| SIGNIFICANT ACCOUNTING POLICIES | 1. SIGNIFICANT ACCOUNTING POLICIE
The McClatchy Company (the “Company,” “we,” “us” or “our”) is a news and information publisher of publications and online platforms such as the Miami Herald , The Kansas City Sta r, The Sacramento Bee , The Charlotte Observer , The (Raleigh) News and Observer , and the (Fort Worth) Star-Telegram . In December 2016, we acquired certain assets and operations of The (Durham, NC) Herald-Sun , including related intangible assets. Including this acquisition, we operate 30 media companies in 29 U.S. markets in 14 states, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We are headquartered in Sacramento, California, and our Class A Common Stock is listed on the New York Stock Exchange under the symbol MNI.
In addition to our media companies, we also own 15.0% of CareerBuilder, LLC, which operates a premier online job website, CareerBuilder.com, as well as certain other digital company investments. See Note 3 for additional discussion. In September 2016, TEGNA Inc., the majority holder of CareerBuilder, LLC, announced that it and other owners, including us, would evaluate strategic alternatives for CareerBuilder. No specific timeline was announced for this process and no further action has been announced.
Our fiscal year ends on the last Sunday in December. The years ended December 25, 2016, December 27, 2015, and December 28, 2014, consist of 52-week periods. Since the acquisition of The (Durham, NC) Herald-Sun occurred on the last day of our fiscal year of 2016, none of The Herald-Sun's operating results are included in our operating results in 2016.
Preparation of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulation of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The consolidated financial statements include the Company and our subsidiaries. Intercompany items and transactions are eliminated.
Reverse Stock Split
Following our May 2016 annual meeting of shareholders, our Board of Directors approved a one-for-ten (1:10) reverse stock split of our issued and outstanding Class A and Class B common stock, which became effective June 7, 2016. As a result, every ten shares of our common stock outstanding were combined into one share of our common stock. The ratio was the same for the Class A common stock and the Class B common stock and each shareholder held the same percentage of Class A and Class B common stock outstanding immediately following the reverse stock split as the shareholder held immediately prior to the reverse stock split. No fractional shares were issued in connection with the reverse stock split. The par value and authorized number of shares of the Class A and Class B common stock were not adjusted as a result of the reverse stock split. All issued and outstanding Class A and Class B common stock and per share amounts contained within our consolidated financial statements and footnotes have been retroactively adjusted to reflect this reverse stock split for all periods presented.
All restricted stock unit awards and stock appreciation right awards outstanding immediately prior to the reverse stock split were adjusted by dividing the number of shares of common stock into which the restricted stock units and stock appreciation rights are exercisable by ten and multiplying the exercise price by ten, all in accordance with the terms of the agreements governing such awards. All restricted stock units and stock appreciation rights activity contained within our consolidated financial statement footnotes have been retroactively adjusted to reflect this reverse stock split for all periods presented.
Revenue recognition
We recognize revenues (i) from advertising placed in a newspaper, a website and/or a mobile service over the advertising contract period or as services are delivered, as appropriate; (ii) from the sale of certain third party digital advertising products and services on a net basis, with wholesale fees reported as a reduction of the associated revenues; and (iii) for audience subscriptions as newspapers and access to online sites are delivered over the applicable subscription term. Print audience revenues are recorded net of direct delivery costs for contracts that are not on a “fee-for-service” arrangement. Print audience revenues on our “fee-for-service” contracts are recorded on a gross basis and associated delivery costs are recorded as other operating expenses.
We enter into certain revenue transactions, primarily related to advertising contracts and circulation subscriptions that are considered multiple element arrangements (arrangements with more than one deliverable). As such we must: (i) determine whether and when each element has been delivered; (ii) determine fair value of each element using the selling price hierarchy of vendor‑specific objective evidence of fair value, third party evidence or best estimated selling price, as applicable and (iii) allocate the total price among the various elements based on the relative selling price method.
Other revenues are recognized when the related product or service has been delivered. Revenues are recorded net of estimated incentives, including special pricing agreements, promotions and other volume‑based incentives and net of sales tax collected from the customer. Revisions to these estimates are charged to revenues in the period in which the facts that give rise to the revision become known.
