NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1 — Basis of presentation and summary of significant accounting policies
Description of business:
Gannett Co., Inc. ("Gannett," "our," "us" and "we") is a leading international, multi-platform news and information company delivering high-quality, trusted content where and when consumers want to engage with it on virtually any device or platform. In addition, we provide a wide variety of online marketing, digital advertising, software-as-a-service, and web presence solutions to small and medium sized businesses through our wholly-owned subsidiary ReachLocal. As of
September 25, 2016
, our operations are comprised of
129
daily publications and related digital platforms in the U.S. and the U.K., and more than
600
and
150
non-daily local publications in the U.S. and U.K., respectively. Our
110
U.S. daily publications include USA TODAY.
Separation from former parent:
On
June 29, 2015
, the separation of Gannett from our former parent, TEGNA Inc., was completed pursuant to a Separation and Distribution Agreement (the "Separation Agreement") dated
June 26, 2015
. On
June 29, 2015
, our former parent completed the pro rata distribution of
98.5%
of the outstanding shares of Gannett common stock to its stockholders (also referred to herein as the "spin-off" or "separation"), and Gannett common stock began trading "regular way" on the New York Stock Exchange. Each holder of our former parent's common stock received one share of Gannett common stock for every two shares of our former parent's common stock held on
June 22, 2015
, the record date for the distribution. Immediately following the distribution, our former parent owned
1.5%
of Gannett's outstanding common stock, and our former parent will continue to own our shares for a period of time not to exceed
five
years after the distribution. Our former parent structured the distribution to be tax free to its U.S. stockholders for U.S. federal income tax purposes.
Basis of presentation:
Our accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and the instructions for Form 10-Q. Therefore, the accompanying statements do not include all information and footnotes which are normally included in the Form 10-K and annual report to shareholders. These unaudited condensed consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and notes thereto included in our annual report on Form 10-K for fiscal year
2015
("2015 Annual Report on Form 10-K"). In our opinion, the financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. All intercompany accounts have been eliminated in consolidation.
Prior to the spin-off, we did not prepare separate financial statements. The accompanying unaudited condensed consolidated and combined financial statements for periods prior to the spin-off were derived from the condensed and consolidated financial statements and accounting records of our former parent and present our combined financial position, results of operations, and cash flows as of and for the periods presented as if we were a separate entity.
Through the date of the spin-off and in preparing these unaudited condensed consolidated and combined financial statements, management has made certain assumptions or implemented methodologies to allocate various expenses from our former parent to us and from us back to our former parent in the form of cost recoveries. These allocations represent services provided between the two entities and are more fully detailed in
Note 14 — Relationship with our former parent
. We believe the assumptions and methodologies used in these allocations are reasonable; however, such allocated costs, net of cost recoveries, may not be indicative of the actual level of expense that would have been incurred had we been operating on a stand-alone basis, and, accordingly, may not necessarily reflect our combined financial position, results of operations, and cash flows had we operated as a stand-alone entity during the periods presented.
For periods subsequent to the spin-off, our financial statements are presented on a consolidated basis as we became a separate consolidated entity.
As of
September 25, 2016
, we identified an error relating to certain participant data that had resulted in an overstatement of the postretirement benefits liabilities transferred from our former parent at separation. Based on our assessments of qualitative and quantitative factors, the error and the related impacts were not considered material to the consolidated financial statements for the quarter ended
September 25, 2016
or the prior periods. The error was corrected by decreasing postretirement medical and life insurance liabilities by
$2.8 million
and pension liabilities by
$23.1 million
, increasing former parent investment, net, which is now reflected in additional paid-in capital, by
$17.5 million
, increasing accumulated other comprehensive loss, net by
$1.6 million
, and decreasing deferred tax assets by
$10.0 million
. There are expected to be additional adjustments to correct certain participant data which are not expected to be material to the financial statements.
Use of estimates:
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the unaudited condensed consolidated and combined financial statements and footnotes thereto. Actual results could differ from those estimates. Significant estimates inherent in the preparation of such financial statements include accounting for asset impairments, reserves established for doubtful accounts, equity-based compensation, depreciation and amortization, business combinations, income taxes, litigation matters, and contingencies.
Segment presentation
:
In the third quarter of 2016, we determined, based on the way we manage our businesses, the nature of those businesses, and the nature of our recent acquisitions, to add an additional operating segment specific to ReachLocal. Our operating segments and goodwill reporting units are now Domestic Publishing, the U.K. group and ReachLocal.
Furthermore, pursuant to the criteria under the Financial Accounting Standards Board's ("FASB") guidance in Accounting Standards Codification ("ASC") Topic 280,
Segment Reporting
, we aggregate our Domestic Publishing segment and the U.K. group into a reportable segment known as Publishing. Our reportable segments beginning in the third quarter of 2016 are Publishing and ReachLocal. In addition to these reportable segments, we have a Corporate and Other category that includes activities that are not directly attributable to or allocable to a specific segment. For further details, see
Note 13 — Segment reporting
.
Business combinations:
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the value of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain identifiable assets include, but are not limited to, expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. As a result, actual results may differ from estimates.
Revenue recognition:
Our revenues include amounts charged to customers for space purchased in our newspapers, digital ads placed on our digital platforms, advertising and marketing service fees, advertising products, commercial printing, and the provision and sale of online marketing products through our ReachLocal subsidiary. Revenues also include circulation revenues for newspapers (both print and digital) purchased by readers or distributors, reduced by the amount of any discounts taken.
Circulation revenues, including online subscriptions, are recognized when purchased newspapers are distributed or made available on our digital platforms. Advertising revenues are recognized net of agency commissions in the period when advertising is printed or placed on digital platforms. Marketing services revenues are generally recognized when advertisements or services are delivered. Commercial printing revenues are recognized when the product is delivered to the customer.
Amounts received from customers in advance of revenue recognition are deferred as liabilities.
For our online marketing products provided by our ReachLocal subsidiary, we typically enter into multi-month agreements for the delivery of our products. Under our agreements, our clients typically pay, in advance, a fixed fee on a monthly basis, which includes all charges for the included technology and any media services, management, third-party content and other costs and fees. We record these prepayments as deferred revenue and only record revenue for income statement purposes as we purchase media and perform other services. Revenue from the licensing of our products is recognized on a straight line basis over the applicable license or service period.
We have various advertising agreements which have both print and digital deliverables. Revenue from sales agreements containing multiple deliverable elements is allocated to each element based on the relative best estimate of selling price. Elements are treated as separate units of accounting if there is standalone value upon delivery.
