THE MCCLATCHY COMPANY
Reference is made to Part I, Item 1 "ForwardLooking Statements." Except for
historical information, the matters discussed in this section are forward
looking statements that involve risks and uncertainties and are based upon
judgments concerning various factors that are beyond our control. Consequently,
and because forward-looking statements are inherently subject to risks and
uncertainties, the actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. In addition,
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. MD&A should be read in
conjunction with our audited consolidated financial statements and accompanying
notes to the consolidated financial statements ("Notes") as of and for each of
the two years ended December 29, 2019 and December 30, 2018 , included elsewhere
in this Annual Report on Form 10K.
Bankruptcy Filing and Going Concern
As a result of the commencement of the Chapter 11 Cases onFebruary 13, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to de-lever our balance sheet and reduce overall indebtedness. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully agree upon a viable plan of reorganization with our various stakeholders, or that any such agreement will be reached in the time frame that is acceptable to theBankruptcy Court . We have concluded that our financial condition and our projected operating results, contribution amounts required on our qualified defined benefit pension plan ("Pension Plan"), the defaults under our debt agreements subsequent toDecember 29, 2019 , 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 have obtained new$50.0 million debtor-in-possession financing under a credit agreement ("DIP Credit Agreement") fromEncina Business Credit, LLC . This DIP Credit Agreement, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders. The DIP Credit Agreement, which replaces our former asset based loan ("ABL") revolver fromWells Fargo, N.A. (see Note 7 for further discussion of our debt), provides for a secured debtor-in-possession credit facility (the "DIP Facility") consisting of a new revolving loan facility in an aggregate principal amount up to$50 million , which is in the form of revolving loans or, subject to a sub-limit of$3.5 million , in the form of letters of credit. Our obligations under the DIP Facility will be guaranteed by all of our assets, whether now existing or hereafter acquired. The scheduled maturity date of the DIP Facility will be the eighteen-month anniversary following the Closing Date (as defined in the DIP Credit Agreement).
The DIP Credit Agreement contains customary representations, warranties and covenants that are typical and customary for debtor-in-possession facilities of this type, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. The DIP Credit Agreement was subject to approval by theBankruptcy Court and is subject to customary conditions precedent.
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
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the NYSE American suspended the trading of our Class A Common Stock upon our filing the Chapter 11 Cases, and our Class A Common Stock has been quoted "over-the-counter" on the OTC Pink Market under the symbol MNIQQ. OnFebruary 21, 2020 , the NYSE American filed a Form 25 with theSEC to delist our Class A Common Stock from the NYSE American. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will become effective 90 days after the filing date of the Form 25. 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 well-respected brands such as theMiami Herald ,The Kansas City Star ,The Sacramento Bee ,The Charlotte Observer ,
Our fiscal year ends on the last Sunday in December of each calendar year. The
fiscal years ended
The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:
Years Ended
December 29, December 30,
2019 2018
Revenues:
Advertising 47.5 % 51.6 %
Audience 45.4 % 42.1 %
Other 7.1 % 6.3 %
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" section below for a discussion of our revenue performance and contribution by category for 2019 and 2018.
