UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

For the transition period from        to       

 

Commission file number: 1‑9824

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

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

 

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐ Yes ☒ No

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒ Yes ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

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

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

Based on the closing price of the registrant’s Class A Common Stock on the NYSE American LLC on June 29, 2018, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the voting and non‑voting common equity held by non‑affiliates was approximately $69.7 million. For purposes of the foregoing calculation only, as required by Form 10‑K, the Registrant has included in the shares owned by affiliates, the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.

Shares outstanding as of March 1, 2019:

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year end of December 30, 2018, are incorporated by reference in Part III of this Annual Report on Form 10‑K.

 

 

TABLE OF CONTENTS

 

 

 

PART I

Forward‑Looking Statements:

This annual report on Form 10‑K contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements relating to our future financial performance, business, strategies and operations. 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:

 

 

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. 

 

ITEM 1.  BUSINESS

Overview

The McClatchy Company (the “Company,” “we,” “us” or “our”) provides strong, independent local journalism to 30 communities with operations in 14 states, as well as selected national news coverage through our Washington D.C. based bureau. We also provide a full suite of digital marketing services, both through our local sales teams based in the communities we serve, as well as through excelerate®, our national digital marketing agency. We consider our journalism to be in the public interest and strive to be essential to our audiences and advertisers through a wide array of storytelling formats. We are a publisher of well-respected brands such as the Miami Herald, The Kansas City Star, The Sacramento Bee, The Charlotte Observer,  The (Raleigh) News & Observer, and the (Fort Worth) Star-

Telegram. Incorporated in Delaware, we are headquartered in Sacramento, California, and our Class A Common Stock is listed on the NYSE American under the symbol MNI.

The cornerstone of our business is providing content, either editorial or through advertising that will inform, educate, entertain and enhance the everyday lives of people with ties to the communities in which we operate. Our media companies and our digital media agency,  excelerate®, distribute content, including video products, through our owned and operated websites and mobile applications, third-party search and ad exchanges, social media platforms, electronic editions of our daily newspapers (“e-editions”) as well as our printed daily newspapers. We also print selected niche publications and community newspapers, as well as offer other print and digital direct marketing services. Our media companies range from large daily newspapers and news websites serving metropolitan areas to non‑daily newspapers with news websites and online platforms serving small communities. We had 66.4 million average monthly unique visitors to our online platforms and 3.9 billion page views of our digital products for the full year ended December 30, 2018. Our local websites, e-editions and mobile applications in each of our markets provide us fully developed but rapidly evolving channels to extend our journalism and advertising products to our audience in each market. In 2018, we continued to expand our full-service digital agency, excelerate®, which provides digital marketing tools designed to customize digital marketing plans for our customers. For the year ended December 30, 2018, we had an average aggregate paid daily print circulation of 1.1 million and Sunday print circulation of 1.7 million.

Our business is roughly divided between those media companies operated west of the Mississippi River and those that are east of it, but includes four operating regions: the West,  Central,  Carolinas and East regions. For the year ended December 30, 2018, no single media company represented more than 12.0% of our total revenues.

Our fiscal year ends on the last Sunday in December. The fiscal year ended December 30, 2018, consisted of a 52-week period and fiscal year ended December 31, 2017, consisted of a 53-week period.

Strategy

Our mission is to deliver strong, independent journalism and information. To accomplish this goal, we are committed to a three‑pronged strategy to grow our businesses and total revenues as a leading local media company:

To assist us with these strategies, we continually improve existing digital products and develop new ones, reengineer our operations to reduce legacy costs and strengthen areas driving performance in news, audience, advertising and digital growth. As a result of our efforts, we saw a 14.8% growth in total digital-only revenues in 2018, which includes digital only advertising and audience revenues. We continued our focus on driving results in direct marketing and audience revenues, while continuing to drive operating expenses down.

Business Initiatives

Our local media companies continue to undergo tremendous structural and cyclical change. To strengthen our position as a leading local media company in the markets we serve and implement our strategies, we are focused on the following five major business initiatives:

Increasing and Broadening Total Revenues

Revenue initiatives over the last couple of years have included aligning ourselves for digital growth by revamping and centralizing certain departments and focusing on digital marketing; digital audience growth through new audiences and digital subscribers; organizing our technology groups to help us better serve our customers; growing our video market share and developing innovation teams that help us implement additional customer-focused approaches to running our businesses. In 2018, we continued to expand our full-service digital agency, excelerate®, which provides customized digital marketing plans for our customers. We also continued to expand our video efforts to improve storytelling and generate additional advertising revenues.

Our strategy has been to focus on growing revenue sources that include digital and direct marketing advertising, audience and other non-traditional revenues. Management expects newspaper print advertising to continue to be a smaller share of total revenues in the future, due in part to expected strong growth in digital-only advertising revenues and certain areas of direct marketing advertising, and more stable performance in audience revenues. However, we continue to look for opportunities to expand our advertiser base, including advertisers outside of our markets using our excelerate® agency services.

Currently, advertising revenues represent a majority of our total revenues. Advertising revenues were 51.6% and 55.2% of total revenues in 2018 and 2017, respectively. Our sales force is responsible for delivering to advertisers a broad array of advertising products, including digital marketing solutions, and print and direct marketing solutions. Our advertisers range from large national retail chains to regional automobile dealerships and grocers to small local businesses and even individuals.

Increasingly, our emphasis has been on growing the breadth of products offered to advertisers, particularly our digital marketing products, while expanding our relationships with current advertisers and growing new accounts. For 2018, total digital and direct marketing advertising revenues combined represented 62.6% of total advertising revenues compared to 55.1% in 2017. Our digital products are discussed in more detail below.

Audience revenues were 42.1% and 40.2% of consolidated total revenues in 2018 and 2017, respectively. Our subscription packages have helped to drive growth in digital audience revenues. Audience revenues have been a more stable revenue source than advertising as we have leveraged technology to increase the number of digital products we offer and better understand our digital audience. As a result, digital only audience revenues grew 34.8% in 2018, while the number of digital subscribers grew by 52,600 as of December 30, 2018, up 51.1% from the end of 2017. See Broadening Our Audience in Our Local Markets below for a greater description of our efforts in digital audience growth.

