Other assets | ||||||||
Goodwill | 127,428 | 41,669 | ||||||
Intangible assets, net | 149,169 | 87,272 | ||||||
Investments | 3,621 | 3,370 | ||||||
Deferred income taxes | 38,084 | — | ||||||
Restricted cash | 17,001 | 27,505 | ||||||
Debt issuance costs and other long-term assets | 25,609 | 11,416 | ||||||
Total other assets | 360,912 | 171,232 | ||||||
Total assets | $ | 843,095 | $ | 686,515 | ||||
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
5
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
September 27, 2015 | December 28, 2014 | |||||||
Liabilities and stockholders' equity | ||||||||
Current liabilities | ||||||||
Current portion of long-term debt | $ | 21,800 | $ | 17,911 | ||||
Accounts payable | 73,605 | 81,567 | ||||||
Employee compensation and benefits | 90,704 | 101,071 | ||||||
Deferred revenue | 79,901 | 73,004 | ||||||
Other current liabilities | 37,158 | 32,435 | ||||||
Total current liabilities | 303,168 | 305,988 | ||||||
Non-current liabilities | ||||||||
Long-term debt | 381,946 | 329,613 | ||||||
Deferred revenue | 7,417 | 8,775 | ||||||
Pension and postretirement benefits payable | 127,165 | 27,672 | ||||||
Other obligations | 22,293 | 8,298 | ||||||
Total non-current liabilities | 538,821 | 374,358 | ||||||
Stockholders' equity | ||||||||
Preferred stock, $.01 par value. Authorized 30,000 shares; no shares issued or outstanding at September 27, 2015 and December 28, 2014 | — | — | ||||||
Common stock, $.01 par value. Authorized 300,000 shares, 26,353 shares issued and 26,232 shares outstanding at September 27, 2015; 25,444 shares issued and outstanding at December 28, 2014 | 264 | 254 | ||||||
Additional paid-in capital | 17,576 | 2,370 | ||||||
Accumulated deficit | (23,809 | ) | (6,937 | ) | ||||
Accumulated other comprehensive income | 8,443 | 10,482 | ||||||
Treasury stock, at cost - 121 shares at September 27, 2015 | (1,368 | ) | — | |||||
Total stockholders' equity | 1,106 | 6,169 | ||||||
Total liabilities and stockholders' equity | $ | 843,095 | $ | 686,515 |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
6
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENT OF EQUITY (DEFICIT)
(In thousands, except share data)
(Unaudited)
Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Treasury | Total Equity | ||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Stock | (Deficit) | |||||||||||||||||||||
Balance at December 28, 2014 | 25,444,057 | $ | 254 | $ | 2,370 | $ | (6,937 | ) | $ | 10,482 | — | $ | 6,169 | ||||||||||||||
Comprehensive income (loss) | — | — | — | (2,688 | ) | (2,039 | ) | — | (4,727 | ) | |||||||||||||||||
Issuance of stock for acquisition | 700,869 | 7 | 11,032 | — | — | — | 11,039 | ||||||||||||||||||||
Dividends declared to common stockholders | — | — | — | (14,184 | ) | — | — | (14,184 | ) | ||||||||||||||||||
Issuance of stock from restricted stock unit conversions | 188,486 | 3 | (3 | ) | — | — | — | — | |||||||||||||||||||
Exercise of stock options | 20,037 | — | 281 | — | — | — | 281 | ||||||||||||||||||||
Excess tax benefit from long-term incentive plan | — | — | 672 | — | — | — | 672 | ||||||||||||||||||||
Share-based compensation | — | — | 5,060 | — | — | — | 5,060 | ||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (1,368 | ) | (1,368 | ) | ||||||||||||||||||
Withholding for taxes on restricted stock unit conversions | — | — | (1,836 | ) | — | — | — | (1,836 | ) | ||||||||||||||||||
Balance at September 27, 2015 | 26,353,449 | $ | 264 | $ | 17,576 | $ | (23,809 | ) | $ | 8,443 | $ | (1,368 | ) | $ | 1,106 |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
7
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 27, 2015 | September 28, 2014 | |||||||
Operating Activities | ||||||||
Net income | $ | (2,688 | ) | $ | 26,819 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 33,105 | 13,636 | ||||||
Amortization of intangible assets | 7,056 | 5,370 | ||||||
Amortization of contract intangible liabilities | (88 | ) | (112 | ) | ||||
Allowance for bad debt | 6,178 | 12,714 | ||||||
Stock compensation expense | 5,060 | — | ||||||
Withholding for taxes on RSU vesting | (1,836 | ) | — | |||||
Loss on equity investments, net | 542 | 830 | ||||||
(Gain) loss on fixed asset sales | 95 | (1,226 | ) | |||||
Gain on investment transaction | — | (1,484 | ) | |||||
Gain on postretirement plan amendment | (7,799 | ) | — | |||||
Changes in working capital items, excluding acquisitions: | ||||||||
Accounts receivable, net | 42,878 | 49,121 | ||||||
Prepaid expenses, inventories and other current assets | 12,919 | (9,356 | ) | |||||
Accounts payable, employee compensation and benefits, deferred revenue and other current liabilities | (37,627 | ) | 12,747 | |||||
Non-current deferred revenue | (1,358 | ) | 7,352 | |||||
Deferred income taxes | 6,986 | 9,459 | ||||||
Postretirement medical, life and other benefits | (3,776 | ) | (1,062 | ) | ||||
Other, net | 1,680 | 1,102 | ||||||
Net cash provided by operating activities | 61,327 | 125,910 | ||||||
Investing Activities | ||||||||
Capital expenditures | (27,487 | ) | (11,370 | ) | ||||
Acquisitions, net of cash acquired | (67,825 | ) | (32,282 | ) | ||||
Restricted cash | 10,504 | (27,500 | ) | |||||
Proceeds from sale of fixed assets | 36 | 1,881 | ||||||
Investments in equity investments, net of distributions | (792 | ) | (2,009 | ) | ||||
Net cash used for investing activities | $ | (85,564 | ) | $ | (71,280 | ) | ||
Continued |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
8
TRIBUNE PUBLISHING COMPANY CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (continued) (In thousands) (Unaudited) | ||||||||
Nine Months Ended | ||||||||
September 27, 2015 | September 28, 2014 | |||||||
Financing Activities | ||||||||
Proceeds from issuance of debt | $ | 68,950 | $ | 346,500 | ||||
Purchase of treasury stock | (1,368 | ) | — | |||||
Payment of debt issuance costs | (2,741 | ) | (10,179 | ) | ||||
Repayment of long-term debt | (14,433 | ) | — | |||||
Net proceeds from revolving debt | 10,000 | — | ||||||
Repayment of revolving debt | (10,000 | ) | — | |||||
Related party dividends | — | (275,000 | ) | |||||
Dividends paid to common stockholders | (9,148 | ) | — | |||||
Proceeds from exercise of stock options | 281 | 182 | ||||||
Excess tax benefits realized from exercise of stock-based awards | 672 | — | ||||||
Transactions with Tribune Media Company, net | — | (66,180 | ) | |||||
Net cash provided by financing activities | 42,213 | (4,677 | ) | |||||
Net increase in cash | 17,976 | 49,953 | ||||||
Cash, beginning of period | 36,675 | 9,694 | ||||||
Cash, end of period | $ | 54,651 | $ | 59,647 |
The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
9
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business—Tribune Publishing Company and its subsidiaries (collectively, the “Company” or “Tribune Publishing”) is a multiplatform media and marketing solutions company that delivers innovative experiences for audiences and advertisers. The Company's diverse portfolio of iconic news and information brands includes award-winning daily and weekly titles, digital properties and verticals in major markets across the country. Tribune Publishing’s media groups include the Chicago Tribune Media Group, the California News Group, the Sun Sentinel Media Group, the Orlando Sentinel Media Group, The Baltimore Sun Media Group, the Hartford Courant Media Group, the Morning Call Media Group and the Daily Press Media Group. In May 2015, the Company acquired The San Diego Union-Tribune newspaper (f/k/a the U-T San Diego) and nine community weeklies and related digital properties in San Diego County. These properties, along with the Los Angeles Times and its related properties, form the California News Group. See Note 5 for additional information on the acquisition.
Fiscal Periods—The Company's fiscal year ends on the last Sunday in December. Fiscal year 2015 ends on December 27, 2015 and fiscal year 2014 ended on December 28, 2014, both 52-week years with 13 weeks in each quarter.