Concentrations of credit risks
Financial instruments, which potentially subject us to concentrations of credit risks, are principally cash and cash equivalents and trade accounts receivables. Cash and cash equivalents are placed with major financial institutions. As of December 25, 2016, substantially all of our cash and cash equivalents are in excess of the FDIC insured limits. We routinely assess the financial strength of significant customers and this assessment, combined with the large number and geographic diversity of our customers, limits our concentration of risk with respect to trade accounts receivable. We have not experienced any losses related to amounts in excess of FDIC limits.
Allowance for doubtful accounts
We maintain an allowance account for estimated losses resulting from the risk that our customers will not make required payments. At certain of our media companies we establish our allowances based on collection experience, aging of our receivables and significant individual account credit risk. At the remaining media companies we use the aging of accounts receivable, reserving for all accounts due 90 days or longer, to establish allowances for losses on accounts receivable; however, if we become aware that the financial condition of specific customers has deteriorated, additional allowances are provided.
We provide an allowance for doubtful accounts as follows:
Years Ended
December 25,
December 27,
December 28,
(in thousands)
2016
2015
2014
Balance at beginning of year
$
$
$
Charged to costs and expenses
Amounts written off
Disposition of discontinued operations
—
—
Balance at end of year
$
$
$
Newsprint, ink and other inventories
Newsprint, ink and other inventories are stated at the lower of cost (based principally on the first‑in, first‑out method) or current market value. During 2014, we recorded a $2.0 million write‑down of non-newsprint inventory.
Property, plant and equipment
Property, plant and equipment (“PP&E”) are recorded at cost. Additions and substantial improvements, as well as interest expense incurred during construction, are capitalized. Capitalized interest was not material in 2016, 2015 or 2014. Expenditures for maintenance and repairs are charged to expense as incurred. When PP&E is sold or retired, the asset and related accumulated depreciation are removed from the accounts and the associated gain or loss is recognized.
Property, plant and equipment consisted of the following:
December 25,
December 27,
Estimated
(in thousands)
2016
2015
Useful Lives
Land
$
$
Building and improvements
-
years
Equipment
-
years
(1)
Construction in process
Less accumulated depreciation
Property, plant and equipment, net
$
$
(1)
Presses are 9 - 25 years and other equipment is 2 - 15 years
We record depreciation using the straight‑line method over estimated useful lives. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets and anticipated technological changes. Our depreciation expense was $41.5 million, $53.2 million and $60.7 million in 2016, 2015 and 2014, respectively.
During 2016, 2015 and 2014, we incurred $7.0 million, $10.3 million and $13.5 million respectively, in accelerated depreciation related to the production equipment associated with outsourcing our printing process at certain of our media companies.
We review the carrying amount of long‑lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events that result in an impairment review include the decision to close a location or a significant decrease in the operating performance of the long‑lived asset. Long‑lived assets are considered impaired if the estimated undiscounted future cash flows of the asset or asset group are less than the carrying amount. For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value, which is recorded in operating expenses in the consolidated statements of operations. The estimated fair value of the asset or asset group is based on the discounted future cash flows of the asset or asset group. The asset group is defined as the lowest level for which identifiable cash flows are available.
Assets held for sale
Assets held for sale includes land and buildings at two of our media companies that we began to actively market for sale during 2016. In connection with the classification to assets held for sale, the carrying value of the land and building of one of the media companies was reduced to their estimated fair value less selling costs, as determined based on the current market conditions and the selling price. As a result, a write-down of $0.3 million was recorded in 2016, and is included in goodwill impairment and other asset write-downs on the consolidated statements of operations.
Investments in unconsolidated companies
We use the equity method of accounting for our investments in, and earnings or losses of, companies that we do not control but over which we do exert significant influence. We consider whether the fair values of any of our equity method investments have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If we consider any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write‑down would be recorded to estimated fair value. See Note 3 for discussion of investments in unconsolidated companies.
