mobile devices.

Daily newspapers paid circulation volumes for 2017 were down 12.4% compared to 2016. The declines in daily circulation reflect the fragmentation of audiences faced by all media, including our own digital‑only subscriptions, as available media outlets proliferate and readership trends change. Our Sunday circulation volumes were down 12.1% in 2017 compared to 2016.

We also reach audiences through our direct marketing products. In 2017, we distributed approximately 641,000 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 sales and digital media, we are also focused on cost efficiencies. Our cost initiatives in 2017 were focused on continuing to reduce legacy costs from our traditional print business, and we have realized significant savings from these efforts, primarily in production and distribution, including substantial savings in newsprint costs. In addition, in 2017, we made additional reductions in costs to help protect our profitability in a period of declining print advertising. Total expenses, excluding depreciation, amortization and non-cash impairment charges, declined $82.9 million in 2017 compared to 2016.  This decline was net of investments made in 2017 intended to generate future savings or that were necessary to invest in revenue generating strategies. 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 through reducing our workforce, optimizing technology and maximizing printing, distribution and content efficiencies, all while maintaining operating profitability at each of our media companies.

In 2017,  in order to ensure a more collaborative enterprise, we began the process of regionalizing certain areas of our operations, including publisher and editorial leadership, and we completed reorganizing our technology, marketing, innovation and other certain finance functions. We will continue to outsource, regionalize and consolidate operations to achieve a more streamlined and efficient cost structure. These changes will result in cost savings in future years,  while giving our operating executives, regionally and in each market, the ability to focus more of their time on our growing digital and direct marketing media businesses.

As of the end of 2017, we have outsourced printing operations at 20 of our 30 media companies, which are printed through arrangements with nearby newspapers owned by us or third-party companies. In markets where we 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-sourcing printing in their areas.

Other Operational Information

Historically, each of our media companies was largely autonomous in their local advertising and editorial operations in order to meet the needs of the particular community it served. However, as discussed above, we continue to regionalize or centralize certain operations across our local markets to strengthen the local media company's ability to increase its 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 Midwest, while the other operating segment (“Eastern Segment”) consists primarily of media operations in the Carolinas and East. Regional or local publishers 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.

As noted previously, 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 vice president of operations 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 July 31, 2017, we sold a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which reduced our ownership interest from 15.0% to approximately 3.0%. Our ownership interests and investments in unconsolidated companies and joint ventures including but not limited to CareerBuilder, provided us with $73.9 million of cash distributions in 2017, which includes $7.3 million in normal distributions and $66.6 million of gross proceeds from the sales of assets.   

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 all of 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 Marketing Solutions, LLC (“Nucleus”) a marketing solutions provider as described above.

Raw Materials 

During 2017, we consumed approximately 67,000 metric tons of newsprint for all of our operations compared to 84,000 metric tons in 2016. 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. We estimate that we will use approximately 54,000 metric tons of newsprint in 2018, depending on the level of print advertising, circulation volumes and other business considerations.

During 2017,  our consumed newsprint was purchased through a third-party intermediary, of which approximately 17,000 metric tons of those purchases were newsprint from Ponderay.

Our earnings are sensitive to changes in newsprint prices. In 2017, 2016 and 2015, newsprint expense accounted for 4.4%,  4.9% and 5.7%, 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 31, 2017, we had approximately 4,200 full and part‑time employees (equating to approximately 3,900 full‑time equivalent employees), of whom approximately 5.7% 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. As of December 31, 2017, we have $1.0 million in a letter of credit shared among various state environmental agencies and the U.S. Environmental Protection Agency to provide collateral related to existing or previously removed storage tanks. However, we do not believe that we currently have any significant environmental issues and in 2017, 2016 and 2015 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)Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available, freerequires our directors, executive officers, and beneficial owners 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 have significant competition in the market for news and advertising, which may reduce our advertising and audience revenues in the future.

Currently,  our primary source of revenues is advertising, followed by audience. The competition we face in the advertising industry generally results from  an increasing number of digital media options available on the internet, which are expanding advertiser and consumer choices significantly, including social networking tools and mobile and other devices distributing news and other content. Faced with a multitude of media choices and a dramatic increase in accessible information, consumers may place greater value on when, where, how and at what price they consume digital contentmore than they do on the source or reliability of such content. News aggregation websites and customized news feeds (often free to users) may reduce our traffic levels by minimizing the need for the audience to visit our websites or use our digital applications directly. Online traffic is also driven by internet search results and referrals from social media platforms; therefore, such search results and referrals are critical to our ability to compete successfully. Search engines frequently update and change the methods for directing search queries to web pages or change methodologies and metrics for valuing the quality and performance of internet traffic on delivering cost‑per‑click advertisements. Social media platforms may also change their emphasis on what content to highlight for users. The failure to successfully adapt to these changes across our businesses could result in significant decreases in traffic to our various websites, which could result in substantial decreases in conversion rates and repeat business, as well as increased costs if we were to replace free traffic with paid traffic, any or all of which could adversely affect our business, financial condition and results of operations. If traffic levels stagnate or decline, we may not be able to create sufficient advertiser interest in our digital businesses or to maintain or increase the advertising rates of the inventory on our digital platforms. In addition, the proliferation of news sources and advertising platforms has resulted in significant competition and a negative impact on our traditional print business. This increased competition for our advertisers and consumers has had and is expected to continue to have an adverse effect on our business and financial results, including negatively impacting revenues and operating income.

Our advertising revenues may decline due to weak general economic and business conditions.

Our advertising revenues are dependent on general economic and business conditions in our markets or those impacting our customers.  Many traditional retail companies face greater competition from online retailers and have faced uncertainty in their businesses, affecting their advertising spending. These changes in business conditions have had and may continue to have an adverse effect on our advertising revenues. To the extent economic conditions were to worsen, our business and advertising revenues could be further adversely affected, which could negatively impact our operations and cash flows and our ability to meet the covenants in our debt agreements. Our advertising revenues will be particularly adversely affected if advertisers respond to weak and uneven economic conditions or online competition by continuing to reduce their budgets or shift spending patterns or priorities, or if they are forced to consolidate or cease operations. Consolidation across various industries may also reduce our overall advertising revenues. Further, we are subject to fluctuating economic conditions in the local markets we serve. For example, real estate advertising fluctuates

with the health of the real estate market. In addition, seasonal variations in consumer spending cause our quarterly advertising revenues to fluctuate. Advertising revenues in the fourth quarter, which contain more holidays, are typically higher than in the first three quarters, in which economic activity is generally slower. If general economic conditions and other factors cause a decline in revenues, particularly during the fourth quarter, we may not be able to increase or maintain our revenues for the year, which would have an adverse effect on our business and financial results.