Separation from Tribune Media Company—On August 4, 2014 (the “Distribution Date”), Tribune Media Company, formerly Tribune Company (“TCO”), completed the spin-off of its principal publishing operations into Tribune Publishing, by distributing 98.5% of the common stock of Tribune Publishing to holders of TCO common stock and warrants. In the distribution, each holder of TCO's Class A common stock, Class B common stock and warrants received 0.25 of a share of Tribune Publishing's common stock for each share of TCO common stock or TCO warrant held as of July 28, 2014 (the “Record Date”). Based on the number of shares of TCO common stock and TCO warrants outstanding as of the Record Date and the distribution ratio, 25,042,263 shares of Tribune Publishing common stock were distributed to the TCO stockholders and holders of TCO warrants and TCO retained 381,354 shares of Tribune Publishing common stock, representing 1.5% of the outstanding common stock of Tribune Publishing. On August 5, 2014, Tribune Publishing became a separate publicly-traded company with its own board of directors and senior management team. Shares of Tribune Publishing common stock are listed on the New York Stock Exchange under the symbol “TPUB.”
Basis of Presentation—The accompanying unaudited Consolidated and Combined Financial Statements and notes of Tribune Publishing have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited Consolidated and Combined Financial Statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of Tribune Publishing as of September 27, 2015 and December 28, 2014, the results of operations for the three and nine months ended September 27, 2015 and September 28, 2014 and the cash flows for the nine months ended September 27, 2015 and September 28, 2014. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform to current period classifications. The year-end Consolidated and Combined Balance Sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Prior to the Distribution Date, separate financial statements were not prepared for Tribune Publishing. The accompanying unaudited Consolidated and Combined Financial Statements for the periods presented prior to the Distribution Date were derived from the historical accounting records of TCO and present Tribune Publishing’s Consolidated and Combined financial position, results of operations and cash flows as of and for the periods presented as if Tribune Publishing was a separate entity through the Distribution Date. The costs of TCO services that are specifically identifiable to Tribune Publishing are included in these Consolidated and Combined Financial Statements. The costs of TCO services that are incurred by TCO but are not specifically identifiable to Tribune Publishing have been allocated to Tribune Publishing and are included in the pre-spin Consolidated and Combined Financial Statements on a basis that management considered to be a reasonable reflection of the utilization of services provided or the benefit received by Tribune Publishing during the periods presented. Management believes that assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses prior to the Distribution Date may not be indicative of the actual level of expense that would have been incurred had Tribune Publishing operated as a separate stand-alone entity, and, accordingly, may not necessarily reflect Tribune Publishing’s consolidated financial position, results of operations and cash flows had Tribune
10
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Publishing operated as a stand-alone entity during the periods presented. See Note 4 for further information on costs allocated from TCO. Subsequent to the Distribution Date, Tribune Publishing's financial statements are presented on a consolidated basis as the Company became a separate consolidated entity.
All intercompany accounts within Tribune Publishing have been eliminated in consolidation. For periods prior to the Distribution Date, all significant intercompany transactions between Tribune Publishing and TCO have been included within the Consolidated and Combined Financial Statements and are considered to be effectively settled through equity contributions or distributions or through cash payments at the time the transactions were recorded. These intercompany transactions are further described in Note 4. The total net effect of these intercompany transactions prior to the Distribution Date are reflected in the Consolidated and Combined Statements of Cash Flows as financing activities.
Tribune Publishing assesses its operating segments in accordance with ASC Topic 280, “Segment Reporting.” Tribune Publishing is managed by its chief operating decision maker, as defined by ASC Topic 280, as one business. Accordingly, the financial statements of Tribune Publishing are presented to reflect one reportable segment.
New Accounting Standards—In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Topic 805, Simplifying the Accounting for Measurement-Period Adjustments, which provides guidance to entities that have provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. This ASU is effective for reporting periods beginning after December 15, 2015. The Company adopted ASU 2015-16 in the third quarter of 2015. The adoption of ASU 2015-16 has been immaterial to the Company's consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Topic 330, Simplifying the Measurement of Inventory. This ASU requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. This ASU is effective for reporting periods beginning after December 15, 2016. The guidance is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the effect that adoption will have on its consolidated financial statements and the date on which to adopt the accounting standard.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which 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 the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. This ASU is effective for reporting periods beginning after December 15, 2015. The Company will adopt the standard in the first quarter of 2016. The Company is evaluating the effect that adoption will have on its consolidated financial statements.
In April 2015, the FASB issued ASU -2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective for reporting periods beginning after December 15, 2015 and interim periods therein. It is to be applied retrospectively and early adoption is permitted. ASU 2015-03 affects presentation only and will have no effect on the Company's financial condition, results of operations or cash flows. The Company will adopt the standard in the first quarter 2016.
In May 2014, the FASB issued ASU 2014-09, Topic 606, Revenue from Contracts with Customers, concerning revenue recognition. The new standard supersedes a majority of existing revenue recognition guidance under U.S. GAAP, and requires a company to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. ASU 2014-09 allows for either a “full retrospective” adoption or a “modified retrospective” adoption. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017 and to permit companies to voluntarily adopt the new standard as of the original effective date. The Company expects to adopt this standard on January 1, 2018. The Company is currently evaluating the revenue recognition impact this guidance will have once implemented and the implementation approach to be used.
11
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2: PROCEEDINGS UNDER CHAPTER 11
Chapter 11 Reorganization—On December 8, 2008, TCO and 110 of its direct and indirect wholly-owned subsidiaries (each a “Debtor” and, collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 (“Chapter 11”) of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). A joint plan of reorganization for the Debtors (the “Plan”) became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). Certain of the legal entities included in the Consolidated and Combined Financial Statements of Tribune Publishing were Debtors or, as a result of the restructuring transactions undertaken pursuant to the Plan, are successor legal entities to legal entities that were Debtors (collectively, the “Tribune Publishing Debtors”). On March 16, 2015, the Chapter 11 estates of 88 of the Debtors were closed by a final decree issued by the Bankruptcy Court. On July 24, 2015, the Chapter 11 estates of an additional 8 of the Debtors were closed by a final decree. The remainder of the Debtors’ Chapter 11 cases, including several of the Tribune Publishing Debtors’ cases, continue to be jointly administered under the caption “In re: Tribune Media Company, et al.,” Case No 08-13141.
On the Effective Date, substantially all of the Debtors’ prepetition liabilities at December 30, 2012 were settled or otherwise satisfied under the Plan. However, certain other claims have been or will be settled or otherwise satisfied subsequent to the Effective Date. Although the allowed amount of certain unresolved claims has not been determined, Tribune Publishing’s liabilities subject to compromise associated with these unresolved claims were discharged upon emergence from Chapter 11 in exchange for the treatment outlined in the Plan.
Reorganization Items, Net—Reorganization items, net, generally includes provisions and adjustments to reflect the carrying value of certain prepetition liabilities at their estimated allowable claim amounts and, pursuant to ASC Topic 852, “Reorganizations,” is reported separately in Tribune Publishing’s Consolidated and Combined Statements of Income. Reorganization items, net, may also include professional advisory fees and other costs directly associated with the Debtors’ Chapter 11 cases.
Specifically identifiable reorganization provisions, adjustments and other costs directly related to Tribune Publishing have been included in the Company’s Consolidated and Combined Statements of Income for the three and nine months ended September 27, 2015 and September 28, 2014 and consisted of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Reorganization costs, net: | ||||||||||||||||
Contract rejections and claim settlements | $ | — | $ | (205 | ) | $ | (15 | ) | $ | (212 | ) | |||||
Other, net | 80 | — | (758 | ) | (2 | ) | ||||||||||
Total reorganization costs, net | $ | 80 | $ | (205 | ) | $ | (773 | ) | $ | (214 | ) |
Tribune Publishing expects to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2015 and potentially in future periods. These expenses are expected to consist primarily of other costs related to the implementation of the Plan and the resolution of unresolved claims.
NOTE 3: CHANGES IN OPERATIONS
Employee Reductions—Tribune Publishing identified reductions in its staffing levels of 24 and 298 in the three and nine months ended September 27, 2015, respectively. Of the total reductions, 186 are related to the San Diego acquisition described in Note 5 as the Company has consolidated many of those positions into its current operating structure. In the three and nine months ended September 28, 2014, the Company had identified reductions in staffing levels in its operations of 20 and 218 positions, respectively. Tribune Publishing recorded pretax charges related to these reductions of $2.8 million and $6.2 million for the three and nine months ended September 27, 2015, respectively, and a pretax credit of $0.4 million and a pretax charge of $1.9 million for the three and nine months ended September 28, 2014, respectively. A summary of the activity with respect to Tribune Publishing’s severance accrual for the nine months ended September 27, 2015 is as follows (in thousands):
12
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Balance at December 28, 2014 | $ | 5,038 | ||
Provision | 6,206 | |||
Payments | (8,163 | ) | ||
Balance at September 27, 2015 | $ | 3,081 |
Charges for severance and related expenses are included in compensation expense in the accompanying Consolidated and Combined Statements of Income. For the three and nine month periods ended September 28, 2014, the severance and related expenses above exclude severance and related expenses incurred by TCO and allocated to Tribune Publishing prior to the Distribution Date. As part of the separation and distribution of allocated charges from TCO, $0.6 million of accrued severance charges were transferred to Tribune Publishing. See Note 4 for further discussion of allocated charges from TCO.