Software development costs:
Our subsidiary ReachLocal incurs certain costs to develop software for internal use. These costs are capitalized when it is determined the development efforts will result in new or additional functionality or new products. Costs incurred prior to meeting these criteria and costs associated with ongoing maintenance are expensed as incurred and included in costs of sales and operating expenses, in addition to amortization of capitalized software development costs, in the accompanying condensed consolidated and combined statements of income. We monitor our existing capitalized software
costs and reduce their carrying value as a result of releases rendering previous features or functions obsolete. Software development costs are evaluated for impairment in accordance with our policy for finite-lived intangible assets and other long-lived assets. Costs capitalized as internal use software are amortized on a straight-line basis over an estimated useful life of
three
years.
Recent accounting standards issued but not yet adopted:
In July 2015, the FASB delayed the effective date for ASU 2014-09, Revenue from Contracts with Customers ("Topic 606"). The core principle contemplated by ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers are also required. We are currently evaluating the provisions of Topic 606 and assessing the impact on our consolidated financial results.
In April 2016, the FASB issued ASU 2016-10 to clarify and amend the identification of performance obligations and licensing implementation guidance contained within Topic 606. Further, the FASB issued ASU 2016-12 in May 2016 to clarify certain core principles of Topic 606 related to assessing the collectability criterion, presenting taxes collected from customers, noncash considerations, contract modifications, and completed contracts at transition. We are required to adopt the standard and its associated amendments in the first quarter of 2018 and retroactively apply it to our 2016 and 2017 financial results at the time of adoption. Under the new rules, we are permitted to adopt the new standard and amendments in 2017. We can also choose to apply the standard and amendments using either the full retrospective approach or a modified retrospective approach which recognizes a cumulative catch up adjustment to the opening balance of retained earnings. We have not yet selected a transition method, and we are currently evaluating the effect the updated guidance will have on our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory ("Topic 330"), which requires entities using the first-in, first-out inventory costing method to subsequently value inventory at the lower of cost or net realizable value. Topic 330 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Topic 330 is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of Topic 330 and assessing the impact on our consolidated financial results.
In February 2016, the FASB issued ASU 2016-02, Leases ("Topic 842"), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the provisions of Topic 842 and assessing the impact on our consolidated financial results.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2016-09 and assessing the impact on our consolidated financial results.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("Topic 230"), which addresses certain cash flow issues such as debt prepayment, debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the provisions of ASU 2016-15 and assessing the impact on our consolidated financial results.
NOTE 2 — Acquisitions
2016 Acquisitions
ReachLocal:
On
August 9, 2016
, we completed the acquisition of
100%
of the outstanding common stock of ReachLocal, Inc. ("ReachLocal") for approximately
$162.5 million
in cash, net of cash acquired. We financed the transaction by borrowing
$175.0 million
under our credit facility as well as with available cash, and we incurred acquisition-related expenses of
$12.4 million
for the
nine months ended September 25, 2016
. Such costs were reflected in selling, general and administrative expenses in the condensed consolidated and combined statements of income.
ReachLocal offers online marketing, digital advertising, software-as-a-service, and web presence products and solutions to small and medium sized businesses. It delivers its suite of products and solutions to local businesses through a combination of its proprietary technology platform, its direct inside and outside sales force, and select third-party agencies and resellers.
The purchase price, based on management's preliminary estimates, was allocated to the tangible assets and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets and liabilities assumed as well as the acquired deferred income tax assets and liabilities and assumed income and non-income based tax liabilities. As of the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is summarized as follows:
|
|
|
|
|
In thousands
|
|
Cash acquired
|
$
|
13,195
|
|
Other current assets
|
15,058
|
|
Property, plant and equipment
|
13,486
|
|
Intangible assets
|
88,500
|
|
Goodwill
|
114,470
|
|
Other noncurrent assets
|
9,641
|
|
Total assets acquired
|
254,350
|
|
Current liabilities
|
49,800
|
|
Noncurrent liabilities
|
28,807
|
|
Total liabilities assumed
|
78,607
|
|
Net assets acquired
|
$
|
175,743
|
|
Acquired property, plant, and equipment will be depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies. Goodwill associated with the acquisition of ReachLocal is allocated entirely to the ReachLocal segment. We expect the purchase price allocated to goodwill and trade names will not be deductible for tax purposes.
Since the acquisition date, revenues for ReachLocal were
$35.0 million
and net loss before taxes was
$11.1 million
.
Assets of North Jersey Media Group:
On
July 6, 2016
, we completed the acquisition of certain assets of North Jersey Media Group, Inc. ("NJMG") for approximately
$39.3 million
. NJMG is a media company with print and digital publishing operations serving primarily the northern New Jersey market. Its brands include such established names as
The Record (Bergen County)
and
The Herald
. We financed the transaction with available cash on hand.
The purchase price, based on management's preliminary estimates, was allocated to the tangible assets and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets and liabilities assumed. As of the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities were as follows: property, plant, and equipment of
$26.1 million
, goodwill of
$8.3 million
, intangible assets of
$7.2 million
, noncurrent liabilities of
$0.3 million
, and net working capital loss of
$3.4 million
. Any goodwill recognized related to the acquisition of NJMG is allocated to the Publishing segment.
Journal Media Group:
On
April 8, 2016
, we completed the acquisition of
100%
of the outstanding common stock of Journal Media Group, Inc. ("JMG") for approximately
$260.6 million
in cash, net of cash acquired. Further, approximately
$2 million
of the purchase price paid was treated as post-acquisition expense for accounting purposes. We financed the transaction by borrowing
$250 million
under our credit facility as well as with available cash, and we incurred acquisition-related costs of
$13.2 million
, of which
$10.7 million
was incurred for the
nine months ended September 25, 2016
. Such costs were reflected in selling, general and administrative expenses in the condensed consolidated and combined statements of income.
JMG is a media company with print and digital publishing operations serving
15
U.S. markets in
9
states, including the
Milwaukee Journal Sentinel,
the
Knoxville News Sentinel,
and
The Commercial Appeal
in Memphis
.
The acquisition expanded our print and digital publishing operations domestically.
The purchase price, based on management's preliminary estimates, was allocated to the tangible assets and identified intangible assets acquired based on their estimated fair values. The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets and liabilities assumed as well as the acquired deferred income tax assets and liabilities and assumed income and non-income based tax liabilities. As of the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is summarized as follows:
|
|
|
|
|
In thousands
|
|
Cash acquired
|
$
|
36,825
|
|
Other current assets
|
54,571
|
|
Property, plant and equipment
|
265,641
|
|
Intangible assets
|
42,880
|
|
Goodwill
|
25,259
|
|
Other noncurrent assets
|
3,825
|
|
Total assets acquired
|
429,001
|
|
Current liabilities
|
76,709
|
|
Noncurrent liabilities
|
57,246
|
|
Total liabilities assumed
|
133,955
|
|
Net assets acquired
|
$
|
295,046
|
|
Acquired property, plant, and equipment will be depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies. Any goodwill recognized related to the acquisition of JMG is allocated to the Publishing segment. We expect the purchase price allocated to goodwill and mastheads will not be deductible for tax purposes.