To remain competitive, we must be able to respond to and exploit changes in technology, services and standards and changes in consumer behavior. Significant capital investments may be required.

Technology in the media industry continues to evolve rapidly. Advances in technology have led to an increasing number of methods for delivery of news and other content and have resulted in a wide variety of consumer demands and expectations, which are also rapidly evolving. For example, the number of people who access online services through devices other than personal computers, including smartphones, handheld tablets and other mobile devices has increased dramatically in the past several years and is projected to continue to increase. If we are unable to exploit new and existing technologies to distinguish our products and services from those of our competitors or adapt to new distribution methods that provide optimal user experiences, our business and financial results may be adversely affected.

Technological developments also pose other challenges that could adversely affect our revenues and competitive position. New delivery platforms may lead to pricing restrictions, the loss of distribution control and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites proliferates.

Technological developments and any changes we make to our business model may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. Some of our existing competitors and new entrants may have greater operational, financial and other resources or may otherwise be better positioned to compete for opportunities and as a result, our digital businesses may be less successful, which could adversely affect our business and financial results.

If we are not successful in growing and managing our digital businesses, our business, financial condition will be adversely affected.

Our future growth depends to a significant degree upon the development and management of our digital businesses. The growth of our digital businesses over the long term depends on various factors, including, among other things, the ability to:

In addition, we expect that our digital business will continue to increase as a percentage of our total revenues in future periods. For 2017, digital advertising revenues comprised 34.7%  of total advertising revenues compared to 30.6% in 2016.  Digital‑only advertising revenues increased 9.8% in 2017 compared to 14.8% in 2016. Total digital‑only, which

includes digital‑only revenues from advertising and audience, was up 9.4% in 2017 compared to 14.3% in 2016. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited to, the following:

If we are unable to execute cost‑control measures successfully, our total operating costs may be greater than expected, which may adversely affect our profitability.

As a result of adverse general business conditions in our industry and our operating results, we have taken steps to lower operating costs by reducing workforce, consolidating or regionalizing operations and implementing general cost‑control measures. If we do not achieve expected savings from these initiatives, or if our operating costs increase as a result of these initiatives, our total operating costs may be greater than anticipated. These cost‑control measures may also affect our business and our ability to generate future revenue. Because portions of our expenses are fixed costs that neither increase nor decrease proportionately with revenues, we may be limited in our ability to reduce costs in the short term to offset any declines in revenues. If these cost‑control efforts do not reduce costs sufficiently or otherwise adversely affect our business, income may decline.

Difficult business conditions in the economy generally and in our industry specifically, or changes to our business and operations may result in goodwill and masthead impairment charges.

Due to business conditions, including lower revenues and operating cash flow, we recorded masthead impairment charges of $21.5 million and $9.2 million in 2017 and 2016, respectively.  We also recorded goodwill impairment charges of $290.9 million in 2015 and masthead impairment charges of $13.9 million, $5.2 million and $5.3 million in 2015, 2014 and 2013, respectively. As of December 31, 2017, we have goodwill of $705.2 million and mastheads of $150.0 million. Further erosion of general economic, market or business conditions (nationally and in our local markets) could have a negative impact on our business and stock price, which may require that we record additional impairment charges in the future, which negatively affects our results of operations.

Our business, reputation and results of operations could be negatively impacted by data security breaches and other security threats and disruptions. 

Certain network and information systems are critical to our business activities. Network and information systems may be affected by cybersecurity incidents that can result from deliberate attacks or system failures. Threats include, but are not limited to, computer hackings, computer viruses, denial of service attacks, worms or other destructive or disruptive software, or other malicious activities.

Our security measures may also be breached due to employee error, malfeasance, or otherwise. As a result of these breaches, an unauthorized party may obtain access to our data or our users’ data or our systems may be compromised. These events evolve quickly and often are not recognized until after an attack is launched, so we may be unable to anticipate these attacks or to implement adequate preventative measures. Our network and information systems may also be compromised by power outages, fire, natural disasters, terrorist attacks, war or other similar events. There can be no assurance that the actions, measures and controls we have implemented will be sufficient to prevent disruptions to mission-critical systems, the unauthorized release of confidential information or corruption of data.

Although we have experienced cybersecurity incidents, to date none has had a material impact on our financial condition, results of operations or liquidity. Nonetheless, these types of events are likely to occur in the future and such events could disrupt our operations or other third-party information technology systems in which we are involved. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or

infrastructure by employees, others with authorized access to our systems, or unauthorized persons could result in legal or financial liability or otherwise negatively impact our operations. They also could require significant management attention and resources, and could negatively impact our reputation among our customers, advertisers and the public, which could have a negative impact on our financial condition, results of operations or liquidity.

We are subject to significant financial risk as a result of our $710  million in total consolidated debt.

As of December 31, 2017, we had approximately $805.0  million in total principal indebtedness outstanding, including the current portion of long-term debt of $75.0 million in 9.00% senior secured notes due in 2022 (“9.00% Notes”), resulting from our commitment to redeem such portion of the 9.00% Notes by January 25, 2018.  We redeemed the 9.00% Notes as of January 25, 2018 and in February 2018, we repurchased an additional $20.0 million of our 9.00% Notes. As a result of the redemption and repurchase, we reduced our total consolidated debt to $710.0 million as of the filing of this annual report on Form 10-K. Despite these repurchases, this level of debt increases our vulnerability to general adverse economic and industry conditions and we may need to refinance our debt prior to its scheduled maturity. Higher leverage ratios, our credit ratings, our economic performance, adverse financial markets or other factors could adversely affect our future ability to refinance maturing debt on commercially acceptable terms, or at all, or the ultimate structure of such refinancing.

Covenants in the indenture governing the notes and our other existing debt agreements will restrict our business.

The indenture governing our 9.00% Notes and our secured credit agreement contain various covenants that limit, subject to certain exceptions, our ability and/or our restricted subsidiaries’ ability to, among other things:

The restrictions contained in the indenture governing the 9.00% Notes and the secured credit agreement could adversely affect our ability to:

Our ability to comply with covenants contained in the indenture for the 9.00% Notes and our secured credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us. In addition, our obligations under the 9.00% Notes and the secured credit agreement are secured, subject to permitted liens, on a first‑priority basis, and in the event of default such security interests could be enforced by the collateral agent for the secured credit agreement. In the event of such enforcement, we cannot be assured that the proceeds from the enforcement would be sufficient to pay our obligations under the 9.00% Notes or secured credit agreement.

We have significant financial obligations and in the future we will need cash to repay our existing indebtedness and meet our other obligations. Our inability to generate sufficient cash to pay our obligations would adversely affect our business.

