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EX-32 - EXHIBIT 32 - Tribune Publishing Coa2018q110qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Tribune Publishing Coa2018q110qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Tribune Publishing Coa2018q110qexhibit311.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 April 1, 2018
 
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

Commission File No. 001-36230
TRONC, INC.
(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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” an “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ____
 
Accelerated filer   X   
Non-accelerated filer ____
 
Smaller reporting company ____
 
 
Emerging growth company ____
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 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 May 7, 2018
Common Stock, $0.01 par value
 
35,287,852






 
 
TRONC INC.
 
 
 
 
FORM 10-Q
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
PART I
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
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 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: changes in advertising demand, circulation levels and audience shares; competition and other economic conditions; factors impacting the ability to close our agreement to sell our California properties; economic and market conditions that could impact the level of our required contributions to the defined benefit pension plans to which we contribute; decisions by trustees under rehabilitation plans (if applicable) or other contributing employers with respect to multiemployer plans to which we contribute which could impact the level of our contributions; our ability to develop and grow our online businesses; changes in newsprint price; our ability to maintain effective internal control over financial reporting; concentration of stock ownership among our principal stockholders whose interests may differ from those of other stockholders; 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 (“SEC”) on March 16, 2018, and in our other filings with the SEC.
The words “believe,” “expect,” “anticipate,” “estimate,” “could,” “should,” “intend,” “may,” “will,” “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, in fact occur 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. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

2




PART I.
Item 1.    Financial Statements
TRONC, INC.
CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
(Unaudited)
 
 
Three months ended
 
 
April 1,
2018
 
March 26,
2017
 
 
 
 
 
Operating revenues
 
$
355,616

 
$
366,116

Operating expenses:
 
 
 
 
Compensation
 
144,537

 
133,147

Newsprint and ink
 
22,034

 
23,524

Outside services
 
130,559

 
114,310

Other operating expenses
 
62,598

 
69,887

Depreciation and amortization
 
14,649

 
13,178

Total operating expenses
 
374,377

 
354,046

Income (loss) from operations
 
(18,761
)
 
12,070

Interest expense, net
 
(6,594
)
 
(6,477
)
Premium on stock buyback
 

 
(6,031
)
Loss on equity investments, net
 
(729
)
 
(688
)
Other income, net
 
4,388

 
430

Loss before income taxes
 
(21,696
)
 
(696
)
Income tax expense (benefit)
 
(7,185
)
 
2,293

Net loss
 
$
(14,511
)
 
$
(2,989
)
Less: Income attributable to noncontrolling interest
 
262

 

Net loss attributable to tronc common stockholders
 
$
(14,773
)
 
$
(2,989
)
 
 
 
 
 
Net loss attributable to tronc per common share:
 
 
 
 
Basic
 
$
(0.42
)
 
$
(0.08
)
Diluted
 
$
(0.42
)
 
$
(0.08
)
Weighted average shares outstanding:
 
 
 
 
Basic
 
34,801

 
36,306

Diluted
 
34,801

 
36,306



The accompanying notes are an integral part of these unaudited consolidated financial statements.

3




TRONC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
Three months ended
 
April 1,
2018
 
March 26,
2017
Net loss
$
(14,511
)
 
$
(2,989
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Amortization of items to periodic pension cost during the period, net of taxes of $873 and $134, respectively
(2,268
)
 
(204
)
Foreign currency translation

 

Other comprehensive income (loss), net of taxes
(2,268
)
 
(204
)
Comprehensive loss
$
(16,779
)
 
$
(3,193
)
Comprehensive income attributable to noncontrolling interest
262

 

Comprehensive loss attributable to tronc common stockholders
$
(17,041
)
 
$
(3,193
)



The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



TRONC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 
 
April 1,
2018
 
December 31,
2017
Assets
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
162,731

 
$
189,653

Accounts receivable (net of allowances of $18,897 and $16,377)
 
153,533

 
180,679

Inventories
 
13,277

 
10,798

Prepaid expenses and other
 
26,870

 
25,575

Total current assets
 
356,411

 
406,705


 
 
 
 
Property, plant and equipment
 
 
 
 
Machinery, equipment and furniture
 
130,289

 
127,988

Buildings and leasehold improvements
 
43,246

 
42,635

 
 
173,535

 
170,623

Accumulated depreciation
 
(77,788
)
 
(72,647
)
 
 
95,747

 
97,976

Advance payments on property, plant and equipment
 
14,007

 
9,064

Property, plant and equipment, net
 
109,754

 
107,040

 
 
 
 
 
Other assets
 
 
 
 
Goodwill
 
203,464

 
121,907

Intangible assets, net
 
144,078

 
125,178

Software, net
 
39,774

 
42,793

Deferred income taxes
 
28,886

 
29,911

Other long-term assets
 
30,818

 
31,599

Total other assets
 
447,020

 
351,388

 
 
 
 
 
Total assets
 
$
913,185

 
$
865,133

 
 
 
 
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5



TRONC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
(In thousands, except per share data)
(Unaudited)


 
 
April 1,
2018
 
December 31,
2017
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
21,829

 
$
21,857

Accounts payable
 
75,281

 
78,365

Employee compensation and benefits
 
56,421

 
63,761

Deferred revenue
 
79,740

 
76,353

Other current liabilities
 
24,291

 
20,568

Total current liabilities
 
257,562

 
260,904

 
 
 
 
 
Non-current liabilities
 
 
 
 
Long-term debt
 
326,979

 
331,881

Deferred revenue
 
3,534

 
5,142

Pension and postretirement benefits payable
 
104,494

 
113,593

Other obligations
 
90,201

 
84,451

Total non-current liabilities
 
525,208

 
535,067

 
 
 
 
 
Noncontrolling interest
 
42,062

 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value. Authorized 30,000 shares; no shares issued or outstanding at April 1, 2018 and December 31, 2017
 

 

Common stock, $.01 par value. Authorized 300,000 shares, 37,230 shares issued and 35,276 shares outstanding at April 1, 2018; 37,551 shares issued and 33,684 shares outstanding at December 31, 2017
 
372

 
376

Additional paid-in capital
 
161,099

 
150,229

Accumulated deficit
 
(31,163
)
 
(16,390
)
Accumulated other comprehensive loss
 
(15,795
)
 
(13,527
)
Treasury stock, at cost - 1,954 shares at April 1, 2018 and 3,867 shares at December 31, 2017
 
(26,160
)
 
(51,526
)
Total stockholders’ equity
 
88,353

 
69,162

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
913,185

 
$
865,133



The accompanying notes are an integral part of these unaudited consolidated financial statements.

6




TRONC, INC.
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(In thousands)
(Unaudited)

 
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Deficit
 
AOCI
 
Treasury Stock
 
Total Equity (Deficit)
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
 
37,551

 
$
376

 
$
150,229

 
$
(16,390
)
 
$
(13,527
)
 
$
(51,526
)
 
$
69,162

Comprehensive income (loss)
 

 

 

 
(14,773
)
 
(2,268
)
 

 
(17,041
)
Issuance of stock from treasury for acquisition
 

 

 
9,229

 

 

 
25,366

 
34,595

Issuance of stock from restricted stock and restricted stock unit conversions
 
122

 
1

 
(1
)
 

 

 

 

Exercise of stock options
 
7

 

 
133

 

 

 

 
133

Stock-based compensation
 

 

 
2,447

 

 

 

 
2,447

Withholding for taxes on restricted stock unit conversions
 

 

 
(943
)
 

 

 

 
(943
)
Forfeited restricted stock
 
(450
)
 
(5
)
 
5

 

 

 

 

Balance at April 1, 2018
 
37,230

 
$
372

 
$
161,099

 
$
(31,163
)
 
$
(15,795
)
 
$
(26,160
)
 
$
88,353




The accompanying notes are an integral part of these unaudited consolidated financial statements.

7




TRONC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
Three Months Ended
 
 
April 1,
2018
 
March 26,
2017
Operating Activities
 
 
 
 
Net income (loss)
 
$
(14,511
)
 
$
(2,989
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
14,649

 
13,178

Stock compensation expense
 
2,447

 
1,859

Loss on equity investments, net
 
707

 
688

Deferred income taxes
 
1,895

 
10,832

Non-current deferred revenue
 
(1,607
)
 
(474
)
Premium on stock buyback
 

 
6,031

Pension contribution
 
(5,743
)
 
(1,957
)
Postretirement medical, life and other benefits
 
(6,497
)
 
(540
)
Changes in working capital items, excluding acquisitions:
 
 
 
 
Accounts receivable, net
 
35,287

 
34,093

Prepaid expenses, inventories and other current assets
 
(4,674
)
 
(10,284
)
Accounts payable, employee compensation and benefits, deferred revenue and other current liabilities
 
107

 
(21,838
)
Other, net
 
(473
)
 
1,949

Net cash provided by operating activities
 
21,587

 
30,548

 
 
 
 
 
Investing Activities
 
 
 
 
Capital expenditures
 
(7,225
)
 
(4,662
)
Acquisition of business, net of cash acquired
 
(33,949
)
 

Other, net
 
(1,087
)
 
(723
)
Net cash used for investing activities
 
(42,261
)
 
(5,385
)
 
 
 
 
 
Financing Activities
 
 
 
 
Purchase of treasury stock
 

 
(56,189
)
Repayment of long-term debt
 
(5,272
)
 
(5,272
)
Repayments of capital lease obligations
 
(167
)
 
(120
)
Withholding for taxes on RSU vesting
 
(943
)
 
(896
)
Dividends paid to common stockholders
 

 
(145
)
Proceeds from exercise of stock options
 
134

 

Net cash used for financing activities
 
(6,248
)
 
(62,622
)
 
 
 
 
 
Net decrease in cash
 
(26,922
)
 
(37,459
)
Cash, beginning of period
 
189,653

 
198,349

Cash, end of period
 
$
162,731

 
$
160,890


The accompanying notes are an integral part of these unaudited consolidated financial statements.