Expanding Our Digital Business

We continue to be a leader among local media providers in digital advertising revenues. In 2018,  43.3% of advertising revenues came from digital products compared to 34.7% in 2017.  In 2018,  84.2% of our digital advertising revenues came from digital-only advertisements (where the online buy was not bundled with a print buy) compared to 77.2% in 2017.  Digital-only advertising revenues grew 13.5%, to $151.7 million in 2018 from $133.7 million in 2017. We believe this independent advertising revenue stream positions us well for the future of our digital business. During 2018, total digital advertising revenues increased 4.1% compared to a decrease of 0.6% in 2017.  Total digital advertising revenues grew at a lower growth rate than digital-only advertising primarily due to a decline in print advertising that is associated with bundled print/digital products and because of our continued focus on growing our digital-only advertising in 2018.  

Our media companies’ websites and mobile applications, e‑mail products, video and mobile services and other electronic media enable us to engage our readers with real‑time news and information that matters to them. As discussed below in Maintaining Our Commitment to Public Service Journalism, our storytelling capability is not only contributing to our growth in digital subscribers, but also to our digital advertising revenue growth. During 2018, our websites attracted an average of approximately 66.4 million unique visitors per month. Although this figure is down 6.7%, compared to 2017, this decline reflects both the changing elements of news coverage (i.e., Hurricane Irma, a significant news event sparking an extraordinary growth in unique visitors coming to our sites in late 2017 versus no similar event in late 2018), and our focus on enforcing stricter pay walls in 2018, which resulted in strong growth in digital subscriptions as discussed above. We had 3.9 billion page views of our digital products for both the full years of 2018 and 2017.  In addition, our average mobile traffic accounted for 65.8% of all digital traffic we received on a monthly basis in 2018 compared to 61.3% in 2017.

We, along with Gannett Co., Inc., Hearst, and Tribune Publishing Company (formerly tronc, Inc.), own Nucleus Marketing Solutions, LLC (“Nucleus”). This marketing solutions provider connects national advertisers with the top 30 U.S. local publishers’ highly engaged audiences across existing and emerging digital platforms. We believe Nucleus has improved our reach with national advertisers and will continue to do so in 2019 and beyond.

We continue to pursue new digital products and offerings. In 2018, we continued to expand our concept of comprehensive digital marketing solutions for local businesses via our digital marketing agency called excelerate®.  We also continued to expand the footprint of excelerate® to markets beyond those served by our media companies. Offering advertisers integrated packages including website customization, search engine marketing and optimization, social media presence and marketing services, and other multi‑platform advertising opportunities, excelerate® helps businesses improve the effectiveness of their marketing efforts.

In 2018, we continued to expand our advertising efforts on third-party advertising exchanges. Our real-time, programmatic buying and selling of digital advertising inventory – often targeting very specific audiences at very specific times – grew 10.2% in 2018 compared to 2017. Our growth continues to be strengthened by our participation in the Local Media Consortium (“LMC”) and its more than 84 member companies representing more than 2,600 daily newspapers, broadcast and online-only local media outlets. The LMC’s mission is to provide economic benefit to its members by negotiating partnerships that deliver cost savings or new revenue opportunities. In addition, LMC offers a private advertising exchange of high-quality advertising inventory from member publishers providing advertisers with access to more than 19 billion ad impressions monthly. 

Video revenue increased 47.5% in 2018 compared to 2017, due to our focus on the use of video in our digital products to enhance the content that we bring to readers and viewers, and also to compete for a growing advertising stream. During 2018, more than 493 million video views were recorded across our digital platforms, including those on social media platforms and distribution partners, up nearly 35% from 366 million video views in 2017.

All of our markets offer audience subscription packages for digital content. The packages include a combined digital and print subscription or a digital‑only subscription. Digital‑only subscriptions grew to approximately 155,500, an increase of 51.1%  at the end of 2018 compared to 102,900 subscriptions at the end of 2017. We have not only increased the number of our digital-only subscriptions, but we have grown ways in which those subscribers are acquired. For instance, some of our growth is driven by a new sports-only subscription product branded as SportsPass™, which was launched in 11 of our markets during 2018. It was first introduced in our Miami market, just before the start of the NFL preseason. Since then we have expanded it to the other ten markets. In addition, in May 2018, we partnered with Google to offer a way for readers to purchase a subscription to each of our digital brands. Consumers are able to link our subscription account with their Google accounts, which allows for a better user experience. We continue to improve our technology to know our customers better, to identify areas of interest that allows us to target and retarget potential subscribers and to provide new products to all subscribers.

Maintaining Our Commitment to Public Service Journalism 

We believe that independent journalism in the public interest is critical to our democracy. It is also the underpinning of our success as a business.

We are committed to producing best‑in‑class journalism and local content in every community we serve. Each of our newsrooms is expected to improve annually; whether measured by growth in readership, loyalty of readers, our own assessments of journalistic strengths, or recognition by peers and others. And each of our newsrooms is expected to serve our core public service mission – holding leaders and institutions accountable and making our communities better places in which to live.

During the digital transition that has reshaped the industry over the past decade, we have moved quickly to expand our digital reach and deliver news to readers where they want it and when they want it. Our company-wide “Newsroom Reinvention” initiative places an intense focus on what our readers want and need from us in a fast-changing news landscape. We continue to produce ground-breaking accountability journalism – from the Miami Herald’s investigation of a billionaire sex abuser who received a sweetheart deal, to The Fresno Bee’s deep exploration of a controversial congressman, to dogged reporting on failures that lead to a fatal bridge collapse in Florida, to a tragic tourist boat accident in Missouri, and the Star-Telegram’s investigation of hundreds of sex abuse allegations in fundamental Baptist churches. Meanwhile, our Washington, D.C. bureau continues to work closely with our local newsrooms while being a significant source of news on the national stage. 

Our heritage of public service journalism is the foundation of our business, and the work of our journalists received significant recognition in 2018. Journalists from the Miami Herald were finalists for the 2018 Pulitzer Prize for investigative reporting for their in-depth report on abuses in the juvenile justice system in Florida. Journalists at The Kansas City Star were finalists for the 2018 Pulitzer Prize in the public service category for their expose on secrecy in state government.  We have been honored with 54 Pulitzer Prize wins and our impressive streak of being a Pulitzer winner or finalist every year for more than a decade.

 

Our video journalists continued to produce ambitious stories around breaking news, projects and series that have gained industry recognition. A podcast series on Rae Carruth, who spent more than 18 years in prison for the killing of his girlfriend while he played for the NFL’s Carolina Panthers, was named Best Podcast of 2018 by Sports Illustrated. Our industry-leading approach to drone journalism has seen more than 50 pilots trained, licensed and routinely flying for daily news coverage across our company, including The Sacramento Bee’s haunting aerials from the devastating Camp Fire in California.