Since the acquisition date, revenues for JMG were
$191.1 million
and net loss before taxes was
$6.5 million
.
Pro forma information:
The following table sets forth unaudited pro forma results of operations assuming the ReachLocal, NJMG and JMG acquisitions, along with transactions necessary to finance the acquisitions, occurred at the beginning of 2015:
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Nine months ended
|
In thousands
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
Total revenues
|
$
|
2,542,117
|
|
|
$
|
2,823,440
|
|
Net income
|
$
|
12,346
|
|
|
$
|
44,090
|
|
Earnings per share - diluted
|
$
|
0.10
|
|
|
$
|
0.38
|
|
This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect depreciation expense and amortization of intangibles related to the fair value adjustments of the assets acquired, additional interest expense related to the financing of the transactions, the elimination of acquisition-related costs, and the related tax effects of the adjustments.
2015 Acquisitions
Texas-New Mexico Partnership:
On
June 1, 2015
, we completed the acquisition of the remaining
59.4%
interest in the Texas-New Mexico Partnership ("TNP") that we did not own from Digital First Media. We completed the acquisition through the assignment of our
19.5%
interest in the California Newspapers Partnership ("CNP"), valued at
$34.4 million
, additional cash consideration, net of cash acquired, of
$5.2 million
, and
$1.9 million
in deferred consideration. As a result, we own
100%
of TNP and no longer have any ownership interest or continuing involvement in CNP. Through the transaction, we acquired news organizations in Texas (
El Paso Times
), New Mexico (
Alamogordo Daily News
;
Carlsbad Current-Argus
;
The Daily Times
in Farmington;
Deming Headlight
;
Las Cruces Sun-News
; and
Silver City Sun-News
) and Pennsylvania (
Chambersburg Public Opinion; Hanover Evening Sun; Lebanon Daily News;
and
The York Daily Record
).
The purchase price was allocated to the tangible assets and identified intangible assets acquired based on their estimated fair values. As of the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is summarized as follows:
|
|
|
|
|
In thousands
|
|
Current assets
|
$
|
12,310
|
|
Property, plant and equipment
|
20,672
|
|
Intangible assets
|
28,440
|
|
Goodwill
|
30,703
|
|
Total assets acquired
|
92,125
|
|
Current liabilities
|
10,860
|
|
Noncurrent liabilities
|
14,211
|
|
Total liabilities assumed
|
25,071
|
|
Net assets acquired
|
$
|
67,054
|
|
On the acquisition date, the fair value of our
40.6%
interest in TNP was
$26.6 million
, and the fair value of our
19.5%
interest in CNP was
$34.4 million
. The pre-acquisition carrying value of TNP and CNP was
$39.2 million
. We recognized a
$21.8 million
pre-tax non-cash gain on the transaction in the second quarter of 2015.
Acquired property, plant, and equipment will be depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships as well as expected future synergies. We expect the purchase price allocated to goodwill and mastheads will be deductible for tax purposes.
Romanes Media Group:
On
May 26, 2015
, our U.K. subsidiary, Newsquest Media Group Ltd. ("Newsquest"), paid
$23.4 million
, net of cash acquired, to purchase
100%
of the shares of Romanes Media Group ("RMG"). RMG publishes local newspapers in Scotland, Berkshire, and Northern Ireland, and its portfolio comprises
one
daily newspaper,
28
weekly newspapers, and their associated websites.
NOTE 3 — Restructuring activities
Severance-related expenses:
We have initiated various cost reducing actions that are severance-related.
In the second quarter of 2015, we initiated an Early Retirement Opportunity Program ("EROP") for our USA TODAY employees. Since its announcement, we have recorded severance-related expenses of
$7.8 million
for the three and nine months ended
September 27, 2015
in accordance with Accounting Standards Codification ("ASC") Topic 712.
In August 2015, we announced an EROP for employees in certain corporate departments and publishing sites. Since its announcement, we have recorded severance-related expenses of
$35.1 million
in accordance with ASC Topic 712. Related to this action, there was
$0.8 million
of additional expense recorded net in 2016 and
$10.6 million
in expense recorded for the
three
and
nine
months ended
September 27, 2015
.
In connection with our acquisitions as discussed in
Note 2 — Acquisitions
, we incurred certain severance-related expenses for the
three
and
nine
months ended
September 25, 2016
totaling
$6.3 million
and
$15.4 million
, respectively.
We had employee termination actions associated with our facility consolidation and other cost efficiency efforts, including various one-time termination actions, terminations related to an ongoing severance plan, as well as the aforementioned acquisition-related activity. We recorded severance-related expenses of
$5.1 million
and
$26.0 million
for the
three
and
nine
months ended
September 25, 2016
, respectively, and
$5.9 million
and
$25.4 million
for the
three
and
nine
months ended
September 27, 2015
, respectively, related to these other actions.
These charges are presented in our statements of income. We recorded
$4.1 million
and
$22.1 million
in costs of sales and operating expenses and
$1.0 million
and
$4.7 million
in selling, general, and administrative expenses during the three and nine months ended
September 25, 2016
, respectively, related to our employee termination actions. We recorded
$13.5 million
and
$35.4 million
in costs of sales and operating expenses and
$2.9 million
and
$8.4 million
in selling, general, and administrative expenses during the
three
and
nine
months ended
September 27, 2015
, respectively, related to such actions.
A summary of our liabilities related to employee termination actions for the
nine months ended
September 25, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Severance Related to Acquisitions
|
|
USA TODAY 2015 EROP
|
|
August 2015 EROP
|
|
Various One-Time Actions
|
|
Ongoing Severance Plan
|
Balance at Dec. 27, 2015
|
$
|
—
|
|
|
$
|
3,337
|
|
|
$
|
28,393
|
|
|
$
|
9,818
|
|
|
$
|
4,035
|
|
Expense
|
15,383
|
|
|
—
|
|
|
837
|
|
|
10,357
|
|
|
254
|
|
Payments
|
(6,832
|
)
|
|
(2,407
|
)
|
|
(27,034
|
)
|
|
(12,695
|
)
|
|
(2,504
|
)
|
Adjustments
|
941
|
|
|
(930
|
)
|
|
864
|
|
|
(2,400
|
)
|
|
—
|
|
Balance at Sept. 25, 2016
|
$
|
9,492
|
|
|
$
|
—
|
|
|
$
|
3,060
|
|
|
$
|
5,080
|
|
|
$
|
1,785
|
|
Facility consolidation and impairment charges:
We evaluated and revised the carrying values and useful lives of property, plant, and equipment at certain sites to reflect the use of those assets over a shortened period because of facility consolidation efforts. We also wrote off assets that were being disposed. Certain assets classified as held-for-sale according to ASC Topic 360 resulted in us recognizing non-cash charges in both
2016
and
2015
as we reduced the carrying values to equal the fair value less cost to dispose. The fair values were based on the estimated prices of similar assets. We recorded pre-tax charges for facility consolidations and asset impairments of
$28.7 million
and
$1.3 million
for the
three months ended September 25, 2016
and
September 27, 2015
, respectively, and
$33.2 million
and
$8.0 million
for the
nine months ended September 25, 2016
and
September 27, 2015
, respectively.