NOTE 4: RELATED PARTY TRANSACTIONS
In connection with the separation and distribution, Tribune Publishing entered into a transition services agreement (the “TSA”) and certain other agreements with TCO that govern the relationships between Tribune Publishing and TCO following the separation and distribution. Under the TSA, the providing company generally is allowed 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. Pursuant to the TSA, TCO provides Tribune Publishing with certain services on a transitional basis. During the three and nine months ended September 27, 2015, Tribune Publishing incurred $0.1 million and $0.7 million, respectively, in charges payable to TCO under the TSA. During the three and nine months ended September 28, 2014, Tribune Publishing incurred $0.9 million in charges payable to TCO under the TSA. In addition, the TSA outlines the services that Tribune Publishing will provide TCO on a transitional basis. For the three and nine months ended September 27, 2015, TCO's charges payable to Tribune Publishing were $0.1 million and $1.3 million, respectively, under the TSA. For the three and nine months ended September 28, 2014, TCO's charges payable to Tribune Publishing were $1.2 million under the TSA.
Prior to the Distribution Date, Tribune Publishing participated in a number of corporate-wide programs administered by TCO. These included participation in TCO’s centralized treasury function, insurance programs, employee benefit programs, workers’ compensation programs, and centralized service centers and other corporate functions. The following is a discussion of the relationship with TCO, the services provided and how transactions with TCO have been accounted for in the Consolidated and Combined Financial Statements. Subsequent to the Distribution Date, any programs not governed by the TSA, as described above, are now administered by Tribune Publishing and are recorded directly to operating expenses.
Support Services Provided and Other Amounts with TCO—Prior to the Distribution Date, Tribune Publishing received allocated charges from TCO for certain corporate support services which were recorded within Tribune Publishing’s Consolidated and Combined Statements of Income. Management believes that the basis used for the allocations was reasonable and reflects the portion of such costs attributable to Tribune Publishing’s operations; however, the amounts may not be representative of the costs necessary for Tribune Publishing to operate as a separate stand-alone company. These allocated costs are summarized in the following table (in thousands):
Three Months Ended | Nine Months Ended | |||||||
September 28, 2014 | September 28, 2014 | |||||||
Corporate management fee | $ | 3,851 | $ | 21,871 | ||||
Allocated depreciation | 1,731 | 11,707 | ||||||
Service center support costs | 10,108 | 53,492 | ||||||
Other | 192 | 3,427 | ||||||
Total | $ | 15,882 | $ | 90,497 |
Medical and Workers’ Compensation Benefit Plans—Tribune Publishing participated in TCO-sponsored employee benefit plans, including medical and workers’ compensation. Allocations of benefit plan costs varied by plan type and were based on actuarial valuations of cost and/or liability, premium amounts and payroll. Total benefit plan costs allocated to Tribune Publishing amounted to $4.1 million and $27.2 million in the three and nine months ended September
13
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
28, 2014, respectively, and were recorded in compensation expense in the Consolidated and Combined Statements of Income. While management believes the cost allocation methods utilized for the benefit plans were reasonable and reflected the portion of such costs attributed to Tribune Publishing, the amounts may not be representative of the costs necessary for Tribune Publishing to operate as a stand-alone business.
Defined Benefit Plans—Retirement benefits obligations pursuant to the TCO defined benefit pension plans have historically been and continue to be an obligation of TCO. Prior to the Distribution Date, costs related to TCO-sponsored pension plans, which totaled credits of $2.1 million and $12.5 million in the three and nine months ended September 28, 2014, respectively, were based upon a specific allocation of actuarially determined service costs plus an allocation of the remaining net periodic pension cost components based upon Tribune Publishing's proportional share of the pension liability. Through the Distribution Date, TCO-sponsored pension plan credits and expenses allocated to Tribune Publishing are recorded in compensation expense in the Consolidated and Combined Statements of Income. Subsequent to the Distribution Date, no further costs or credits were allocated.
Defined Contribution Plans—Tribune Publishing’s employees have historically participated in various TCO qualified 401(k) savings plans, which permit eligible employees to make voluntary contributions on a pretax basis. The plans allowed participants to invest their savings in various investments. Amounts charged to expense by Tribune Publishing for employer contributions to TCO 401(k) savings plans totaled $1.3 million and $7.3 million in the three and nine months ended September 28, 2014, respectively, and are recorded in compensation expense in the Consolidated and Combined Statements of Income.
Related Party Lease Agreements—In 2013, Tribune Publishing entered into related party lease agreements with TCO to lease certain land and buildings. The initial term of these non-cancelable related party lease agreements is either five or ten years, with two optional renewal terms. In connection with all related party lease agreements, Tribune Publishing recognized $8.4 million and $25.3 million of rent expense for the three and nine months ended September 27, 2015, respectively, and $9.1 million and $28.2 million of rent expense for the three and nine months ended September 28, 2014, respectively, recorded in other operating expense.
NOTE 5: ACQUISITIONS
The San Diego Union-Tribune
On May 21, 2015, the Company completed the acquisition of MLIM, LLC (“MLIM”), the indirect owner of The San Diego Union-Tribune (f/k/a the U-T San Diego) and nine community weeklies and related digital properties in San Diego County, California, pursuant to the Membership Interest Purchase Agreement (the “Agreement”), dated May 7, 2015, among the Company, MLIM Holdings, LLC, the Papa Doug Trust under agreement dated January 11, 2010, Douglas F. Manchester and Douglas W. Manchester, and MLIM, as amended effective May 21, 2015. As of the closing of the transaction, the Company acquired 100% of the equity interests in MLIM.
The stated purchase price was $85 million, consisting of $73 million in cash, subject to a working capital adjustment, and $12 million in Tribune Publishing common stock. The Company financed the $73 million cash portion of the purchase price, less a $2 million preliminary working capital adjustment at close, with a combination of cash-on-hand and funds available under the Company's existing Senior ABL Facility, as defined in Note 10, as well as the net proceeds of the term loan increase as further described in Note 10. In the three months ended September 27, 2015, the Company received the final working capital adjustment of $2.6 million in cash from the seller and the purchase price has been adjusted.
Prior to the closing of the acquisition, certain assets and liabilities of MLIM related to the business and the operation of The San Diego Union-Tribune, including real property used by the business, were distributed to the seller or its affiliates. Upon the close of the acquisition, MLIM became a wholly-owned subsidiary of the Company, and retained certain liabilities, including certain legal matters and its existing pension obligations, and entered into a lease to use certain real property from the seller.
The seller has provided the Company a full indemnity with respect to certain legal matters which were at various states of adjudication at the date of the acquisition. Inasmuch as such judgments represent a liability of the acquired entity which is subject to indemnification, the initial purchase price allocation reflects the assignment of $11.2 million to both the
14
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
litigation judgment liability and the seller indemnification asset and is reflected in the Consolidated and Combined Balance Sheet as other long-term assets and other obligations.
In one such matter, a consolidated class action against a predecessor entity to MLIM which asserts various claims on behalf of home delivery newspaper carriers alleged to have been misclassified as independent contractors, the plaintiffs have been granted a judgment comprised of unreimbursed business expenses, interest and attorney's fees totaling approximately $10 million.
On the closing of the acquisition, the Company entered into a registration rights agreement with the seller, whereby the seller would be entitled to certain registration rights with respect to the shares of common stock of the Company acquired in connection with the Agreement. Pursuant to the registration rights agreement, the Company filed a registration statement on Form S-3 on August 12, 2015 to register the shares issued to the seller.
As part of the acquisition, the Company became the sponsor of a single-employer defined benefit plan, The San Diego Union-Tribune, LLC Retirement Plan (the “San Diego Plan”). The San Diego Plan provides benefits to certain current and former employees of The San Diego Union-Tribune. Future benefits under the plan have been frozen since January 31, 2009. As of September 27, 2015, the estimated underfunded status of the San Diego Plan was $107.2 million which is based upon the January 4, 2015 actuarial determination completed by the seller, adjusted for current year pre-acquisition activity and contributions since the acquisition.
The allocation of the purchase price presented below is based upon management’s preliminary estimates. As of the filing date of this report, the determination of the fair value of the assets acquired and liabilities assumed and the funded status of the pension plan assumed have not been completed. The definite-lived intangible assets are expected to be amortized over a total weighted average period of nine years that includes a three to six year life for subscriber relationships, a three to eleven year life for advertiser relationships and a one year life for other customer relationships. The acquired property and equipment will be depreciated on a straight-line basis over its estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future cost and revenue synergies. The entire amount of purchase price allocated to intangible assets and $23.9 million of goodwill will be deductible for tax purposes pursuant to Internal Revenue Code Section 197 over a 15 year period.