 

These are just a few of the hundreds of examples of our powerful journalism published across the company. We intend to build on our legacy in the years ahead, propelled by the success of our ongoing digital transformation. For instance, the digital replica edition of each of our daily newspapers includes stories from our 30 newsrooms and other journalistic organizations that on many days more than doubles the news that could be found in the daily newspaper delivered to subscribers’ doorsteps. This additional content, known as “Extra Extra” and “SportsXtra,” has been well received by readers of our digital products.

 

Broadening Our Audience in Our Local Markets

Each of our media companies has the largest print circulation of any news media source serving its respective community, and, coupled with its local website and other digital platforms in each community, reaches a broad audience in each market. We believe that our broad reach in each market is of primary importance in attracting advertising, which is currently an important source of revenues.

Our digital audience continues to be strong. Our digital audience comes from traffic on our websites, social media and other digital platforms. During 2018, average monthly unique visitors to our digital sites declined 6.7% compared to 2017. As discussed above, this decline reflects both the changing elements of news coverage (i.e., Hurricane Irma, a significant news event sparking an extraordinary growth in unique visitors coming to our sites in late 2017 versus no similar event in late 2018), and our focus on enforcing stricter pay walls in 2018, which resulted in strong growth in digital subscriptions as discussed above. 

In 2018, our monthly mobile traffic was up 0.2% as compared to 2017 and accounted for 65.8% of all monthly digital traffic we received. Additionally, 493 million video views were recorded across our digital platforms, including those on social media platforms and distribution partners, up nearly 35% from 2017. We work hard to appeal to our mobile audience. We have invested in new digital publishing systems to better serve these mobile readers, and we continually update all of our news websites to be responsive to changes in technology, such as to automatically resize to optimize the viewing experience on the user’s screen, whether it is on a smartphone,  a tablet or desktop.

Our news and information follow readers continuously. To start their day, we reach our readers who can check out our latest headlines and stories on their mobile phones or with the morning newspaper. Our news websites, updated frequently throughout the day, are available to readers via their desktop computers and optimized for all of their different mobile devices.

Daily newspapers paid circulation volumes for 2018 were down 11.1% compared to 2017. The declines in daily circulation reflect the fragmentation of audiences faced by all media companies, including our own digital‑only subscriptions, as available media outlets proliferate, and readership trends change. Our Sunday circulation volumes were down 9.8% in 2018 compared to 2017.

We also reach audiences through our direct marketing products. In 2018, we distributed approximately 626,000 Sunday Select packages per week, which are packages of preprinted advertisements generally delivered on Sunday to non‑newspaper subscribers who have interest in circulars. We also distribute thousands of e-mail messages each day, including editorial and advertising content, as well as other alerts to subscribers and non‑subscribers in our markets which supplement the reach of our print and digital subscriptions.

To remain the leading local media company for the communities we serve and a must‑buy for advertisers, we are focused on maintaining a broad reach of print and digital audiences in each of our markets. We will continue to refine and strengthen our print platform, but our growth increasingly comes from our digital products and the beneficial impact those products have on the total audience we deliver for our advertisers.

Focusing on Cost Efficiencies While Investing for the Future

While continuing to maintain our core business in news, advertising and audience revenues and digital media, we pay particular attention to cost efficiencies. Our cost initiatives in 2018 were focused on continuing to reduce legacy costs from our traditional print business, and we have realized significant savings from these efforts, primarily in postage, newsroom and advertising regionalization/consolidation, distribution and outsourced printing costs. In 2018, we achieved reductions in costs to help protect our profitability in a period of declining print advertising. Compensation, newsprint, supplements and printing expenses and other operating expenses, declined $41.2 million in 2018 compared to 2017.  This decline was net of investments made in 2018 intended to generate future savings or that were necessary to invest in revenue generating strategies and technology. The ongoing structural and cyclical changes in our markets demand that we respond by reengineering our operations, as needed, to achieve an efficient and sustainable cost structure. Over the past several years, we have substantially lowered our cost structure by reducing our workforce, optimizing technology and maximizing printing, distribution and content efficiencies.

In 2018, in order to ensure a more collaborative enterprise, we began the process of regionalizing certain areas of our operations, including newsrooms and advertising departments. We had previously regionalized our publisher and editorial leadership functions and those transitions continued into 2018.  We have previously centralized certain functional areas, like audience operations, revenue accounting and other functions. We will continue to outsource, regionalize and consolidate operations to achieve a more streamlined and efficient cost structure. For instance, in early 2019 we announced a more centralized structure for advertising operations that will be rolled out during the following year.  These changes will result in cost savings in future years, while giving our operating executives, in our Eastern and Western operating segments (see discussion of segments below in “Other Operational Information”) and in each market, the ability to focus more of their time on our growing digital and direct marketing media businesses.

As of December 30, 2018, we have outsourced the printing operations at 22 of our 30 media companies and announced that in early 2019, we would outsource an additional newspaper in the Northwest. With this accomplished, we now have 23 of our 30 newspapers being printed by centers outside of their markets. These newspapers are printed through arrangements with nearby newspapers owned by us or third-party companies. In markets where we continue to operate our own printing presses we in‑source the printing of nearby newspapers for other companies. This allows us to maximize the use of our existing press capacity and generate additional revenues. Five markets (Charlotte, Columbia, Kansas City, Miami and Sacramento) have become hubs for in-sourced printing in their areas.

Other Operational Information

Historically, each of our media companies was largely autonomous in its local advertising and editorial operations in order to meet the needs of the particular community it served. However,  we continue to regionalize or centralize certain operations across our local markets to strengthen our local media companies’ ability to collaborate and increase their performance in news, audience, advertising and digital growth.

We have two operating segments that are aggregated into a single reportable segment. Each operating segment consists primarily of a group of local media companies with similar economic characteristics, products, customers and distribution methods. Both operating segments report to one segment manager. One of our operating segments (“Western Segment”) consists of our media operations in the West and Central regions, while the other operating segment (“Eastern Segment”) consists of media operations in the Carolinas and East regions. Regional publishers or local publishers/general managers of the media companies make day‑to‑day decisions and report to the segment manager, who is responsible for implementing the operating and financial plans at each operation within the respective operating segment. The corporate managers, including executive officers, set the basic business, accounting, financial and reporting policies.

Our media companies also work together to consolidate functions and share resources regionally and across operating segments that lend themselves to such efficiencies, such as certain regional or national sales efforts, certain editorial functions, accounting functions, digital publishing systems and products, information technology functions and others. These efforts are often coordinated through the senior executives and corporate personnel.

Our business is somewhat seasonal, with peak revenues and profits generally occurring in the fourth quarter of each year, reflecting the Thanksgiving and Christmas holidays. The other quarters, when holidays are not as prevalent, are historically the slower quarters for revenues and operating profits.