Segment reporting
We operate 30 media companies, providing each of our communities with high-quality news and advertising services in a wide array of digital and print formats. We have two operating segments that we aggregate into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. Our operating segments are based on how our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), makes decisions about allocating resources and assessing performance. The CODM is provided discrete financial information for the two operating segments. Each operating segment consists of a group of media companies and both operating segments report to the same segment manager. One of our operating segments (“Western Segment”) consists of our media companies operations in California, the Northwest, and the Midwest, while the other operating segment (“Eastern Segment”) consists primarily of media companies operations in the Southeast and Florida.
Goodwill and intangible impairment
We test for impairment of goodwill annually, at year‑end, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two‑step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. We perform this testing on operating segments, which are also considered our reporting units. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of our reporting units is determined using a combination of a discounted cash flow model and market based approaches. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, newsprint prices, compensation levels, discount rate, hypothetical transaction structures, and for the market based approach, private and public market trading multiples for newspaper assets. We consider current market capitalization, based upon the recent stock market prices, plus an estimated control premium in determining the reasonableness of the aggregate fair value of the reporting units. We determined that no impairment charge was required in 2016 or 2014. We determined an impairment charge of $290.9 million in 2015 was required. Also see Note 4.
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 which utilizes a discounted cash flow model discussed above, to determine the fair value of each newspaper masthead. We determined that impairment charges of $9.2 million, $13.9 million and $5.2 million in 2016, 2015 and 2014, respectively, were required. Also see Note 4.
Long‑lived assets such as intangible assets (primarily advertiser and subscriber lists) are amortized and 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. We had no impairment of long‑lived assets subject to amortization during 2016, 2015 or 2014.
Stock‑based compensation
All stock‑based compensation, including grants of stock appreciation rights, restricted stock units and common stock under equity incentive plans, are recognized in the financial statements based on their fair values. At December 25, 2016, we had two stock‑based compensation plans. See Note 10.
Income taxes
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.
Current accounting standards in the United States prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.
Fair value of financial instruments
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1
—
Unadjusted quoted prices available in active markets for identical investments as of the reporting date.
Level 2
—
Observable inputs to the valuation methodology are other than Level 1 inputs and are either directly or indirectly observable as of the reporting date and fair value can be determined through the use of models or other valuation methodologies.
Level 3
—
Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.
Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable. As of December 25, 2016, and December 27, 2015, the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.
Long‑term debt. The fair value of long‑term debt is determined using quoted market prices and other inputs that were derived from available market information, including the current market activity of our publicly‑traded notes and bank debt, trends in investor demand and market values of comparable publicly‑traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance, and may not be representative of actual. At December 25, 2016, and December 27, 2015, the estimated fair value of long‑term debt was $844.0 million and $729.8 million, respectively. At December 25, 2016, and December 27, 2015, the carrying value of long‑term debt was $846.2 million and $905.4 million, respectively.
Pension plan. As of December 25, 2016, and December 27, 2015, we had assets related to our qualified defined benefit pension plan measured at fair value. The required disclosures regarding such assets are presented in Note 7.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non‑financial assets measured at fair value on a nonrecurring basis in the accompanying consolidated balance sheet as of December 25, 2016, and December 27, 2015, were assets held for sale, goodwill, intangible assets not subject to amortization and equity method investments. All of these were measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs. The significant unobservable inputs include our expected cash flows and discount rate that we estimate market participants would seek for bearing the risk associated with such assets.
Accumulated other comprehensive loss
We record changes in our net assets from non‑owner sources in our consolidated statements of stockholders’ equity. Such changes relate primarily to valuing our pension liabilities, net of tax effects.