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Recent Developments
Coronavirus (COVID-19) Pandemic
OnJanuary 30, 2020 , theWorld Health Organization declared that the recent coronavirus disease 2019 ("COVID-19") outbreak was a global health emergency. OnMarch 11, 2020 , theWorld Health Organization raised the COVID-19 outbreak to "pandemic" status. Our advertising revenues are dependent on general economic and business conditions in our markets or those impacting our customers, including from natural disasters and public health emergencies, such as COVID-19. COVID-19 was first detected inChina in late 2019 and subsequently spread globally. The transmission of COVID-19 and efforts to contain its spread have resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the economic environment. In many of the states in which we operate, the governors have issued stay-at-home orders, which restrict 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. In addition to disrupting our operations, these developments may adversely affect our access to capital and/or financing. As such, we expect the majority of the COVID-19 pandemic disruptions to impact our business operations, employee costs, single copy newspaper revenues (4.2% of 2019 total revenues) and total advertising revenues (47.5% of 2019 total revenues), with a greater impact to revenues than 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. We are unable to quantify the impact on our business at this time, but it could have a material adverse effect on our business, financial position, results of operations and/or cash flows in the future. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. 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 may result in a federal tax refund of approximately$9.0 million . Non-Cash Impairment Charges
Our financial operating results for 2019 include$335.7 million of non-cash impairment charges, which primarily includes a reduction of the carrying value of goodwill for$285.0 million and of intangible newspaper mastheads for$49.9 million . See Critical Accounting Policies below and Notes 3 and 6 for additional discussion regarding the goodwill and masthead impairments. Asset sales and leasebacks
During 2019, we recognized gains totaling$3.3 million related to the sale of land and buildings inBelleville, Illinois ,Kennewick, Washington andMiami, Florida . InMay 2019 , we closed a sale and leaseback of real property inKansas City, Missouri . The transaction resulted in net proceeds of$29.7 million . We are leasing back theKansas City property under a 15-year lease with initial annual payments totaling approximately$2.8 million . The lease includes a repurchase clause allowing us to repurchase the property after the 15-year lease term. Accordingly, the lease is being treated as a financing obligation, and we continue to depreciate the carrying value of the property in our financial statements. No gain or loss was recognized on the transfer of the property to the buyer and no gain or loss will be recognized until the transaction qualifies for sale accounting. 16 Table of Contents
Debt Redemption and extinguishment of debt
In accordance with our 2026 Notes Indenture, we are required to redeem the 2026 Notes from the net cash proceeds of certain asset dispositions and from a portion of our excess cash flow (as defined in the 2026 Notes Indenture). During 2019, in accordance with our 2026 Notes Indenture, we redeemed$41.8 million aggregate principal amount of our 2026 Notes from the net proceeds from asset dispositions and from 2018 excess cash flows. As a result, we recorded a loss on extinguishment of debt of$2.3 million in 2019. Debt Issuance and Exchange
InMarch 2019 , we converted approximately$75.0 million aggregate principal amount of 2029 Debentures to additional 2031 Notes. The additional 2031 Notes have identical terms to our senior secured junior lien 2031 Notes, other than with respect to the date of issuance, and will be treated as a single class for all purposes under the applicable indenture. See Note 7.
Early Retirement Incentive Program
InFebruary 2019 , we announced a one-time voluntary Early Retirement Incentive Program ("ERIP") that was offered to approximately 450 employees. The ERIP allowed the employees to accept a special termination benefit based on years of continuous service and the option to take their vested benefits under our frozen Pension Plan in a lump sum payment. Nearly 50% of the employees opted into
the program. Lump sum pension and termination payments made under the ERIP totaled approximately$35.1 million , decreasing both the benefit obligation and the fair value of plan assets. Due to the significance of this program, we remeasured the retirement plan assets and benefit obligations as ofMarch 22, 2019 , resulting in a net reduction to the pension liability, the recognition of a one-time non-cash charge of$6.8 million for the special termination benefits and an increase in our total 2019 benefit pension costs by approximately$1.5 million . See Note 9 for additional information. Results of Operations The following table reflects our financial results on a consolidated basis for 2019 and 2018: Years Ended December 29, December 30, (in thousands, except per share amounts) 2019 2018 Net loss$ (411,107) $
(79,757)
Net loss per diluted common share $ (51.97) $ (10.27)
The increase in net loss in 2019 compared to 2018 was primarily due to non-cash
impairment charges totaling $335.7 million for in 2019 compared to $37.3 million
in 2018 (see Notes 3 and 6). In addition, we recognized a $30.6 million gain
on extinguishment of debt during 2018 compared to a $2.3 million loss on
extinguishment of debt in 2019. During 2019 we also recorded a non-cash charge
of $6.8 million related to the ERIP (see Note 9) and a non-cash deferred tax
valuation allowance charge of $28.5 million . In addition, while advertising
revenues were lower during 2019 compared to 2018, the lower revenues were
largely offset by lower operating expenses, excluding goodwill and other asset
write-downs.
2019 Compared to 2018
Revenues
During 2019, total revenues decreased 12.1% compared to 2018, primarily due to
the continued decline in demand for advertising. The decline in print
advertising was primarily a result of large retail advertisers continuing to
reduce preprinted inserts and printed ROP advertising in favor of digital
products. We expect this trend to continue for the foreseeable future and
particularly in light of our Chapter 11 filing. In addition, we experienced
lower page views in 2019 compared to 2018, resulting in a decline in digital
advertising revenues, primarily impacting programmatic revenues in the national
advertising category, as discussed below.