The following table summarizes our media companies, their digital platforms, newspaper circulation and total unique visitors:

 

Other Operations

On September 13, 2018, we sold our remaining 3.0% ownership interest in CareerBuilder, LLC (“CareerBuilder”) and received gross proceeds of $5.3 million. During 2018, we also received other distributions totaling approximately $2.8 million from CareerBuilder. In July 2017, we sold a majority of our interest in CareerBuilder, which reduced our ownership interest from 15.0% to approximately 3.0%. 

We own 49.5% of the voting stock and 70.6% of the nonvoting stock of The Seattle Times Company. The Seattle Times Company owns The Seattle Times newspaper, weekly newspapers in the Puget Sound area and daily newspapers located in Walla Walla and Yakima, Washington, and their related websites and mobile applications.

In addition, three of our wholly-owned subsidiaries own a combined 27.0% interest in Ponderay Newsprint Company (“Ponderay”), a general partnership that owns and operates a newsprint mill in the state of Washington.

We also own a 25.0% interest in Nucleus, a marketing solutions provider as described above.

Raw Materials

During 2018, we consumed approximately 50,700 metric tons of newsprint for all of our operations compared to 67,000 metric tons in 2017. The decrease in tons consumed was primarily due to changes in our print products at numerous media companies, as well as lower print advertising sales and print circulation volumes.

During 2018,  our consumed newsprint was purchased through a third-party intermediary, of which approximately 12,700 metric tons of those purchases were newsprint from Ponderay.

Our earnings are somewhat sensitive to changes in newsprint prices, albeit substantially less sensitive as our digital business continues to grow. In 2018 and 2017, newsprint expense accounted for 4.0% and 4.4%,  respectively, of total operating expenses, excluding impairments and other asset write-downs.

Competition

Our newspapers, direct marketing programs, websites and mobile content compete for advertising revenues and readers’ time with television, radio, other media websites, social network sites and mobile applications, direct mail companies, free shoppers, suburban neighborhood and national newspapers and other publications, and billboard companies, among others. In some of our markets, our newspapers also compete with other newspapers published in nearby cities and towns. Competition for advertising is generally based upon digital and print readership levels and demographics, advertising rates, internet usage and advertiser results, while competition for circulation and readership (digital and print) is generally based upon the content, journalistic quality, service, competing news sources and the price of the newspaper or digital service.

Our media companies’ internet sites are generally a leading local website in each of our major daily markets. We have continued to shift advertising to digital advertising to stay current with reader trends. Our media companies are also the largest print circulation of any news media source in each of their respective markets. However, our media companies have experienced difficulty maintaining print circulation levels because of a number of factors. These include increased competition from other publications and other forms of media technologies, including the internet and other new media formats that are often free for users; and a proliferation of news outlets that fragments audiences. We face greater competition, particularly in the areas of employment, automotive and real estate advertising, from online competitors.

To address the structural shift to digital media, we reengineered our operations to strengthen areas driving performance in news, audience, advertising and digital growth. Our newsrooms also provide editorial content on a wide variety of platforms and formats from our daily newspaper to leading local websites; on social network sites such as Facebook and Twitter; on smartphones and on e‑readers; on websites and blogs; in niche online publications and in e‑mail newsletters; and mobile applications. Upgrades are continually made to our mobile applications and websites.

Employees — Labor

As of December 30, 2018, we had approximately 3,500 full and part‑time employees (equating to approximately 3,300 full‑time equivalent employees), of whom approximately 5.0% were represented by unions. Most of our union‑represented employees are currently working under labor agreements with expiration dates through 2020. We have unions at 5 of our 30 media companies.

While our media companies have not had a strike for decades, and we do not currently anticipate a strike occurring, we cannot preclude the possibility that a strike may occur at one or more of our media companies when future negotiations take place. We believe that in the event of a strike we would be able to continue to publish and deliver to subscribers, a capability that is critical to retaining revenues from advertising and audience, although there can be no assurance that we will be able to continue to publish in the event of a strike.

Compliance with Environmental Laws

We use appropriate waste disposal techniques for hazardous materials. To the best of our knowledge, as of December 30, 2018, we have complied with all applicable environmental certifications with various state environmental agencies and the U.S. Environmental Protection Agency related to existing underground storage tanks. We do not believe that we

currently have any significant environmental issues and, in 2018 and 2017, had no significant expenses or capital expenditures related to environmental control facilities.

Available Information

Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available, free of charge, on our website at www.mcclatchy.com, as soon as reasonably practicable after we file or furnish them with the U.S. Securities and Exchange Commission (the “SEC”).

 

ITEM 1A.  RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None. 

ITEM 2.  PROPERTIES

Our corporate headquarters are located at 2100 Q Street, Sacramento, California. At December 30, 2018, we had newspaper production facilities in 8 markets in 7 states. Our facilities vary in size and in total occupy about 4.1 million square feet. Approximately 2.7 million of the total square footage is leased from others, while we own the properties for the remaining square footage. We own substantially all of our production equipment, although certain office equipment is leased.

We maintain our properties in good condition and believe that our current facilities are adequate to meet the present needs of our media companies.

ITEM 3.  LEGAL PROCEEDINGS

See Part II, Item 8, Note 9,  Commitments and Contingencies to the consolidated financial statements included as part of this Annual Report on Form 10-K.

 

ITEM 4.  MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Since September 12, 2017, our Class A Common Stock has been listed on the NYSE American under the symbol MNI. Prior to that time, our Class A Common Stock was listed on the New York Stock Exchange under the same symbol. A small amount of Class A Common Stock is also traded on other exchanges. Our Class B Common Stock is not publicly traded. As of March 1, 2019, there were approximately 3,255 and 15 record holders of our Class A and Class B Common Stock, respectively. We believe that the total number of holders of our Class A Common Stock is much higher since many shares are held in street name.

Dividends:

In 2009, we suspended our quarterly dividend; therefore, we have not paid any cash dividends since the first quarter of 2009. Under the indenture for the 2026 Notes, dividends are allowed if the consolidated leverage ratio (as defined in the indenture) is less than 5.25 to 1.00 and we have sufficient amounts under our restricted payments basket (as determined pursuant to the indenture), or if we use other available exceptions provided for under the indenture. However, the payment and amount of future dividends remain within the discretion of the Board of Directors and will depend upon our future earnings, financial condition, and other factors considered relevant by the Board of Directors.

Equity Securities:

During the year ended December 30, 2018, we did not repurchase any equity securities and we did not sell any equity securities of the Company that were not registered under the Securities Act of 1933, as amended.