8


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1: DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business—tronc, Inc., formerly Tribune Publishing Company, was formed as a Delaware corporation on November 21, 2013. tronc, Inc. together with its subsidiaries (collectively, the “Company” or “tronc”) is a media company rooted in award-winning journalism. Headquartered in Chicago, tronc operates newsrooms in ten markets with titles including Chicago Tribune, The Baltimore Sun, Orlando Sentinel, South Florida’s Sun Sentinel, Virginia’s Daily Press, Lehigh Valley, Pennsylvania’s The Morning Call, Hartford Courant, Los Angeles Times, and The San Diego Union Tribune. On September 3, 2017, the Company completed the purchase of the New York Daily News, New York City’s “Hometown Newspaper”. On February 6, 2018, the Company acquired a 60% interest in BestReviews LLC (“BestReviews”). See Note 5 for further information on the acquisition. tronc’s legacy of brands, including the New York Daily News, has earned a combined 105 Pulitzer Prizes and is committed to informing, inspiring and engaging local communities.
tronc’s brands create and distribute content across its media portfolio, offering integrated marketing, media, and business services to consumers and advertisers, including digital solutions and advertising opportunities.
On February 7, 2018, the Company entered into a Membership Interest Purchase Agreement (“MIPA”) by and between the Company and Nant Capital, LLC (“Nant Capital”) pursuant to which the Company will sell the Los Angeles Times, The San Diego Union-Tribune and various other titles of the Company’s California properties to Nant Capital for an aggregate purchase price of $500 million in cash plus the assumption of unfunded pension liabilities related to the San Diego Pension Plan (the “Nant Transaction”). As set forth in the MIPA, Nant Capital has received an equity commitment from Dr. Patrick Soon-Shiong for the full amount of the cash purchase price. The Nant Transaction is expected to close in the second or third quarter of 2018. Dr. Soon-Shiong, a former director of the Company, together with Nant Capital, beneficially own 8,743,619 shares of tronc common stock, which represented 24.8% of the outstanding shares of tronc common stock as of April 1, 2018.
Since these properties did not meet the criteria to be classified as assets held for sale or discontinued operations as of April 1, 2018, any discussions of the business of the Company and all reported financial and operating results and metrics reflect inclusion of the Los Angeles Times and The San Diego Union-Tribune.
Fiscal Periods—The Company’s fiscal year ends on the last Sunday in December. Fiscal year 2018 ends on December 30, 2018 and fiscal year 2017 ended on December 31, 2017. Fiscal year 2018 is a 52-week year with 13 weeks in each quarter. Fiscal year 2017 was a 53-week year with 13 weeks in the first through third quarters and 14 weeks in the fourth quarter.
Basis of Presentation—The accompanying unaudited Consolidated Financial Statements and notes of the Company 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 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 tronc as of April 1, 2018 and December 31, 2017 and the results of operations and cash flows for the three months ended April 1, 2018 and March 26, 2017. This includes all normal and recurring adjustments and elimination of intercompany transactions. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The year-end Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The Company assesses its operating segments in accordance with ASC Topic 280, “Segment Reporting.” The Company is managed by its chief operating decision maker, as defined by ASC Topic 280, in two reportable segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, Tribune Content Agency (“TCA”), BestReviews and forsalebyowner.com. See Note 16 for additional segment information.

9


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


New Accounting Standards—In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Topic 220, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU amends ASC 220, Income Statement — Reporting Comprehensive Income, to “allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.” In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Topic 715, Compensation - Retirement Benefits; Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires the disaggregation of the service cost component from other components of net periodic benefit cost, clarifies how to present the service cost component and other components of net benefit costs in the financial statements and allows only the service cost component of net benefit costs to be eligible for capitalization. The Company adopted the standard on January 1, 2018 and has applied the standard on a retrospective basis. Accordingly, prior period amounts have been adjusted. Adoption of the standard had no effect on the Company’s overall results of operations. The disclosures required by the standard can be found in Note 10.
In January 2017, the FASB issued ASU 2017-04, Topic 350, Intangibles-Goodwill and Other; Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test standardizing the impairment assessment to measure a reporting unit’s carrying value against its fair value and eliminate the calculation of an implied fair value of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating how the adoption of this standard will impact the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Topic 805, Clarifying the Definition of a Business, which establishes criteria to determine when an integrated set of assets and activities is not a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017 and should be applied prospectively. The Company adopted the standard effective January 1, 2018 and will apply the standard to acquisitions or dispositions after that date.
In November 2016, the FASB issued ASU 2016-18, Topic 230, Statement of Cash Flows, which clarifies how companies present and classify restricted cash in the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. The guidance is required to be applied on a retrospective basis. The Company adopted the standard effective January 1, 2018. The adoption had no effect on the Company’s consolidated financial statements as the Company has no restricted cash.
In August 2016, the FASB issued ASU 2016-15, Topic 230, Statement of Cash Flows, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. The guidance is required to be applied on a retrospective basis. The Company adopted the standard effective January 1, 2018. The adoption had no effect of the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Topic 842, Leases, which requires lessees to recognize lease assets and lease liabilities for operating leases. The Company expects to adopt this standard in the first quarter of 2019 and has initiated efforts to assess the impact of this new standard on the Company’s future reported results and operating and accounting processes and systems.
In May 2014, the FASB issued ASU 2014-09, Topic 606, Revenue from Contracts with Customers and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. 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”

10


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


adoption or a “modified retrospective” adoption. The amended effective date of ASU 2014-09 is for reporting periods beginning after December 15, 2017. The Company adopted the standard effective January 1, 2018. The adoption did not have a material effect on the Company’s consolidated financial statements. See Note 2 for disclosures as a result of the adoption.
NOTE 2: REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU 2014-09, Topic 606, Revenue from Contracts with Customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results of operations for periods after January 1, 2018 reflect the changes under ASU 2014-09. Results of operations for periods before January 1, 2018, continue to be reported under guidance in effect at that time.
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services. Revenues are recognized as performance obligations that are satisfied either at a point in time, such as when an advertisement is published, or over time, such as content licensing.
Advertising revenue
Print advertising revenue is typically in the form of print display, classified, and preprint advertising in tronc newspapers. Digital advertising consists of website display, banner ads, advertising widgets, coupon ads, video, search advertising and linear ads placed on tronc and affiliated websites. Customers submit ads to appear either in the print newspapers or on websites. Advertising revenue is recognized when the Company satisfies the performance obligation by transferring the promised goods or services to the customer in an amount that reflects the consideration the Company is entitled to receive. For print advertising, classified and preprint advertising, this transfer, which occurs at a point in time, occurs when the advertising appears in the newspaper.
Digital advertising is typically sold on a cost-per-impression basis. An advertiser pays an amount based on the number of times their ad is displayed on the Company’s websites. Revenue is recognized at a point in time when the ad is displayed on the websites.
Advertising revenue also includes digital marketing services which consist of development of mobile websites, search engine marketing and optimization, social media account management and content marketing for customers’ web presence for small to medium size businesses. For mobile website development, revenue is recognized when the website is live. For search engine marketing and optimization, social account management and content marketing, revenue is recognized over the period of time the service is performed for the customer.
Certain customers receive cash-based incentives or credits, which are accounted for as variable consideration. The Company estimates these amounts based on the expected amount to be provided to customers and reduces revenues recognized. The Company expects there will be no significant changes to our estimates of variable consideration.
Circulation revenue
Circulation revenue results from the sale of print editions of newspapers to individual subscribers and to sales outlets that re-sell the newspapers. For individual subscribers, revenue is recognized at a point in time when the newspapers are delivered to the subscribers. For sales outlets, revenue is recognized at a point in time when the newspapers are delivered to the sales outlets or to an intermediary which has purchased the newspapers to resell to the sales outlets.
Other revenue
Other revenues are derived from commercial printing and delivery services provided to other newspapers, direct mail advertising and services, syndication and licensing revenue and digital only subscriptions.
Digital circulation revenue results from the provision of online content to subscribers. tronc recognizes revenue daily, per the contract term as the customer receives access to digital content.