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The following table summarizes our revenues by category, which compares 2019 to
2018:
Year Ended
December 29, December 30, $ %
(in thousands) 2019 2018 Change Change
Advertising
Digital-only $ 127,255 $ 151,733 $ (24,478) (16.1)
Digital bundled with print 27,111 28,517 (1,406) (4.9)
Total digital 154,366 180,250 (25,884) (14.4)
Print 122,593 155,701 (33,108) (21.3)
Direct marketing and other 60,151 80,769 (20,618) (25.5)
Total advertising 337,110 416,720 (79,610) (19.1)
Total audience 321,782 339,506 (17,724) (5.2)
Other revenues 50,624 51,000 (376) (0.7)
Total revenues $ 709,516 $ 807,226 $ (97,710) (12.1)
Supplemental advertising detail:
Retail $ 155,944 $ 191,043 $ (35,099) (18.4)
National 31,927 42,273 (10,346) (24.5)
Classified 89,088 102,635 (13,547) (13.2)
Direct marketing and other 60,151 80,769 (20,618) (25.5)
Total advertising $ 337,110 $ 416,720 $ (79,610) (19.1)
Advertising Revenues
Total advertising revenues decreased 19.1% during 2019 compared to 2018. We experienced declines in all of our advertising revenue categories, as discussed below.
The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:
Year Ended
December 29, December 30,
2019 2018
Advertising:
Total digital 45.8 % 43.2 %
Print 36.4 % 37.4 %
Direct marketing and other 17.8 % 19.4 %
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 14.4% during year ended
December 29, 2019 , compared to the same period in 2018. Digital advertising
constituted 45.8% of total advertising revenues in 2019 compared to 43.2% in
2018. Total digital advertising includes digital-only advertising and digital
advertising bundled with print.
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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 16.1% in 2019 compared to 2018, largely due to lower page views. As
expected, the decline in digital-only advertising continued due to lower
audience traffic compared to 2018, largely the result of a strategic tightening
of website paywalls that accelerated paid digital subscriptions and a change in
algorithms by a large platform company in the last half of 2018 that impacted us
and the rest of the industry during all of 2019. In addition, we restructured
our advertising function during the second quarter of 2019, which temporarily
impacted sales in the second quarter, and to a lesser extent, the third quarter
of 2019.
Digital advertising revenues bundled with print products declined 4.9% in 2019 compared to 2018 as a result of lower print advertising sales and a decline in digital sales.
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 21.3% during the year ended
Direct Marketing and Other:
Direct marketing and other advertising revenues decreased 25.5% during the year endedDecember 29, 2019 , compared to the same period in 2018. The decrease was largely due to declines in insert advertising in our total market coverage ("TMC") products by large retail customers and from eliminating certain unprofitable TMC programs or niche and direct marketing products. Audience Revenues Total audience revenues decreased 5.2% during the year endedDecember 29, 2019 , compared to the same period in 2018. Total audience revenues represented 45.4% of the total revenues during 2019 compared to 42.1% in the same period of 2018. Overall, digital audience revenues increased 7.8% in 2019 compared to 2018. Digital-only audience revenues increased 47.5% in 2019 compared to the same period in 2018. The increase in digital-only audience revenues during 2019 was largely a result of a 41.0% increase in our digital-only subscribers to 219,200 at the end of 2019 compared to 155,500 at the end of 2018. Print audience revenues decreased 10.9% in 2019 compared to the same period in 2018, primarily due to lower print circulation volumes that were partially offset by pricing adjustments. Print circulation volumes continue to decline as a result of fragmentation of audiences faced by our industry as available media outlets proliferate and readership trends change. To help reduce potential attrition due to the increased pricing, we increased our subscription-related marketing and promotion efforts. Operating Expenses Total operating expenses increased 23.1% in the year endedDecember 29, 2019 , compared to the same period in 2018, primarily due to increases in goodwill and other asset write-offs. This was partially offset by decreases in compensation and amortization expenses, as discussed below. Our total operating expenses, excluding goodwill and other asset write-offs, decreased 13.5% and reflects our continued effort to reduce costs through streamlining processes to gain efficiencies. 