 

 

 

 

 

ITEM 6.  SELECTED FINANCIAL DATA 

We are a smaller reporting company  as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reference is made to Part I, Item 1 “Forward‑Looking 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 the Company’s 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 30, 2018 and December 31, 2017, included elsewhere in this Annual Report on Form 10‑K.

Overview

We operate 30 media companies in 14 states, providing each of its communities 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 the Miami Herald, The Kansas City Star, The Sacramento Bee, The Charlotte Observer,  The (Raleigh) News & Observer, and the (Fort Worth) Star-Telegram. We are headquartered in Sacramento, California, and our Class A Common Stock is listed on the NYSE American under the symbol MNI.

Our fiscal year ends on the last Sunday in December. The fiscal year ended December 30, 2018 consisted of a 52-week period. Fiscal year ended December 31, 2017 consisted of  a 53‑week period.

The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:

 

 

Our primary sources of revenues are digital and print advertising and audience subscriptions. All categories (retail, national and classified) of advertising discussed below include both digital and print advertising. Retail advertising revenues (from retail clients) include advertising delivered digitally and/or advertising carried as a part of newspapers (run of press (“ROP”) advertising), advertising inserts placed in newspapers (“preprint advertising”). Audience revenues include either digital-only subscriptions, or bundled subscriptions, which include both digital and print. Our print newspapers are delivered by large distributors and independent contractors. Other revenues include, among others, commercial printing and distribution revenues.

See “Results of Operations” section below for a discussion of our revenue performance and contribution by category for 2018 and 2017.

Recent Developments

Debt Repurchases, Redemptions and Refinancing

 

On July 16, 2018, we closed on the previously announced offering of $310.0 million aggregate principal amount of our 2026 Notes. The 2026 Notes are guaranteed by certain of our subsidiaries. The 2026 Notes and the guarantees are secured by a first-priority lien on certain of our subsidiary guarantors’ assets, stock of certain subsidiaries and by second-priority liens on certain of our subsidiary guarantor’s other assets.

 

On July 16, 2018, the Notes Trustee, at our direction, delivered a notice of full redemption to the holder of the $344.1 million aggregate principal amount of our outstanding 2022 Notes. The 2022 Notes were redeemed on August 15, 2018, at a premium, together with accrued and unpaid interest.

 

On July 16, 2018, we entered into a Junior Term Loan Agreement, which provided for $157.1 million Tranche A Junior Term Loans and $193.5 million Tranche B Junior Term Loans. The Tranche A Junior Term Loans are due on July 15, 2030 and the Tranche B Junior Term Loans are due on July 15, 2031. Our obligations under the Junior Term Loan Agreement are guaranteed by our subsidiaries that guarantee the 2026 Notes. In December 2018, the $193.5 million of Tranche B Junior Term Loans were exchanged by the holder for the Notes due on July 15, 2031 (“2031 Notes”).  These 2031 Notes are of substantially similar character and terms as the Tranche B Junior Term Loan. As such the Tranche B Junior Term Loans were fully extinguished at the end of 2018. 

 

On July 16, 2018, the Junior Term Loans were exchanged for $82.1 million in aggregate principal amount of 2027 Debentures and $193.5 million in aggregate principal amount of 2029 Debentures.  The Junior Term Loans included $75 million principal of new debt issued at a discount of $15 million. 

 

On July 16, 2018, we entered into an ABL Credit Agreement, which provides for a $65.0 million secured asset-backed revolving credit facility with a letter of credit subfacility and a swing line subfacility. In addition, the ABL Credit Agreement provides for a $35.0 million cash secured letter of credit facility. The commitments under the ABL Credit Agreement expire July 16, 2023.

 

We used the net proceeds of the 2026 Notes offering, together with cash available under the ABL Credit Agreement, junior lien term loan financing and cash on hand, to fund our refinancing transaction and related expenses and the satisfaction and discharge and redemption of all of our outstanding 2022 Notes.

 

During 2018, excluding the transactions discussed above, we redeemed or repurchased $95.5 million aggregate principal amount of our 2022 Notes and $5.3 million aggregate principal amount of our 2026 Notes.

 

Extinguishment of Debt

 

During 2018, we recorded a net gain on the extinguishment of debt of $30.6 million, as a result of the following transactions. As a result of the debt refinancing discussed above, 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. We also redeemed or repurchased $95.5 million of our 2022 Notes and $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 fair market value adjustment on the exchange. See Note 5 for further discussion.

 

Asset Sales and Leasebacks

 

During 2018, we recognized a net gain of $4.1 million related to the sale of land and buildings in several of our markets. We also have various sales agreements or letters of intent to sell other properties that may close in 2019.

 

On April 23, 2018, we closed a sale and leaseback of real property in Columbia, South Carolina. The transaction resulted in net proceeds of $15.7 million. We are leasing back the Columbia property under a 15-year lease with initial annual payments totaling approximately $1.6 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 lease, and we continue to depreciate the carrying value of the property in our financial statements. No gain or loss will be recognized on the sale and leaseback of the property until we no longer have a continuing involvement in the property.

 

Under the 2022 Notes Indenture we were required to use the net after tax proceeds of $13.0 million from the Columbia transaction to reinvest in the Company within 365 days from the date of the sale or to make an offer to the holders of the 2022 Notes to purchase their notes at 100% of the principal amount plus accrued and unpaid interest. On April 25, 2018, we announced an offer to purchase $13.0 million of the 2022 Notes using the net after tax proceeds from the Columbia transaction at par plus accrued and unpaid interest. The offer expired on May 22, 2018, and $0.5 million principal amount of the 2022 Notes were tendered in the offer and redeemed by us at par.

 

Sale of interest in CareerBuilder

 

On September 13, 2018, we sold our remaining 3.0% ownership interest in CareerBuilder and received gross proceeds of $5.3 million. Under the 2026 Notes Indenture we are required to use the net cash proceeds of $5.3 million from the sale of CareerBuilder to redeem our 2026 Notes. In November 2018 we redeemed these notes at par plus accrued and unpaid interest.

 

Early retirement incentive program

 

On February 1, 2019 we announced a voluntary retirement incentive plan that was offered to approximately 450 employees.  The plan would allow them to accept a supplemental benefit based on years of service that included a severance package and their vested benefits under the company’s frozen defined benefit plan in a lump sum payment. Nearly 50% of the employees have opted into the program which is expected to result in approximately $12 million to $13 million of savings over the remainder of 2019.