NOTE 4 — Goodwill and other intangible assets
The following table displays information on our goodwill, indefinite-lived intangible assets and amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Sept. 25, 2016
|
|
Dec. 27, 2015
|
|
Gross
|
|
Accumulated Amortization
|
|
Gross
|
|
Accumulated Amortization
|
Goodwill
|
$
|
699,891
|
|
|
$
|
—
|
|
|
$
|
575,685
|
|
|
$
|
—
|
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
Mastheads
|
62,568
|
|
|
—
|
|
|
31,521
|
|
|
—
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
Developed technology
|
54,000
|
|
|
(2,350
|
)
|
|
—
|
|
|
—
|
|
Customer relationships
|
104,718
|
|
|
(44,200
|
)
|
|
68,005
|
|
|
(39,813
|
)
|
Other
|
24,782
|
|
|
(12,414
|
)
|
|
11,478
|
|
|
(11,478
|
)
|
Customer relationships include subscriber lists and advertiser relationships and are amortized on a straight-line basis over their useful lives. Developed technology includes digital marketing solutions and other technology acquired as part of the ReachLocal transaction and is amortized on a straight-line basis over its useful life. Other intangibles are primarily amortizable trade names and are amortized on a straight-line basis over their useful lives.
The following table summarizes the changes in our net goodwill balance through
September 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
|
|
|
Publishing
|
|
ReachLocal
|
|
Consolidated
|
Balance at Dec. 27, 2015:
|
|
|
|
|
|
Goodwill
|
$
|
7,297,752
|
|
|
$
|
—
|
|
|
$
|
7,297,752
|
|
Accumulated impairment losses
|
(6,722,067
|
)
|
|
—
|
|
|
(6,722,067
|
)
|
Net balance at Dec. 27, 2015
|
575,685
|
|
|
—
|
|
|
575,685
|
|
Activity during the period:
|
|
|
|
|
|
Acquisitions and adjustments (see Note 2)
|
34,487
|
|
|
114,470
|
|
|
148,957
|
|
Foreign currency exchange rate changes
|
(24,751
|
)
|
|
—
|
|
|
(24,751
|
)
|
Total
|
9,736
|
|
|
114,470
|
|
|
124,206
|
|
Balance at Sept. 25, 2016:
|
|
|
|
|
|
Goodwill
|
7,028,359
|
|
|
114,470
|
|
|
7,142,829
|
|
Accumulated impairment losses
|
(6,442,938
|
)
|
|
—
|
|
|
(6,442,938
|
)
|
Net balance at Sept. 25, 2016
|
$
|
585,421
|
|
|
$
|
114,470
|
|
|
$
|
699,891
|
|
NOTE 5 — Revolving credit facility
We maintain a
five
-year secured revolving credit facility pursuant to which we may borrow from time to time up to an aggregate principal amount of
$500.0 million
("Credit Facility"). Under the Credit Facility, we may borrow at an applicable margin above the Eurodollar base rate ("LIBOR loan") or the higher of the Prime Rate, the Federal Funds Effective Rate plus
0.50%
, or the one month LIBOR rate plus
1.00%
("ABR loan"). The applicable margin is determined based on our total leverage ratio but differs between LIBOR loans and ABR loans. For LIBOR-based borrowing, the margin varies from
2.00%
to
2.50%
. For ABR-based borrowing, the margin varies from
1.00%
to
1.50%
. Up to
$50.0 million
of the Credit Facility is available for issuance of letters of credit. The Credit Facility matures on June 29, 2020.
Customary fees are payable related to the Credit Facility, including commitment fees on the undrawn commitments of between
0.30%
and
0.40%
per annum, payable quarterly in arrears, based on our total leverage ratio. Borrowings under the Credit Facility are guaranteed by our wholly-owned material domestic subsidiaries. All obligations of Gannett and each subsidiary guarantor under the Credit Facility are or will be secured by first priority security interests in our equipment, inventory, accounts receivable, fixtures, general intangibles and other personal property, mortgages on certain material real property, and pledges of the capital stock of each subsidiary guarantor.
Under the Credit Facility, our consolidated interest coverage ratio cannot be less than
3.00
:1.00, and our total leverage ratio cannot exceed
3.00
:1.00 as of the last day of the test period consisting of the last four fiscal quarters. We were in compliance with these financial covenants as of
September 25, 2016
.
The Credit Facility also contains a number of covenants that, among other things, limit or restrict our ability, subject to certain exceptions, to: (i) permit certain liens on current or future assets, (ii) enter into certain corporate transactions, (iii) incur additional indebtedness, (iv) make certain payments or declare certain dividends or distributions, (v) dispose of certain property, (vi) make certain investments, (vii) prepay or amend the terms of other indebtedness, or (viii) enter into certain transactions with our affiliates. We were in compliance with these covenants as of
September 25, 2016
.
On April 8, 2016, we borrowed
$250 million
under our Credit Facility to complete the acquisition of JMG. Furthermore, on August 9, 2016, we borrowed an additional
$175 million
under our Credit Facility to complete the acquisition of ReachLocal. Refer to
Note 2 — Acquisitions
for further details on these acquisitions. As of
September 25, 2016
, we had
$385.0 million
in outstanding borrowings under the Credit Facility and
$6.9 million
of letters of credit outstanding, leaving
$108.1 million
of availability remaining.
NOTE 6 — Retirement plans
Defined benefit retirement plans:
We, along with our subsidiaries, have various defined benefit retirement plans, including plans established under collective bargaining agreements. Our principal retirement plan is the Gannett Retirement Plan ("GRP"). Our retirement plans also include the Gannett 2015 Supplemental Retirement Plan ("SERP"), the Newsquest Pension Scheme in the U.K. ("Newsquest Plan"), and the Newspaper Guild of Detroit Pension Plan. We use a December 31 measurement date convention for our retirement plans.
