THE MCCLATCHY COMPANY Forward-Looking Information
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements relating to future financial performance and operations, trends in advertising, uses of cash, and the outcome of the Chapter 11 Cases. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words "believes," "expects," "anticipates," "estimates" or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. For all of those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, trends and uncertainties. These risks and uncertainties include, but are not limited to:
? the effects of the
in Note 2) and the outcome of the proceedings in general;
? the length of time the Company will operate while in the Chapter 11 Cases;
? our restructuring efforts rely on coming to terms with multiple parties
have conflicting interests;
the potential adverse effects of Chapter 11 Cases on the Company's liquidity or
? results of operations or its ability to pursue its business strategies,
maintain business and operational relationships and retain key executives;
our ability to complete definitive documentation in connection with any Chapter
11 transaction satisfactory to the Company and our stakeholders, and our
? ability to obtain requisite support for any proposed transaction from various
stakeholders and confirm and consummate that transaction in accordance with its
terms;
? the sufficiency of the DIP Facility (as defined below) to allow the Company to
operate as usual and fulfill ongoing commitments to stakeholders;
our ability to successfully emerge from Chapter 11 via a plan of reorganization
or to successfully consummate the proposed sale of the business pursuant to
? Section 363 of the Bankruptcy Code, which will be contingent upon numerous
factors, including obtaining the
plan of reorganization or sale agreement;
? our ability to obtain a new credit facility, or "exit financing" upon our
emergence from Chapter 11;
? increased levels of employee attrition during the Chapter 11 Cases;
? our reliance on third party vendors and the impact of the Chapter 11 filing on
such relationships;
? our ability to continue as a going concern;
? the continued trading of our securities on the OTC Pink Market;
? significant competition in the market for news and advertising;
? general economic and business conditions;
? continued diminished revenues from advertising as a result of the COVID-19
pandemic and increased costs or other disruptions as a result of COVID-19;
? changes in technology, services and standards, and changes in consumer
behavior;
? ability to grow and manage our digital businesses;
? our ability to successfully execute cost-control measures, including selling
excess assets;
? any changes to our business and operations that may result in goodwill and
masthead impairment charges;
? any harm to our reputation, business and results of operations resulting from
data security breaches and other threats and disruptions;
? fluctuating price of newsprint or disruptions in newsprint supply chain;
? any labor unrest;
? accelerated decline in print circulation volume;
? developments in the laws and regulations to which we are subject resulting in
increased costs and lower revenues; and
? adverse results from litigation or governmental investigations.
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Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition. This MD&A should be read in
conjunction with our unaudited condensed consolidated financial statements and
accompanying notes to the financial statements ("Notes") as of and for the three
months ended
Overview
We operate 30 media companies in 14 states, each providing its community with
high-quality news and advertising services in a wide array of digital and print
formats. We are a publisher of brands such as the
The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:
Three Months Ended
March 29, March 31,
2020 2019
Revenues:
Advertising 39.8 % 47.2 %
Audience 51.7 % 46.1 %
Other 8.5 % 6.7 %
Total revenues 100.0 % 100.0 %
Our primary sources of revenues are digital and print advertising and audience subscriptions. Advertising revenues include advertising delivered digital-only, advertising carried digitally and bundled as a part of newspapers (run of press ("ROP") advertising), and/or advertising inserts placed in newspapers ("preprint" advertising). Audience revenues include either digital-only subscriptions, or bundled subscriptions, which include digital and print. Our print newspapers are delivered by large distributors and independent contractors. Other revenues include commercial printing and distribution revenues.
See "Results of Operations" below for a discussion of our revenue and expense
performance for the three months ended
Recent Developments
Bankruptcy Filing and Going Concern
As a result of the commencement of the Chapter 11 Cases on
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We have concluded that our financial condition and projected operating results, contribution amounts required on our Pension Plan, defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 Cases raise substantial doubt as to our ability to continue as a going concern.
See Note 2 for further discussion.