 

 

Results of Operations

The following table reflects our financial results on a consolidated basis for 2018 and 2017: 

The decrease in net loss in 2018 compared to 2017 was primarily due to the timing and amounts of non-cash deferred tax valuation allowance other non-cash impairment charges and the operating loss in 2018 compared with operating income in 2017. In 2018, we recorded a non-cash charge of $20.4 million for the deferred tax valuation allowance and a pre-tax non-cash impairment charge of $37.2 million for intangible newspaper mastheads. In 2017, pre-tax impairment charges were $193.4 million, primarily related to a $168.2 million impairment of our CareerBuilder equity investment and a $23.4 million impairment of our intangible newspaper mastheads, and non-cash charges that established the deferred tax valuation allowance of $192.3 million. In addition, advertising revenues were lower, which were partially offset by a decrease in expenses, as described more fully below.

2018 Compared to 2017

Revenues

The following table summarizes our revenues by category, which compares 2018 to 2017:

During 2018, total revenues decreased 10.7% compared to 2017 primarily due to the continued decline in demand for print advertising. Consistent with the end of 2017, the decline in print advertising was primarily a result of large retail advertisers continuing to reduce preprinted insert and in-newspaper ROP advertising. The decline in print advertising revenues is the result of the desire of advertisers to reach customers directly through online advertising, and the secular shift in advertising demand from print to digital products. We expect these trends to continue for the foreseeable future. The decrease in total revenues was exacerbated by the 53rd week in 2017 (compared to a 52-week year in 2018). The

additional week in 2017 provided an estimated additional $6.6 million in advertising revenues, $6.7 million in audience revenues and $14.0 million in total revenues.

Advertising Revenues

Total advertising revenues decreased 16.4% during 2018 compared to 2017, including the impact of one less week in 2018. We experienced declines in all advertising revenue categories, except national advertising, primarily due to declines in print advertising revenues. The decreases in print advertising revenues were partially offset by increases in our national and digital classified advertising revenue categories, as discussed below.

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. Advertising printed directly in the newspaper is considered ROP advertising while preprint advertising consists of preprinted advertising inserts delivered with the newspaper or delivered to non-subscribers as direct marketing products.

The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:

We categorize advertising revenues as follows:

Retail:

During 2018, retail advertising revenues decreased 19.1% compared to 2017. In 2018, the decrease in retail advertising revenues was primarily due to decreases of 25.2% in print ROP advertising revenues and 35.4% in preprint advertising revenues compared to 2017. The overall decreases in retail advertising revenues for 2018 were spread among ROP and preprint.

National:

National advertising revenues increased 4.8% during 2018 compared to 2017. We experienced an increase of 11.6% in digital national advertising offset partially by a 10.4% decrease in print national advertising during 2018 compared to 2017. Overall, the increase in digital national advertising revenues during 2018 was largely led by programmatic digital advertising, including mobile and video revenues.

Classified:

During 2018, classified advertising revenues decreased 14.9% compared to 2017. Automotive, employment and real estate categories combined accounted for 50.2% of our classified advertising revenues during 2018 compared to 54.9% in 2017. Other classified advertising revenue includes legal, remembrance and celebration notices and miscellaneous classified advertising. During 2018 compared to 2017, we experienced an 8.3% increase in digital classified advertising led by other classified advertising and a 33.5% decrease in print classified advertising.

 

During the first quarter of 2018, we revisited the sales activity in remembrance/obituary sales noting that digital advertising has, over time, become the predominate source of obituary sales. As a result, we revised the classification of such sales, which allocates a greater amount of obituary sales from print/digital bundled advertising to digital-only advertising. See definition of digital-only below. Additionally, we continued to see a shift from other print classified advertising to digital platforms.

 

Digital Advertising:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 43.3% of total advertising revenues during 2018 compared to 34.7% during 2017. Total digital advertising includes digital-only advertising and digital advertising bundled with print and digital-only advertising.

 

Digital-only advertising is defined as digital advertising sold on a stand-alone basis or as the primary advertising buy with print sold as an “up-sell.” Digital-only advertising revenues increased 13.5% to $151.7 million in 2018 compared to 2017. In 2018, total digital advertising revenues increased 4.1% to $180.2 million compared to 2017 partially reflecting a change in allocation from print/digital bundled sales to digital-only sales as discussed above.

 

Digital advertising revenues bundled with print products declined 27.6% to $28.5 million in 2018 compared to 2017 as a result of fewer print advertising 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 grown, we expect to continue to face intense competition in the digital advertising space. 

 

Direct Marketing and Other:

Direct marketing and other advertising revenues decreased 20.5% during 2018 compared to 2017. The decrease was largely due to declines in preprint advertising by large retail customers that are delivered to non-subscribers as described above and to a lesser extent, to decreases in our niche products.

Audience Revenues

Audience revenues decreased 6.6% during 2018 compared to 2017. As noted above, the 53rd week in 2017 contributed an estimated $6.7 million in audience revenues exacerbating the year-over-year decline. 

Overall, digital audience revenues increased 2.6% during 2018 and digital-only audience revenues increased 34.8% in 2018 compared to 2017. The increase in digital-only audience revenues during 2018 was a result of a 51.1% increase in our digital-only subscribers to 155,500 as of the end of 2018 compared to 2017.

Print audience revenues decreased 10.2% in 2018 compared to 2017, primarily due to lower print circulation volumes and the 53rd week of 2017 that were partially offset by pricing adjustments. We have a dynamic pricing model for our traditional print subscriptions for which pricing is constantly being adjusted. 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.

Operating Expenses

Total operating expenses decreased 3.6% in 2018 compared to 2017. The decrease during 2018 was primarily due to changes in compensation and newsprint expenses, partially offset by other operating expenses and other asset write-downs as compared to 2017. Our total operating expenses, excluding other asset write-downs, reflect our continued effort to reduce costs through streamlining processes to gain efficiencies. Our operating expenses for 2017 also include a

53rd week, which resulted in higher expenses during 2017 than in 2018.

 

The following table summarizes our operating expenses, which compares 2018 to 2017:

 

 

Compensation expenses, which included both payroll and fringe benefit costs, decreased 12.0% in 2018 compared to 2017. Payroll expenses declined 13.6% during 2018 compared to 2017, reflecting a 14.8% decline in average full-time equivalent employees. Fringe benefits costs decreased 3.2% in 2018 compared to 2017 primarily due to decreases in health benefit costs and other fringe benefit costs, such as the employer portion of taxes, due to the reduction of headcount. These decreases were partially offset by the implementation of a 401(k) employer match resulting in costs of $2.5 million in 2018 with no comparable expense in 2017. 