Our retirement plan costs include costs for all of our qualified plans and our allocated portions of former parent-sponsored qualified and non-qualified plans and are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
(a)
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
(a)
|
Service cost-benefits earned during the period
|
$
|
818
|
|
|
$
|
995
|
|
|
$
|
2,446
|
|
|
$
|
3,204
|
|
Interest cost on benefit obligation
|
30,853
|
|
|
32,997
|
|
|
94,571
|
|
|
98,483
|
|
Expected return on plan assets
|
(45,560
|
)
|
|
(49,742
|
)
|
|
(138,708
|
)
|
|
(147,068
|
)
|
Amortization of prior service cost
|
1,668
|
|
|
1,705
|
|
|
4,997
|
|
|
5,173
|
|
Amortization of actuarial loss
|
15,823
|
|
|
13,594
|
|
|
46,946
|
|
|
41,267
|
|
Expense (credit) for retirement plans
|
$
|
3,602
|
|
|
$
|
(451
|
)
|
|
$
|
10,252
|
|
|
$
|
1,059
|
|
(a) A portion of our current and former employees also participated in pension plans sponsored by our former parent. Retirement benefits obligations and assets pursuant to the former parent-sponsored retirement plans related to our current and former employees were transferred to us at the separation date and, accordingly, were allocated to us in our unaudited condensed combined financial statements for all periods prior to the spin-off. This allocation was done by determining the projected benefit obligation of participants for which the liability was transferred. Subsequent to the spin-off, no further costs were allocated to us.
|
Beginning in 2016, in addition to any other contributions that may be required, we will make contributions of
$25 million
in each of the next five fiscal years through 2020 and
$15 million
in 2021 for the GRP. In March 2016, we made our 2016
$25 million
contribution to the GRP.
During the
nine months ended September 25, 2016
, we contributed $
46.7 million
(£
34.8 million
) to the Newsquest Plan. We expect to contribute approximately £
1.9 million
to the Newsquest Plan throughout the remainder of
2016
.
Defined contribution plans:
Our U.S. employees participate in qualified 401(k) savings plans, permitting eligible employees to make voluntary contributions on a pre-tax basis subject to certain limits. Substantially all of our employees (other than those covered by certain collective bargaining agreements) scheduled to work at least
1,000
hours during each year of employment are eligible to participate. The plans allow participants to invest their savings in various investments. For most participants, the matching formula is
100%
of the first
5%
of employee contributions, and the employer match obligation is settled by buying our stock in the open market and depositing it in the participants' accounts.
In connection with our acquisition of JMG as discussed in
Note 2 — Acquisitions
, we assumed JMG's 401(k) savings plan, which continues to cover former JMG employees. For most participants in this plan, the matching formula is
50%
of the first
7%
of employee contributions, and the employer match obligation is settled in cash. Additionally, effective August 9, 2016, we assumed ReachLocal's 401(k) savings plan, which continues to cover their former full-time U.S. employees and which has no employer match obligation.
Amounts charged to expense for employer contributions to the 401(k) savings plans totaled
$7.5 million
and
$6.5 million
in the
three months ended September 25, 2016
and
September 27, 2015
, respectively. Amounts charged to expense for employer contributions to the 401(k) savings plans totaled
$21.7 million
and
$21.2 million
in the
nine months ended September 25, 2016
and
September 27, 2015
, respectively. These amounts are recorded in Cost of sales and operating expenses and Selling, general and administrative expenses, as appropriate, in the unaudited condensed consolidated and combined statements of income.
NOTE 7 — Postretirement benefits other than pension
We provide health care and life insurance benefits to certain retired employees who meet age and service requirements. Most of our retirees contribute to the cost of these benefits, and retiree contributions are increased as actual benefit costs increase. The cost of providing retiree health care and life insurance benefits is actuarially determined. Our policy is to fund benefits as claims and premiums are paid.
Our postretirement benefit costs and our allocated portions of former parent-sponsored postretirement plans for health care and life insurance are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
Service cost-benefits earned during the period
|
$
|
49
|
|
|
$
|
75
|
|
|
$
|
146
|
|
|
$
|
272
|
|
Interest cost on net benefit obligation
|
964
|
|
|
989
|
|
|
2,838
|
|
|
2,961
|
|
Amortization of prior service credit
|
(1,198
|
)
|
|
(2,355
|
)
|
|
(3,458
|
)
|
|
(7,277
|
)
|
Amortization of actuarial loss
|
202
|
|
|
315
|
|
|
266
|
|
|
1,102
|
|
Net periodic postretirement benefit expense (credit)
|
$
|
17
|
|
|
$
|
(976
|
)
|
|
$
|
(208
|
)
|
|
$
|
(2,942
|
)
|
Certain of our employees also participated in postretirement benefit plans sponsored by our former parent. Health care and life insurance benefit obligations pursuant to the former parent-sponsored postretirement plans and related to our current and former employees were transferred to us at the separation date and, accordingly, have been allocated to us in our unaudited condensed consolidated and combined financial statements for periods prior to the separation date by determining the projected benefit obligation of participants for which the liability was transferred. Subsequent to the separation, no further costs were allocated to us.
NOTE 8 — Income taxes
Our reported effective income tax rate on pre-tax loss was
26.9%
for the
three months ended September 25, 2016
, compared to
20.6%
on pre-tax income for the
three months ended September 27, 2015
. Our reported effective income tax rate on pre-tax income was
40.2%
for the
nine months ended September 25, 2016
, compared to
21.6%
for the
nine months ended September 27, 2015
. The tax rate for the three and
nine months ended September 25, 2016
was higher than the comparable rate in
2015
due to a one-time tax benefit in
2015
from a change in accounting method to amortize previously non-deductible intangible assets, interest expense disallowance in the U.K. in
2016
, U.K. tax rate changes and non-deductible transaction costs in
2016
.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $
10.4 million
as of
September 25, 2016
and $
11.3 million
as of
December 27, 2015
. The amount of accrued interest and penalties payable related to unrecognized tax benefits was $
3.9 million
as of
September 25, 2016
and $
3.4 million
as of
December 27, 2015
.
It is reasonably possible that the amount of unrecognized benefits with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations, or other regulatory developments. At this time, we estimate the amount of gross unrecognized tax positions may be reduced by up to approximately $
1.8 million
within the next 12 months primarily due to lapses of statutes of limitations and settlements of ongoing audits in various jurisdictions.
In connection with the spin-off, we entered into a tax matters agreement with our former parent which states each company's rights and responsibilities with respect to payment of taxes, tax return filings, and control of tax examinations. We are generally responsible for taxes allocable to periods (or portions of periods) beginning after the spin-off. Although any changes with regards to additional income tax liabilities related to periods prior to the spin-off may impact our effective tax rate in the future, we may be entitled to seek indemnification for these items from our former parent under the tax matters agreement.