19 Table of Contents The following table summarizes our operating expenses, which compares 2019 to 2018: Years Ended December 29, December 30, $ % (in thousands) 2019 2018 Change Change Compensation expenses$ 251,677 $ 298,033 $ (46,356) (15.6) Newsprint, supplements and printing expenses 45,617 54,592 (8,975) (16.4) Depreciation and amortization expenses 46,021 76,242 (30,221) (39.6) Other operating expenses 342,631 364,038 (21,407) (5.9) Other asset write-downs 335,676 37,274 298,402 nm$ 1,021,622 $ 830,179 $ 191,443 23.1 _________________ _____________________ nm - not meaningful Compensation expenses, which included both payroll and fringe benefit costs, decreased 15.6% in the year endedDecember 29, 2019 , compared to the same period in 2018. Payroll expenses declined 14.8% during 2019 compared to the same period in 2018, primarily due to the reduction in headcount. Average full-time equivalent employees declined 19.7% in 2019 compared to in 2018, partially reflecting the ERIP we discussed above in Recent Developments, as well as the restructuring of our advertising function in mid-2019. Fringe benefit costs decreased 19.4% in 2019 compared to in 2018, which is consistent with the decreases in payroll expenses. Newsprint, supplements and printing expenses decreased 16.4% in the year endedDecember 29, 2019 , compared to the same period in 2018. Newsprint expense declined 22.3% during 2019 compared to the same period in 2018. The newsprint expense decline reflects a decrease in newsprint tonnage used of 21.3% in 2019 compared to in 2018. Newsprint prices decreased 1.3% during 2019 compared to 2018. During these same periods, printing expenses, which are primarily costs associated with outsourced printing to third parties, decreased 14.9%. Depreciation and amortization expenses decreased 39.6% in the year endedDecember 29, 2019 , compared to the same period in 2018. Depreciation expense decreased$6.7 million or 23.5% in 2019 compared to the same period in 2018, as a result of assets becoming fully depreciated in previous periods. Amortization expense decreased 49.3% in 2019 compared to in 2018. A majority of the intangible assets subject to amortization became fully amortized in the second quarter of 2019 and therefore amortization expense during the remainder of 2019 and in future years will be significantly lower. Other operating expenses decreased 5.9% in the year endedDecember 29, 2019 , compared to the same period in 2018. The decrease was primarily a result of cost savings initiatives and other efforts to reduce operational costs, as well as the timing of gains on the sale of property and equipment. During 2019, compared to 2018, we had decreases in various categories, such as bad debt, postage, travel, outsourcing costs, circulation delivery costs and other miscellaneous expenses. These decreases were partially offset by an increase other professional services and the change in gain on sale of property and equipment. Other professional services include the legal counsel and financial consultants engaged to advise us through the negotiations with stakeholders and to prepare for the Chapter 11 proceedings, as discussed above. The change in the gain on sale of property and equipment includes a$4.1 million gain on the disposal of property and equipment, which reduced operating expenses in 2018, with similar transactions for$2.6 million in 2019.Goodwill and other asset write-downs include charges of$335.7 million in the year endedDecember 29, 2019 , compared to$37.3 million in the same period in 2018. These write-downs in 2019 are primarily due to impairment charges to goodwill of$285.0 million and intangible newspaper mastheads of$49.9 million . The write-downs in 2018 are due to impairment charges related to intangible newspaper mastheads. During 2019 and 2018, goodwill and other asset write-downs also includes impairment charges recognized upon classifying certain land and buildings as assets held for sale during the applicable periods. NonOperating Items Interest Expense:
Total interest expense decreased 3.0% in the year endedDecember 29, 2019 , compared to the same period in 2018. During 2019, interest expense related to debt balances decreased$0.5 million compared to the same period in 2018, primarily related to lower overall debt balances resulting from redemptions
made
in the first half of 2019.
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In 2019, the decrease in total interest expense was also due to a decrease in
our non-cash imputed interest of
Gains Related to Investments in Unconsolidated Companies:
During 2018, we recorded
Extinguishment of Debt:
In accordance with our 2026 Notes Indenture, we are required to redeem 2026 Notes from the net cash proceeds of certain asset dispositions and from a portion of our excess cash flow (as defined in the 2026 Notes Indenture). During 2019, in accordance with our 2026 Notes Indenture, we redeemed$41.8 million aggregate principal amount of our 2026 Notes from the net proceeds from asset dispositions and from 2018 excess cash flows. As a result, we recorded a loss on extinguishment of debt of$2.3 million in 2019.