11


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


For commercial printing and delivery services, the Company contracts with a number of national and local newspapers to both print and/or distribute their respective publications in local markets where it is a newspaper publisher. For commercial printing, revenue is recognized as the papers are printed and available for delivery. For commercial delivery, the Company has two models under which it operates, buy/sell and fee-for-delivery model. Under the buy/sell model, the Company buys the customers newspapers and resells them to subscribers and sales outlets. Revenue the Company receives for the sale of the newspapers is recognized when the newspapers are delivered to subscribers or sales outlets. Under the fee-for-delivery model the Company receives a fee for each newspaper delivered. Revenue is recognized at the time the newspaper is delivered either to the subscriber or to the sales outlet.
For direct mail advertising and services, the Company enters into an arrangement with customers to design, print and distribute advertising materials. Revenue is recognized when the items are delivered to the postage courier.
For licensing and syndication revenue, the Company enters into a sales-based royalty arrangement with the customer to provide a license to tronc content. The Company receives a periodic royalty payment based on usage of the content or derived sales of the content. Revenue is recognized based on royalties received.
The Company’s revenues disaggregated by type of revenue and segment are presented in Note 16.
The Company receives payments from its subscribers in advance of the delivery of the content both either in print or digitally. These up-front payments and fees are recorded as deferred revenue upon receipt and generally require deferral of revenue recognition to a future period until the Company performs its obligations under the subscription agreement. The deferred revenue is recognized as revenue as the content is delivered. The deferred revenue is considered a contract liability under ASC 606. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. Therefore the Company has no contract assets as defined under ASC 606. The following table presents changes in the Company’s contract liabilities during the three months ended April 1, 2018 (in thousands):
Balance as of December 31, 2017
 
$
81,495

Additions
 
53,991

Amounts recognized as revenue
 
(52,212
)
Balance as of April 1, 2018
 
$
83,274

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within cost of sales. Additionally, the Company does not disclose the value of unsatisfied performance obligations because the vast majority of contracts have original expected lengths of one year or less and payment terms are generally short-term in nature unless a customer is in bankruptcy.
NOTE 3: CHANGES IN OPERATIONS
Employee Reductions
The Company implemented reductions of 206 and 73 positions in the three months ended April 1, 2018 and March 26, 2017, respectively, and recorded pretax charges related to these reductions and executive separations of $6.1 million and $1.9 million, respectively.
A summary of the activity with respect to the Company’s severance accrual for the three months ended April 1, 2018 is as follows (in thousands):
Balance at December 31, 2017
 
$
13,994

Provision
 
6,126

Payments
 
(7,316
)
Balance at April 1, 2018
 
$
12,804


12


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Charges for severance and related expenses are included in compensation expense in the accompanying Consolidated Statements of Loss.
Lease Abandonment
A summary of the activity with respect to the Company’s lease abandonment accrual for the three months ended April 1, 2018 is as follows (in thousands):
Balance at December 31, 2017
 
$
5,417

Provision
 

Payments and other
 
(1,359
)
Balance at April 1, 2018
 
$
4,058

These charges are included in other operating expenses in the accompanying Consolidated Statements of Loss.
NOTE 4: RELATED PARTY TRANSACTIONS
Merrick Consulting Agreement
On December 20, 2017, the Company, entered into a Consulting Agreement with Merrick Ventures LLC (“Merrick Ventures”) and solely for certain sections thereof, Michael W. Ferro, Jr. and Merrick Media, LLC (“Merrick Media”). Mr. Ferro is: (1) Chairman and Chief Executive Officer of Merrick Ventures and (2) the manager of Merrick Venture Management, LLC which is the sole manager of Merrick Media. At the time the agreement was signed, Mr. Ferro was also Chairman of tronc’s Board of Directors and, together with Merrick Ventures and Merrick Media, a significant stockholder. The Consulting Agreement provides for the engagement of Merrick Ventures on a non-exclusive basis to provide certain management expertise and technical services for an annual fee of $5 million in cash, payable in advance on the first business day of each calendar year. The first payment was made in January 2018. The Consulting Agreement provides for a rolling three-year term, with the initial term continuing through December 31, 2020. During the term of the Consulting Agreement, Merrick Ventures and Mr. Ferro agreed to certain non-competition covenants relating to engaging in certain other daily printed newspaper businesses, subject to certain exceptions, and amended certain terms of the Securities Purchase Agreement by and among the Company, Merrick Media and Mr. Ferro. The Consulting Agreement also provided for termination of the Aircraft Dry Sublease Agreement described below as of December 31, 2017 and after such time, Merrick Ventures and Mr. Ferro are responsible for all travel expenses (including private plane expenses) incurred by them in performance of their services for the Company, rather than the Company reimbursing them for such expenses. Such expenses totaled $3.0 million in fiscal 2017 and $2.7 million in fiscal 2016.
On March 18, 2018, Mr. Ferro retired from the Company’s Board and on April 13, 2018, Mr. Ferro, Merrick Ventures, and Merrick Media entered into a securities purchase agreement to sell all of their outstanding shares in the Company. Upon consummation of the sale, Mr. Ferro will no longer be a related party. The Consulting Agreement will remain in effect after the consummation of such sale. As Mr. Ferro is no longer actively engaged in the business and the Company remains contractually committed for the future payments due under the Consulting Agreement, the Company recognized expense for the full $15.0 million due under the Consulting Agreement in outside services in the first quarter of 2018.
Aircraft Dry Sublease
During 2017, the Company was party to an Aircraft Dry Sublease Agreement with Merrick Ventures. Under the agreement, the Company subleased on a non-exclusive basis, a Bombardier aircraft leased by Merrick Ventures, which included the Company’s proportionate share of the insurance premiums and maintenance expenses and for charges attributable to the Company for the operation of the aircraft by the Company during the lease term. This lease was terminated effective December 31, 2017. During the three months ended March 26, 2017, the Company incurred $0.7 million related to the aircraft sublease. For the three months ended March 26, 2017, the Company paid $0.6 million to Merrick Ventures and $0.1 million to an outside party for pilot services.

13


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Event tickets
In April 2017, the Company acquired Merrick Ventures’ interest and obligations in connection with the license of a suite and tickets to certain sporting events. The aggregate cost of the suite and regular season tickets approximates $0.3 million annually. During the first quarter of 2017, the Company paid Merrick Ventures $0.2 million for the face value of the suite and tickets for events. There are no further obligations to Merrick Ventures for these tickets. The suite and tickets are utilized in the Company’s sales and marketing efforts and for other corporate purposes.
CIPS Marketing Group Inc.
The Company utilizes the services of CIPS Marketing Group, Inc. (“CIPS”) for local marketing efforts such as distribution, door-to-door marketing and total market coverage. Prior to the Company’s sale of its 50% interest in CIPS in July 2017, the investment was recorded as an equity investment. During the three months ended March 26, 2017, the Company recorded $0.2 million in revenue from CIPS and $1.5 million in other operating expenses related to such marketing services.
Nucleus Marketing Solutions, LLC
In April 2016, tronc, along with other leading media companies McClatchy, Gannett and Hearst, formed Nucleus Marketing Solutions, LLC (“Nucleus”). This network connects national advertisers to audiences across existing and emerging print and digital platforms. Nucleus works with its marketing partners to address their goals by offering integrated services across all platforms. The Company owned 25% of Nucleus as of April 1, 2018. The Company’s interest in Nucleus is recorded as an equity method investment. During the three months ended March 26, 2017, the Company recorded $2.0 million on a net basis for revenue related to the Nucleus agreement. The revenue recorded in the three months ended April 1, 2018 was immaterial.
NOTE 5: ACQUISITIONS
BestReviews Acquisition
Acquisition Agreement
On February 6, 2018, the Company acquired a 60% membership interest in BestReviews LLC (“BestReviews”), a company engaged in the business of testing, researching and reviewing consumer products, pursuant to an Acquisition Agreement, entered into on the same date (the “Acquisition Agreement”), among the Company, BestReviews Inc., a Delaware corporation (“Parent”), BestReviews and the stockholders of Best Reviews Inc.
Upon the terms and subject to the conditions set forth in the Acquisition Agreement, the Company acquired (the “Acquisition”) 60% of Parent’s membership interest in BestReviews for a total purchase price of $68.3 million, consisting of $33.7 million in cash, subject to a post-closing working capital adjustment, and $34.6 million in common stock of the Company. The Company issued 1,913,438 shares of common stock in connection with the closing (the “Stock Consideration”). The Stock Consideration is subject to lock-up provisions that prohibit certain transfers of the shares and standstill provisions based upon the following schedule: 25% of the Stock Consideration will cease to be subject to the lockup provisions on the 6-month anniversary of the closing date of the Acquisition, 50% of the Stock Consideration will cease to be subject to the lock-up provisions on the 9-month anniversary of the closing date of the Acquisition and 25% of the Stock Consideration will cease to be subject to the lock-up provisions on the 12-month anniversary of the closing date of the Acquisition. The Acquisition Agreement also contains representations, warranties, covenants, and indemnities of the parties thereto.
Limited Liability Company Agreement
In connection with the Acquisition, the Company and Parent also entered into an amended and restated limited liability company agreement of BestReviews (the “LLC Agreement”). Subject to the terms of the LLC Agreement, the Company has the right (the “Call Option”), beginning six months after the closing of the Acquisition, to purchase all (but not less than all) of the remaining 40% of the membership interests of BestReviews using, at the Company’s election, cash,