Debtor-In-Possession Financing
To ensure sufficient liquidity throughout the Chapter 11 Cases, we obtained a
The DIP Credit Agreement, which replaces our former ABL Credit Agreement. (see
Note 7 for further discussion of our debt), provides for a DIP Facility
consisting of a new revolving loan facility in an aggregate principal amount up
to
Delisting of our Common Stock from the NYSE American
Our Class A Common Stock was previously listed on the NYSE American under the
symbol MNI. On
Coronavirus (COVID-19) Pandemic
In early 2020, the
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In the states in which we operate, the governors issued stay-at-home orders, which restricted the movements of residents except for essential tasks or to go to work in essential businesses. These restrictions have caused challenges to our business operations and have increased the risk factors listed above. And while, the news media industry has generally been designated as essential businesses thus far, if significant portions of our workforce are unable to work effectively, our operations, including the printing and delivery of print newspapers, will likely be impacted. We may be unable to perform fully on our contracts and our costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. Furthermore, the outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the financial markets.
The majority of the COVID-19 pandemic impacts have been to total advertising revenues (39.8% of total revenues in the first quarter of 2020), the collectability of some of our accounts receivables, single copy newspaper revenues (5.1% of total revenues in the first quarter of 2020), and employee costs. We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences.
On
While we do not qualify for any of the business loans or grants under the CARES
Act, modifications to the tax rules for the carryback of net operating losses
and business interest limitations allowed us to file for a federal tax refund of
approximately
Non-Cash Impairment Charges
During the quarter ended
Results of Operations
The following table reflects our financial results on a consolidated basis for
the three months ended
Three Months Ended
March 29, March 31,
(in thousands, except per share amounts) 2020 2019
Net loss $ (178,653) $ (41,956)
Net loss per diluted common share $ (22.52) $ (5.34) The increase in the net loss in the three months ended
Revenues
During the three months ended
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pandemic. The decline in print advertising was also due to large retail advertisers continuing to reduce preprinted inserts and in-newspaper ROP advertising in favor of digital products. We expect this trend to continue for the foreseeable future.
The following table summarizes our revenues by category:
Three Months Ended
March 29, March 31, $ %
(in thousands) 2020 2019 Change Change
Advertising
Digital-only $ 24,550 $ 34,433 $ (9,883) (28.7)
Digital bundled with print 6,150 6,114 36 0.6
Total digital 30,700 40,547 (9,847) (24.3)
Print 20,609 31,209 (10,600) (34.0)
Direct marketing 10,786 13,439 (2,653) (19.7)
Total advertising 62,095 85,195 (23,100) (27.1)
Total audience 80,692 83,112 (2,420) (2.9)
Other revenues 13,238 12,017 1,221 10.2
Total revenues $ 156,025 $ 180,324 $ (24,299) (13.5)
Advertising Revenues
Total advertising revenues decreased 27.1% during the three months ended
The following table reflects the category of advertising revenue as a percentage of total advertising revenue for the periods presented:
Three Months Ended
March 29, March 31,
2020 2019
Advertising:
Total digital 49.4 % 47.6 %
Print 33.2 % 36.6 %
Direct marketing and other 17.4 % 15.8 %
Total advertising 100.0 % 100.0 %
We categorize advertising revenues as follows:
Digital advertising - can come in many forms, including banner ads, video,
? search advertising and/or liner ads, while print advertising is typically
display advertising, or in the case of classified, display and/or liner
advertising.
? Print advertising - directly in the newspaper is considered ROP advertising.
Direct Marketing and Other - primarily preprint advertisements in direct mail,
shared mail and niche publications, events programs, total market coverage
? publications and other miscellaneous advertising not included in the daily
newspaper. These products are generally delivered to non-subscribers of our
daily newspapers. Digital:
Total digital advertising revenues decreased 24.3% during the three months ended
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Digital-only advertising is defined as digital advertising sold on a stand-alone
basis or as the primary advertising buy. Digital-only advertising revenues
decreased 28.7% in the first three months of 2020 compared to the same period in
2019, largely due to display advertising and a loss of an affiliate agreement
that ended in the
Digital advertising revenues bundled with print products increased slightly in the first quarter of 2020 compared to the same period in 2019.
The newspaper industry continues to experience a secular shift in advertising demand from print to digital products as advertisers look for multiple advertising channels to reach their customers and are increasingly focused on online customers. While our product offerings and collaboration efforts in digital advertising have steadily grown, we expect to continue to face intense competition in the digital advertising space. We will continue to adjust our content, targeting and paywalls as we pursue the best experience for our digital customers, knowing that it may impact the mix of digital advertising and digital audience revenues.