NOTE 9 — Supplemental equity information
The following table summarizes equity account activity for the
nine months ended September 25, 2016
and
September 27, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
1,058,576
|
|
|
$
|
937,472
|
|
Comprehensive income:
|
|
|
|
Net income
|
19,324
|
|
|
125,740
|
|
Other comprehensive income (see Note 1)
|
8,620
|
|
|
62,741
|
|
Total comprehensive income
|
27,944
|
|
|
188,481
|
|
Dividends declared
|
(55,936
|
)
|
|
(18,462
|
)
|
Stock-based compensation
|
14,986
|
|
|
12,359
|
|
Other activity (see Note 1)
|
19,544
|
|
|
3,409
|
|
Transactions with our former parent, net
|
—
|
|
|
(43,145
|
)
|
Balance at end of period
|
$
|
1,065,114
|
|
|
$
|
1,080,114
|
|
The following table summarizes the components of, and the changes in, Accumulated other comprehensive loss (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Retirement Plans
|
|
Foreign Currency Translation
|
|
Total
|
Balance at Dec. 27, 2015
|
$
|
(1,058,234
|
)
|
|
$
|
384,810
|
|
|
$
|
(673,424
|
)
|
Other comprehensive income (loss) before reclassifications
|
39,751
|
|
|
(62,440
|
)
|
|
(22,689
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
31,309
|
|
|
—
|
|
|
31,309
|
|
Other comprehensive income (loss)
|
71,060
|
|
|
(62,440
|
)
|
|
8,620
|
|
Balance at Sept. 25, 2016
|
$
|
(987,174
|
)
|
|
$
|
322,370
|
|
|
$
|
(664,804
|
)
|
|
|
|
|
|
|
Balance at Dec. 28, 2014
|
$
|
(1,082,312
|
)
|
|
$
|
404,200
|
|
|
$
|
(678,112
|
)
|
Other comprehensive income (loss) before reclassifications
|
49,147
|
|
|
(11,996
|
)
|
|
37,151
|
|
Amounts reclassified from accumulated other comprehensive loss
|
25,590
|
|
|
—
|
|
|
25,590
|
|
Other comprehensive income (loss)
|
74,737
|
|
|
(11,996
|
)
|
|
62,741
|
|
Transactions with former parent
|
7,237
|
|
|
—
|
|
|
7,237
|
|
Balance at Sept. 27, 2015
|
$
|
(1,000,338
|
)
|
|
$
|
392,204
|
|
|
$
|
(608,134
|
)
|
Accumulated other comprehensive loss components are included in computing net periodic postretirement costs as outlined in
Note 6 — Retirement plans
and
Note 7 — Postretirement benefits other than pension
. Reclassifications out of accumulated other comprehensive loss related to these postretirement plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
Amortization of prior service credit, net
|
$
|
470
|
|
|
$
|
(650
|
)
|
|
$
|
1,539
|
|
|
$
|
(2,104
|
)
|
Amortization of actuarial loss
|
16,025
|
|
|
13,909
|
|
|
47,212
|
|
|
42,369
|
|
Total reclassifications, before tax
|
16,495
|
|
|
13,259
|
|
|
48,751
|
|
|
40,265
|
|
Income tax effect
|
(5,936
|
)
|
|
(5,043
|
)
|
|
(17,442
|
)
|
|
(14,675
|
)
|
Total reclassifications, net of tax
|
$
|
10,559
|
|
|
$
|
8,216
|
|
|
$
|
31,309
|
|
|
$
|
25,590
|
|
NOTE 10 — Fair value measurement
In the accompanying unaudited condensed consolidated and combined financial statements, we measure and record certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurement, establishes a hierarchy for those instruments measured at fair value that distinguishes between market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 - Quoted market prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 - Unobservable inputs developed using our own estimates and assumptions, which reflect those a market participant would use.
As of
September 25, 2016
and
December 27, 2015
, assets and liabilities held at fair value measured on a recurring basis primarily consist of pension plan assets and our revolving credit facility. The carrying value of our revolving credit facility approximates the fair value and is classified as Level 3.
We also have certain assets requiring fair value measurement on a non-recurring basis. Our assets measured on a nonrecurring basis are assets held for sale, which are classified as Level 3 assets and evaluated using executed purchase agreements or third party valuation experts when certain circumstances arise. Assets held for sale total $
2.0 million
as of
September 25, 2016
and
$12.3 million
as of
December 27, 2015
.
NOTE 11 — Commitments, contingencies and other matters
Telephone Consumer Protection Act ("TCPA") litigation:
On January 2, 2014, a class action lawsuit was filed against Gannett in the U.S. District Court for the District of New Jersey (Casagrand et al v. Gannett Co., Inc., et al) alleging various violations of the TCPA arising from allegedly improper telemarketing calls made to consumers by one of our vendors. The plaintiffs sought to certify a class that would include all telemarketing calls made by the vendor or us. The TCPA provides for statutory damages of
$500
per violation (
$1,500
for willful violations). In April 2016, we agreed to settle all of the claims raised. The settlements are reflected, net of insurance recoveries, in our financial statements as of
September 25, 2016
and were not material to our results of operations, financial position, or cash flows.
Environmental contingency:
In March 2011, the Advertiser Company, a subsidiary that publishes the
Montgomery Advertiser
, was notified by the U.S. Environmental Protection Agency ("EPA") that it had been identified as a potentially responsible party ("PRP") for the investigation and remediation of groundwater contamination in downtown Montgomery, Alabama. The
Advertiser
is a member of the Downtown Environmental Alliance, which has agreed to jointly fund and conduct all required investigation and remediation. The U.S. EPA has approved the work plan for the investigation and remediation and has transferred responsibility for oversight of this work to the Alabama Department of Environmental Management. The investigation and remediation are underway. In the third quarter of 2015, the
Advertiser
and other members of the Downtown Environmental Alliance also reached a settlement with the U.S. EPA regarding the costs the U.S. EPA spent to investigate the site. The
Advertiser's
final costs cannot be determined until the cleanup work is completed and contributions from other PRPs are finalized.
Other litigation:
We are defendants in judicial and administrative proceedings involving matters incidental to our business.
While the ultimate results of these proceedings cannot be predicted with certainty, we expect the ultimate resolution of all pending or threatened claims and litigation will not have a material effect on our consolidated results of operations, financial position, or cash flows.
NOTE 12 — Earnings (loss) per share
Basic earnings per share is calculated as net income divided by the weighted average number of shares of common stock outstanding. Diluted earnings per share is similarly calculated except the calculation includes the dilutive effect of the assumed issuance of shares under equity-based compensation plans except where the inclusion of such shares would have an anti-dilutive impact.
On June 29, 2015, our former parent distributed
98.5%
of our total shares outstanding and retained the remaining
1.5%
. The total number of shares outstanding at that date, which was approximately
115
million, was used for the calculation of both basic and diluted earnings per share for the
nine months ended September 27, 2015
.