14


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


shares of common stock of the Company, or a combination thereof at a purchase price to be based on a pre-determined multiple of BestReviews’ trailing 12-month EBITDA, with such purchase price capped per the LLC Agreement if the Call is exercised prior to the third anniversary of the closing of the Acquisition. In addition, beginning six months after closing the Acquisition, the Company is entitled to exercise a one-time right to purchase 25% of the units of membership interest of BestReviews retained by Parent (10% of the issued and outstanding equity) with terms identical to those applicable to the Call Option.
Parent also has the right (the “Put Option”), beginning three years after closing of the Acquisition, to cause the Company to purchase all (but not less than all) of the remaining 40% of the membership interests of BestReviews using, at the Company’s election, cash, shares of common stock of the Company, or a combination thereof at a purchase price to be determined in the same manner as if the Call Option were exercised.
If the exercise of the Call Option or the Put Option requires that the Company seek stockholder approval prior to issuing common stock of the Company as consideration in connection with such exercise, and the Company does not obtain requisite stockholder approval, then BestReviews will initiate a sale process for disposition of a majority of the voting power interests of BestReviews or other disposition of all or substantially all of BestReviews’ assets.
The LLC Agreement provides that Parent is entitled to certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the Company’s common stock issued to Parent. The Company is required to file (1) a registration statement on Form S-3 (“Form S-3”) with the Securities and Exchange Commission (“SEC”) to register the resale of the Stock Consideration within 90 days following the closing date of the Acquisition and (2) a Form S-3 with the SEC to register the resale of any shares of common stock of the Company issued in connection with an exercise of the Call Option or the Put Option within 60 days after the issuance of such shares.
The LLC Agreement contains other terms and conditions, including transfer restrictions, tag-along and drag-along rights, and indemnification obligations.
The allocation of the purchase price presented below is based upon management’s preliminary estimates. The Company has engaged a valuation firm to assist with the valuation of intangible assets and noncontrolling interest; however, such valuation is not complete as of the filing date of this report. The preliminary allocation of the purchase price is as follows (in thousands):
Consideration
 
 
Cash consideration for acquisition
 
$
33,693

Fair value of noncontrolling interest
 
41,800

Value of shares issued for acquisition
 
34,595

Total consideration
 
$
110,088

 
 
 
Allocated Fair Value of Acquired Assets and Assumed Liabilities
 
 
Accounts receivable and other current assets
 
$
9,518

Property, plant and equipment
 
36

Intangible assets
 
20,000

Accounts payable and other current liabilities
 
(767
)
Total identifiable assets (liabilities), net
 
28,787

Goodwill
 
81,301

Total net assets acquired
 
$
110,088

The allocation of the purchase price is preliminary. The valuation of the noncontrolling interest and intangible assets are not complete. The intangible assets currently being evaluated are trade names, proprietary technology and processes and certain relationships; however, the Company may identify additional intangible assets prior to finalizing the purchase price allocation. 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

15


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


qualify for separate recognition, including access to the Company’s subscriber base and non-contractual relationships, as well as expected future cost and revenue synergies. The entire amount of purchase price allocated to intangible assets and a portion of goodwill is expected to be deductible for tax purposes pursuant to Internal Revenue Code Section 197.
The results of operations of BestReviews have been included in the Consolidated Financial Statements beginning on the closing date of the acquisition and are included in the results of the Company’s troncX segment. For the three months ended April 1, 2018, reported revenues from BestReviews were approximately $3.2 million and reported operating expenses were approximately $2.6 million. The pro forma effect of the acquisitions is not material to the Company’s Consolidated and Combined Financial Statements.
New York Daily News Acquisition
On September 3, 2017, the Company completed the acquisition of 100% of the partnership interests in Daily News, L. P. (“DNLP”), the owner of the New York Daily News in New York City, pursuant to the Partnership Interest Purchase Agreement dated September 3, 2017, for a cash purchase price of $1 and the assumption of certain liabilities, subject to a post-closing working capital adjustment. Following the acquisition, DNLP’s assets and liabilities are in the process of being valued at fair value. Subsequent to April 1, 2018, the Company finalized the working capital adjustment and has reflected those adjustments in the table below.
As of the filing date of this report, the final determination of the fair value of the assets acquired and liabilities assumed has not been completed. The estimated values are presented in the table below (in thousands):
Allocated Fair Value of Acquired Assets and Assumed Liabilities
 
 
Cash acquired as part of the purchase
 
$
2,555

Accounts receivable and other current assets
 
20,154

Property, plant and equipment, including assets under capital leases
 
45,961

Mastheads and intangible assets not subject to amortization
 
3,791

Other long-term assets
 
9,466

Accounts payable and other current liabilities
 
(20,309
)
Pension and postemployment benefits liability
 
(25,445
)
Workers compensation and auto insurance liability
 
(25,902
)
Other long-term liabilities
 
(10,271
)
Total net assets acquired
 
$

NOTE 6: INVENTORIES
Inventories consisted of the following (in thousands):
 
 
As of
 
 
April 1, 2018
 
December 31, 2017
Newsprint
 
$
12,764

 
$
10,381

Supplies and other
 
513

 
417

Total inventories
 
$
13,277

 
$
10,798

Inventories are stated at the lower of cost or net realizable value determined using the first-in, first-out (“FIFO”) basis for all inventories.

16


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets at April 1, 2018 and December 31, 2017 consisted of the following (in thousands):
 
 
April 1, 2018
 
December 31, 2017
 
 
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)
 
$
24,632

 
$
(9,805
)
 
$
14,827

 
$
24,632

 
$
(9,064
)
 
$
15,568

Advertiser relationships (useful life of 2 to 13 years)
 
42,252

 
(16,470
)
 
25,782

 
42,252

 
(15,357
)
 
26,895

Tradenames (useful life of 20 years)
 
15,100

 
(2,771
)
 
12,329

 
15,100

 
(2,583
)
 
12,517

Other (useful life of 1 to 20 years)
 
25,379

 
(2,359
)
 
23,020

 
5,379

 
(2,243
)
 
3,136

Total intangible assets subject to amortization
 
$
107,363

 
$
(31,405
)
 
75,958

 
$
87,363

 
$
(29,247
)
 
58,116

 
 
 
 
 
 
 
 
 
 
 
 
 
Software (useful life of 2 to 10 years)
 
$
139,115

 
$
(99,341
)
 
39,774

 
$
134,794

 
$
(92,001
)
 
42,793

 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets not subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
203,464

 
 
 
 
 
121,907

Newspaper mastheads and other intangible assets not subject to amortization
 
 
 
 
 
68,120

 
 
 
 
 
67,062

Total goodwill and other intangible assets
 
 
 
 
 
$
387,316

 
 
 
 
 
$
289,878

NOTE 8: DEBT
As of April 1, 2018, the Company had $348.0 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 6.14%. At April 1, 2018, the fair value of borrowings outstanding under the Term Loan Credit Agreement was estimated to be $348.0 million based on Level 2 inputs, because the fair value for these instruments is determined using observable inputs in non-active markets. Level 2 inputs include 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.
Senior Term Facility
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 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. In 2015, $70 million of the expansion was drawn for the acquisition of The San Diego Union-Tribune. As of April 1, 2018, total principal outstanding under the Term Loans was $348.0 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 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 the 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

17


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


customary covenants. As of April 1, 2018, $21.1 million of the principal balance is included in current liabilities, the unamortized balance of the discount was $2.3 million and the unamortized balance of the fees associated with the Term Loans was $5.5 million. As of April 1, 2018, the Company was in compliance with the covenants of the Senior Term Facility.
Senior ABL Facility
On August 4, 2014, the 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 the 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. tronc, Inc. and the Subsidiary Guarantors are the borrowers under the Senior ABL Facility. tronc, Inc. 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 tronc 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 April 1, 2018, there were no borrowings under the Senior ABL Facility and $54.0 million of the Senior ABL Facility availability supported outstanding undrawn letters of credit in the same amount.
Capital Leases
The Company has capital leases on land, technology licenses and trucks. The total balance outstanding as of April 1, 2018 for capital leases was $8.5 million, of which $0.7 million is in short-term debt.
NOTE 9: INCOME TAXES
For the three months ended April 1, 2018, the Company recorded income tax benefit of $7.2 million. The effective tax rate on pretax income was 33.1% in the three months ended April 1, 2018. For the three months ended April 1, 2018, the rate differs from the U.S. federal statutory rate of 21% primarily due to state income taxes, net of federal benefit, and nondeductible expenses.
For the three months ended March 26, 2017, the Company recorded income tax expense of $2.3 million. The effective tax rate on pretax income was (329.5)% in the three months ended March 26, 2017. For the three months ended March 26, 2017, the rate differs from the U.S. federal statutory rate of 35% primarily due to the fact that the $6.0 million premium on stock buyback is a non-deductible permanent difference for the calculation of income taxes. The rate also differs due to state income taxes, net of federal benefit and nondeductible expenses and the domestic production activities deduction.

In the fourth quarter of 2017, the Company recorded an additional tax expense of $10.8 million that represents what it believes is the impact of the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).  The expense was based on currently available information and interpretations, which are continuing to evolve, and as a result the expense is considered provisional.  The Company has continued to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available.  The Company continues to analyze the impact of the Tax Act, which could result in additional adjustments in future periods.
NOTE 10: PENSION AND OTHER POSTRETIREMENT BENEFITS
Multiemployer Pension Plans
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees.