We may not be able to generate sufficient cash internally to repay all of our indebtedness at maturity or to meet our other obligations. As of December 31, 2017, we had approximately $805.0  million of total indebtedness outstanding, which was reduced to $710.0 million by the end of February 2018, with our redemption and repurchase of a portion of the 9.00% Notes. Of the remaining $710.0 million aggregate principal amount, we have approximately $344.6 million of 9.00% Notes due in 2022; approximately $89.2 million of debentures with an interest rate of 7.150% due in 2027 and approximately $276.2 million of debentures with an interest rate of 6.875% due in 2029. As of December 31, 2017, we had approximately $31.7 million in face amount of letters of credit outstanding, which are fully collateralized with certificates of deposits,  under a Collateralized Issuance and Reimbursement Agreement.

As of December 31, 2017, the projected benefit obligations of our qualified defined benefit pension plan (“Pension Plan”) exceeded Pension Plan assets by $476.7 million. Future contributions are subject to numerous assumptions, including, among others, changes in interest rates, returns on assets in the Pension Plan and future government regulations. In addition, we have a limited number of supplemental retirement plans, which provide certain key employees with additional retirement benefits. These plans have no assets; however as of December 31, 2017, our projected benefit obligation of these plans was $125.4 million. These plans are on a pay‑as‑you‑go basis.

Our ability to make payments on and to refinance our indebtedness, including the 9.00% Notes and our other series of outstanding notes, to make required contributions to the Pension Plan, to fund the supplemental retirement plans and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness, including the 9.00% Notes and our other series of outstanding notes or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations or our ability to refinance our existing debt. The terms of existing or future debt instruments, including the indenture governing the 9.00% Notes and the secured credit agreement, may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on

commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations with respect to our outstanding debt.

We may be required to make greater contributions to our qualified defined benefit pension plan in the next several years than previously required, placing greater liquidity needs upon our operations.

The projected benefit obligations of the Pension Plan exceeded Pension Plan assets by $476.7 million as of December 31, 2017, a decrease of $10.7 million from December 31, 2016, primarily due to favorable market returns that were partially offset by unfavorable changes in the discount rate. The value of the Pension Plan assets fluctuates based on many factors, including changes in interest rates and market returns.

The excess of benefit obligations over pension assets is expected to give rise to required pension contributions over the next several years. Over the last several years federal legislation has provided for pension funding relief in the form of mandated changes in the discount rates used to calculate the projected benefit obligations for purposes of funding pension plans. Legislation and calculations use historical averages of long‑term highly‑rated corporate bonds (within ranges as defined in the legislation) which have an impact of applying a higher discount rate to determine the projected benefit obligations for funding and current long‑term interest rates, but also mandated increases in fees paid to the Pension Benefit Guaranty Corporation, also known as the PBGC, based in part on the level of underfunding in the company’s qualified defined pension plan. Even with the relief provided by these legislative rules, we expect future contributions to be required. In addition, adverse conditions in the capital markets and/or lower long‑term interest rates may result in greater annual contribution requirements, placing greater liquidity needs upon our operations.

We require newsprint for operations and, therefore, our operating results may be adversely affected if the price of newsprint increases or if we experience disruptions in our newsprint supply chain that reduce the availability of newsprint in our markets.

We require newsprint to deliver our daily and Sunday newspapers and maintain our print subscriber revenues. Newsprint accounted for 4.4% of our operating expenses, excluding impairments, in 2017 compared to 4.9% in 2016. The price of newsprint has historically been volatile. More recently newsprint availability has tightened in the United States. The price and availability of newsprint are affected by various factors, including:

We have not attempted to hedge price fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint other than the natural hedge created by our ownership interest in Ponderay. If the price of newsprint increases materially, our operating results could be adversely affected. In addition, we rely on a limited number of suppliers for deliveries of newsprint. If newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect our operating results.

A portion of our employees are members of unions, and if we experience labor unrest, our ability to produce and deliver newspapers could be impaired.

If we experience labor unrest, our ability to produce and deliver newspapers could be impaired in some locations. In addition, the results of future labor negotiations could harm our operating results. Our media companies have not experienced a labor strike for decades. However, we cannot ensure that a strike will not occur at one or more of our

media companies in the future. As of December 31, 2017,  approximately 5.7% of full‑time and part‑time employees were represented by unions. Most of our union‑represented employees are currently working under labor agreements, with expiration dates through 2020. We face collective bargaining upon the expirations of these labor agreements. Even if our media companies do not suffer a labor strike, our operating results could be harmed if the results of labor negotiations restrict our ability to maximize the efficiency of our newspaper operations. In addition, our ability to make short‑term adjustments to control compensation and benefits costs, rebalance our portfolio of businesses or otherwise adapt to changing business needs may be limited by the terms and duration of our collective bargaining agreements.

We have invested in certain digital or other ventures, but such ventures may not be as successful as expected, which could adversely affect our results of operations.

We continue to evaluate our business and make strategic investments in digital ventures, either alone or with partners, to further our digital growth. We have numerous small “seed” investments in other digital companies. We also own 25.0% of Nucleus, a national marketing agency, and, through three wholly-owned subsidiaries, a combined 27.0% interest in the Ponderay Newsprint Company. We also continue to hold a small interest in CareerBuilder. The success of these ventures is dependent to an extent on the efforts and strategic plans of our partners. Further, our ability to monetize the investments and/or the value we may receive upon any disposition may depend on the actions of our partners. As a result, our ability to control the timing or process relating to a disposition may be limited, which could adversely affect the liquidity of these investments or the value we may ultimately attain upon disposition. If the value of the companies in which we invest declines, we may be required to record a charge to earnings. There can be no assurances that we will receive a return on these investments or that they will result in advertising growth or will produce equity income or capital gains in future years.

Circulation volume declines will adversely affect our print audience and print advertising revenues, and audience price increases could exacerbate declines in circulation volumes.

Print advertising and audience revenues are affected by changes in customer habits, which impact circulation volumes and readership levels of our print newspapers. In recent years, newspaper companies, including us, have experienced difficulty maintaining or increasing print circulation levels because of a number of factors, including:

These factors could also affect our media companies’ ability to institute circulation price increases for print products. Also, print price increases have historically had an initial negative impact on circulation volumes that may not be mitigated with additional marketing and promotion. A prolonged reduction in circulation volumes would have a material adverse effect on print advertising revenues. To maintain our circulation base, we may be required to incur additional costs that we may not be able to recover through audience and advertising revenues.

We rely on third party vendors for various services and if any of those third parties fail to fulfill their obligations to us with quality and timeliness we expect, or if our relationship with such vendors is damaged, our business may be harmed.