Our Board of Directors announced in July 2015 a share repurchase program authorizing us to repurchase shares with an aggregate value of up to
$150 million
over a
three
-year period. Shares may be repurchased at management's discretion, either in the open market or in privately negotiated block transactions. Management's decision to repurchase shares will depend on a number of factors, including share price and other corporate liquidity requirements. As of
September 25, 2016
,
no
shares have been repurchased under this program.
For the three and
nine months ended September 25, 2016
and
September 27, 2015
, basic and diluted earnings (loss) per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share data
|
Three months ended
|
|
Nine months ended
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
Net income (loss)
|
$
|
(24,242
|
)
|
|
$
|
39,166
|
|
|
$
|
19,324
|
|
|
$
|
125,740
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
116,556
|
|
|
115,186
|
|
|
116,461
|
|
|
115,035
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
Restricted stock units
|
—
|
|
|
1,312
|
|
|
1,321
|
|
|
437
|
|
Performance share units
|
—
|
|
|
1,117
|
|
|
761
|
|
|
373
|
|
Stock options
|
—
|
|
|
553
|
|
|
243
|
|
|
184
|
|
Weighted average number of shares outstanding - diluted
|
116,556
|
|
|
118,168
|
|
|
118,786
|
|
|
116,029
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
$
|
(0.21
|
)
|
|
$
|
0.34
|
|
|
$
|
0.17
|
|
|
$
|
1.09
|
|
Earnings (loss) per share - diluted
|
$
|
(0.21
|
)
|
|
$
|
0.33
|
|
|
$
|
0.16
|
|
|
$
|
1.08
|
|
The impact of anti-dilutive equity awards excluded from the computation of diluted earnings per share for the three months ended September 25, 2016 was
$0.01
. The impact of anti-dilutive equity awards excluded from the computation of diluted earnings per share for the
nine months ended September 25, 2016
was not material.
On October 12, 2016, we declared a dividend of
$0.16
per share of common stock, payable on December 19, 2016, to shareholders of record as of the close of business on December 5, 2016.
NOTE 13 — Segment reporting
We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently the Chief Executive Officer, manages the operations for purposes of allocating resources and assessing performance.
As discussed in
Note 1 — Basis of presentation and summary of significant accounting policies
, we reorganized our reportable segments in the
third quarter
of
2016
as a result of the ReachLocal acquisition to include the following:
•
Publishing, which consists of our portfolio of regional, national, and international newspaper publishers. The results of this segment include retail, classified, and national advertising revenues, circulation revenues from the distribution of our publications on our digital platforms, home delivery of our publications, and single copy sales, and other revenues from commercial printing and distribution arrangements.
•
ReachLocal, which consists exclusively of our ReachLocal digital marketing solutions subsidiary. The results of this segment include advertising revenues from our search and display services as well as and other revenues related to web presence and software solutions provided by ReachLocal.
In addition to the above operating segments, we have a corporate category that includes activities not directly attributable to a specific segment. This category primarily consists of broad corporate functions and includes legal, human resources, accounting, analytics, finance, and marketing as well as activities and costs not directly attributable to a particular segment such as tax settlements and other general business costs.
The CODM uses Adjusted EBITDA to evaluate the performance of the segments and allocate resources. Adjusted EBITDA is a financial performance measure defined as net income (loss) before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) severance-related charges (including early retirement programs), (6) facility consolidation costs, (7) asset impairment charges, (8) depreciation, and (9) amortization.
Management considers Adjusted EBITDA to be the appropriate metric to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as it eliminates the effect of items which we do not believe are indicative of each segment's core operating performance. Adjusted EBITDA is considered to be a non-GAAP measure and may be different than similarly-titled non-GAAP financial measures used by other companies.
The segment information for the three months ended September 25, 2016 and September 27, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Consolidated
|
2016
|
|
|
|
|
|
|
|
Advertising
|
$
|
397,214
|
|
|
$
|
31,839
|
|
|
$
|
—
|
|
|
$
|
429,053
|
|
Circulation
|
285,583
|
|
|
—
|
|
|
—
|
|
|
285,583
|
|
Other
|
53,773
|
|
|
3,138
|
|
|
774
|
|
|
57,685
|
|
Total revenues
|
$
|
736,570
|
|
|
$
|
34,977
|
|
|
$
|
774
|
|
|
$
|
772,321
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
87,490
|
|
|
$
|
(6,744
|
)
|
|
$
|
(25,469
|
)
|
|
$
|
55,277
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Advertising
|
$
|
384,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384,149
|
|
Circulation
|
265,227
|
|
|
—
|
|
|
—
|
|
|
265,227
|
|
Other
|
51,822
|
|
|
—
|
|
|
38
|
|
|
51,860
|
|
Total revenues
|
$
|
701,198
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
701,236
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
124,806
|
|
|
$
|
—
|
|
|
$
|
(27,796
|
)
|
|
$
|
97,010
|
|
The segment information for the nine months ended September 25, 2016 and September 27, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Publishing
|
|
ReachLocal
|
|
Corporate and Other
|
|
Consolidated
|
2016
|
|
|
|
|
|
|
|
Advertising
|
$
|
1,158,269
|
|
|
$
|
31,839
|
|
|
$
|
—
|
|
|
$
|
1,190,108
|
|
Circulation
|
835,872
|
|
|
—
|
|
|
—
|
|
|
835,872
|
|
Other
|
148,480
|
|
|
3,138
|
|
|
2,882
|
|
|
154,500
|
|
Total revenues
|
$
|
2,142,621
|
|
|
$
|
34,977
|
|
|
$
|
2,882
|
|
|
$
|
2,180,480
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
301,229
|
|
|
$
|
(6,744
|
)
|
|
$
|
(71,887
|
)
|
|
$
|
222,598
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Advertising
|
$
|
1,191,902
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,191,902
|
|
Circulation
|
802,389
|
|
|
—
|
|
|
—
|
|
|
802,389
|
|
Other
|
151,339
|
|
|
—
|
|
|
38
|
|
|
151,377
|
|
Total revenues
|
$
|
2,145,630
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
2,145,668
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
312,339
|
|
|
$
|
—
|
|
|
$
|
(47,171
|
)
|
|
$
|
265,168
|
|
The following table present our reconciliation of Adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Three months ended
|
|
Nine months ended
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
|
Sept. 25, 2016
|
|
Sept. 27, 2015
|
Net income (loss) (GAAP basis)
|
$
|
(24,242
|
)
|
|
$
|
39,166
|
|
|
$
|
19,324
|
|
|
$
|
125,740
|
|
Provision (benefit) for income taxes
|
(8,942
|
)
|
|
10,141
|
|
|
12,949
|
|
|
34,611
|
|
Equity (income) loss in unconsolidated investees, net
|
766
|
|
|
(609
|
)
|
|
(844
|
)
|
|
(11,411
|
)
|
Interest expense
|
3,652
|
|
|
1,582
|
|
|
8,509
|
|
|
1,760
|
|
Other non-operating items, net
|
176
|
|
|
1,833
|
|
|
2,964
|
|
|
(19,782
|
)
|
Operating income (loss) (GAAP basis)
|
(28,590
|
)
|
|
52,113
|
|
|
42,902
|
|
|
130,918
|
|
Early retirement program
|
2
|
|
|
10,572
|
|
|
837
|
|
|
18,373
|
|
Severance-related charges
|
5,135
|
|
|
5,872
|
|
|
25,994
|
|
|
25,386
|
|
Acquisition-related expenses
|
14,416
|
|
|
—
|
|
|
29,055
|
|
|
—
|
|
Facility consolidation and asset impairment charges
|
28,673
|
|
|
66
|
|
|
31,960
|
|
|
6,711
|
|
Depreciation
|
30,638
|
|
|
25,291
|
|
|
83,889
|
|
|
73,677
|
|
Amortization
|
5,003
|
|
|
3,096
|
|
|
7,961
|
|
|
10,103
|
|
Adjusted EBITDA (non-GAAP basis)
|
$
|
55,277
|
|
|
$
|
97,010
|
|
|
$
|
222,598
|
|
|
$
|
265,168
|
|
Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment. Additionally, equity income in unconsolidated investees, net, income from cost method investments, interest expense, other non-operating items, net, and provision for income taxes, as reported in the condensed consolidated financial statements, are not part of operating income and are primarily recorded at the corporate level.