15
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is as follows (in thousands):
Consideration for acquisition, less cash acquired and working capital adjustments | $ | 78,864 | ||
Less: Shares issued for acquisition | (11,039 | ) | ||
Cash consideration for acquisition | $ | 67,825 | ||
Allocated Fair Value of Acquired Assets and Assumed Liabilities | ||||
Accounts receivable and other current assets | $ | 12,408 | ||
Property, plant and equipment | 311 | |||
Intangible assets subject to amortization: | ||||
Subscriber relationships (useful life of 3 to 6 years) | 9,873 | |||
Advertiser relationships (useful life of 3 to 11 years) | 14,605 | |||
Other customer relationships (useful life of 1 year) | 529 | |||
Mastheads and intangible assets not subject to amortization | 43,945 | |||
Deferred taxes | 43,617 | |||
Other long-term assets | 10,800 | |||
Accounts payable and other current liabilities | (21,875 | ) | ||
Pension and postemployment benefits liability | (109,042 | ) | ||
Other long-term liabilities | (12,066 | ) | ||
Total identifiable net assets (liabilities) | (6,895 | ) | ||
Goodwill | 85,759 | |||
Total net assets acquired | $ | 78,864 |
The Company included the results of operations of MLIM in the Consolidated and Combined Financial Statements beginning on the closing date of the acquisition. For the three and nine months ended September 27, 2015, the revenues from MLIM were $32.5 million and $47.1 million, respectively, and the total operating expenses were approximately $29.4 million and $44.3 million, respectively. The pro forma effect of the acquisition is not material to the Company’s Consolidated and Combined Financial Statements.
NOTE 6: INVENTORIES
Inventories consisted of the following (in thousands):
As of | ||||||||
September 27, 2015 | December 28, 2014 | |||||||
Newsprint | $ | 13,092 | $ | 16,174 | ||||
Supplies and other | 563 | 477 | ||||||
Total inventories | $ | 13,655 | $ | 16,651 |
Inventories are stated at the lower of cost or market determined using the first-in, first-out (“FIFO”) basis for all inventories.
16
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 7: GOODWILL, OTHER INTANGIBLE ASSETS AND INTANGIBLE LIABILITIES
Goodwill, other intangible assets and intangible liabilities at September 27, 2015 and December 28, 2014 consisted of the following (in thousands):
September 27, 2015 | December 28, 2014 | |||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||||
Subscribers (useful life of 2 to 10 years) | $ | 18,367 | $ | (3,416 | ) | $ | 14,951 | $ | 8,494 | $ | (2,121 | ) | $ | 6,373 | ||||||||||
Advertiser relationships (useful life of 2 to 13 years) | 42,971 | (6,902 | ) | 36,069 | 28,366 | (4,596 | ) | 23,770 | ||||||||||||||||
Affiliate agreements (useful life of 4 years) | 12,458 | (8,473 | ) | 3,985 | 11,929 | (5,965 | ) | 5,964 | ||||||||||||||||
Tradenames (useful life of 20 years) | 15,100 | (875 | ) | 14,225 | 15,100 | (317 | ) | 14,783 | ||||||||||||||||
Other (useful life of 1 to 20 years) | 5,541 | (1,347 | ) | 4,194 | 5,540 | (958 | ) | 4,582 | ||||||||||||||||
Total intangible assets subject to amortization | $ | 94,437 | $ | (21,013 | ) | $ | 73,424 | $ | 69,429 | $ | (13,957 | ) | $ | 55,472 | ||||||||||
Goodwill and other intangible assets not subject to amortization | ||||||||||||||||||||||||
Goodwill | 127,428 | 41,669 | ||||||||||||||||||||||
Newspaper mastheads and other intangible assets not subject to amortization | 75,745 | 31,800 | ||||||||||||||||||||||
Total goodwill and other intangible assets | $ | 276,597 | $ | 128,941 | ||||||||||||||||||||
Intangible liabilities subject to amortization | ||||||||||||||||||||||||
Unfavorable lease contracts | $ | (1,746 | ) | $ | 447 | $ | (1,299 | ) | $ | (570 | ) | $ | 359 | $ | (211 | ) | ||||||||
Total intangible liabilities subject to amortization | $ | (1,746 | ) | $ | 447 | $ | (1,299 | ) | $ | (570 | ) | $ | 359 | $ | (211 | ) |
The changes in the carrying amounts of intangible assets subject to amortization during the nine months ended September 27, 2015 were as follows (in thousands):
Intangible assets subject to amortization | ||||
Balance at December 28, 2014 | $ | 55,472 | ||
Acquisitions | 25,008 | |||
Amortization | (7,056 | ) | ||
Balance at September 27, 2015 | $ | 73,424 |
The changes in the carrying amounts of goodwill and intangible assets not subject to amortization during the nine months ended September 27, 2015 were as follows (in thousands):
Goodwill | Other intangible assets not subject to amortization | |||||||
Balance at December 28, 2014 | $ | 41,669 | $ | 31,800 | ||||
Acquisitions | 85,759 | 43,945 | ||||||
Balance at September 27, 2015 | $ | 127,428 | $ | 75,745 |
17
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8: INVESTMENTS
Investments consist of equity method investments in private companies totaling $3.6 million and $3.4 million at September 27, 2015 and December 28, 2014, respectively:
% Owned | ||||||
Company | September 27, 2015 | December 28, 2014 | ||||
CIPS Marketing Group, Inc. | 50 | % | 50 | % | ||
Homefinder.com, LLC | 33 | % | 33 | % | ||
Contend, LLC | 20 | % | 20 | % | ||
Jean Knows Cars, LLC | 20 | % | — |
On January 8, 2015, the Company purchased a 20% interest in Jean Knows Cars, LLC for $0.5 million. Jean Knows Cars, LLC is a content creation company that develops and produces digital content relating to the car industry.
NOTE 9: FAIR VALUE MEASUREMENTS
Tribune Publishing measures and records in its Consolidated and Combined Financial Statements certain assets and liabilities at fair value. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and Tribune Publishing’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
• | Level 1-Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. |
• | Level 2-Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data. |
• | Level 3-Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement. |
The carrying values of cash, trade accounts receivable and trade accounts payable approximated their respective fair values due to their short term to maturity.
NOTE 10: DEBT
At September 27, 2015, Tribune Publishing had $406.0 million in variable-rate debt outstanding under the Term Loan Credit Agreement, as defined below. The weighted average interest rate for the variable-rate debt is 5.75%. At September 27, 2015, the fair value of the Term Loan Credit Agreement was estimated to be $387.7 million. The Company's Term Loan Credit Agreement's classification is determined based on Level 2 inputs, because the fair value for these instruments is determined using observable inputs in non-active markets. See below for details related to the Company's debt agreements.
Senior Term Facility
On May 21, 2015, the Company entered into a lender joinder agreement (“Joinder Agreement”) with Citicorp North America, Inc. (“Citi”) and JPMorgan Chase Bank, N.A. to partially finance the acquisition of The San Diego Union-Tribune. See Note 5. This Joinder Agreement expanded the borrowings under the Senior Term Facility, described below, by $70 million. This borrowing bears the same interest rate and has the same maturity date as the existing loans under the Senior Term Facility.
18
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On August 4, 2014, the Company entered into a credit agreement (as amended, amended and restated or supplemented, the “Term Loan Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Term Collateral Agent”), and the lenders party thereto (the “Senior Term Facility”). The Senior Term Facility originally provided for secured loans (the “Term Loans”) in the aggregate principal amount of $350.0 million. The Term Loans bear interest at a variable interest rate based on either LIBOR or a base rate, in either case plus an applicable margin. The Term Loans amortize in equal quarterly installments equal to 1.25% of principal amounts borrowed against the Senior Term Facility with the balance payable on the maturity date, August 4, 2021. The Senior Term Facility initially provided that it could be expanded by an amount up to (i) the greater of $100.0 million and an amount as will not cause the net senior secured leverage ratio after giving effect to such incurrence to exceed 2:1 plus (ii) an amount equal to all voluntary prepayments of the term loans borrowed under the Senior Term Facility, subject to certain conditions. As of September 27, 2015, $70 million of the expansion had been drawn for the acquisition described previously. Tribune Publishing Company is the borrower under the Senior Term Facility and each of the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions (the “Subsidiary Guarantors”), guarantee the payment obligations under the Senior Term Facility. The Senior Term Facility contains a number of covenants that, among other things, limit the ability of Tribune Publishing Company and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; and certain other usual and customary covenants. As of September 27, 2015, the outstanding balance under the Senior Term Facility is $406.0 million, the unamortized balance of the discount is $3.9 million and the Company was in compliance with the covenants of the Senior Term Facility.