Print:
Print advertising decreased 34.0% during the three months ended
In the first quarter of 2020, the decreases in print advertising revenues were primarily due to decreases of 37.2% in ROP advertising revenues and 26.4% in preprint advertising revenues compared to the same period in 2019. Print advertising results were also impacted by the COVID-19 pandemic and temporary closure of businesses. We expect to continue to see a significant decrease in print revenues in the future periods until businesses are able to allow customers back into their establishments.
Direct Marketing:
Direct marketing and other advertising revenues decreased 19.7% during the three
months ended
Audience Revenues
Total audience revenues decreased 2.9% during the three months ended
Overall, total digital audience revenues decreased 3.4% in the three months
ended
Print audience revenues decreased 2.7% in the three months ended
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Operating Expenses
Total operating expenses increased 22.3% in the three months ended
The following table summarizes operating expenses:
Three Months Ended
March 29, March 31, $ %
(in thousands) 2020 2019 Change Change
Compensation expenses $ 58,442 $ 69,435 $ (10,993) (15.8)Newsprint, supplements and printing expenses 8,880 11,696 (2,816) (24.1) Depreciation and amortization expenses
14,992 17,518 (2,526) (14.4)
Other operating expenses 83,328 88,204 (4,876) (5.5)
Goodwill and other asset write-downs 63,762 739 63,023 nm
$ 229,404 $ 187,592 $ 41,812 22.3
_____________________
nm - not meaningful
Compensation expenses, which included both payroll and fringe benefit costs,
decreased 15.8% in the three months ended
Newsprint, supplements and printing expenses decreased 24.1% in the three months
ended
Depreciation and amortization expenses decreased 14.4% in the three months ended
Other operating expenses decreased 5.5% in the three months ended
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Non-Operating Expenses
Interest Expense:
Total interest expense decreased 24.6% in the three months ended
Reorganizational items, net:
Reorganizational items, net, totaled
Income Taxes:
In the three months ended
Liquidity and Capital Resources
As a result of the commencement of the Chapter 11 Cases on
We have entered into a
As a result of the substantial doubt about our ability to continue as a going
concern for the next twelve months, and the associated steps that have been
undertaken to restructure our balance sheet, our expected cash outflows related
to interest payments on our debt in 2020 are difficult to predict at this time.
We expect to make adequate protection payments on our DIP Credit Agreement and
our first lien notes during 2020 in accordance with the
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We are unable to predict when we will emerge from Chapter 11 because it is
contingent upon numerous factors, many of which are out of our control.
Emergence from bankruptcy is contingent upon several factors, which includes
obtaining the
We are a highly leveraged company. Our primary sources of liquidity are cash flows generated from operations and availability under our DIP Credit Agreement. Subsequent to and during pendency of the Chapter 11 Cases, we expect that our primary liquidity requirements will be to fund operations and make required payments under our DIP Credit Agreement. Our ability to meet the requirements of our DIP Credit Agreement will be dependent on our ability to generate sufficient cash flows from operations.
Based on current financial projections, we expect to be able to continue to generate cash flows from operations and through availability on our DIP Credit Agreement, in amounts sufficient to fund our operations, satisfy our interest payment obligations on our DIP Credit Agreement and pay administrative expenses including professional fees while under Chapter 11. However, should the Chapter 11 Cases take longer than anticipated or should our financial results be materially and negatively impacted by the COVID-19 pandemic, we may be required to seek additional sources of liquidity. There can be no assurance that we will be able to obtain such liquidity on terms favorable to us, if at all.
At
Pension Matters:
For our Pension Plan, the net retirement obligations in excess of the retirement
plan assets were
Sources and Uses of Liquidity and Capital Resources:
Our cash and cash equivalents were
The following table summarizes our cash flows:
Three Months Ended
March 29, March 31,
(in thousands) 2020 2019
Cash flows provided by (used in)
Operating activities $ 6,569 $ (5,712)
Investing activities (646) (237)
Financing activities (1,364) (579)
Increase (decrease) in cash, cash equivalents and
restricted cash $ 4,559 $ (6,528)
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Table of Contents Operating Activities:
We generated
Investing Activities:
We used
We used
Financing Activities:
We used
Off-Balance-Sheet Arrangements
As of
Critical Accounting Policies
Critical accounting policies are those accounting policies that we believe are important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our 2019 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to goodwill and intangible impairment, pension and post-retirement benefits and income taxes. There have been no material changes to our critical accounting policies described in our 2019 Annual Report on Form 10-K.
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