During the first quarter of 2019, our exchange of
During 2018, we recorded a net gain on the extinguishment of debt of$30.6 million as a result of the following transactions: we redeemed$344.1 million of our 2022 Notes and we executed a non-cash exchange of most of our Debentures for new Tranche A and Tranche B Junior Term Loans. Also, during 2018, we redeemed or repurchased$95.5 million of our 2022 Notes and we redeemed$5.3 million of our 2026 Notes. As a result of these transactions, we recorded any applicable premiums that were paid, wrote off unamortized discounts and debt issuance costs, and recorded a gain based on the relative fair market of the new debt issued as compared to the carrying value of the debt that was extinguished.
Income Taxes: In the year endedDecember 29, 2019 , we recorded an income tax benefit of$6.3 million . As discussed more fully in Note 3 under Income Taxes, during 2019, we recorded charges of$28.5 million related to the current period impact of the valuation allowance on deferred tax assets. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, certain permanently non-deductible expenses and the impact of non-tax deductible charges related to intangibles and goodwill. In 2018, we recorded an income tax benefit of$2.2 million . As discussed more fully in Note 3 under Income Taxes, during 2018, we recorded a charge of$20.4 million related to the current period impact of the valuation allowance on deferred taxes. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes and certain permanently non-deductible expenses. Liquidity and Capital Resources As a result of the commencement of the Chapter 11 Cases onFebruary 13, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 filings, we intend to de-lever our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully agree upon a viable plan of reorganization with our various stakeholders or reach any such agreement in the time frame that is acceptable to theBankruptcy Court . See Note 2 for additional information.
We have entered into a new
We have concluded that our financial condition and projected operating results, the minimum required contribution amounts to the Pension Plan, the defaults under our debt agreements subsequent toDecember 29, 2019 , and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going 21
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concern. 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 interest payments under the DIP Credit Agreement and our first lien notes during 2020 in accordance with theBankruptcy Court order approving the DIP Credit Agreement but do not expect to make interest payments on our other notes. We plan to fund our ongoing operations through available borrowings under our DIP Credit Agreement as well as cash generated from operations. 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. Major factors include obtaining theBankruptcy Court's approval of a Chapter 11 plan of reorganization, which will enable us to transition from Chapter 11 into ordinary course operations outside of bankruptcy. We also may need to obtain a new credit facility, or "exit financing." Our ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Chapter 11 Cases as well as the general global economic downturn due to the recent outbreak of COVID-19. The plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations andBankruptcy Court decisions ongoing through the date on which such plan is confirmed. 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 in amounts sufficient to fund our operations, satisfy our interest and principal 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 coronavirus 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. AtDecember 29, 2019 , we had$703.3 million aggregate principal amount of outstanding debt consisting of$262.9 million of our 2026 Notes,$157.1 million of our Junior Term Loan,$268.4 million of our senior secured junior lien 2031 Notes and$14.9 million of our unsecured Debentures.
Pension Matters:
For our Pension Plan, the net retirement obligations in excess of the retirement plan assets were$526.3 million as ofDecember 29, 2019 . We will seek theBankruptcy Court's authority to terminate our Pension Plan, and appoint the PBGC as the plan's trustee. Under a plan termination, the PBGC would continue to pay the Pension Plan participants their benefits, subject to federal statutory limits. Under current regulations, we believe that such a solution would not have an adverse impact on qualified pension benefits for substantially all
plan participants.
Sources and Uses of Liquidity and Capital Resources:
Our cash and cash equivalents were
The following table summarizes our cash flows:
Years Ended
December 29, December 30,
(in thousands) 2019 2018
Cash flows provided by (used in)
Operating activities $ (6,763) $ 25,919
Investing activities 7,219 (374)
Financing activities (13,848) (106,344)
Increase (decrease) in cash, cash equivalents and
restricted cash $ (13,392) $ (80,799)
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Operating Activities:
We used$6.8 million of cash from operating activities in 2019 compared to generating$25.9 million of cash in 2018. The decrease in operating cash flows reflects a contribution of$3.1 million to our Pension Plan in 2019 (no contribution was made in 2018), a$13.3 million change in our accounts payable balances and an$18.8 million change in our accrued interest balances in 2019 compared to the same period in 2018. This was partially offset by the timing of income tax payments in 2019 compared to 2018. In 2019, we had net income tax payments of$7.5 million compared to net income tax payments of$13.9 million during the same period in 2018. The remaining changes in operating activities relate to miscellaneous timing differences in various payments and receipts.