Senior ABL Facility
On August 4, 2014, Tribune Publishing Company and the Subsidiary Guarantors entered into a credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent (in such capacity, the “ABL Collateral Agent”), swing line lender and letter of credit issuer and the lenders party thereto (the “Senior ABL Facility”). The Senior ABL Facility will mature on August 4, 2019. The Senior ABL Facility provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $140.0 million. Up to $75.0 million of availability under the Senior ABL Facility is available for letters of credit and up to $15.0 million of availability under the Senior ABL Facility is available for swing line loans. The Senior ABL Facility also permits Tribune Publishing Company to increase the commitments under the Senior ABL Facility by up to $75.0 million. The Senior ABL Facility bears interest at a variable interest rate based on either LIBOR or a base rate, in either case plus an applicable margin. Tribune Publishing Company and the Subsidiary Guarantors are the borrowers under the Senior ABL Facility. Tribune Publishing Company and the Subsidiary Guarantors guarantee the payment obligations under the Senior ABL Facility. The Senior ABL Facility contains a number of covenants that, among other things, limit the ability of Tribune Publishing Company and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; and certain other usual and customary covenants. Customary fees are payable in respect of the Senior ABL Facility, including commitment fees of 0.25% and letter of credit fees. As of September 27, 2015, $23.6 million of the Senior ABL Facility availability supported outstanding undrawn letters of credit in the same amount.
Letter of Credit Agreement
On August 4, 2014, Tribune Publishing Company and JPMorgan Chase Bank, N.A., as letter of credit issuer (the “L/C Issuer”) entered into a letter of credit agreement (the “Letter of Credit Agreement”). The Letter of Credit Agreement provides for the issuance of standby letters of credit of up to a maximum aggregate principal face of $30.0 million. The Letter of Credit Agreement permits Tribune Publishing Company, at the sole discretion of L/C Issuer, to request an increase of the amount available to be issued under the Letter of Credit Agreement up to an aggregate maximum face amount of $50.0 million. The Letter of Credit Agreement is scheduled to terminate on August 4, 2019.
During the quarter ended September 27, 2015, the Company's outstanding undrawn letter of credit was reduced from $27.5 million to $17.0 million. As a result, the cash collateral requirement associated with the letter of credit was reduced by, and the Company received, $10.5 million during the quarter from the cash collateral account. As of September 27, 2015, the $17.0 million undrawn letter of credit was outstanding against the Letter of Credit Agreement. This letter of credit is collateralized with $17.0 million of cash held in a specified cash collateral account. The specified cash account is required to remain as long as the undrawn letter of credit remains outstanding and is recorded in restricted cash in the Consolidated and Combined Balance Sheets.
19
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 11: INCOME TAXES
For the three and nine months ended September 27, 2015, Tribune Publishing recorded an income tax benefit of $6.3 million and $2.8 million, respectively. The effective tax rate on pretax income was 42.5% and 51.0% in the three and nine months ended September 27, 2015, respectively. During the nine months ended September 27, 2015, the Company increased the estimated deferred tax rate on net deferred tax assets from 39.5% to 40.0% which resulted in a decrease in the nine-month period income tax expense of $0.5 million. For the three and nine months ended September 27, 2015, the rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit, non-deductible expenses and the domestic production activities deduction, as well as a change in the deferred tax rate that was applied to current and non-current deferred tax assets and liabilities. For the three and nine months ended September 28, 2014, Tribune Publishing recorded income tax expense of $0.5 million and $20.1 million. The effective tax rate on pretax income was 147.6% and 42.8% in the three and nine months ended September 28, 2014. This rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes, net of federal benefit, nondeductible expenses, certain transaction costs not fully deductible for tax purposes and the domestic production activities deduction.
NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFITS
Multiemployer Pension Plans—Tribune Publishing contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. See Note 4 for the description of costs and credits related to TCO-sponsored pension plans.
Defined Benefit Plans—As part of the acquisition of The San Diego Union-Tribune, the Company became the sponsor of the San Diego Plan, a single-employer defined benefit plan. The San Diego Plan provides benefits to certain current and former employees of The San Diego Union-Tribune. Future benefits under the San Diego Plan have been frozen since January 31, 2009. The funded status of the San Diego Plan is being actuarially determined as of May 21, 2015, the closing date for The San Diego Union-Tribune acquisition, and that determination had not been completed as of the filing date of this report. As of September 27, 2015, the estimated underfunded status of the San Diego Plan was $107.2 million. This estimate of the underfunded status of the plan is based upon the January 4, 2015 actuarially determined underfunded status of the San Diego Plan adjusted for the 2015 pre-acquisition activity recorded for the plan. As of January 4, 2015, the benefit obligation was $267.9 million and the fair value of the San Diego Plan's assets was $156.7 million. The Company contributed $1.8 million during the three months ended September 27, 2015 to the San Diego Plan and expects to contribute approximately $1.1 million to the San Diego Plan in the remainder of 2015. The net periodic benefit cost recorded subsequent to the acquisition was immaterial.
Postretirement Benefits Other Than Pensions—Prior to the Distribution Date, retirement benefits were provided to eligible employees of Tribune Publishing through defined benefit pension plans sponsored by TCO. Subsequent to the Distribution Date, Tribune Publishing provides postretirement health care and life insurance benefits to Tribune Publishing employees. There is some variation in the provisions of these plans, including different provisions for lifetime maximums, prescription drug coverage and certain other benefits. The components of net periodic benefit cost for Tribune Publishing were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Service cost | $ | 65 | $ | 99 | $ | 197 | $ | 275 | ||||||||
Interest cost | 164 | 461 | 555 | 1,277 | ||||||||||||
Amortization of prior service credits | (701 | ) | — | (2,103 | ) | — | ||||||||||
Amortization of gain | (609 | ) | (8 | ) | (1,245 | ) | (22 | ) | ||||||||
Net periodic benefit cost (credit) | (1,081 | ) | 552 | (2,596 | ) | 1,530 | ||||||||||
Curtailment gain | — | — | (7,799 | ) | — | |||||||||||
Net periodic benefit cost (credit) after curtailment gain | $ | (1,081 | ) | $ | 552 | $ | (10,395 | ) | $ | 1,530 |
In the first quarter of 2015, Tribune Publishing notified plan members that the Company was no longer going to offer the life insurance benefit effective December 27, 2015. These life insurance modifications impact a grandfathered
20
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
group of employees that were eligible for post-retirement life insurance benefits based on their employment date and certain employment qualifications. The impact of this plan modification was to reduce the postretirement medical, life and other benefits liability by $7.8 million and to recognize a gain of the same amount to compensation expense.
Expected Future Benefit Payments—Tribune Publishing expects to contribute $3.2 million to its other postretirement plans during 2015.
NOTE 13: STOCK-BASED COMPENSATION
The Tribune Publishing Company 2014 Omnibus Incentive Plan (the “Tribune Publishing Equity Plan”) provides for the granting of stock options, stock appreciation rights, restricted stock units (“RSU”), performance share units, restricted and unrestricted stock awards, dividend equivalents and cash awards. In the nine months ended September 27, 2015, 464,892 options and 514,164 RSUs were granted under the Tribune Publishing Equity Plan. Stock-based compensation expense under the Tribune Publishing Equity Plan totaled $2.1 million and $5.1 million during the three and nine months ended September 27, 2015, respectively.
Prior to the Distribution Date, stock-based compensation expense for participants in the TCO 2013 Equity Incentive Plan who were solely dedicated to Tribune Publishing has been included in compensation expense. Stock-based compensation expense related to Tribune Publishing employees under both plans totaled $0.9 million and $2.2 million for the three and nine months ended September 28, 2014, respectively. Stock-based compensation expense for participants in the TCO 2013 Equity Incentive Plan who provided services to but were not solely dedicated to Tribune Publishing have been allocated to Tribune Publishing through the corporate management fee and service center support costs, as described in Note 4. In the three and nine months ended September 28, 2014, the Company was allocated $0.8 million and $4.9 million, respectively, of stock-based compensation expense through the corporate management fee and service center support costs.
As of September 27, 2015, the Company has $2.9 million of total unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 2.82 years. Additionally, as of September 27, 2015, the Company has $13.7 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.61 years.
NOTE 14: EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income attributable to Tribune Publishing common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of common shares under equity-based compensation plans, except where the inclusion of such common shares would have an anti-dilutive impact.