18


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Defined Benefit Plans
The Company is the sponsor of two single-employer defined benefit plans, The San Diego Union-Tribune, LLC Retirement Plan (the “San Diego Pension Plan”) and the Daily News Retirement Plan (the “NYDN Pension Plan”). The San Diego Pension Plan provides benefits to certain current and former employees of The San Diego Union-Tribune. Future benefits under the San Diego Pension Plan have been frozen since January 1, 2009. The NYDN Pension Plan provides benefits to certain current and former employees of the New York Daily News. As of March 31, 2018, future benefits under the NYDN Pension Plan were frozen and no new participants are permitted after that time. The Company contributed $5.7 million to the San Diego Pension Plan in the first three months of 2018. No contributions were required during the first three months of 2018 for the NYDN Pension Plan. The Company expects to contribute $4.0 million to the NYDN Pension Plan during the remainder of 2018. Should the Nant Transaction not close, the Company will be required to contribute an additional $9.5 million to the San Diego Pension Plan during the remainder of 2018. The components of net periodic benefit credit for the Company’s defined benefit plans were as follows (in thousands):
 
 
Three Months Ended
 
Affected Line Items in the Consolidated Statements of Income (Loss)
 
 
April 1, 2018
 
March 26, 2017
 
Service cost
 
$
80

 
$

 
Compensation
Interest cost
 
2,611

 
2,200

 
Other income, net
Expected return on assets
 
(3,843
)
 
(2,350
)
 
Other income, net
Amortization of actuarial loss
 
$
150

 
$

 
Other income, net
Net periodic benefit
 
$
(1,002
)
 
$
(150
)
 
 
Postretirement Benefits Other Than Pensions
The Company provides postretirement health care to retirees pursuant to a number of benefit plans. The plans are frozen for new non-union 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 credit for the Company’s postretirement health care and life insurance plans were as follows (in thousands):
 
 
Three Months Ended
 
Affected Line Items in the Consolidated Statements of Income (Loss)
 
 
April 1, 2018
 
March 26, 2017
 
Service cost
 
$
3

 
$
3

 
Compensation
Interest cost
 
9

 
55

 
Other income, net
Amortization of prior service credits
 
(2,633
)
 
(292
)
 
Other income, net
Amortization of gain
 
(658
)
 
(46
)
 
Other income, net
Net periodic benefit
 
$
(3,279
)
 
$
(280
)
 
 
NOTE 11: NONCONTROLLING INTEREST
Noncontrolling interest represents the 40% membership interest in BestReviews not owned by the Company and is presented between liabilities and stockholders’ equity within the Company’s consolidated balance sheet because the Put Option described in Note 5 could, upon exercise, require the Company, under certain circumstances, to pay cash to purchase the noncontrolling interest. Each quarter, the carrying value of noncontrolling interest is adjusted to the amount the Company would be required to pay the noncontrolling interest holders as if the Put Option had been exercised as of the balance sheet date, with an offsetting adjustment to stockholders’ equity. Adjustments to increase (decrease) the carrying value of noncontrolling interest also reduce (increase) the amount of net income or loss attribute to tronc common stockholders for purposes of determining both basic and diluted earnings per share. No adjustment to the carrying value of noncontrolling interest was required for the three months ended April 1, 2018.

19


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


A summary of the activity with respect to non-controlling interest for the three months ended April 1, 2018 is as follows (in thousands):

Balance at December 31, 2017
 
$

Acquisition of BestReviews
 
41,800

Income attributable to noncontrolling interest
 
262

Balance at April 1, 2018
 
$
42,062

NOTE 12: EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income attributable to tronc 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.
For the three months ended April 1, 2018 and March 26, 2017, basic and diluted earnings per common share were as follows (in thousands, except per share amounts):
 
Three Months Ended
 
April 1, 2018
 
March 26, 2017
Income (Loss) - Numerator:
 
 
 
Net income (loss) available to tronc stockholders
$
(14,773
)
 
$
(2,989
)
 
 
 
 
Shares - Denominator:
 
 
 
Weighted average number of common shares outstanding (basic)
34,801

 
36,306

Dilutive effect of employee stock options and RSUs

 

Adjusted weighted average shares outstanding (diluted)
34,801

 
36,306

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
(0.42
)
 
$
(0.08
)
Diluted
$
(0.42
)
 
$
(0.08
)
Potential dilutive common shares were anti-dilutive as a result of the Company’s net loss for the three months ended April 1, 2018 and March 26, 2017. As a result, basic weighted average shares were used in the calculations of basic net earnings per share and diluted earnings per share for that period.
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 610,387 and 826,997 for the three months ended April 1, 2018 and March 26, 2017, respectively. 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 1,913,604 and 1,418,126 for the three months ended April 1, 2018 and March 26, 2017, respectively.
NOTE 13: STOCKHOLDERS’ EQUITY
Stock Repurchases
On March 23, 2017, the Company entered into a purchase agreement with investment funds associated with Oaktree Capital Management, L.P. (“Oaktree”), pursuant to which the Company acquired 3,745,947 shares of the Company’s common stock for $15.00 per share or a total purchase price of $56.2 million. In the event that the Company undergoes a change of control on or before March 23, 2018, or enters into a definitive agreement concerning a change of control on or before March 23, 2018, whereby the transaction is ultimately consummated and the consideration per share payable to stockholders is greater than $15.00 per share, the Company will pay Oaktree additional consideration per share equal to the

20


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


difference between the consideration per share payable to the Company’s stockholders in such change of control transaction and $15.00. The purchase agreement contains a “standstill” covenant prohibiting Oaktree from acquiring, directly or indirectly, any of the Company’s common stock, soliciting proxies to vote shares of the Company’s common stock or taking certain actions with respect to any business combination, asset acquisition or disposition or similar transaction involving the Company through March 22, 2019 (the “Standstill Period”). The parties also agreed to a mutual non-disparagement covenant applicable during the Standstill Period and to a mutual release of claims. On March 22, 2017, the Company’s stock price closed at $13.39. The $6.0 million difference between the aggregate purchase price and the fair value of the acquired stock at the transaction date was expensed as a premium on stock buyback in the Consolidated Statements of Income (Loss). The agreement to pay additional consideration expired on March 23, 2018.
Significant Shareholders
Merrick Media, LLC
On March 23, 2017, the Company entered into Amendment No. 1 (the “Amendment”) to the Securities Purchase Agreement dated February 3, 2016 among the Company, Merrick Media, LLC (“Merrick Media”) and Michael W. Ferro, Jr., the Company’s non-executive Chairman of the Board at the time the agreement was signed. The Amendment increases from 25% to 30% the maximum percentage of the Company’s outstanding shares of common stock that Merrick Media and its affiliates may acquire.
Mr. Ferro is the manager of Merrick Venture Management, LLC, which is the sole manager of Merrick Media. Because Merrick Venture Management, LLC serves as the sole manager of Merrick Media, Mr. Ferro may be deemed to indirectly control all of the shares of the Company’s common stock owned by Merrick Media. Mr. Ferro, together with his affiliated entities, beneficially owned 9,095,270 shares of tronc common stock, which represented 25.8% of tronc common stock as of April 1, 2018. On April 13, 2018, Mr. Ferro, Merrick Media, LLC and Merrick Ventures Management, LLC entered into an agreement to sell all of their shares in the Company. As of May 10, 2018, the sale is still pending.
Nant Capital, LLC
Dr. Patrick Soon-Shiong, a former director of the Company, together with Nant Capital, LLC (“Nant Capital”), beneficially own 8,743,619 shares of tronc common stock, which represented 24.8% of the outstanding shares of tronc common stock as of April 1, 2018. California Capital Equity, LLC (“CalCap”) directly owns all of the equity interests of Nant Capital, and CalCap may be deemed to have beneficial ownership of the shares held by Nant Capital. Dr. Soon-Shiong directly owns all of the equity interests of CalCap and may be deemed to beneficially own, and share voting power and investment power with Nant Capital over all shares of tronc common stock beneficially owned by Nant Capital. Under the purchase agreement dated May 22, 2016, among the Company, Nant Capital and Dr. Patrick Soon-Shiong, Nant Capital and Dr. Soon-Shiong and their respective affiliates are prohibited, without the prior written approval of the Board of Directors, from acquiring additional equity of the Company if the acquisition could result in their beneficial ownership of more than 25% of the Company’s then-outstanding shares of common stock. The purchase agreement under which Nant Capital purchased shares of the Company’s common stock also includes covenants prohibiting the transfer of shares of the Company’s common stock if the transfer would result in a person beneficially owning more than 4.9% of the Company’s then-outstanding shares of common stock following the transfer, as well as transfers to a material competitor of the Company in any of the Company’s then-existing primary geographical markets.

21


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 14: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):    
 
 
Foreign Currency
 
OPEB
 
Pension
 
Total
Balance at December 31, 2017
 
$
(31
)
 
$
9,932

 
$
(23,428
)
 
$
(13,527
)
  Amounts reclassified from AOCI
 

 
(2,376
)
 
$
108

 
(2,268
)
Balance at April 1, 2018
 
(31
)
 
7,556

 
(23,320
)
 
(15,795
)
The following table presents the amounts and line items in the Consolidated Statements of Loss where adjustments reclassified from accumulated other comprehensive income (loss) were recorded during the three months ended April 1, 2018 and March 26, 2017 (in thousands):
 
Three Months Ended
 
 
Accumulated Other Comprehensive Income (Loss) Components
April 1, 2018
 
March 26, 2017
 
Affected Line Items in the Consolidated Statements of Income (Loss)
Pension and postretirement benefit adjustments:
 
 
 
 
 
Prior service cost recognized
$
(2,633
)
 
$
(292
)
 
Other income, net
Amortization of actuarial losses
(508
)
 
(46
)
 
Other income, net
Total before taxes
(3,141
)
 
(338
)
 
 
Tax effect
(873
)
 
(134
)
 
Income tax expense (benefit)
Total reclassifications for the period
$
(2,268
)
 
$
(204
)
 