Investing Activities:
We generated$7.2 million of cash from investing activities in 2019. We received proceeds from the sale of property, plant and equipment ("PP&E") of$8.8 million and from the redemption of time deposits of$2.0 million . These amounts were offset by the purchase of PP&E for$2.7 million and contributions to equity investments of$0.8 million . We used$0.4 million of cash from investing activities in 2018. We received proceeds from the sale of PP&E of$5.7 million , from the sale of an investment of$5.3 million and from the net purchases of and proceeds from redemptions of certificates of deposit, which net to a$2.3 million source of cash. These amounts were offset by the purchase of PP&E for$11.1 million and contributions to equity investments of$2.5 million .
Financing Activities:
We used$13.8 million of cash for financing activities in 2019. During 2019, we redeemed$41.8 million principal amount of our 2026 Notes at par. See Note 7 for further discussion. These redemptions were partially offset by the$29.7 million increase in our financial obligations as a result of the sale and leaseback of one of our real properties, as described in Recent Developments. We used$106.3 million of cash for financing activities in 2018. During 2018, we repurchased or redeemed$439.6 million principal amount of our 2022 Notes for$459.6 million in cash, we redeemed$5.3 million principal amount of our 2026 Notes at par, and incurred financing costs of$17.7 million related to the refinancing of our debt. Those amounts were offset by cash proceeds of$361.4 million for the issuance of$310.0 million principal amount of the 2026 Notes and$75.0 million principal amount of the Junior Term Loans (which represents the excess from the exchange of debt, as more fully described in Note 7). We also had an increase of$15.7 million in our financing obligations as a result of the sale and leaseback of one of our real properties.
OffBalanceSheet Arrangements
As of
Critical Accounting Policies
This MD&A is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States . The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. We base our estimates and judgments on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. The most significant areas
involving estimates and assumptions are amortization and/or impairment of
goodwill and other intangibles, pension and postretirement expenses, and our
accounting for income taxes. We believe the following critical accounting
policies in particular, affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements.
Goodwill Impairment:
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. An impairment loss is recognized when the carrying amount of the reporting
unit's net
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assets exceed the estimated fair value of the reporting unit. We assess goodwill
for impairment on an annual basis at a reporting unit level, and we have
identified two reporting units. One reporting unit ("Western" reporting unit)
consists of operations in California , Washington and the Central region and the
other reporting unit ("Eastern" reporting unit) consists of operations primarily
in the Carolinas and East and Southeast regions. Goodwill is assessed between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value.
These events or circumstances could include a significant change in the business
climate, a change in strategic direction, legal factors, operating performance
indicators, a change in the competitive environment, the sale or disposition of
a significant portion of a reporting unit, or future economic factors such as
unfavorable changes in our stock price and market capitalization or in the
estimated future discounted cash flows of our reporting units. Our annual test
is performed at our fiscal year end.
We test for goodwill impairment using an equal weighting of a market approach
and an income approach. We used market multiples derived from a set of
competitors or companies with comparable market characteristics to establish
fair values for a reporting unit (market approach). We also estimate fair value
using discounted projected cash flow analysis (income approach. This analysis
requires significant judgments, including future cash flows, which is dependent
on internal forecasts, the longterm rate of growth for our business, estimation
of the useful life over which cash flows will occur, and determination of our
weighted average cost of capital. Changes in these estimates and assumptions
could materially affect the determination of fair value and goodwill impairment
for each reporting unit. In addition, financial and credit market volatility
directly impacts our fair value measurement through our weighted average cost of
capital, used to determine our discount rate, and through our stock price, used
to determine our market capitalization. We may be required to recognize
impairment of goodwill based on future economic factors.
We performed interim and annual goodwill impairment tests in 2019. As a result
of our testing, we recorded total impairment charges of $285.0 million , of which
a majority was recorded as of the third quarter of 2019. No goodwill
impairments were recorded during 2018.
As of December 29, 2019 , the amount of goodwill allocated to the Eastern
reporting unit was $174.4 million and the amount allocated to the Western
reporting unit was $245.8 million . We performed the annual goodwill impairment
tests using a terminal growth rate of 0.0% and a discount rate of 9.6% for the
income approach and comparable market multiples from seven companies as an input
for the market approach.
After the impairments, the fair value of our Eastern reporting unit is equal
to its carrying value and the fair value of our Western reporting unit exceeded
its carrying value by approximately 3.1%. An increase of 50 basis points in the
discount rate would result in an additional impairment charge of approximately
$6.3 million in the Eastern reporting unit and an impairment charge of $0.3
million in the Western reporting unit.