21
TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three and nine months ended September 27, 2015 and September 28, 2014, basic and diluted earnings per common share were as follows (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Income (Loss) - Numerator: | ||||||||||||||||
Net income (loss) available to Tribune Publishing stockholders plus assumed conversions | $ | (8,601 | ) | $ | (156 | ) | $ | (2,688 | ) | $ | 26,819 | |||||
Shares - Denominator: | ||||||||||||||||
Weighted average number of common shares outstanding (basic) | 26,321 | 25,430 | 25,908 | 25,426 | ||||||||||||
Dilutive effect of employee stock options and RSUs | — | — | — | 39 | ||||||||||||
Adjusted weighted average shares outstanding (diluted) | 26,321 | 25,430 | 25,908 | 25,465 | ||||||||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | (0.33 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 1.05 | |||||
Diluted | $ | (0.33 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 1.05 |
Potential dilutive common shares were anti-dilutive as a result of the Company’s net loss for the three and nine months ended September 27, 2015 and the three months ended September 28, 2014. As a result, basic weighted average shares were used in the calculations of basic net earnings per share and diluted earnings per share for those periods.
The number of stock options that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 1,023,033 for both the three and nine months ended September 27, 2015. The number of RSUs that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 1,004,468 for both the three and nine months ended September 27, 2015.
On August 4, 2014, approximately 25.4 million shares of the Company's common stock were distributed to TCO and TCO stockholders and warrant holders who held shares or warrants as of the record date of July 28, 2014. This share amount is being utilized for the calculation of both basic and diluted earnings per common share for all periods prior to the Distribution Date.
NOTE 15: STOCKHOLDERS' EQUITY
Dividends
On September 3, 2015, the Board of Directors of the Company declared a dividend of $0.175 per share on common stock outstanding, to be paid on October 29, 2015, to stockholders of record on October 1, 2015.
On August 14, 2015, the Company paid a dividend of $0.175 per share on common stock outstanding, to stockholders of record on July 15, 2015. On May 15, 2015, the Company paid a dividend of $0.175 per share on common stock outstanding, to stockholders of record on April 15, 2015.
Stock Repurchases
In August 2015, the Board of Directors authorized $30 million to be used for stock repurchases for 24 months from the date of authorization. Any stock repurchases under the stock repurchase plan may be made in the open market, through privately negotiated transactions or other means. The stock repurchase plan may be modified or discontinued at any time without prior notice. Repurchased shares become a part of treasury stock.
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TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three months ended September 27, 2015, the Company repurchased 121,168 shares of common stock for an aggregate purchase price of $1.4 million. The Company has $28.6 million remaining authorization under the stock repurchase plan at September 27, 2015.
NOTE 16: ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):
September 27, 2015 | December 28, 2014 | |||||||
Accumulated other comprehensive income (loss), net of tax: | ||||||||
Pension and other postretirement costs | $ | 8,476 | $ | 10,502 | ||||
Foreign currency translation adjustments | (33 | ) | (20 | ) | ||||
Accumulated other comprehensive income (loss) | $ | 8,443 | $ | 10,482 |
The following table presents the amounts and line items in the Consolidated and Combined Statements of Income where adjustments reclassified from accumulated other comprehensive income (loss) were recorded during the three and nine months ended September 27, 2015 and September 28, 2014 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||
Accumulated Other Comprehensive Income (Loss) Components | September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | Affected Line Items in the Consolidated and Combined Statements of Income | |||||||||||||
Pension and postretirement benefit adjustments: | ||||||||||||||||||
Amortization of recognized actuarial gains | $ | (1,310 | ) | $ | 5,945 | $ | (3,349 | ) | $ | 3,753 | Compensation | |||||||
Total before taxes | (1,310 | ) | 5,945 | (3,349 | ) | 3,753 | ||||||||||||
Tax effect | 518 | (2,226 | ) | 1,323 | (1,360 | ) | Income tax (expense) benefit | |||||||||||
Total reclassifications for the period | $ | (792 | ) | $ | 3,719 | $ | (2,026 | ) | $ | 2,393 |
NOTE 17: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for each of the periods presented is as follows (in thousands):
Nine Months Ended | ||||||||
September 27, 2015 | September 28, 2014 | |||||||
Cash paid during the period for: | ||||||||
Interest | $ | 16,710 | $ | 1,398 | ||||
Income taxes, net | 13,829 | 12,970 | ||||||
Non-cash items in investing and financing activities: | ||||||||
Shares issued for acquisitions | 11,039 | — | ||||||
Change in non-cash additions to construction in progress | (6,586 | ) | 2,773 |
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TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 18: SUBSEQUENT EVENTS
On October 5, 2015, the Company offered an Employee Voluntary Separation Program (EVSP), which provides enhanced separation benefits to eligible non-union employees with more than one year of service. The Company expects a net reduction in total headcount of approximately 7% as a result of this program. The Company plans to fund the EVSP through salary continuation starting immediately and continuing through the first half of 2018. The Company expects the EVSP will result in a charge of approximately $55 million for all related severance, benefits and taxes. During the fourth quarter of 2015, the Company will record a charge estimated at $47 million related to the EVSP, partially offset by a non-cash gain for curtailment of post-retirement medical benefits, subject to the number of employees accepted into the EVSP.
On November 4, 2015, the Company received an adverse jury verdict in an employment litigation matter that originated prior to the spin-off. Accordingly, for the three and nine-month periods ended September 27, 2015, the Company has recorded a $9.1 million litigation reserve for this matter, composed of $7.1 million for the judgment and $2.0 million for the estimated amount of legal fees and expenses. The Company plans to appeal the verdict.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in thousands, except share and per share amounts)
The following discussion and analysis should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q, including the Company’s Consolidated and Combined Financial Statements and related Notes filed as part of this Quarterly Report, and “Cautionary Statement Concerning Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this Quarterly Report, as well as the factors described in our annual report on Form 10-K as filed with the SEC on March 25, 2015, particularly under Item 1A. “Risk Factors,” as supplemented in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 12, 2015, particularly under Part II Item IA, and in the Company’s other filings with the SEC.
We believe that the assumptions underlying the Consolidated and Combined Financial Statements included in this Quarterly Report are reasonable. However, the Consolidated and Combined Financial Statements may not necessarily reflect our results of operations, financial position and cash flows for future periods or what they would have been had Tribune Publishing been a separate, stand-alone company during the prior year periods presented.
OVERVIEW
Tribune Publishing Company (collectively with its subsidiaries, the “Company” or “Tribune Publishing”) was formed as a Delaware corporation on November 21, 2013. Tribune Publishing is a multiplatform media and marketing solutions company that delivers innovative experiences for audiences and advertisers. The Company's diverse portfolio of iconic news and information brands includes award-winning daily and weekly titles, digital properties and verticals in major markets across the country. Tribune Publishing’s media groups include the Chicago Tribune Media Group, the California News Group, the Sun Sentinel Media Group, the Orlando Sentinel Media Group, The Baltimore Sun Media Group, the Hartford Courant Media Group, the Morning Call Media Group and the Daily Press Media Group. In May 2015, the Company acquired The San Diego Union-Tribune newspaper (f/k/a the U-T San Diego) and nine community weeklies and related digital properties in San Diego County. These properties, along with the Los Angeles Times and its related properties, form the California News Group. See below for more information regarding the acquisition of The San Diego Union-Tribune.
On August 4, 2014 (the “Distribution Date”), Tribune Media Company, formerly Tribune Company (“TCO”) completed the spin-off of its principal publishing operations into an independent company, Tribune Publishing, by distributing 98.5% of the outstanding shares of Tribune Publishing common stock to holders of TCO common stock and warrants (the “Distribution”). In the Distribution, each holder of TCO Class A common stock, Class B common stock and warrants received 0.25 of a share of Tribune Publishing common stock for each share of TCO common stock or TCO warrant held as of the record date of July 28, 2014. Based on the number of shares of TCO common stock and TCO warrants outstanding as of 5:00 P.M. Eastern time on July 28, 2014 and the distribution ratio, 25,042,263 shares of Tribune Publishing common stock were distributed to the TCO stockholders and holders of TCO warrants and TCO retained 381,354 shares of Tribune Publishing common stock, representing 1.5% of outstanding common stock of Tribune Publishing. Subsequent to the Distribution, Tribune Publishing became a separate publicly-traded company with its own board of directors and senior management team. Shares of Tribune Publishing common stock are listed on the New York Stock Exchange under the symbol “TPUB.” In connection with the spin-off, Tribune Publishing paid a $275.0 million cash dividend to TCO from a portion of the proceeds of a senior secured credit facility entered into by Tribune Publishing.