We rely on third party vendors to provide various services such as printing, distribution and production, as well as various information technology systems and services. We do not control the operation of these vendors. If any of these third party vendors terminate their relationship with us, or do not provide an adequate level of service, it would be disruptive to our business as we seek to replace the vendor or remedy the inadequate level of service. This disruption may adversely affect our operating results. 

Developments in the laws and regulations to which we are subject may result in increased costs and lower advertising revenues from our digital businesses.

We are generally subject to government regulation in the jurisdictions in which we operate. In addition, our websites are available worldwide and are subject to laws regulating the internet both within and outside the United States. The adoption of any laws or regulations that limit use of the internet, including laws or practices limiting internet neutrality, could decrease demand for, or the usage of, our products and services, which could adversely affect our operating results. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Advertising revenues from our digital businesses could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to the use of consumer data in digital media.

Adverse results from litigation or governmental investigations can impact our business practices and operating results.

In the ordinary course of business, we and our subsidiaries are parties to litigation and regulatory, environmental and other proceedings with governmental authorities and administrative agencies. For example, we are currently involved in two class action lawsuits that are described further in Part II, Item 8, Note 8,  Commitments and Contingencies to the consolidated financial statements.  Adverse outcomes in lawsuits or investigations could result in significant monetary damages or injunctive relief that could adversely affect our operating results or financial condition as well as our ability to conduct our business as it is presently being conducted.  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

Our corporate headquarters are located at 2100 Q Street, Sacramento, California. At December 31, 2017, we had newspaper production facilities in 10 markets in 9 states. Our facilities vary in size and in total occupy about 4.8 million square feet. Approximately 2.8 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 8,  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 2, 2018, there were approximately 3,294 and 20 record holders of our Class A and Class B Common Stock, respectively. We believe that the total number of holders10% of our Class A Common Stock is much higher since many shares are held in street name. The following table lists the high and low prices of our Class A Common Stock as reported by the NYSE American or New York Stock Exchange, as applicable, for each fiscal quarter of 2017 and 2016:

Dividends:

In 2009, we suspended our quarterly dividend; therefore, we have not paid any cash dividends since the first quarter of 2009. Our credit agreement prohibits the payment of a dividend if a payment would not be permitted under the indenture for the 9.00% Notes (discussed below). Dividends under the indenture for the 9.00% Notes 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:

In 2015 and as amended in 2016, our Board of Directors authorized a share repurchase program for the repurchase of up to $20.0 million of our Class A Common Stock through December 31, 2016. The shares were repurchased from time to time depending on prevailing market prices, availability, and market conditions, among other factors. From inception through December 31, 2016, we repurchased 1.3 million shares at an average price of $12.28 per share. No shares were repurchased during the year ended December 31, 2017, as the plan had expired.

During the year ended December 31, 2017, we did not sell any equity securities of the Company that were not registered under the Securities Act of 1933, as amended.

Performance Graph:

The following graph compares the cumulative five‑year total return attained by shareholders on The McClatchy Company’s common stock versus the cumulative total returns of the S&P Midcap 400 index and a customized peer group composed of six companies (“Peer Group”).

Our Peer Group is customized to include six companies that are publicly tradedfile with at least 40% of their revenues from print and digital newspaper publishing. This peer group includes: A.H. Belo Corp., Gannett Co. Inc., Lee Enterprises, Inc., New Media Investment Group, Inc., The New York Times Company and tronc, Inc. 

ITEM 6.  SELECTED FINANCIAL DATA 

The selected financial data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and other financial data included elsewhere in this annual report. Historical results are not necessarily indicative of the results to be expected in future periods.

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” and Item 1A “Risk Factors,” which describes important factors that could cause actual results to differ from expectations and non‑historical information contained herein. 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 three years ended December 31, 2017, December 25, 2016, and December 27, 2015, 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.

On July 31, 2017, we closed a transaction to sell a majority of our interest in CareerBuilder LLC (“CareerBuilder”), which reduced our ownership interest in CareerBuilder from 15.0% to approximately 3.0%.  

Our fiscal year ends on the last Sunday in December. Fiscal year ended December 31, 2017, consisted of a 53-week period. Fiscal years ended December 25, 2016, and December 26, 2015, consisted of 52‑week periods.

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 2017, 2016 and 2015.

Recent Developments

Deferred Tax Valuation Allowance

As discussed further in Note  5, as a result of our deferred tax asset valuation assessment, we recorded a valuation allowance charge of $192.3 million in 2017, primarily because we have incurred three years of cumulative pre-tax losses. The amount of the valuation allowance that we recorded represents the deferred taxes for which we determined it is not more-likely-than-not that we will realize the benefits in future periods. We will continue to evaluate the valuation allowance and if actual outcomes differ from our current expectations, we may record additional valuation allowance or reverse the allowance, in whole or in part, through income tax expense in the period such determination is made. Despite having this valuation allowance, for the 2017 tax year, we anticipate being a U.S. taxpayer and benefiting from our deferred taxes as they become realized in our federal tax return.

CareerBuilder Transaction and Impairment Charge

As discussed further in Note 2, in July 2017, we - along with the then existing ownership group of CareerBuilder - sold a majority of the collective ownership interest in CareerBuilder. We received $73.9 million from the closing of the transaction, consisting of approximately $7.3 million in normal distributions and $66.6 million of gross proceeds. As a result of the closing of the transaction, our ownership interest in CareerBuilder was reduced to approximately 3.0% from 15.0%. As a result, we recorded impairment charges of $168.2 million on our equity investment in CareerBuilder during 2017.

Under the terms of the indenture for our 9.00% Notes, we were required to use the after-tax proceeds from the sale of our interest in CareerBuilder to reinvest in the company within 365 days from the date of the sale or to make an offer to the holders of the 9.00% Notes to purchase their notes at par plus accrued and unpaid interest. On August 1, 2017, we announced an offer to purchase up to $65.0 million of the 9.00% Notes using the net cash proceeds from the sale of our interests in CareerBuilder at par plus accrued and unpaid interest. As a result of this offer to purchase the 9.00% Notes, $1.7 million of notes were tendered in the offer and were redeemed by us at par in September 2017.

Asset sales and leasebacks

During 2017, we sold various real estate (“Property Sales”) totaling gross proceeds of approximately  $90.0 million. The largest of these was a sale of land and buildings in Sacramento, California, home of The Sacramento Bee.  We are leasing back the Sacramento property under a  15-year lease with initial annual payments totaling approximately $4.4 million. Accordingly, the lease is treated as 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 terms of the indenture for our 7.150% notes due in 2027 ("7.150% Notes") and 6.875% notes due in 2029 ("6.875% Notes"), we were required to repurchase approximately $32.0 million in publicly traded notes within 90 days following the execution of the lease on the Sacramento property. As discussed below, we repurchased $35.0 million of our 9.00% Notes during September 2017, which satisfied our obligation under the indenture for the 7.150% Notes and the 6.875% Notes to repurchase publicly traded notes.