Mastheads:
Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, at yearend, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief-from-royalty approach that utilizes the discounted cash flow model discussed above, and estimated royalty rates to determine the fair value of each newspaper masthead. Our judgments and estimates of future operating results in determining the reporting unit fair values are consistently applied to each newspaper in determining the fair value of each newspaper masthead.
We performed interim and annual masthead impairment tests in 2019 and 2018.
As
a result of our testing, we recorded total impairment charges of
Other Intangible Assets:
Longlived assets such as other intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. No impairment loss was recognized on intangible assets subject to amortization in 2019 or 2018.
Pension and PostRetirement Benefits:
We have significant pension and postretirement benefit costs and credits that are developed from actuarial valuations.
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Inherent in these valuations are key assumptions including discount rates and expected returns on plan assets. We are required to consider current market conditions, including changes in interest rates, in establishing these assumptions. Changes in the related pension and postretirement benefit costs or credits may occur in the future because of changes resulting from fluctuations in our employee headcount and/or changes in the various assumptions. Current standards of accounting for defined benefit pension plans and postretirement benefit plans require recognition of (1) the funded status of a pension plan (difference between the plan assets at fair value and the projected benefit obligation) and (2) the funded status of a postretirement plan (difference between the plan assets at fair value and the accumulated benefit obligation), as an asset or liability on the balance sheet. AtDecember 29, 2019 andDecember 30, 2018 , we had a total pension and post-retirement obligation of$645.5 million and$661.0 million , respectively. We maintain a Pension Plan, which covers certain eligible employees. Benefits are based on years of service that continue to count toward early retirement calculations and vesting previously earned. No new participants may enter the Pension Plan and no further benefits will accrue. For our Pension Plan, the net retirement obligations in excess of the retirement plan assets were$526.3 million and$548.2 million as ofDecember 29, 2019 , andDecember 30, 2018 , respectively. AtDecember 29, 2019 , we used a discount rate of 4.42% and an assumed longterm return on assets of 7.75% to calculate our retirement plan expenses in 2019. We also performed a remeasurement onMarch 22, 2019 , as a result of the Early Retirement Incentive Program (see Note 9 for more information) and used a discount rate of 4.10% and an assumed long-term return on assets of 7.75%. We also have a limited number of supplemental and post-retirement plans to provide certain key employees and retirees with additional retirement benefits. These plans are funded on a payasyougo basis. For these nonqualified plans that do not have assets, the post-retirement obligations were$119.2 million and$112.8 million as ofDecember 29, 2019 , andDecember 30, 2018 , respectively. We used discount rates of 4.30% to 4.45% to calculate our retirement plan expenses in 2019. We used discount rates of 3.67% and 3.89% to calculate our retirement plan expenses in 2018.
For 2019, for the Pension Plan and the non-qualified post-retirement plans combined, a change in the weighted average rates would have had the following impact on our net benefit cost:
· A decrease of 50 basis points in the longterm rate of return would have
increased our net benefit cost by approximately
· A decrease of 25 basis points in the discount rate would have decreased our net
benefit cost by approximately
Income Taxes:
Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified. The amount of income taxes paid is subject to periodic audits by federal and state taxing authorities, which may result in proposed assessments. These audits may challenge certain aspects of our tax positions such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. Income tax contingencies require significant judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future periods. We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
As of
Due to the adjustments in 2019 noted above, our effective tax rate for 2019 is not comparable to the effective tax rate for 2018. See Note 8 for further discussion
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The timing of recording or releasing a valuation allowance requires significant
judgment. The development of these expectations involves the use of estimates
such as operating profitability. The weight given to the evidence is
commensurate with the extent to which it can be objectively verified. We will
continue to maintain a valuation allowance against our deferred tax assets until
sufficient positive evidence arises in future that provides an indication that
all or a portion of the deferred tax assets meet the more likely than not
standard that these assets will be realized in the future. If sufficient
positive evidence, such as three-year cumulative pre-tax income, arises in the
future that provides an indication that all or a portion of the deferred tax
assets meet the more-likely-than-not standard, the valuation allowance may be
reversed, in whole or in part, in the period that such determination is made.
Recent Accounting Pronouncements
For information regarding the impact of certain recent accounting pronouncements, see Note 3.
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