 
NOTE 15: CONTINGENCIES
Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business. The legal entities comprising our operations are defendants from time to time in actions for matters arising out of their business operations. In addition, the legal entities comprising our operations are involved from time to time as parties in various regulatory, environmental and other proceedings with governmental authorities and administrative agencies.
Tribune Company Bankruptcy
On December 31, 2012, Tribune Media Company, formerly Tribune Company (“TCO”) and 110 of its direct and indirect wholly-owned subsidiaries that had filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware on December 8, 2008 (or on October 12, 2009, in the case of Tribune CNLBC, LLC) emerged from Chapter 11. Certain of the legal entities included in the Consolidated Financial Statements of tronc were Debtors or, as a result of the restructuring transactions undertaken at the time of the Debtors’ emergence, are successor legal entities to legal entities that were Debtors (“tronc Debtors”).
Notices of appeal of the Bankruptcy Court’s order confirming the Plan (the “Confirmation Order”) were filed by (i) Aurelius Capital Management L.P. on behalf of its managed entities that were holders of TCO’s senior notes and Exchangeable Subordinated Debentures due 2029 (“PHONES”), (ii) Law Debenture Trust Company of New York (“Law Debenture”) and Deutsche Bank Trust Company Americas (“Deutsche Bank”), each successor trustees under the respective indentures for TCO’s senior notes; (iii) Wilmington Trust Company, as successor indenture trustee for the PHONES, and (iv) EGI-TRB, L.L.C., a Delaware limited liability company wholly-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family) (the “Zell Entity”). The appellants sought, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court embodied in the Plan, including the settlement of certain claims and causes of action related to the series of transactions (collectively, the “Leveraged ESOP Transactions”)

22


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


consummated by TCO, the TCO employee stock ownership plan, the Zell Entity and Samuel Zell in 2007. Each of the Confirmation Order appeals have been dismissed or otherwise resolved by a final order, with the exception of the appeals of Law Debenture and Deutsche Bank, which remain pending before the U. S. District Court for the District of Delaware. There is no stay of the Confirmation Order in place pending resolution of the confirmation related appeals.
The Bankruptcy Court had entered final decrees collectively closing 106 of the Debtors’ Chapter 11 cases, including the last one of the tronc Debtors’ cases. The remaining Chapter 11 cases relate to Debtors and successor legal entities that are subsidiaries of TCO. These cases have not yet been closed by the Bankruptcy Court, and certain claims asserted against various of the Debtors (including certain of the tronc Debtors) in the Chapter 11 cases remain unresolved. The remaining Chapter 11 cases continue to be administered under the caption “In re: Tribune Media Company, et al.,” Case No 08-13141.
NOTE 16: SEGMENT INFORMATION
The Company’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Beginning in the second quarter of fiscal 2016, the operating segments consist of troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, BestReviews and forsalebyowner.com. Assets are not presented to or used by management at a segment level for making operating and investment decisions and therefore are not reported.
The Company measures segment profit using income from operations, which is defined as income from operations before net interest expense, gain on investment transactions, reorganization items and income taxes.
As discussed in Note 2, the Company adopted ASU 2014-09, Topic 606, Revenue from Contracts with Customers effective January 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results of operations for periods after January 1, 2018 reflect the changes under ASU 2014-09. Results of operations for periods before January 1, 2018, continue to be reported under guidance in effect at that time.

23


TRONC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Disaggregated operating revenues and income (loss) from operations by operating segment were as follows for the periods indicated (in thousands):
 
Three Months Ended
 
tronc M
 
troncX
 
Corporate and Eliminations
 
Consolidated
 
(Print)
 
(Digital)
 
 
 
 
 
 
 
 
 
April 1, 2018
 
March 26, 2017
 
April 1, 2018
 
March 26, 2017
 
April 1, 2018
 
March 26, 2017
 
April 1, 2018
 
March 26, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
125,501

 
$
142,550

 
$
30,859

 
$
44,837

 
$

 
$
(95
)
 
$
156,360

 
$
187,292

Circulation
134,224

 
119,622

 

 

 

 

 
134,224

 
119,622

Commercial print and delivery
34,004

 
33,166

 

 

 

 

 
34,004

 
33,166

Direct mail
9,848

 
11,335

 

 

 

 

 
9,848

 
11,335

Content syndication and other
4,840

 
4,839

 
17,144

 
10,602

 
(804
)
 
(740
)
 
21,180

 
14,701

Other
48,692

 
49,340

 
17,144

 
10,602

 
(804
)
 
(740
)
 
65,032

 
59,202

Operating revenues
308,417

 
311,512

 
48,003

 
55,439

 
(804
)
 
(835
)
 
355,616

 
366,116

Operating expenses
297,624

 
292,189

 
46,606

 
51,290

 
30,147

 
10,567

 
374,377

 
354,046

Income (loss) from operations
$
10,793

 
$
19,323

 
$
1,397

 
$
4,149

 
$
(30,951
)
 
$
(11,402
)
 
(18,761
)
 
12,070

Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(6,594
)
 
(6,477
)
Premium on stock buyback
 
 
 
 
 
 
 
 
 
 
 
 

 
(6,031
)
Gain (loss) on investments, net
 
 
 
 
 
 
 
 
 
 
 
 
(729
)
 
(688
)
Other income (expense), net
 
 
 
 
 
 
 
 
 
 
 
 
4,388

 
430

Income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
(21,696
)
 
$
(696
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
5,540

 
$
5,707

 
$
4,614

 
$
3,237

 
$
4,495

 
$
4,234

 
$
14,649

 
$
13,178

The operating revenues and operating results presented above are not necessarily indicative of the results that may be expected for the full fiscal year.
NOTE 17: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for each of the periods presented is as follows (in thousands):
 
 
Three months ended
 
 
April 1,
2018
 
March 26,
2017
Cash paid during the period for:
 
 
 
 
Interest
 
$
5,883

 
$
5,668

Income taxes, net of refunds
 
179

 
(32
)
Non-cash items in investing activities:
 
 
 
 
Value of shares issued for acquisition
 
34,595

 


24




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 16, 2018, particularly under Item 1A. “Risk Factors,” and in the Company’s other filings with the SEC.
We believe that the assumptions underlying the Consolidated Financial Statements included in this Quarterly Report are reasonable. However, the Consolidated Financial Statements may not necessarily reflect our results of operations, financial position and cash flows for future periods.
OVERVIEW
tronc, Inc., was formed as a Delaware corporation on November 21, 2013. tronc, Inc., together with its subsidiaries (collectively, “tronc” or the “Company”) is a media company rooted in award-winning journalism. Headquartered in Chicago, tronc operates newsrooms in ten markets with titles including Chicago Tribune, The Baltimore Sun, Orlando Sentinel, South Florida’s Sun Sentinel, Virginia’s Daily Press, Lehigh Valley, Pennsylvania’s The Morning Call, Hartford Courant, Los Angeles Times and The San Diego Union-Tribune. On September 3, 2017, the Company completed the purchase of the New York Daily News, New York City’s “Hometown Newspaper”. On February 6, 2018, the Company acquired a 60% interest in BestReviews LLC (“BestReviews”). See Note 5 for further information on the acquisition. tronc’s legacy of brands has earned a combined 105 Pulitzer Prizes and is committed to informing, inspiring and engaging local communities.
tronc’s brands create and distribute content across its media portfolio, offering integrated marketing, media, and business services to consumers and advertisers, including digital solutions and advertising opportunities.
The Company continually assesses its operations in an effort to identify opportunities to enhance operational efficiencies and reduce expenses. These activities have in the past included, and could include in the future, outsourcing of various functions or operations, additional abandonment of leased space and other activities which may result in changes to employee headcount. See Note 3 to the Consolidated Financial Statements for more information on changes in operations in the first quarter of 2018. The Company expects to continue to take actions deemed appropriate to enhance profitability but does not currently know whether or when any such actions will occur or the potential costs and expected savings. Depending on the actions taken and the timing of any such actions, the anticipated cost savings could be recognized in fiscal periods that do not correspond to the fiscal period(s) in which the charges are recognized. As a result, the Company’s net income trends could be impacted and more difficult to predict.
In the first quarter the U.S. imposed preliminary tariffs on certain Canadian newsprint suppliers. While the tariffs are not final, newsprint suppliers have raised their prices in response. The Company expects some level of the price increase to generally remain in place for some period of time even if the preliminary tariffs are repealed.
Significant transactions and recent events
On February 6, 2018, the Company acquired a 60% membership interest in BestReviews LLC (“BestReviews”), a company engaged in the business of testing, researching and reviewing consumer products, pursuant to an Acquisition Agreement, entered into on the same date (the “Acquisition Agreement”), among the Company, BestReviews Inc., a Delaware corporation (“Parent”), BestReviews and the stockholders of Parent named therein. The total purchase price of $68.3 million consisted of $33.7 million in cash, subject to a post-closing working capital adjustment, and $34.6 million in common stock of the Company. The Company issued 1,913,438 shares of common stock in connection with the closing (the “Stock Consideration”).
On February 7, 2018, the Company entered into a Membership Interest Purchase Agreement (“MIPA”) by and between the Company and Nant Capital, LLC (“Nant Capital”) pursuant to which the Company will sell the Los Angeles Times, The San Diego Union-Tribune and various other titles of the Company’s California properties to Nant Capital for an aggregate purchase price of $500 million in cash plus the assumption of unfunded pension liabilities related to the San Diego