On May 21, 2015, the Company completed the acquisition of MLIM, LLC (“MLIM”), the indirect owner of The San Diego Union-Tribune (f/k/a the U-T San Diego) and nine community weeklies and related digital properties in San Diego County. The stated purchase price was $85 million, consisting of $73 million in cash, subject to a working capital adjustment, and $12 million in Tribune Publishing common stock. The Company financed the $73 million cash portion of the purchase price, less a $2 million preliminary working capital adjustment at close, with a combination of cash-on-hand, funds available under the Company's Senior ABL Facility, as well as the net proceeds under an expansion under the Senior Term Loan further described in Liquidity and Capital Resources below. On the closing of the transaction, the Company entered into a registration rights agreement with the seller, whereby the seller is entitled to certain registration rights with respect to the shares of common stock of the Company acquired in connection with the transaction. Pursuant to the registration rights agreement, the Company filed a registration statement on Form S-3 on August 12, 2015 to register the shares issued to the seller. In the three months ended September 27, 2015, the Company received the final working capital adjustment of $2.6 million in cash from the seller.
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Prior to the closing, certain assets and liabilities of MLIM related to the business and the operation of The San Diego Union-Tribune, including real property used by the business, were distributed to the seller or its affiliates. Upon the close of the transaction, MLIM became a wholly-owned subsidiary of the Company, and retained certain liabilities, including certain indemnified legal matters and its existing pension obligations, and entered into a lease with the seller to use certain real property.
As part of the acquisition the Company became the sponsor of the single-employer defined benefit plan, The San Diego Union-Tribune LLC Retirement Plan (the “San Diego Plan”). The San Diego Plan provides benefits to certain current and former employees of The San Diego Union-Tribune. Future benefits under the plan have been frozen since January 31, 2009. As of September 27, 2015, the estimated underfunded status of the San Diego Plan was $107.2 million which is based upon the January 4, 2015 actuarial determination completed by the seller, adjusted for current year pre-acquisition activity and contributions since the acquisition.
Products and Services
Our product mix consists of three publication types: (i) daily newspapers, (ii) weekly newspapers and (iii) niche publications. Most of these publications also have a digital presence. The key characteristics of each of these types of publications are summarized in the table below.
Daily Newspapers | Weekly Newspapers | Niche Publications | |
Cost: | Paid | Paid and free | Paid and free |
Distribution: | Distributed four to seven days per week | Distributed one to three days per week | Distributed weekly, monthly or on an annual basis |
Income: | Revenue from advertisers, subscribers, rack/box sales | Paid: Revenue from advertising, subscribers, rack/box sales | Paid: Revenue from advertising, rack/box sales |
Free: Advertising revenue only | Free: Advertising revenue only | ||
Digital presence: | Maintain locally oriented websites, mobile sites and mobile apps, for select locations | Major publications maintain locally oriented websites and mobile sites for select locations | Selectively available online |
As of September 27, 2015, Tribune Publishing’s prominent publications include:
Media Group | City | Masthead | Circulation Type | Paid or Free | ||||
Chicago Tribune Media Group | ||||||||
Chicago, IL | Chicago Tribune www.chicagotribune.com | Daily | Paid | |||||
Chicago, IL | Chicago Magazine www.chicagomag.com | Monthly | Paid | |||||
Chicago, IL | Hoy www.vivelohoy.com | Daily | Free | |||||
Chicago, IL | Redeye www.redeyechicago.com | Daily | Free | |||||
California News Group | ||||||||
Los Angeles, CA | Los Angeles Times www.latimes.com | Daily | Paid | |||||
Los Angeles, CA | Hoy Los Angeles www.hoylosangeles.com | Weekly | Free | |||||
San Diego, CA | The San Diego Union-Tribune www.sandiegouniontribune.com | Daily | Paid |
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Media Group | City | Masthead | Circulation Type | Paid or Free | ||||
Sun Sentinel Media Group | ||||||||
Broward County, FL, Palm Beach County, FL | Sun Sentinel www.SunSentinel.com | Daily | Paid | |||||
Broward County, FL, Palm Beach County, FL | el Sentinel www.ElSentinel.com | Weekly | Free | |||||
Orlando Sentinel Media Group | ||||||||
Orlando, FL | Orlando Sentinel www.OrlandoSentinel.com | Daily | Paid | |||||
Orlando, FL | el Sentinel www.ElSentinel.com | Weekly | Free | |||||
The Baltimore Sun Media Group | ||||||||
Baltimore, MD | The Baltimore Sun www.baltimoresun.com | Daily | Paid | |||||
Annapolis, MD | The Capital www.capitalgazette.com | Daily | Paid | |||||
Westminster, MD | Carroll County Times www.carrollcountytimes.com | Daily | Paid | |||||
Hartford Courant Media Group | ||||||||
Hartford County, CT, Middlesex County, CT, Tolland County, CT | The Hartford Courant www.courant.com | Daily | Paid | |||||
Daily Press Media Group | ||||||||
Newport News, VA (Peninsula) | Daily Press www.dailypress.com | Daily | Paid | |||||
The Morning Call Media Group | ||||||||
Lehigh Valley, PA | The Morning Call www.themorningcall.com | Daily | Paid |
ForSaleByOwner.com is a national consumer-to-consumer focused real estate website. The site has been the largest “by owner” website in the country since 1999. The majority of the revenue generated by ForSaleByOwner.com is e-commerce, but approximately one third is generated through an in-house call center and strategic partnerships with service providers in the real estate industry. The business generates the majority of its revenue by selling listing packages directly to home sellers who receive online advertising, home pricing tools, marketing advice, yard signs and technical support. ForSaleByOwner.com also sells packages that allow home sellers to syndicate to other national websites such as Zillow and Realtor.com as well as their local multiple listing service (“MLS”).
Tribune Content Agency (“TCA”) is a syndication and licensing business providing quality content solutions for publishers around the globe. Working with a vast collection of the world’s best news and information sources, it delivers a daily news service and syndicated premium content to 2,000 media and digital information publishers in nearly 100 countries. Tribune News Service delivers the best material from 70 leading companies, including Los Angeles Times, Chicago Tribune, Bloomberg News, Miami Herald, The Dallas Morning News, Seattle Times and The Philadelphia Inquirer. The Tribune Premium Content Service syndicates columnists such as Arianna Huffington, Cal Thomas, Clarence Page, Ask Amy, Mario Batali and Rick Steves. TCA manages the licensing of premium content from publications such as Rolling Stone, The Atlantic, Fast Company, Mayo Clinic, Variety and many more. TCA Originals is a new service that identifies remarkable journalism for production in Hollywood. Tribune Content Agency traces its roots to 1918.
The Company contracts with a number of national and local newspapers to both print and distribute their respective publications in local markets where it is a newspaper publisher. In some instances where it prints publications, it also manages and procures newsprint, ink and plates on their behalf. These arrangements allow the Company to leverage its investment in infrastructure in those markets that support its own publications. As a result, these arrangements tend to contribute significant incremental profitability relative to the underlying revenues. The Company currently distributes national newspapers (including USA Today, The New York Times, and The Wall Street Journal) in its local markets under
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multiple agreements. Additionally, in Los Angeles, Chicago, South Florida and Hartford, the Company provides some or all of these services to other local publications.
Revenue Sources
In the nine months ended September 27, 2015, 54.9% of Tribune Publishing's operating revenues were derived from advertising. These revenues were generated from the sale of advertising space in published issues of the newspapers and on interactive websites and from the delivery of preprinted advertising supplements. Approximately 28.4% of operating revenues for the nine months ended September 27, 2015 were generated from the sale of newspapers, digital subscriptions and other publications to individual subscribers or to sales outlets, which re-sell the newspapers. The remaining 16.6% of operating revenues for the nine months ended September 27, 2015 were generated from the provision of commercial printing and delivery services to other newspapers, direct mail advertising and services, digital marketing services, the distribution of syndicated content and other related activities.
Advertising revenue includes newspaper print advertising and digital advertising. Newspaper print advertising is typically in the form of display or preprint advertising whereas digital advertising can be in the form of display, banner ads, coupon ads, video, search advertising and linear ads placed on Tribune Publishing and affiliated websites. Advertising revenues are comprised of three basic categories: retail, national and classified. Changes in advertising revenues are heavily correlated with changes in the level of economic activity in the United States. Changes in gross domestic product, consumer spending levels, auto sales, housing sales, unemployment rates, job creation, circulation levels and rates all impact demand for advertising in Tribune Publishing’s newspapers and websites. Tribune Publishing’s advertising revenues are subject to changes in these factors both on a national level and on a local level in its markets. Circulation revenue results from the sale of print and digital editions of newspapers to individual subscribers and the sale of print editions of newspapers to sales outlets, which re-sell the newspapers. Other revenues are derived from commercial printing and delivery services provided to other newspapers, direct mail advertising and services, digital marketing services, the distribution of syndicated content and other related activities.