NOTE 14 — Relationship with our former parent
Subsequent to the spin-off
Transition services agreement:
In connection with the spin-off, we entered into a transition services agreement with our former parent, pursuant to which we and our former parent will provide to each other certain specified services on a transitional basis, including various information technology, financial, and administrative services. The charges for the transition services generally are expected to allow the providing entity to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the service plus, in some cases, the allocated indirect costs of providing the services, generally without profit. The transition services agreement will terminate on the expiration of the term of the last service provided under it but not later than
24 months
following the distribution date. Subsequent to separation, we provided certain IT, payroll, and other services to our former parent in the amount of
$1.1 million
and
$5.4 million
for the three and
nine months ended
September 25, 2016
, respectively. Our former parent provided certain services to us in the amount of
$1.4 million
and
$4.9 million
for the three and
nine months ended
September 25, 2016
, respectively.
Employee matters agreement:
In connection with the spin-off, we entered into an employee matters agreement with our former parent prior to the separation to allocate liabilities and responsibilities relating to employment matters, employee compensation and benefit plans, and programs and other related matters. The employee matters agreement governs certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company.
Revenue and other transactions entered into in the ordinary course of business:
Certain of our revenue arrangements relate to contracts entered into in the ordinary course of business with our former parent and its affiliates, principally Cars.com, CareerBuilder, and G/O Digital.
Prior to the spin-off
The following is a discussion of our relationship with our former parent prior to the spin-off, including the services provided by both parties and how transactions with our former parent and its affiliates through June 28, 2015 were accounted for in the unaudited condensed consolidated and combined financial statements.
Intercompany transactions:
All significant intercompany transactions between either (i) us and our former parent or (ii) us and our former parent's affiliates have been included within the unaudited condensed combined financial statements and are considered to be effectively settled through equity contributions or distributions at the time the transactions were recorded.
Centralized cash management:
Prior to the spin-off, our former parent utilized a centralized approach to cash management and the financing of its operations by providing funds to its entities as needed. These transactions were recorded in Former parent's investment, net when advanced and were reflected in the unaudited condensed combined statement of cash flows as financing activities. Accordingly, none of our former parent's cash and cash equivalents were assigned to us in the unaudited condensed combined financial statements. Cash and cash equivalents prior to the spin-off represent cash held by us.
Support services provided and other amounts with our former parent and former parent's affiliates:
Prior to the spin-off, we received allocated charges from our former parent and its affiliates for certain corporate support services, which are recorded within Selling, general and administrative expense in our unaudited condensed combined statement of income, net of cost recoveries reflecting services provided by us and allocated to our former parent. Management believes the bases used for the allocations are reasonable and reflect the portion of such costs, net of cost recoveries, attributable to our operations; however, the amounts may not be representative of the costs necessary for us to operate as a separate stand-alone company.
These allocated costs, net of cost recoveries, are summarized in the following table:
|
|
|
|
|
|
Nine months ended
|
In thousands
|
Sept. 27, 2015
(f)
|
Corporate allocations
(a)
|
$
|
25,832
|
|
Occupancy
(b)
|
2,884
|
|
Depreciation
(c)
|
4,067
|
|
Other support costs
(d)
|
6,249
|
|
Cost recoveries
(e)
|
(6,055
|
)
|
Total
|
$
|
32,977
|
|
(a) The corporate allocations related to support we received from our former parent and its affiliates for certain corporate activities include: (i) corporate general and administrative expenses, (ii) marketing services, (iii) investor relations, (iv) legal, (v) human resources, (vi) internal audit, (vii) financial reporting, (viii) tax, (ix) treasury, (x) information technology, (xi) production services, (xii) travel services and (xiii) other former parent corporate and infrastructure costs. For these services, we recorded an allocation of a management fee based on actual costs incurred by our former parent and its affiliates. This was allocated to us based upon our revenue as a percentage of total former parent revenue in each fiscal period.
(b) Occupancy costs relate to certain facilities owned and/or leased by our former parent and its affiliates that were utilized by our employees and principally relate to shared corporate office space. These costs were charged to us primarily based on actual square footage utilized or our revenue as a percentage of total former parent revenue in each fiscal period. Occupancy costs include facility rent, repairs and maintenance, security and other occupancy-related costs incurred to manage the properties.
(c) Depreciation expense was allocated by our former parent and its affiliates for certain assets. These assets primarily relate to facilities and IT equipment that are utilized by our former parent and us to operate our businesses. These assets have not been included in our unaudited condensed combined balance sheets. Depreciation expense was allocated primarily based on our revenue as a percentage of total former parent revenue or our utilization of these assets.
(d) Other support costs related to charges to us from our former parent and its affiliates include certain insurance costs and our allocated portions of share-based compensation costs and net periodic pension costs relating to the SERP for employees of our former parent. Such costs were allocated based on actual costs incurred or our revenue as a percentage of total former parent revenue.
(e) Cost recoveries reflect costs recovered from our former parent and its affiliates for functions provided by us, such as functions that serve our former parent's digital and broadcasting platforms for content optimization and financial transaction processing at shared service centers. Such costs were primarily allocated based on our revenue as a percentage of total former parent revenue or based upon transactional volume in each fiscal year.
|
|
(f)
|
Costs were allocated from our former parent to us up to the spin date. No costs were allocated to us by our former parent after the spin-off.
|