25




Pension Plan (the “Nant Transaction”). Nant Capital has received an equity commitment from Dr. Patrick Soon-Shiong for the full amount of the cash purchase price. The Nant Transaction is expected to close in the second or third quarter of 2018.
On January 29, 2018, the Company and Cars.com Inc. agreed to convert the Company’s affiliate markets into Cars.com's direct retail channel. The agreement, which will see more than 2,000 car deal customers move from the Company to Cars.com, took effect February 1, 2018. The Company’s related sales and support teams have joined Cars.com in connection with the transition. The deal also includes a multi-year advertising and marketing agreement between the Company and Cars.com.
In the first quarter of 2018, the Company entered an agreement to sell the forsalebyowner.com business as it no longer fits within the Company’s digital strategy.  The transaction is expected to close in the second quarter of 2018.
Segments
The Company manages its business as two distinct segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, Tribune Content Agency (“TCA”), BestReviews and forsalebyowner.com.
troncM
troncM’s media groups include the Chicago Tribune Media 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, the Daily Press Media Group, the New York Daily News Group, the Los Angeles Times Media Group, and the San Diego Media Group.
In the three months ended April 1, 2018, 40.7% of troncM’s operating revenues were derived from advertising. These revenues were generated from the sale of advertising space in published issues of the newspapers and from the delivery of preprinted advertising supplements. Approximately 43.4% of operating revenues for the three months ended April 1, 2018 were generated from the sale of newspapers and other publications to individual subscribers or to sales outlets that re-sell the newspapers. The remaining 15.9% of operating revenues for the three months ended April 1, 2018 were generated from the provision of commercial printing and delivery services to other newspapers, direct mail advertising and services, and other related activities.
Newspaper print advertising is typically in the form of display, classified or preprint advertising. Advertising and marketing services revenues are comprised of three basic categories: retail, national and classified. Retail is a category of customers who tend to do business directly with the general public. National is a category of customers who tend to do business directly with other businesses. Classified is a type of advertising which is other than display or preprint.
Circulation revenue results from the sale of print editions of newspapers to individual subscribers and the sale of print editions of newspapers to sales outlets that re-sell the newspapers.
Other revenues are derived from commercial printing and delivery services provided to other newspapers, direct mail advertising and services and other related activities. 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 incremental profitability and revenues. The Company currently distributes national newspapers (including The New York Times, USA Today, and The Wall Street Journal) in its local markets under multiple agreements. Additionally, in New York, Chicago, South Florida, and Los Angeles the Company provides some or all of these services to other local publications.

26




Products and Services
Our product mix consists of three publication types: (i) daily newspapers, (ii) weekly newspapers and (iii) niche publications and direct mail. 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
As of April 1, 2018, the Company’s prominent print publications include:
Media Group
 
City
 
Masthead
 
Circulation Type
 
Paid or Free
Chicago Tribune Media Group
 
 
 
 
 
 
Chicago, IL
 
Chicago Tribune
 
Daily
 
Paid
 
 
Chicago, IL
 
Chicago Magazine
 
Monthly
 
Paid
 
 
Chicago, IL
 
Hoy
 
Weekly
 
Free
 
 
Chicago, IL
 
RedEye
 
Weekly
 
Free
The New York Daily News Group
 
 
 
 
 
 
New York, NY
 
New York Daily News
 
Daily
 
Paid
Sun Sentinel Media Group
 
 
 
 
 
 
Broward County, FL, Palm Beach County, FL
 
Sun Sentinel
 
Daily
 
Paid
 
 
Broward County, FL, Palm Beach County, FL
 
el Sentinel
 
Weekly
 
Free
Orlando Sentinel Media Group
 
 
 
 
 
 
Orlando, FL
 
Orlando Sentinel
 
Daily
 
Paid
 
 
Orlando, FL
 
el Sentinel
 
Weekly
 
Free
The Baltimore Sun Media Group
 
 
 
 
 
 
Baltimore, MD
 
The Baltimore Sun
 
Daily
 
Paid
 
 
Annapolis, MD
 
The Capital
 
Daily
 
Paid
 
 
Westminster, MD
 
Carroll County Times
 
Daily
 
Paid
Hartford Courant Media Group
 
 
 
 
 
 
Hartford County, CT, Middlesex County, CT, Tolland County, CT
 
The Hartford Courant
 
Daily
 
Paid
Daily Press Media Group
 
 
 
 
 
 
Newport News, VA (Peninsula)
 
Daily Press
 
Daily
 
Paid
The Morning Call Media Group
 
 
 
 
 
 
Lehigh Valley, PA
 
The Morning Call
 
Daily
 
Paid
Los Angeles Times Media Group
 
 
 
 
 
 
Los Angeles, CA
 
Los Angeles Times
 
Daily
 
Paid
 
 
Los Angeles, CA
 
Hoy Los Angeles
 
Weekly
 
Free
San Diego Media Group
 
 
 
 
 
 
San Diego, CA
 
The San Diego Union-Tribune
 
Daily
 
Paid
 
 
San Diego, CA
 
Hoy San Diego
 
Weekly
 
Free

27




troncX
troncX comprises the Company’s digital operations and includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, BestReviews, and forsalebyowner.com.
TCA is a syndication and licensing business providing content solutions for publishers around the globe.  Working with a vast collection of the world’s news and information sources, TCA delivers a daily news service and syndicated premium content to over 1,700 media and digital information publishers in more than 70 countries. Tribune News Service delivers material from 70 leading publications, including Chicago Tribune, Bloomberg News, Miami Herald, The Dallas Morning News, Seattle Times, The Philadelphia Inquirer, and Los Angeles Times. Tribune Premium Content syndicates columnists such as Leonard Pitts, Cal Thomas, Clarence Page, Ask Amy, 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 traces its roots to 1918.
On February 6, 2018, the Company acquired a 60% membership interest in BestReviews LLC (“BestReviews”), a company engaged in the business of testing, researching and reviewing consumer products. BestReviews generates referral fee revenue by directing online traffic from their published reviews to sites where the product can be purchased. BestReviews has affiliate agreements with the online sellers, of which the two largest are Amazon and Walmart. BestReviews receives a referral fee once the product is purchased.
forsalebyowner.com is a national consumer-to-consumer focused real estate website. The majority of the revenue generated by forsalebyowner.com is e-commerce, but approximately one-third is generated through a call center and strategic partnerships with service providers in the real estate industry.
In the three months ended April 1, 2018, 64.3% of troncX’s operating revenues were derived from advertising. These revenues were generated from the sale of advertising space on interactive websites and digital marketing services. The remaining 35.7% of operating revenues for the three months ended April 1, 2018 were generated from the sale of digital content and other related activities.
Digital advertising can be in the form of display, banner ads, coupon ads, video, search advertising and linear ads placed on tronc and affiliated websites. Advertising services include development of mobile websites, search engine marketing and optimization, social media account management and content marketing for its customers’ web presence for small to medium size businesses.
Products and Services
As of April 1, 2018, the Company’s prominent websites include:
Websites
www.tronc.com
www.sun-sentinel/elsentinel.com
www.themorningcall.com
www.chicagotribune.com
www.orlandosentinel.com
www.forsalebyowner.com
www.chicagomag.com
www.orlandosentinel/elsentinel.com
www.TheDailyMeal.com
www.vivelohoy.com
www.baltimoresun.com
www.TheActiveTimes.com
www.redeyechicago.com
www.capitalgazette.com
www.la.com
www.bestreviews.com
www.carrollcountytimes.com
www.latimes.com
www.NYDailyNews.com
www.courant.com
www.hoylosangeles.com
www.sun-sentinel.com
www.dailypress.com
www.sandiegouniontribune.com
The Company’s results of operations, when examined on a quarterly basis, reflect the seasonality of tronc’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.

28




Results of Operations
Consolidated
Operating results for the three and three months ended April 1, 2018 and March 26, 2017 are shown in the table below (in thousands).
 
Three months ended
 
April 1,
2018
 
March 26,
2017
 
% Change
Operating revenues
$
355,616

 
$
366,116

 
(2.9
%)
Compensation
144,537

 
133,147

 
8.6
%
Newsprint and ink
22,034

 
23,524

 
(6.3
%)
Outside services
130,559

 
114,310

 
14.2
%
Other operating expenses
62,598

 
69,887

 
(10.4
%)
Depreciation and amortization
14,649

 
13,178

 
11.2
%
Operating expenses
374,377

 
354,046

 
5.7
%
Income from operations
(18,761
)
 
12,070

 
*
Interest expense, net
(6,594
)
 
(6,477
)
 
1.8
%
Premium on stock buyback

 
(6,031
)
 
*
Loss on equity investments, net
(729
)
 
(688
)
 
6.0
%
Other income, net
4,388

 
430

 
*
Income tax expense (benefit)
(7,185
)
 
2,293

 
*
Net income (loss)
(14,511
)
 
(2,989
)
 
*
Income attributable to noncontrolling interest
262

 

 
*
Net income (loss) attributable to tronc
$
(14,773
)
 
$
(2,989
)
 
*
* Represents positive or negative change in excess of 100%
Three Months Ended April 1, 2018 compared to the Three Months Ended March 26, 2017
Operating Revenues—Operating revenues decreased 2.9%, or $10.5 million, in the three months ended April 1, 2018 compared to the same period for 2017. The decrease was due primarily to decreases in advertising and other revenue partially offset by an increase in circulation revenue and revenue from the acquisitions of BestReviews in 2018 and the New York Daily News in the third quarter 2017. The decrease in advertising revenue also reflects the conversion of the Cars.com agreement.
Compensation Expense—Compensation expense increased 8.6%, or $11.4 million, in the three months ended April 1, 2018 due primarily to compensation expenses from the acquisitions of Best Reviews in 2018 and the New York Daily News in the third quarter 2017. The increase from acquisitions was partially offset by a decrease in salary expense of $8.3 million as a result of the reduction in headcount due to the prior periods personnel restructuring.
Newsprint and Ink Expense—Newsprint and ink expense declined 6.3%, or $1.5 million, in the three months ended April 1, 2018 due mainly to a 24.7% decrease in consumption, partially offset by a 4.4% increase in the average cost per ton of newsprint and newsprint and ink expenses from the acquisition of the New York Daily News in the third quarter 2017.
Outside Services Expense—Outside services expense increased 14.2%, or $16.2 million, in the three months ended April 1, 2018 due primarily to expense related to the Consulting Agreement described in Note 4 to the Consolidated Financial Statements.