Our accumulated other comprehensive loss (“AOCL”) and reclassifications from AOCL, net of tax, consisted of the following:
Other
Minimum
Comprehensive
Pension and
Loss
Post-
Related to
Retirement
Equity
(in thousands)
Liability
Investments
Total
Balance at December 28, 2014
$
$
$
Other comprehensive income (loss) before reclassifications
—
Amounts reclassified from AOCL
—
Other comprehensive income (loss)
Balance at December 27, 2015
$
$
$
Other comprehensive income (loss) before reclassifications
—
Amounts reclassified from AOCL
—
Other comprehensive income (loss)
Balance at December 25, 2016
$
$
$
Amount Reclassified from AOCL (in thousands)
Year Ended
Year Ended
December 25,
December 27,
Affected Line in the
AOCL Component
2016
2015
Consolidated Statements of Operations
Minimum pension and post-retirement liability
$
$
Compensation
Provision (benefit) for income taxes
$
$
Net of tax
Earnings per share (EPS)
As discussed previously, all share amounts have been restated to reflect the reverse stock split that became effective on June 7, 2016, and applied retrospectively. Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period. Common stock equivalents arise from dilutive stock options, restricted stock units and restricted stock and are computed using the treasury stock method. The weighted average anti‑dilutive stock options that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation consisted of the following:
Years Ended
December 25,
December 27,
December 28,
(shares in thousands)
2016
2015
2014
Anti-dilutive stock options
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “ Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ” ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnotes disclosures in certain circumstances. It was effective for us in the fourth quarter of 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, “ Consolidation (Topic 810); Amendments to the Consolidated Analysis, ” which changed the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance was effective for us at the beginning of 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, " Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. " ASU 2015-05 provided guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for service contracts. This guidance was effective for us at the beginning of 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “ Investments-Equity Method and Joint Ventures (Topic 323). ” ASU 2016-07 eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings. ASU 2016-07 is effective for us for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We early adopted this standard and it did not have an impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “ Compensation-Stock Compensation (Topic 718): Improvements of Employee Share-Based Payment Accounting. ” ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This guidance also clarifies the statement of cash flows presentation of certain components of share-based awards. ASU 2016-09 is effective for us for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We early adopted this standard as of the beginning of fiscal year 2016. While certain amendments of this standard were not applicable to us or were applied prospectively, certain other amendments were applied retrospectively as required by the standard. The adoption of this standard did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update (“ASU”) ASU No. 2014-09, “ Revenue from Contracts with Customers. ” ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In 2016, the FASB issued additional updates: ASU No. 2016-08, 2016-10, 2016-11, 2016-12 and 2016-20. These updates provide further guidance and clarification on specific items within the previously issued update. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements. ASU 2014-09, as well as the additional FASB updates noted above, is effective for us for annual and interim periods beginning on or after December 15, 2017, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. We do not plan to early adopt this guidance. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented ("full retrospective"), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application ("modified retrospective"). We are planning to adopt the standard using the modified retrospective method. We are still in the process of finalizing the impact this standard will have on our controls, processes and financial results, but at this point we do not believe this standard will significantly impact revenue recognition associated with our primary advertising, audience and other revenue categories. We plan to finalize our determination of the impact by the end of the second quarter of 2017, and continue to focus on our process and control activities assessments and documentation during the remainder of 2017.
In July 2015, the FASB issued ASU No. 2015-11, “ Simplifying the Measurement of Inventory. ” ASU 2015-11 simplifies the measurement of inventory by requiring certain inventory to be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” It is effective for us for interim and annual reporting periods beginning after December 15, 2016. The standard should be applied prospectively with early adoption permitted. We are still finalizing our assessment of the impact, but for our primary categories of inventory such as newsprint, we are not expecting a significant impact to our operations or our consolidated financial statements resulting from the adoption of this standard.
In January 2016, the FASB issued ASU No. 2016-01, “ Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for us for interim and annual reporting periods beginning after December 15, 2017. We do not believe the adoption of this guidance will have an impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “ Leases ” (Accounting Standards Codification 842 (“ASC 842”)) and it replaces the existing guidance in ASC 840, “ Leases. ” ASC 842 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. It is effective for us for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are in the process of reviewing the impact this standard will have on our existing lease population and the impact the adoption will have on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ” ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected credit losses during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. It is effective for us for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim or annual reporting periods beginning after December 15, 2018. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ” ASU 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It is effective for us for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “ Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ” ASU 2017-04 simplifies the subsequent measurement of goodwill and eliminates the Step 2 from the goodwill impairment test. It is effective for us for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We will adopt this standard for any impairment test performed after January 1, 2017, as permitted under the standard. We do not believe the adoption of this guidance will have an impact on our consolidated financial statements. |