We are also required under the indenture for the 9.00% Notes to use the net after tax proceeds of $44.8 million from the Property Sales to reinvest in the Company within 365 days from the date of the sale or to make an offer to the holders of the 9.00% Notes to purchase their notes at 100% of the principal amount plus accrued and unpaid interest. On September 20, 2017, we announced an offer to purchase up to $40.0 million of the 9.00% Notes using the net after tax proceeds from the Property Sales at par plus accrued and unpaid interest. The offer expired on October 19, 2017, and $0.1 million principal amount of the 9.00% Notes were tendered in the offer and redeemed by us at par.

We also have various sales agreements or letters of intent to sell other smaller properties that are expected to close in 2018, including the building and land in Columbia, South Carolina. The Columbia, South Carolina transaction will be structured similar to the Sacramento sale and leaseback transaction. 

Debt Repurchase and Extinguishment of Debt

During 2017, we (i) retired $16.9 million of the 5.75% Notes due in 2017 (“5.75% Notes”)  that matured on September 1, 2017; (ii) repurchased a total $50.0 million of our 9.00% Senior Secured Notes due in 2022 (“9.00% Notes”) through privately negotiated transactions; and (iii) we redeemed $1.8 million of the 9.00% Notes from the offers to purchase that we announced in 2017. As a result of these transactions, we recorded a loss on the extinguishment of debt of $2.7 million in 2017.

On January 25, 2018, pursuant to the terms of the indenture for the 9.00% Notes, we redeemed $75.0 million aggregate principal amount of our 9.00% Notes at a premium and we wrote off the associated debt issuance costs. In addition, in February 2018, we repurchased $20.0 million of our 9.00% Notes. As a result of these transactions, we expect to record a loss on the extinguishment of debt of approximately $5.3 million during the quarter ending April 1, 2018.

Listing on NYSE American

Effective September 12, 2017, we voluntarily transferred our Class A Common Stock listing from the NYSE to the NYSE American, which is an enhanced market for small to –mid-cap companies, that more closely reflects our current size and capital structure. We continue to trade under the symbol MNI.

Tax Legislation

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal corporate rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (iii) creating a new limitation on deductible interest expense; (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (v) bonus depreciation that will allow for full expensing of qualified property; and (vi) limitations on the deductibility of certain executive compensation. See Notes 1 and 5 for more detailed discussion of the Tax Act and the impact to us.

Results of Operations

The following table reflects our financial results on a consolidated basis for 2017, 2016 and 2015:

The increase in net loss in 2017 compared to 2016 was primarily due to a pre-tax impairment charges of $193.4 million (see Recent Developments above regarding the $168.2 million CareerBuilder impairment) and a non-cash charge to establish a deferred tax valuation allowance of $192.3 million  (see Recent Developments above). In addition, advertising revenues were lower, which were partially offset by a decrease in expenses, as described more fully below.

The decrease in net loss in 2016 compared to 2015 was largely due to non-cash impairment charges of $9.5 million in 2016 compared to impairment charges of $304.8 million in 2015.

2017 Compared to 2016

Revenues

The following table summarizes our revenues by category, which compares 2017 to 2016:

During 2017, total revenues decreased 7.5% compared to 2016 primarily due to the continued decline in demand for print advertising. Consistent with the end of 2016, 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 partially offset by the 53rd week in 2017 that we estimate provide for an 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 12.3% during 2017 compared to 2016. While we experienced declines in all of our advertising revenue categories, the decrease in total advertising revenues was primarily related to declines in print retail and print and digital classified advertising revenues. These decreases in advertising revenues were partially offset by increases in several digital revenue categories, as discussed below, as well as the impact of a 53rd week in 2017.  

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.

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 2017, retail advertising revenues decreased 15.9%, compared to 2016. In 2017, the decrease in retail advertising revenues was primarily due to decreases of 22.9% in print ROP advertising revenues and 25.5% in preprint advertising revenues, compared to 2016. These decreases were partially offset by an increase in digital retail advertising of 2.0% in 2017 compared to 2016. The overall decreases in retail advertising revenues for 2017 were spread among all of the ROP and preprint categories.

National:

National advertising revenues decreased 6.0% during 2017 compared to 2016. While we experienced a 34.0% decrease in print national advertising during 2017 compared to 2016, we recorded an increase of 16.1% in digital national advertising. Overall, the increase in digital national advertising revenues during 2017 was largely led by programmatic digital advertising, including mobile and video revenues.

Classified:

During 2017, classified advertising revenues decreased 12.2% compared to 2016. Automotive, employment and real estate categories combined accounted for 54.9% of our classified advertising revenues during 2017 compared to 58.2%

in 2016. During 2017, we experienced decreases of 13.1% and 11.1% in print classified advertising and digital classified advertising, respectively, compared to 2016, which were led by automotive and employment advertising. Our decrease in print classified advertising revenues resulted from the continued shift of print advertising to digital platforms, while the decrease in digital classified advertising was primarily due to the large number of competitors in the digital environment. Accordingly, we expect this market will continue to be volatile and highly competitive. The real estate category had similar results, although to a lesser extent, due to similar trends. Other classified advertising revenues, which is our largest classified category and includes legal, remembrance and celebration notices and miscellaneous advertising, also experienced decreases in both print and digital in 2017 compared to 2016.

Digital Advertising:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 34.7% of total advertising revenues during 2017 compared to 30.6% during 2016. Total digital advertising includes 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 9.8% to $133.7 million in 2017 compared to 2016. In 2017, total digital advertising revenues decreased 0.6% to $173.1 million compared to 2016 reflecting the negative impact of lower print advertising revenues on bundled sales. Digital advertising revenues bundled with print products declined 24.8% in 2017 compared to 2016 as a result of fewer print advertising sales. The advertising 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 5.5% during 2017 compared to 2016. This represents a lower rate of decline from trends in 2016 when these revenues decreased by 9.5% compared to 2015. The lower rate of decline in 2017 versus in 2016 was partially due to the addition of new customers in certain markets in the second half of 2016, which was largely offset by the declines in preprint retail advertising by large retail customers as described above.