29




Other Operating Expenses—Other expenses decreased 10.4%, or $7.3 million, in the three months ended April 1, 2018 due primarily to a decrease in affiliate fees related to the conversion of the Cars.com agreement partially offset by other operating expenses from the acquisitions of Best Reviews in 2018 and the New York Daily News in the third quarter 2017.
Depreciation and Amortization Expense—Depreciation and amortization expense was consistent with the prior year.
Interest Expense, Net—Interest expense was consistent with the prior year.
Premium on Stock Buyback—On March 23, 2017, the Company purchased 3,745,947 shares of the Company’s stock for $56.2 million, or $15 per common share. The fair value of the stock as of the purchase date was $50.2 million, or $13.39 per common share. The $6.0 million difference between the purchase price and the transaction date fair value was recorded as a premium on the stock buyback, a non-operating expense. See Note 13 to the Consolidated Financial Statements for additional information.
Loss on Equity Investments, Net—Loss on equity investments, net was consistent with the prior year.
Other Income, Net - Increase is due to increased credits related to periodic pension costs.
Income Tax Expense (Benefit)—Income tax expense (benefit) decreased $9.5 million for the three months ended April 1, 2018 over the prior year period. The effective tax rate on pretax income was 33.1% in the three months ended April 1, 2018. This rate differs from the U.S. federal statutory rate of 21% primarily due to state income taxes, net of federal benefit and non-deductible expenses. For the three months ended April 1, 2018, the Company recorded an income tax benefit of $7.2 million.
For the three months ended March 26, 2017, the Company recorded income tax expense of $2.3 million. The effective tax rate on pretax income was (329.5)% in the three months ended March 26, 2017. This rate differs from the U.S. federal statutory rate of 35% primarily due to the fact that the $6.0 million premium on stock buyback is a nondeductible permanent difference for the calculation of income taxes. The rate also differs due to state income taxes, net of federal benefit and nondeductible expenses and the domestic production activities deduction.
Segments
The Company manages its business as two distinct segments, troncM and troncX. troncM is comprised of the Company’s media groups excluding their digital revenues and related digital expenses, except digital subscription revenues when bundled with a print subscription. troncX includes the Company’s digital revenues and related digital expenses from local tronc websites, third party websites, mobile applications, digital only subscriptions, TCA, BestReviews and forsalebyowner.com.
The Company measures segment profit using income from operations, which is defined as net income before net interest expense, gain on investment transactions, reorganization items and income taxes.

30




The tables below show the segmentation of income and expenses for the three months ended April 1, 2018 as compared to the three months ended March 26, 2017 (in thousands). Each three-month period consists of 13 weeks.
 
Three months ended
 
troncM
 
troncX
 
Corporate and Eliminations
 
Consolidated
 
Apr 1, 2018
 
Mar 26, 2017
 
Apr 1, 2018
 
Mar 26, 2017
 
Apr 1, 2018
 
Mar 26, 2017
 
Apr 1, 2018
 
Mar 26, 2017
Total revenues
$
308,417

 
$
311,512

 
$
48,003

 
$
55,439

 
$
(804
)
 
$
(835
)
 
$
355,616

 
$
366,116

Operating expenses
297,624

 
292,189

 
46,606

 
51,290

 
30,147

 
10,567

 
374,377

 
354,046

Income (loss) from operations
10,793

 
19,323

 
1,397

 
4,149

 
(30,951
)
 
(11,402
)
 
(18,761
)
 
12,070

Depreciation and amortization
5,540

 
5,707

 
4,614

 
3,237

 
4,495

 
4,234

 
14,649

 
13,178

Adjustments (1)
6,174

 
3,414

 
1,981

 
1,197

 
20,346

 
3,819

 
28,501

 
8,430

Adjusted EBITDA
$
22,507

 
$
28,444

 
$
7,992

 
$
8,583

 
$
(6,110
)
 
$
(3,349
)
 
$
24,389

 
$
33,678

(1) See Non-GAAP Measures for additional information on adjustments.
troncM
 
Three months ended
(in thousands)
April 1,
2018
 
March 26,
2017
 
% Change
Operating revenues:
 
 
 
 
 
Advertising
$
125,501

 
$
142,550

 
(12.0
%)
Circulation
134,224

 
119,622

 
12.2
%
Other
48,692

 
49,340

 
(1.3
%)
Total revenues
308,417

 
311,512

 
(1.0
%)
Operating expenses
297,624

 
292,189

 
1.9
%
Income from operations
10,793

 
19,323

 
(44.1
%)
Depreciation and amortization
5,540

 
5,707

 
(2.9
%)
Adjustments (1)
6,174

 
3,414

 
80.8
%
Adjusted EBITDA
$
22,507

 
$
28,444

 
(20.9
%)
(1) See Non-GAAP Measures for additional information on adjustments.
Three Months Ended April 1, 2018 compared to the Three Months Ended March 26, 2017
Advertising Revenues—Total advertising revenues decreased 12.0%, or $17.0 million, in the three months ended April 1, 2018. Retail advertising decreased $19.6 million, year over year, primarily due to decreases in furniture and home furnishings, food and drug stores, car dealership and lots, department stores and specialty merchandise categories. National advertising decreased $3.1 million, year over year, primarily due to decreases in advertising agencies and wireless categories. Classified advertising revenues decreased $1.2 million, primarily due to decreases in recruitment and auto categories. These decreases were partially offset by advertising revenue from the New York Daily News acquired in the third quarter of 2017.
Circulation Revenues—Circulation revenues increased 12.2%, or 14.6 million, in the three months ended April 1, 2018, due primarily to an increase in rates and revenue from the New York Daily News acquired in the third quarter 2017.
Other Revenues—Other revenues decreased 1.3%, or $0.6 million, in the three months ended April 1, 2018, due primarily to declines in commercial print and delivery of $3.0 million and direct mail revenues of $1.5 million partially offset by revenue from the New York Daily News acquired in the third quarter of 2017.

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Operating Expenses—Operating expenses increased 1.9%, or $5.4 million, in the three months ended April 1, 2018, due primarily to operating expenses from the New York Daily News acquired in the third quarter of 2017 partially offset by decreases in almost all expense categories.
troncX
 
Three months ended
(in thousands)
April 1,
2018
 
March 26,
2017
 
% Change
Operating revenues:
 
 
 
 
 
Advertising
$
30,859

 
$
44,837

 
(31.2
%)
Content
17,144

 
10,602

 
61.7
%
Total revenues
48,003

 
55,439

 
(13.4
%)
Operating expenses
46,606

 
51,290

 
(9.1
%)
Income from operations
1,397

 
4,149

 
(66.3
%)
Depreciation and amortization
4,614

 
3,237

 
42.5
%
Adjustments (1)
1,981

 
1,197

 
65.5
%
Adjusted EBITDA
$
7,992

 
$
8,583

 
(6.9
%)
(1) See Non-GAAP Measures for additional information on adjustments.
Three Months Ended April 1, 2018 compared to the Three Months Ended March 26, 2017
Advertising Revenues—Total advertising revenues decreased 31.2%, or $14.0 million, in the three months ended April 1, 2018. Classified advertising revenue decreased $17.3 million, primarily due to a decrease in the automotive category as a result of the conversion of the Cars.com agreement. This decrease was partially offset by an increase in retail advertising revenue of $1.2 million, primarily due to increases in display and programmatic revenue. National advertising revenue was consistent with prior year. The decreases were offset by revenue from the acquisitions of BestReviews in 2018 and the New York Daily News in the third quarter 2017.
Content Revenues—Content revenues increased 61.7%, or $6.5 million, in the three months ended April 1, 2018, with increases in digital subscription revenue and revenue from the acquisition of BestReviews in 2018 and the New York Daily News in the third quarter 2017.
Operating Expenses—Operating expenses decreased 9.1%, or $4.7 million, in the three months ended April 1, 2018, due primarily to decreases across all expense categories partially offset by operating expenses from the New York Daily News acquired in the third quarter of 2017 and BestReviews acquired in 2018.

32




Non-GAAP Measures
Adjusted EBITDA—The Company defines Adjusted EBITDA as net income before equity in earnings of unconsolidated affiliates, income taxes, loss on early debt extinguishment, interest expense, other (expense) income, realized gain (loss) on investments, reorganization items, depreciation and amortization, net income attributable to noncontrolling interest, and other items that the Company does not consider in the evaluation of ongoing operating performance. These items include stock-based compensation expense, restructuring charges, transaction expenses, certain other charges and gains that the Company does not believe reflects the underlying business performance (including spin-related costs).