The advertising industry continues to experience a secular shift toward digital advertising, which can be less expensive and can offer more directly measurable returns than traditional print media. The digital advertising marketplace has become increasingly complex and fragmented, particularly as digital advertising networks and exchanges, real-time bidding and other programmatic-buying channels that allow advertisers to buy audience at scale play a more significant role. Competition from a wide variety of digital media and services, many of which charge lower rates than us, and a significant increase in inventory in the digital marketplace have affected, and will likely continue to affect, our ability to maintain or increase our advertising revenues.
Circulation revenue is primarily from traditional print products, where the industry has experienced declining print circulation volume in recent years due to, among other factors, increased competition from digital platforms and sources other than traditional newspapers (which are often free to users), higher subscription and single-copy rates and a growing preference among some consumers for receiving their news from a variety of sources.
Expenses and Operating Measures
Significant operating expense categories include compensation, newsprint and ink, circulation distribution, depreciation and amortization, other operating expenses, and in prior year periods, allocations of corporate costs. Compensation expense is affected by many factors, including the number of full-time equivalent employees, changes in the design and costs of various employee benefit plans, the level of pay increases and actions that impact staffing levels. Circulation distribution expenses primarily include delivery and inserting fees paid to third party contractors and postage costs for Tribune Publishing’s total market coverage products. Circulation distribution expenses can vary from year to year due to changes in volume levels, the fees negotiated with third party contractors and postage rates. Newsprint and ink are commodities and pricing can vary significantly from year to year. Other expenses are principally for sales and marketing activities, occupancy costs, amounts paid to third parties for temporary labor, outside printing and production costs and other general and administrative expenses. Allocated corporate costs include charges from TCO prior to the Distribution for certain corporate, service center and technology support services, as well as insurance, occupancy and other costs.
Tribune Publishing uses operating revenues, income from operations and Adjusted EBITDA as measures of financial performance. In addition, Tribune Publishing uses average net paid circulation for its newspapers, together with other factors, to measure its market share and performance. Net paid circulation includes both individually paid copy sales (home delivery, single copy and digital copy sales) and other paid copy sales (education, sponsored and hotel copy sales).
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Tribune Publishing’s results of operations, when examined on a quarterly basis, reflect the seasonality of Tribune Publishing’s revenues. Second and fourth quarter advertising revenues are typically higher than first and third quarter revenues. Results for the second quarter reflect spring advertising revenues, while the fourth quarter includes advertising revenues related to the holiday season.
Chapter 11 Reorganization
On December 8, 2008 (the “Petition Date”), TCO and 110 of its direct and indirect wholly-owned subsidiaries (each a “Debtor” and, collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 (“Chapter 11”) of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). A joint plan of reorganization for the Debtors (the “Plan”) became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). Certain of the legal entities included in the Consolidated and Combined Financial Statements of Tribune Publishing were Debtors or, as a result of the restructuring transactions undertaken pursuant to the Plan, are successor legal entities to legal entities that were Debtors (collectively, the “Tribune Publishing Debtors”). On March 16, 2015, the Chapter 11 estates of 88 of the Debtors were closed by a final decree issued by the Bankruptcy Court. On July 24, 2015, the Chapter 11 estates of an additional 8 of the Debtors were closed by final decree. The remainder of the Debtors’ Chapter 11 cases, including several of the Tribune Publishing Debtors’ cases, continue to be jointly administered under the caption “In re:Tribune Media Company, et al.,” Case No. 08-13141.
On the Effective Date, substantially all of the Debtors’ prepetition liabilities at December 30, 2012 were settled or otherwise satisfied under the Plan. However, certain other claims have been or will be settled or otherwise satisfied subsequent to the Effective Date. Although the allowed amount of certain unresolved claims has not been determined, Tribune Publishing’s liabilities subject to compromise associated with these unresolved claims were discharged upon emergence from Chapter 11 in exchange for the treatment outlined in the Plan.
Reorganization Items, Net—Reorganization items, net, generally includes provisions and adjustments to reflect the carrying value of certain prepetition liabilities at their estimated allowable claim amounts and, pursuant to ASC Topic 852, “Reorganizations,” is reported separately in Tribune Publishing’s Consolidated and Combined Statements of Income. Reorganization items, net, may also include professional advisory fees and other costs directly associated with the Debtors’ Chapter 11 cases.
Specifically identifiable reorganization provisions, adjustments and other costs directly related to Tribune Publishing have been included in the Company’s Consolidated and Combined Statements of Comprehensive Income for the three and nine months ended September 27, 2015 and September 28, 2014 and consisted of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 | September 28, 2014 | September 27, 2015 | September 28, 2014 | |||||||||||||
Reorganization costs, net: | ||||||||||||||||
Contract rejections and claim settlements | $ | — | $ | (205 | ) | $ | (15 | ) | $ | (212 | ) | |||||
Other, net | 80 | — | (758 | ) | (2 | ) | ||||||||||
Total reorganization costs, net | $ | 80 | $ | (205 | ) | $ | (773 | ) | $ | (214 | ) |
Tribune Publishing expects to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2015 and potentially in future periods. These expenses are expected to consist primarily of other costs related to the implementation of the Plan and the resolution of unresolved claims.
Employee Reductions
Tribune Publishing identified reductions in its staffing levels of 24 and 298 in the three and nine months ended September 27, 2015, respectively. Of these reductions, 186 are for the Company's newly acquired operations in San Diego as the Company has consolidated many of those positions into its current operating structure. Tribune Publishing recorded pretax charges related to these reductions of $2.8 million and $6.2 million for the three and nine months ended September 27, 2015, respectively. The accrued liability for severance and related expenses was $3.1 million at September 27, 2015 and $5.0 million at December 28, 2014.
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Results of Operations
Operating results for the three and nine months ended September 27, 2015 and September 28, 2014 are shown in the table below. References in this discussion to individual markets include daily newspapers in those markets and their related businesses (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||||||||
September 27, 2015 | September 28, 2014 | % Change | September 27, 2015 | September 28, 2014 | % Change | |||||||||||||||||
Operating revenues | $ | 404,333 | $ | 404,057 | 0.1 | % | $ | 1,210,994 | $ | 1,250,502 | (3.2 | %) | ||||||||||
Operating expenses | 411,901 | 399,540 | 3.1 | % | 1,196,049 | 1,200,203 | (0.3 | %) | ||||||||||||||
Income (loss) from operations | $ | (7,568 | ) | $ | 4,517 | * | $ | 14,945 | $ | 50,299 | (70.3 | %) |
Overview
Three Months Ended September 27, 2015 compared to the Three Months Ended September 28, 2014
Operating revenues increased 0.1%, or $0.3 million, in the three months ended September 27, 2015 primarily due to an increase of $12.5 million in circulation revenues, partially offset by a $1.1 million decline in advertising revenues and a $11.1 million decrease in other revenues. Operating revenues include revenues from acquisitions.
Income from operations decreased $12.1 million, in the three months ended September 27, 2015 primarily due to an increase in litigation reserves in connection with an adverse jury verdict related to an employment litigation matter that originated prior to the spin-off, as well as slightly higher operating expenses related to the 2015 acquisition.
Nine Months Ended September 27, 2015 compared to the Nine Months Ended September 28, 2014
Operating revenues decreased 3.2%, or $39.5 million, in the nine months ended September 27, 2015 due to a $30.9 million decline in advertising revenues and a $29.1 million decrease in other revenues, partially offset by an increase of $20.5 million in circulation revenues. Operating revenues include revenues from acquisitions.
Income from operations decreased 70.3%, or $35.4 million, in the nine months ended September 27, 2015 due mainly to lower advertising revenues and an increase in litigation reserves in connection with an adverse jury verdict related to an employment litigation matter that originated prior to the spin-off.
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Operating Revenues—Total operating revenues, by classification, for the three and nine months ended September 27, 2015 and September 28, 2014 were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||
September 27, 2015 | September 28, 2014 | % Change | September 27, 2015 | September 28, 2014 | % Change | |||||||||||||||||
Advertising | ||||||||||||||||||||||
Retail | $ | 116,087 | $ | 114,653 | 1.3 | % | $ | 342,954 | $ | 353,889 | (3.1 | %) | ||||||||||
National | 36,817 | 37,652 | (2.2 | %) | 121,891 | 133,528 | (8.7 | %) | ||||||||||||||
Classified | 66,868 | 68,537 | (2.4 | %) | 200,297 | 208,591 | (4.0 | %) | ||||||||||||||
Total advertising | 219,772 | 220,842 | (0.5 | %) | 665,142 | 696,008 | (4.4 | %) | ||||||||||||||
Circulation | 119,979 | 107,511 | 11.6 | % | 344,288 | 323,828 | 6.3 | % | ||||||||||||||
Other revenue | ||||||||||||||||||||||
Commercial print and delivery | 31,116 | 43,951 | (29.2 | %) | 97,325 | 133,792 | (27.3 | %) | ||||||||||||||
Direct mail and marketing | 13,583 | 17,459 |