Audience Revenues

Audience revenues decreased slightly at 0.4% during 2017 compared to 2016. Overall, digital audience revenues increased 0.9% during 2017 and digital-only audience revenues associated with digital subscriptions increased 9.8% in 2017 compared to 2016. The increase in digital-only audience revenues during 2017 was a result of (i) a  23.8% increase in our digital-only subscribers to 102,900 as of the end of 2017 compared to 2016, (ii) digital subscription rate increases in some markets, and (iii) the revenues received in the 53rd week of 2017. Print audience revenues decreased 0.8% in 2017 compared to 2016, primarily due to pricing adjustments that were implemented and were partially offset by lower print circulation volumes and the 53rd week of 2017. We have a dynamic pricing model for our traditional print subscriptions for which pricing is constantly being adjusted based upon the market’s ability to accept pricing adjustments. Print circulation volumes continue to decline as a result of fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change. To help reduce potential attrition due to the increased pricing, we also increased our subscription related marketing and promotion efforts. 

Operating Expenses

Total operating expenses decreased 8.3% in 2017, compared to 2016. Retirement benefit expenses related to the pension and post-retirement benefits are now recorded as non-operating costs (see Note 1) and therefore, excluded from this discussion in all periods presented. The decreases during 2017 were primarily due to decreases in compensation and other operating expenses compared to 2016, as discussed below. Our total operating expenses reflect our continued effort to reduce costs through streamlining processes to gain efficiencies. These decreases in total operating expenses were partially offset by an increase in impairment charges recorded during 2017, as discussed below. As discussed above, our operating expenses for 2017 also include a 53rd week, which results in higher expenses during the period than the comparable period in 2016.

The following table summarizes our operating expenses, which compares 2017 to 2016:

Compensation expenses, which included both payroll and fringe benefit costs, decreased 8.2% in 2017 compared to 2016. Payroll expenses declined 7.5% during 2017 compared to 2016, reflecting a 13.3% decline in average full-time equivalent employees. Similarly, fringe benefits costs decreased 12.3% in 2017 compared to 2016. These decreases were primarily due to decreases in health benefit costs and other fringe benefit costs, a result of lower headcount.  The decrease in fringe benefit costs is also impacted by the $2.3 million charge we incurred during 2016 when we outsourced the printing production at one of our media companies and exited the multiemployer pension plans that covered the impacted employees that was not repeated in 2017.

Newsprint, supplements and printing expenses decreased 15.8% in 2017 compared to 2016. Newsprint expense declined 20.1% during 2017 compared to 2016. The decline in newsprint expense reflects a decrease in newsprint usage of 21.1% in 2017, partially offset by an increase in newsprint prices of 1.3%, in both cases compared to 2016. During this same period, printing expenses, which are primarily outsourced printing costs, decreased $3.0 million or 9.3%.

Depreciation and amortization expenses decreased 10.4% in 2017 compared to 2016. Depreciation expense decreased $10.6 million in 2017 compared to 2016, as a result of assets becoming fully depreciated in previous periods and due to $7.0 million in accelerated depreciation charges taken in 2016 compared to only $0.3 million in 2017. The decrease in depreciation expense was partially offset by the 53rd week in 2017. Amortization expense increased $1.3 million in 2017 compared to 2016 due to the intangible assets acquired in December 2016 when we purchased The (Durham, NC) Herald-Sun and due to the 53rd week in 2017.  

Other operating expenses decreased 10.2% in 2017 compared to 2016. In 2017, other operating expenses included $23.6 million gain on the disposal of property and equipment compared to $5.8 million in 2016. In addition, as a result of our efforts to reduce operational costs, we had decreases of $8.8 million in circulation delivery costs, $2.6 million in production costs, and $10.5 million in relocation and other costs, which were partially offset by an increase of $4.9 million in professional fees,  $1.3 million in other miscellaneous expenses and the 53rd week in 2017.

Other asset write-downs include an impairment charge of $21.5 million related to intangible newspaper mastheads during 2017, and a write down of $2.0 million of non-newsprint inventory during 2017. During 2016, other asset write-downs include $9.2 million write-downs of intangible newspaper mastheads and $0.3 million related to certain assets held for sale. See  Notes 1 and 4  for additional discussion.

Non‑Operating Items

Interest Expense:

Total interest expense decreased 2.0% in 2017 compared to 2016. Interest expense related to debt balances decreased by $4.8 million in 2017 as a result of lower overall debt balances reflecting repurchases of debt made during 2016 and in 2017. In 2017, this was offset by a $2.0 million increase of non-cash imputed interest related to our financing obligations that increased due to our contribution of real properties to our Pension Plan and due to the sale and leaseback of our Sacramento property.

Equity Income (Loss) in Unconsolidated Companies, Net:

During 2017, we recorded equity losses in unconsolidated companies of $1.7 million as compared to income of $13.4 million in 2016. The decreases during 2017 compared to 2016 are due to lower income from our equity method

investments. Following the sale of CareerBuilder in the third quarter of 2017, we expect income from unconsolidated equity investments to continue to be lower than historical levels.

Impairments Related to Equity Investments, Net:

As described more fully in Note 2, during 2017, we recorded $1.8 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. During 2016, we recorded a $0.9 million write-down related to our equity investment in HomeFinder, LLC (“HomeFinder”), which was sold in the first quarter of 2016.

Extinguishment of Debt:

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. See Note 2 for further discussion.

During 2016, we repurchased $63.6 million aggregate principal amount of various series of our outstanding notes. We repurchased these notes at a price higher or lower than par value and wrote off historical discounts and unamortized issuance costs related to these notes, as applicable, which resulted in a net gain on extinguishment of debt of $0.4 million in 2016.

Income Taxes:

In 2017, we recorded an income tax expense of $105.5 million. As discussed more fully in Note 1(under Income Taxes) and Note 5, 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. 

In 2016, we recorded an income tax benefit of $13.1 million. The income tax benefit differs from the expected federal tax amounts primarily due to the inclusion of state income taxes, non-deductible stock related compensation, certain discrete tax items and the impact from a non-deductible loss for tax purposes related to the transfer of real property to our Pension Plan. 

2016 Compared to 2015

Revenues

The following table summarizes our revenues by category, which compares 2016 to 2015:

In 2016, total revenues decreased 7.5% compared to 2015 primarily due to the continued decline in demand for print advertising. The largest impact on print advertising came from large retail advertisers who began reducing preprinted insert and in-newspaper ROP advertising in 2015, which continued in 2016. Other long-term factors contributing to the

decline in print advertising revenues was the desire of advertisers to reach online customers, and the secular shift in advertising demand from print to digital products. As a result, the print advertising revenues declines were partially offset by growth in digital advertising.