 

Newsprint, supplements and printing expenses decreased 17.8% in 2018 compared to 2017. Newsprint expense declined 14.8% during 2018 compared to 2017. The newsprint expense declines reflect a decrease in newsprint tonnage used of 25.5% during 2018, offset by an increase in newsprint prices of 14.3% during 2018 compared to 2017.  The newsprint price increase in 2018 reflect, in part, the temporary impact of U.S. tariffs on Canadian newsprint sold to U.S. newspapers in 2018 that have since been removed. During these same periods, printing expenses, which are primarily outsourced printing costs, decreased 22.1%.

 

Depreciation and amortization expenses decreased 4.9% in 2018 compared to 2017. Depreciation expense decreased $2.2 million in 2018 compared to 2017, as a result of assets becoming fully depreciated in previous periods. Amortization expense decreased 3.3% in 2018 compared to 2017 primarily due to some intangible assets becoming fully amortized in 2018. We expect a significant portion of the remaining long-lived intangible assets to be fully amortized in the first two quarters of 2019. 

Other operating expenses increased 3.2% in 2018 compared to 2017. Other operating expenses included a $4.1 million gain on the disposal of property and equipment in 2018 compared to $23.6 million in 2017. This change in the gain was partially offset by cost savings initiatives and other efforts to reduce operational costs. We have had decreases in various categories, such as travel, bad debt, postage, circulation delivery costs and other miscellaneous expenses that were partially offset by increases for software for various enterprise-wide information technology related projects and the 53rd week in 2017.

 

Other asset write-downs in 2018 include an impairment charge of $37.2 million related to intangible newspaper mastheads, and a write down of $0.1 million related to classifying certain land and buildings as assets held for sale during the first quarter of 2018. Other asset write-downs in 2017 include an impairment charge of $21.5 million related to intangible newspaper mastheads and a write down of $2.0 million of non-newsprint inventory during the first quarter of 2017.   See Notes 1 and 4 for additional discussion. 

 

Non‑Operating Items

Interest Expense:

Total interest expense decreased less than 0.1% in 2018 compared to 2017. While the first six months of 2018 experienced lower overall debt balances due to repurchases of debt made during 2017 and early 2018, in third quarter of 2018, interest expense related to debt balances increased. This increase was primarily related to the amortization of debt issuance costs resulting from the refinancing and an extra month of interest expense we paid on our 2022 Notes while the funds were being held by the trustee until the redemption date of August 15, 2018.

 

In 2018, the increase in total interest expense was also due to increase in our non-cash imputed interest of $5.3 million related to our financing obligations due to the sales and leasebacks of our Columbia, South Carolina real property in the second quarter of 2018 and our Sacramento, California real property in the third quarter of 2017.

 

Equity Income (Loss) in Unconsolidated Companies, Net:

 

During 2018, we recorded equity income of $0.6 million compared to losses of $1.7 million in 2017. Our positive income in 2018 resulted from distributions of earnings from our investment in CareerBuilder.

 

Impairments Related to Investments in Unconsolidated Companies, Net:

 

As described more fully in Note 3, during 2017, we recorded $2.4 million in impairment charges related to certain other unconsolidated equity investments and $168.2 million in impairment charges related to our equity investment in CareerBuilder. We had no impairment charges related to equity investments during 2018.

 

Gains Related to Investments in Unconsolidated Companies:

 

As described more fully in Note 3, during 2018, we recorded $1.7 million gain on the sale of our investment in CareerBuilder. We had no such related transactions during 2017.

 

Extinguishment of Debt:

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. See Recent Developments above and Note 5 for further discussion.

 

During 2017, we retired, repurchased or redeemed $68.7 million aggregate principal amount of various series of our outstanding notes. We repurchased some of these notes at a price higher than par value and redeemed some at par value. We wrote off historical debt issuance costs and as a result, we recorded a loss on the extinguishment of debt of $2.7 million during 2017.

Income Taxes: 

 

In 2018, we recorded an income tax benefit of $2.2 million. As discussed more fully in Note 1 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.

 

In 2017, we recorded an income tax expense of $105.5 million. As discussed more fully in Note 1 (under Income Taxes) and Note 6, during 2017, we recorded a $192.3 million valuation allowance related to our deferred tax assets because we determined that it is not more-likely-than-not that we will realize such deferred tax assets. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, the tax impact of stock compensation, the benefit from the reduced federal tax rate as a result of the Tax Act on our deferred tax liabilities, and certain permanently non-deductible expenses.

Liquidity and Capital Resources

Sources and Uses of Liquidity and Capital Resources:

Our cash and cash equivalents were $21.9 million as of December 30, 2018, compared to $99.4 million of cash and cash equivalents at December 31, 2017. Our cash balance at the end of 2017 reflected the receipt of sales proceeds from the sale or sale and leaseback of some of our buildings and land during 2017, the remaining proceeds received from sale of a portion of our investment in CareerBuilder in the third quarter of 2017, and cash from operations. In January 2018 we

used a significant portion of the cash on hand to redeem $75.0 million aggregate principal amount of our 2022 Notes as announced in December 2017. We repurchased an additional $20.0 million aggregate principal amount of our 2022 Notes in February 2018, and $5.3 million aggregate principal amount of our 2026 Notes in December 2018.   

For the foreseeable future, we expect that most of our cash and cash equivalents, and our cash generated from operations will be used to (i) repay debt, (ii) pay income taxes, (iii) fund our capital expenditures, (iv) invest in new revenue initiatives, digital investments and enterprise-wide operating systems, (v) make required contributions to the Pension Plan, and (vi) fund other corporate uses as determined by management and our Board of Directors. As of December 30, 2018, we had approximately $745.1 million in total aggregate principal amount of debt outstanding, consisting of $304.7 million of our 2026 Notes, $89.9 million of our Debentures, $157.1 million of our Tranche A and $193.5 million of our 2031 Notes. As of December 30, 2018, we were not permitted to incur additional pari passu obligations under the limitation on indebtedness incurrence test as defined in the 2026 Notes Indenture. See Note 5 and Recent Developments above, regarding the transactions we entered into in July 2018 related to the restructuring and refinancing of certain of our debt. 

 

We expect to continue to opportunistically repurchase or restructure our debt from time to time if market conditions are favorable, whether through privately negotiated repurchases of debt using cash from operations, or other types of tender offers or exchange offers or other means. We may refinance or restructure a significant portion of this debt prior to the scheduled maturity of such debt. However, we may not be able to do so on terms favorable to us or at all. We will be 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). We believe that our cash from operations is sufficient to satisfy our liquidity needs over the next 12 months, while maintaining adequate cash and cash equivalents to fund our operations.