Advertising Revenues

Total advertising revenues decreased 10.8% in 2016 compared to 2015. While we experienced declines in all of our advertising revenue categories, the decrease in total advertising revenues was primarily related to declines in print retail and print and digital classified advertising revenues. These decreases in advertising revenues were partially offset by increases in certain digital 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:

Retail:

In 2016, retail advertising revenues decreased 11.9% compared to 2015, primarily due to decreases of 19.6% in print ROP advertising revenues and 18.6% in preprint advertising revenues, compared to 2015. These decreases were partially offset by increases in digital retail advertising of 8.5% in 2016 compared to 2015 as advertisers continued to move to digital. The overall decreases in retail advertising revenues in 2016 were widespread among ROP and preprint categories.

National:

National advertising revenues decreased 6.4% during 2016 compared to 2015. For 2016, we experienced a 25.3% decrease in print national advertising and a 17.0% increase in digital national advertising compared to 2015. Overall, the decrease in total national advertising revenues during 2016 was led by the telecommunications category. The increase in digital national advertising revenues during 2016 was largely led by programmatic digital advertising, including mobile, political and video revenues.

Classified:

In 2016, classified advertising revenues decreased 10.6% compared to 2015. Automotive, employment and real estate categories combined for 58.2% of our total classified advertising revenues during 2016 compared to 61.8% in 2015.

During 2016, we experienced decreases of 14.5% and 5.2% in print classified advertising and digital classified advertising, respectively, compared to 2015, which was led by automotive and employment advertising in the print category and by employment in the digital category. Our decrease in print classified advertising revenues resulted from the continued shift of print advertising to digital platforms, while the decrease in digital classified advertising was primarily due to the large number of competitors in digital environment. The real estate category had similar results in print classified advertising, although to a lesser extent due to similar trends. The real estate category increased slightly in the digital classified advertising. Other classified advertising revenues, which is our largest classified category and includes legal, remembrance and celebration notices and miscellaneous advertising, also experienced decreases in both print and digital in 2016 compared to 2015 and we believe these trends will continue in the near term.

Digital Advertising:

Digital advertising revenues, which were included in each of the advertising categories discussed above, constituted 30.6% of total advertising revenues in 2016 compared to 26.2% in 2015. Total digital advertising includes digital advertising bundled with print and digital-only advertising. As described above, 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 14.8% to $121.7 million in 2016 compared to 2015. In 2016, total digital advertising revenues increased 4.3% to $174.1 million compared to 2015. Digital advertising revenues bundled with print products declined 14.0% in 2016 compared to 2015 as a result of fewer print advertising sales. The advertising industry was still experiencing a secular shift in advertising demand from print to digital products as advertisers looked for multiple advertising channels to reach their customers. While our product offerings and collaboration efforts in digital advertising had grown, we expected and continue to expect to face intense competition in the digital advertising space.

Direct Marketing and Other:

Direct marketing and other advertising revenues decreased 9.5% during 2016 compared to 2015. The decrease was partially due to the declines in the preprint retail advertising by large retail customers as described above and, to a lesser extent, the elimination of certain niche products during fiscal years 2015 and 2016 that did not meet our profit expectations.

 Audience Revenues

Audience revenues decreased 0.8% during 2016 compared to 2015. Overall, digital audience revenues increased 1.7% in 2016 and digital-only audience revenues increased 9.0% in 2016. The increase in digital-only audience revenues resulted in a 4.8% increase in digital-only subscribers to 83,100 at the end of 2016 compared to 79,300 at the end of 2015, and to digital rate increases in our markets. Print audience revenues declined 1.8% in 2016 compared to 2015. We used a dynamic pricing model for our traditional subscriptions for which pricing was constantly being adjusted based upon a variety of market factors. This dynamic pricing model helped to partially offset print circulation declines. Print circulation volumes continued to decline as a result of fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change. To help reduce potential attrition due to the increased pricing, we also increased our subscription-related marketing and promotion efforts.

Operating Expenses

Total operating expenses decreased 27.3% in 2016 compared to 2015. Retirement benefit expenses related to the pension and post-retirement benefits are now recorded as non-operating costs (see Note 1) and therefore excluded from this discussion in all periods presented. The decrease in 2016 was primarily due to lower impairment charges incurred during 2016 compared to 2015. The decreases in 2016 were also due in part to our continued effort to reduce costs. Our total operating expenses, excluding impairments and asset write-downs, reflect our continued effort to reduce costs through streamlining processes to gain efficiencies as well as staff reductions.

 The following table summarizes our operating expenses, which compares 2016 to 2015:

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Compensation expenses, which include payroll and fringe benefit costs, decreased 4.3% in 2016 compared to 2015. Payroll expenses declined 4.6% in 2016 compared to 2015, reflecting a 9.1% decline in average full-time equivalent

employees. Payroll expenses included approximately $6.2 million more in severance costs in 2016 compared to 2015 related to outsourcing printing production and co-sourcing certain other functions. Fringe benefit costs decreased 1.7% in 2016 compared to 2015. The decrease was primarily due to lower health care costs, partially offset by a $2.3 million charge incurred when we outsourced the printing production at one of our media companies and exited the multiemployer pension plans that covered the impacted employees. 

Newsprint, supplements and printing expenses decreased 17.5% in 2016 compared to 2015. Newsprint expense declined 18.4% in 2016 compared to 2015. The newsprint expenses declines reflected a 15.8% decrease in newsprint usage and a 3.4% decrease in newsprint prices during 2016 compared to 2015. Printing expenses decreased 15.3% in 2016 compared to 2015 due to lower outsourced printing costs and lower direct marketing printing costs, as discussed above.

Depreciation and amortization expenses decreased 12.0% in 2016 compared to 2015. Depreciation expense decreased $11.8 million in 2016 compared to 2015, partially due to the impact and timing of accelerated depreciation during the periods and due to assets that became fully depreciated in 2015 or early 2016. During 2016, we incurred accelerated depreciation of $7.0 million compared to $10.3 million in accelerated depreciation during 2015. The accelerated depreciation during 2016 and 2015 related to production equipment associated with outsourcing our printing process at certain of our media companies. Amortization expense decreased $0.4 million in 2016 compared to 2015.

Other operating expenses decreased 2.8% in 2016 compared to 2015. In 2016, other operating expenses included decreases in circulation delivery costs of $12.8 million as expected due to decreased circulation volumes, professional fees of $2.1 million, postage of $2.8 million, as well as other miscellaneous expenses of $11.0 million, which were partially offset by increases in sales costs for digital advertising of $5.4 million and $12.0 million in relocation and other costs, which we believed would result in significant future cost savings.