 

The following table summarizes our cash flows:

 

Operating Activities:

We generated $25.9 million of cash from operating activities in 2018, compared to generating $19.1 million of cash in 2017.  The change in cash generated from operating activities was primarily due to the timing of collections of accounts receivable, which were higher by $5.2 million and timing of payments of accounts payable, which were lower by $10.6 million. The remaining changes in operating activities related to miscellaneous timing differences in other receipts and payments or receipts.

Pension Plan Matters

We made no cash contributions to the Pension Plan during 2018 and 2017. After applying credits, which resulted from contributing more than the Pension Plan’s minimum required contribution amounts in prior years, we did not have a required cash contribution for 2018. We expect to have a required pension contribution of approximately $3.0 million under the Employee Retirement Income Security Act in fiscal year 2019, and we expect to have material contributions in the future.

Investing Activities: 

We used $0.4 million of cash from investing activities in 2018. We received proceeds from the sale of property, plant and equipment (“PP&E”) of $5.7 million and from the sale of an investment of $5.3 million. These amounts were offset by the purchase of PP&E for $11.1 million,  net purchases of and proceeds from redemptions of certificates of deposit, which net to a $2.3 million use of cash and contributions to equity investments of $2.5 million.

 

We generated $102.5 million of cash from investing activities in 2017, which was primarily due to the sale of our interest in equity investments of $66.9 million and $7.3 million in distributions from our equity investments that exceeded the cumulative earnings from the investee and such amounts were considered a return of investment. We also sold property plan and equipment which generated $43.9 million of cash in 2017. 

 

Financing Activities: 

We used $106.3 million of cash for financing activities in 2018, compared to using $26.5 million 2017. During 2018, we repurchased or redeemed $439.6 million principal amount of our 2022 Notes for $459.5 million in cash 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 5).  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, as described in Recent Developments previously.

We used $26.5 million of cash from financing activities in 2017, primarily related to the repurchase of debt. During 2017, we repurchased at maturity a total of $16.9 million principal amount of our 5.75% Notes due in 2017, and we repurchased or redeemed $51.8 million principal amount of our 2022 Notes for an aggregate of $70.7 million in cash. These repurchases were partially offset by the $44.0 million increase in our financial obligations as a result of the sale and leaseback of one of our real properties. 

 

Off‑Balance‑Sheet Arrangements

As of December 30, 2018, we did not have any significant off‑balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S‑K.

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 post‑retirement 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:

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 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 our West and Central regions and the other reporting unit (“Eastern” reporting unit) consists of operations primarily in our Carolinas and East 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 long‑term 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.

As of December 30, 2018, the amount of goodwill allocated to the Eastern reporting unit was $240.6 million and the amount allocated to the Western reporting unit was $464.5 million. We performed the annual goodwill impairment tests using a terminal growth rate of 1.0% and a discount rate of 10.5% for the income approach and comparable market multiples from eight companies and a 20% control premium to reflect McClatchy’s two-tiered ownership structure as inputs for the market approach.

The results of the annual goodwill impairment test for 2018 indicated that an impairment was not required. However, the risk of a future goodwill impairment for the Western reporting unit has increased. The fair value of our Eastern reporting unit exceeded the carrying value by 58.2%, and the fair value of our Western reporting unit exceeded the carrying value by approximately 6.1%. Sensitivity analysis of the inputs to the indicated equity value of the Western reporting unit shows that decreasing the terminal growth rate or increasing the discount rate by 0.5% reduces the excess of fair value over the carrying value to 4.2% and 2.8%, respectively. A reduction of the control premium by 5% would reduce the excess of fair value over the carrying value of the Western reporting unit to 4.2%. 

No goodwill impairments were recorded during 2017.    

Mastheads: 

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, at year‑end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief-from-royalty approach 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 2018 and 2017.  As a result of our testing, we recorded total impairment charges of $37.2 million and $21.5 million in 2018 and 2017, respectively.

Other Intangible Assets:

Long‑lived 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 2018 or 2017.    

Pension and Post‑Retirement Benefits: 

We have significant pension and post‑retirement benefit costs and credits that are developed from actuarial valuations. 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 post‑retirement 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 post‑retirement 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 post‑retirement plan (difference between the plan assets at fair value and the accumulated benefit obligation), as an asset or liability on the balance sheet. At December 30, 2018 and December 31, 2017, we had a total pension and post-retirement obligation of $661.0 million and $602.1 million, respectively.

We maintain a qualified defined benefit pension plan (“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 $548.2 million and $476.7 million as of December 30, 2018, and December 31, 2017, respectively. We used a discount rate of 3.91% and an assumed long‑term return on assets of 7.75% to calculate our retirement plan expenses in 2018.

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 pay‑as‑you‑go basis. For these non‑qualified plans that do not have assets, the post-retirement obligations were $112.8 million and $125.4 million as of December 30, 2018, and December 31, 2017, respectively. We used discount rates of 3.67% to 3.89% to calculate our retirement plan expenses in 2018.

For 2018, 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:

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.

During 2018, we finalized the impacts of the Tax Act and noted no material adjustments to our previously recorded balances and results. Additionally, we reviewed the overall valuation allowance as of December 30, 2018, and we determined that we needed to increase our valuation allowance by $34.0 million as a result of the changes to our deferred tax asset balances associated with the masthead and other intangible balances, tax amortizable goodwill and pension.

In 2017, we recorded a valuation allowance related to our deferred tax assets of $192.3 million. As a result of the Tax Act, principally the change that allows an indefinite carryforward period of net operating losses, we reassessed our analysis and decreased our related valuation allowance by $53.6 million during 2017. Due to the adjustments in 2018 noted above, our effective tax rate for 2018 is not comparable to the effective tax rate for 2017.  See Note 6 for further discussion

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 1.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of The McClatchy Company:

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of The McClatchy Company and subsidiaries (the “Company”) as of December 30, 2018 and December 31, 2017, and the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 30, 2018, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 30, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

Basis for Opinions

 

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/  Deloitte & Touche LLP

Sacramento, California

March 8, 2019

 

We have served as the Company’s auditor since at least 1984; however, an earlier year could not be reliably determined.

THE MCCLATCHY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

 

 

 

See notes to consolidated financial statements.

 

THE MCCLATCHY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

 

_____________________

See notes to consolidated financial statements.

THE MCCLATCHY COMPANY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

 

 

See notes to consolidated financial statements.

THE MCCLATCHY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) 

 

 

See notes to consolidated financial statements.