In 2016, goodwill impairment and other asset write-downs included $9.2 million in non-cash impairment charges related to intangible newspaper mastheads and $0.3 million related to classifying certain assets as assets held for sale during 2016. In 2015, we recorded non-cash impairment charges related to goodwill of $290.9 million resulting from an interim goodwill impairment test during the second quarter of 2015, and to intangible newspaper mastheads of $13.9 million resulting from interim and annual impairment testing. See Notes 1 and 3 for additional discussion.

 Non‑Operating Items

Interest Expense:

Total interest expense decreased 3.3% in 2016 compared to 2015, primarily reflecting lower overall debt balances due to the repurchases made in 2016 and 2015. Interest expense on debt declined by $7.4 million, or 8.7% in 2016 compared to 2015. The lower interest expense on debt was partially offset by a $3.8 million increase of non-cash imputed interest related to our financing obligations that grew due to the contributed real properties to our Pension Plan in January 2016.  

Equity Income in Unconsolidated Companies, Net:

Total income from unconsolidated investments increased 23.8% during 2016 compared to 2015. While we had lower income from our equity method investments in 2016 compared to 2015, the increase in income from unconsolidated investments was due to the timing of write-downs. During 2016 and 2015, we recorded write‑downs of $1.0 million and $8.2 million, respectively, which reduced our equity income in unconsolidated companies, net, in the consolidated statements of operations. The write-down in 2016 was related to our HomeFinder investment, which was sold in the first quarter of 2016. The write-down in 2015 was primarily related to CareerBuilder, LLC, which recorded a non-cash, goodwill impairment charge related to their international reporting unit in the fourth quarter of 2015. Our portion of that impairment charge was $7.5 million.

Gains related to equity investments:

We recognized $8.1 million in gains related to equity investments during 2015, from a previously sold equity investment, as a result of a final cash distribution of $7.5 million that was received in the second quarter of 2015 and a final working capital adjustment of $0.6 million that was received in the first quarter of 2015. There were no such gains in 2016.

Extinguishment of Debt:

During 2016, we repurchased $63.6 million aggregate principal amount of various series of our outstanding notes. We repurchased these notes at a price higher or lower than par value and wrote off historical discounts and unamortized issuance costs related to these notes, as applicable, which resulted in a net gain on extinguishment of debt of $0.4 million in 2016.

During 2015, we repurchased $95.2 million aggregate principal amount of various series of our outstanding notes. We repurchased these notes at either par or at a price lower than par value and wrote off historical discounts and unamortized issuance costs related to these notes, as applicable, which resulted in a net gain on extinguishment of debt of $1.2 million in 2015.

Income Taxes:

In 2016, we recorded an income tax benefit of $13.1 million. The income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, non-deductible stock related compensation, certain discrete tax items and the impact from a non-deductible loss for tax purposes related to the transfer of real property to our Pension Plan. 

In 2015, we recorded an income tax benefit of $11.8 million. The income tax benefit differed from the expected federal tax amounts primarily due to the tax impact of state income taxes, the impact of non-tax-deductible goodwill, the reversal of unrecognized tax benefits and certain expenses not deductible for income tax purposes.

Liquidity and Capital Resources 

Sources and Uses of Liquidity and Capital Resources:

Our cash and cash equivalents were $99.4 million as of December 31, 2017, compared to $5.3 million of cash and cash equivalents at December 25, 2016.  Our cash balance at the end of 2017 reflects 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. See Recent Developments for more on our divestitures. However, in January 2018 we used a significant portion of the cash on hand to redeem $75.0 million aggregate principal amount of our 9.00% Notes as announced in December 2017, and in February 2018 we repurchase an additional $20.0 million aggregate principal amount of our 9.00% Notes. Following the redemption of notes in January 2018 and repurchases in February 2018, we had approximately $710.0 million remaining in outstanding indebtedness.

We expect that most of our cash and cash equivalents, and our cash generated from operations, for the foreseeable future will be used to repay debt, pay income taxes, fund our capital expenditures, invest in new revenue initiatives, digital investments and enterprise-wide operating systems, make required contributions to the Pension Plan, and for other corporate uses as determined by management and our Board of Directors. As discussed above and in Note 4, following the partial redemption in January 2018 and the repurchases in February 2018, we had approximately $710.0 million in total aggregate principal amount of debt outstanding, consisting of $344.6 million of our 9.00% Notes due 2022 and $365.4 million of our notes due in 2027 and 2029. 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 also expect that we will 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 may also be required to use cash on hand or cash from operations to meet these obligations. 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 $18.1 million of cash from operating activities in 2017, compared to generating $75.4 million of cash in 2016. The change is partially due to the timing of income tax payments in 2017 compared to 2016. In 2017, we had net income tax payments of $12.4 million compared to $2.5 million in 2016. In addition, the change in cash generated from operating activities was due to the timing of collections of accounts receivable, which were lower by $11.5 million. The remaining changes in operating activities related to miscellaneous timing differences in various receipts and payments.

We generated $75.4 million of cash from operating activities in 2016 compared to using $122.5 million of cash from operating activities in 2015. The change is primarily due to the timing of income tax payments of $2.5 million in 2016 compared to $207.0 million in 2015. This difference was primarily related to the tax payments made in the first quarter of 2015 related to the gain on sale of a previously owned equity investment that was recorded in the fourth quarter of 2014, offset by the tax losses on bond repurchases in the fourth quarter of 2014.

Pension Plan Matters

We made no cash contributions to the Pension Plan during 2017, 2016 or 2015. In February 2016, we contributed certain of our real property appraised at $47.1 million to our Pension Plan. The contribution of real property exceeded our required pension contribution for 2016. 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 2017 and we do not expect to have a required pension contribution under the Employee Retirement Income Security Act in fiscal year 2018. However, we expect to have material contributions in the future.

Investing Activities:

We generated $102.5 million of cash from investing activities in 2017. We received proceeds from the sale of property, plant and equipment (“PP&E”)  of  $43.9 million, proceeds from 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. These amounts were partially offset by the purchase of PP&E for $11.1 million and contributions to equity investments of $3.9 million.

We used $9.3 million of cash from investing activities in 2016, which was primarily due to the purchase of PP&E of $13.0 million.

We generated $13.8 million of cash from investing activities in 2015, which reflected the receipts associated with the sale of a former equity investment of $25.6 million from an escrow account and a final cash distribution of $7.5 million from an equity investment, offset by the purchase of PP&E of $18.6 million.

Financing Activities:

We used $26.5 million of cash from financing activities in 2017. During 2017, we retired $16.9 million principal amount of the 5.75% Notes that matured on September 1, 2017, and we repurchased or redeemed $51.8 million principal amount of our 9.00% Notes, for $70.7 million in cash. See Note 4 for further discussion. 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, as described in Recent Developments previously.